# my-works-for-llm: Full Corpus Dump

Dataset DOI: https://doi.org/10.5281/zenodo.18781458
License: CC0-1.0
Generated (UTC): 2026-02-26T07:59:32Z

This file concatenates corpus content into a single ingestible artifact.

---

## ssrn-1641438: CONTRACT REMEDIES IN ACTION: SPECIFIC PERFORMANCE
Year: 2015
Authors: Yonathan Arbel
Source: papers/ssrn-1641438/paper.txt

CONTRACT REMEDIES IN ACTION: SPECIFIC PERFORMANCE
Yonathan A. Arbel*
ABSTRACT ............................................................................................. 370
I. INTRODUCTION ...................................................................................... 370
II. CONTRACT REMEDIES IN THEORY: NORMATIVE AND EMPIRICAL
ASSUMPTIONS ....................................................................................... 375
A. Rights-Based Theories ................................................................... 375
1. Common Structure ................................................................... 375
2. Common Assumptions ............................................................. 377
B. Economic Theories ........................................................................ 379
1. Common Structure ................................................................... 379
2. Common Assumptions ............................................................. 380
III. THE LEGAL FRAMEWORK ..................................................................... 381
IV. METHODOLOGY ..................................................................................... 384
V. FINDINGS ON SPECIFIC PERFORMANCE PRE-JUDGMENT....................... 386
A. Why Do Parties Not Sue More Frequently for Specific
Performance?................................................................................. 387
1. Low Enforceability .................................................................. 388
2. The Lawyers’ Agency Problem ............................................... 388
3. Preferences over Time ............................................................. 389
B. Why Do Parties Sue for Specific Performance? ............................ 390
1. Signaling .................................................................................. 391
2. Achieving Faster, Cheaper Case Resolution ............................ 391
3. Post-Judgment Renegotiation .................................................. 392
VI. POST-JUDGMENT RENEGOTIATION AND ITS FAILURES ......................... 392
VII. IMPLEMENTING SPECIFIC PERFORMANCE: PITFALLS AND
OBSTACLES ........................................................................................... 396
A. Animosity ....................................................................................... 398
B. Costly Supervision and Lack of Standards .................................... 399
C. Post-Judgment Costs and Liquidity ............................................... 400
* Terence M. Considine Fellow at the Center for Law, Economics and Business, and Private
Law Fellow, Harvard Law School. The Author would like to thank Hadar Aviram, Janet Freilch,
Lawrence Friedman, A. Mitchell Polinsky, Louis Kaplow, Kobi Kastiel, Amalia Kessler, Steven
Shavell, and Roy Shapira for helpful comments. The Author is also grateful for the suggestions
of the participants of the Empirical Legal Studies and Law and Society conferences, and for the
dedicated work of Jim McDaniel and the rest of the board of the West Virginia Law Review.
Financial and research support was provided by the John M. Olin Center for Law, Economics,
and Business.
369
Electronic copy available at: https://ssrn.com/abstract=1641438
370 WEST VIRGINIA LAW REVIEW [Vol. 118
D. Capitalization and the Judgment-Proof Problem .......................... 401
E. Defendant’s Reputation ................................................................. 401
F. Social Norms and Social Pressures ............................................... 402
VII. IMPLICATIONS FOR LAW AND THEORY ................................................. 403
A. Rights-Based Theories of Contract ................................................ 403
B. Economic Theories ........................................................................ 406
C. Legal Implications ......................................................................... 408
X. CONCLUSION ......................................................................................... 410
ABSTRACT
How is a right to specific performance of a contract used by parties?
Despite longstanding scholarly interest in the topic, this question has been
largely left unexplored. This Article presents a qualitative study of parties and
attorneys involved in specific performance litigation. It investigates how parties
choose between remedies, whether they negotiate after judgment for specific
performance, whether specific performance is implemented, and the difficulties
involved in its implementation.
The findings reveal important theoretical oversights and challenges to
prevailing law. In practice, many plaintiffs opt out of specific performance.
This is puzzling as expectation damages are notoriously under compensatory
relative to performance. A primary explanation is that it is harder to execute
specific relief than a money judgment. Focusing attention on execution
provides a valuable lesson: in exactly these circumstances where U.S. law
grants specific performance—unique goods—it is least valuable due to a lack
of clear standards by which to evaluate performance. Another explanation is
lawyer’s bias: attorneys will often advise clients to sue for money damages to
ensure easy collection of their own fees.
Another set of findings reveal that parties think about specific
performance in ways that are inconsistent with both economic and rights-based
theories. Sometimes plaintiffs will not negotiate a judgment as they will be
reluctant to commodify it, in contrast to economic theories, and other times
they will treat specific performance instrumentally, to achieve other ends but
performance of the contractual promise, which is in tension with rights-based
theories. The Article concludes by discussing the theoretical and policy
implications of these findings, and highlights the ways in which qualitative
research could enrich, challenge, and contextualize contract theory.
I. INTRODUCTION
A central debate in modern contract theory concerns the choice of
remedies for breach of contract—should courts award money damages or
specific relief? This debate is seen as central because it involves some of the
Electronic copy available at: https://ssrn.com/abstract=1641438
2015] CONTRACT REMEDIES IN ACTION 371
most fundamental dilemmas of contract law:1 whether the law should protect
rights or promote efficiency, bind parties to past commitments or evolve in
light of new information, ensure proper compensation or create optimal
incentives, etc.2
This debate is often understood as being between normative economic
analysis and an assortment of moral philosophies, which can be grouped, for
convenience, under the heading of rights-based theories.3 The economic
analysis stresses efficiency and social welfare, while rights-based theories are
more concerned with the morality of actions and intentions.4 Beyond this
primary normative distinction, these theories base their respective legal
prescriptions on contrasting assumptions about the world in which people
contract: their motivations, understandings, and expectations.5
For concreteness, rights-based theories often favor specific
performance because it is supposed to offer better compensation to victims of
breach than money damages. Additionally, giving the promisee what was
promised in the contract is deemed important, and it is supposed that specific
performance will be used to achieve performance and not instrumentally to
other ends. Economic theories alternatively assume that judgments are used
instrumentally to maximize victim’s welfare rather than coercing performance.
As a corollary, victims will prefer specific performance to expectation
damages, because it can be used either to demand performance or as leverage in
negotiations to extract higher value payment. Lastly, both theories omit from
consideration the choice that victims have between remedies, implicitly
assuming that the choice has no impact on the legal process. If judges, for
example, draw inferences from the choice of remedies on the merit of the case,
or if lawyers are biased in favor of one of these remedies, providing victims a
choice has broader implications than recognized. These assumptions, while not
always explicit, are fundamental to justifying the legal prescriptions that
1 See STEPHEN A. SMITH, CONTRACT THEORY 387 (1993) (discussing the relationship
between contract remedies and contract theory).
2 For a recent review of the debate, see Gregory Klass, Efficient Breach, in THE
PHILOSOPHICAL FOUNDATIONS OF CONTRACT LAW 362 (Gregory Klass, George Letsas & Prince
Saprai eds., Oxford Univ. Press 2015).
3 While labels are notoriously difficult in this area, given the many applicable nuances and
inter-connections, most scholars adopt a generalized dichotomy between some variant of
consequentialism and a residual category for non-consequentialist theories.
4 See STEVEN SHAVELL, FOUNDATIONS OF ECONOMIC ANALYSIS OF LAW 595–605 (2004)
(comparing the welfarist view with other moral philosophies).
5 For a critique of some of these assumptions and of promise-based theories, see generally
LOUIS KAPLOW & STEVEN SHAVELL, FAIRNESS VERSUS WELFARE 155–224 (2002).
Electronic copy available at: https://ssrn.com/abstract=1641438
372 WEST VIRGINIA LAW REVIEW [Vol. 118
follow, and their exploration promises a hope of advancing the debate beyond a
normative stalemate.6
It is therefore disappointing that despite a growing empirical literature
on contract remedies,7 much is still unknown about the empirical validity of
these assumptions.8 An important missing piece of the puzzle is an examination
of the parties’ internal point of view: What are parties’ expectations,
motivations, reasons, and actual behaviors with respect to the legal remedy of
specific performance? How do they put remedies into use, and what is their
practical significance? How do they implement the remedies? The answers to
all of these questions are frustratingly scarce.
This Article makes explicit some of these assumptions and explores
their validity. Its main contribution is a qualitative investigation, consisting of
interviews with litigants and their lawyers who were involved in specific
performance litigation.9
A preliminary design issue is the choice of jurisdiction, because in the
United States specific relief is only awarded in exceptional circumstances. As a
result, the conclusions of any domestic investigation might be limited to these
circumstances rather than the actual nature of specific performance. To
overcome that, what is needed is a jurisdiction where contract law is
sufficiently close to American contract law but nonetheless has specific
performance set as the default remedy. Israel presents exactly such an
opportunity.10
6 Hence, Peter Benson’s pessimistic view that “[t]he effort to develop a coherent
explanation of contract seems to have reached an impasse.” Peter Benson, Contract, in A
COMPANION TO PHILOSOPHY OF LAW AND LEGAL THEORY 29 (Dennis Patterson ed., 2d ed. 2010).
7 Some recent examples of empirical work in contract law include: Yuval Feldman, Amos
Schurr & Doron Teichman, Reference Points and Contractual Choices: An Experimental
Examination, 10 J. EMPIR. LEGAL STUD. 512–41 (2013) (psychological experiments); Tess
Wilkinson-Ryan & Jonathan Baron, Moral Judgment and Moral Heuristics in Breach of
Contract, 6 J. EMPIR. LEGAL STUD. 405 (2009) (psychological experiments); Theodore Eisenberg
& Geoffrey P. Miller, Damages Versus Specific Performance: Lessons from Commercial
Contracts (N.Y.U. Ctr. for Law, Econ. & Org., Working Paper No. 13-09, 2013) (studying
inclusion of specific performance provisions in commercial contracts). For a review of some of
the general empirical literature on contracts, see Russell B. Korobkin, Empirical Scholarship in
Contract Law: Possibilities and Pitfalls, 2002 U. ILL. L. REV. 1033, 1036, and Russell J.
Weintraub, A Survey of Contract Practice and Policy, 1992 WIS. L. REV. 1, 4 n.10.
8 Daniel Keating described the legal landscape as “the land of the blind” due to the scarcity
of broad empirical data on contracting practices. Daniel Keating, Measuring Sales Law Against
Sales Practice: A Reality Check, 17 J.L. & COM. 99, 99 (1997).
9 An important source of inspiration is the study conducted by Ward Farnsworth, Do Parties
to Nuisance Cases Bargain After Judgment? A Glimpse Inside the Cathedral, 66 U. CHI. L. REV.
373 (1999), in which he interviewed lawyers involved in nuisance litigation and inquired
regarding post-judgment renegotiations.
10 See infra Part III.
Electronic copy available at: https://ssrn.com/abstract=1641438
2015] CONTRACT REMEDIES IN ACTION 373
The results are grouped by the chronological stage in the life of a
litigated contract case: choice of remedies, post-judgment renegotiation, and
the implementation and execution of the judgment. Working backwards, the
Article describes, in each stage, findings that challenge traditional assumptions
of contract theory.
Starting with the execution of specific performance awards,
enforcement is found to be rife with practical problems, which are most
pronounced when goods are unique.11 The principal problem is that
performance, unlike damages, often requires the good will of the performing
party—which, by the time the trial is over, is often non-existent and may
actually turn into spite and bad faith. When there are no clear standards by
which to judge the quality of performance, courts lack means of ensuring
quality. When goods are unique, it generally means that clear quality standards
are absent, meaning that in exactly these circumstances where specific
performance is available under American law, it will be hardest to enforce. The
Article also addresses the role of plaintiffs’ and promisors’ liquidity, and
explains that specific performance is not a silver bullet against a promisee’s
insolvency. Social norms and reputation are important leverages, but their
effects are not always in the direction of greater enforcement.
Before the judgment is implemented, economic theory predicts that the
parties will negotiate over the decree if performance is inefficient. A surprising
finding is that some parties (although not all) have refrained from negotiation
despite the existence of an ostensible financial incentive to do so. The
explanation seems to be derived, first, from the litigation dynamics that often
contribute to the animosity between the parties and, second, from the cognitive
perception of specific performance decrees as being qualitatively different from
other goods on the market that may be freely traded. The framing of these
decrees as default rights seems to affect parties’ willingness to negotiate over
them.12
Despite a general theoretical expectation that, given the choice of
remedies, plaintiffs will sue for specific performance, it was found that many
opt-out of the default in favor of money damages.13 Of the reasons identified,
11 See generally Steven Shavell, Specific Performance Versus Damages for Breach of
Contract: An Economic Analysis, 84 TEX. L. REV. 831 (2006).
12 Various lab experiments find that default rules do indeed change parties’ preferences and
therefore may affect the likelihood of settlement. See Russell B. Korobkin, The Status Quo Bias
and Contract Default Rules, 83 CORNELL L. REV. 608, 633–37 (1998); Stewart Schwab, A
Coasean Experiment on Contract Presumptions, 17 J. LEGAL STUD. 237, 237–38 (1988).
13 In economic theory, specific performance is expected to be used as a bargaining chip to
extract side payments from the defendant that exceed the value of expectation damages. See, e.g.,
Marco J. Jimenez, The Value of a Promise: A Utilitarian Approach to Contract Law Remedies,
56 UCLA L. REV. 59, 69 (2008). In deontological theory, the plaintiff motivations are far less
explicit, but it is regularly implied that specific performance will be pursued out of a sense of
vindication of moral rights.
Electronic copy available at: https://ssrn.com/abstract=1641438
374 WEST VIRGINIA LAW REVIEW [Vol. 118
one that stands out is lawyer’s bias. Attorneys have a general preference for
money damages out of concern for their own fees and their ability to collect
them, which is harder in the case of specific performance decrees.
Of course, not all plaintiffs choose to opt-out. This is predicted by
mainstream theory and may therefore seem to be of lesser interest, but delving
deeper into plaintiffs’ motivations suggests a more involved story. First,
because the plaintiffs are given a choice between different contract remedies,
courts may draw inferences from the choices made and use them to assess the
merits of the case. Lawyers reported that a belief that opting out of specific
performance sends a signal of bad faith to the court, as if the plaintiff is
behaving opportunistically and only cares about money, not performance.
Second, specific performance may be sued for to speed up the resolution of the
case and to reduce the costs of litigation, because the costs of proving damages
are spared. Third, parties occasionally sue for specific performance to use it as
a bargaining chip.14
The Article concludes by discussing various theoretical and legal
implications of these findings. It is argued that rights-based theory should
directly address the instrumental uses that parties make of specific performance
judgments, as they create a wedge between what was promised and what is
legally prescribed. The under-compensatory nature of specific performance
should be recognized within corrective justice theories of contract law, and due
attention should be given to the fact that the problem will not vanish simply by
giving the promisee a choice between damages and enforcement. These
findings suggest new areas for exploration for economic theories—primarily,
the signaling effects of remedies and the attorney’s influence on choice of
remedies. The aversion to post-judgment renegotiation suggests that judgments
are sticky and parties should not be trusted to renegotiate as a general matter.
Concerns with a flood of litigation following a more liberal approach to
specific performance should also be alleviated. Finally, it is explained that
specific performance is not a silver bullet against a promisor’s insolvency.
Regarding the law, it is argued that limiting the scope of specific performance
to cases of unique goods is non-constructive, as these are the cases where
enforcement is most likely to be ineffective. Additionally, it is argued that
lawyers should pay much closer attention to enforcement mechanisms.
The organization of this Article is as follows: Part II lays out the
necessary theoretical framework. Specifically, it points out the relevant
empirical assumptions and the role they play in theory. Part III presents stylized
facts about Israeli and U.S. contract law, emphasizing the similarity of the
systems in the context of this Article. Part IV delves into the methodology and
explains the research protocol. Parts V, VI, and VII discuss the primary
14 While this is exactly what is envisioned by economic theory, it is worth nothing since
other studies have doubted the prevalence of this kind of motive. See Farnsworth, supra note 9, at
391–414 (finding that parties are averse to renegotiate their judgments).
Electronic copy available at: https://ssrn.com/abstract=1641438
2015] CONTRACT REMEDIES IN ACTION 375
findings of the study. These Parts cover three time periods: the parties’ choices
before and during litigation, the parties’ post-judgment renegotiations, and,
finally, the implementation of the judgment in these cases where no post-
judgment settlement has occurred. The final Part considers the chief theoretical
and legal implications of these findings.
II. CONTRACT REMEDIES IN THEORY: NORMATIVE AND EMPIRICAL
ASSUMPTIONS
This Article responds to the theoretical literature, and a brief review of
this literature is in order. This review will be brief, general, and mostly focused
on those assumptions that will be later examined empirically; the interested
reader may refer to one of the many extensive surveys of the literature
developed elsewhere.15 As is conventional, the discussion is divided into rights-
(and duties-) based theories and economic theories.16
A. Rights-Based Theories
1. Common Structure
Probably the most common and influential perspective on contract
remedies has been that of the rights-based theories. By rights-based theories I
denote a large (and diverse) class of theories, which adhere to non-economic
principles. Generally, these theories judge the morality of choices, actions, or
relationships between individuals based on their adherence to a-priori moral
principles rather than on the basis of their consequences.17 In the contractual
context, the fundamental challenge of these theories is to justify legal
institutions that allow the use of state power to enforce financial obligations
15 See, e.g., Peter Benson, Introduction, in THE THEORY OF CONTRACT LAW (Peter Benson
ed., 2001); Hermalin et al., infra note 42, at 99–127; Paul G. Mahoney, Contract Remedies:
General, in 3 ENCYCLOPEDIA OF LAW AND ECONOMICS § 4600, at 117 (Boudewijn Bouckaert &
Gerrit De Geest eds., 2000) (economic theories); Jeffrey L. Harrison, A Nihilistic View of the
Efficient Breach, 2013 MICH. ST. L. REV. 167.
16 It is worth noting that many non-economic theories also care, at least to an extent, about
consequences. See JOHN RAWLS, A THEORY OF JUSTICE 26 (1971) (“All ethical doctrines worth
our attention take consequences into account in judging rightness. One which did not would
simply be irrational, crazy.”). For a more general discussion, see Christopher P. Taggart,
A Critical Analysis of Kaplow and Shavell’s Project Concerning the Foundations of Normative
Law and Economics 12–14, 73–76 (Nov. 2012) (unpublished S.J.D. dissertation, Harvard Law
School) (on file with the Harvard Law School Library); see also EYAL ZAMIR & BARAK MEDINA,
LAW, ECONOMICS, AND MORALITY (2010) (exploring intermediate positions between
consequentialism and deontology).
17 For a survey of deontological theories, see Larry Alexander & Michael Moore,
Deontological Ethics, STANFORD ENCYCLOPEDIA OF PHILOSOPHY (Dec. 12, 2012),
http://plato.stanford.edu/archives/win2012/entries/ethics-deontological/.
Electronic copy available at: https://ssrn.com/abstract=1641438
376 WEST VIRGINIA LAW REVIEW [Vol. 118
which are against the ex-post will of the promisor.18 A second challenge, and
equally complex, is the derivation of specific legal remedies from core moral
principles. 19
Various theories have been developed to address these challenges.20
Famously, Charles Fried has claimed that the justification of legal enforcement
owes to the promisor’s duty to keep his promise, resulting from her willful
solicitation of expectations of performance through the speech act of promise.21
After invoking this trust, breaking the promise is immoral.22 Other important
variants include Randy Barnett’s consent theory, which emphasizes objective
manifestations of assent to enforcement as the basis for the duty to uphold
contracts,23 or Thomas Scanlon’s expectation theory, which is based on the
obligation not to cause harm after invoking expectation of performance by the
act of promise.24 A relatively different theory is Seana Shiffrin’s view, which is
derived from virtue ethics.25 To her, contract law must not create rules that are
18 Duncan Kennedy and Frank Michelman lucidly explain the anti-liberal character of
enforcement “the meaning of enforcement of contracts is the application of ineluctable force to
make people do things they don’t then want to do.” Duncan Kennedy & Frank Michelman, Are
Property and Contract Efficient?, 8 HOFSTRA L. REV. 711, 741 (1980); see also T. M. Scanlon,
Promises and Contracts, in THE THEORY OF CONTRACT LAW 86, 100 (Peter Benson ed., 2001).
The Harm Principle has been interpreted in this context as limiting the use of state enforcement.
See (a critical) review in Brian H. Bix, Theories of Contract Law and Enforcing Promissory
Morality: Comments on Charles Fried, 45 SUFFOLK U. L. REV. 719, 726–33 (2011).
19 See generally Richard Craswell, Contract Law, Default Rules, and the Philosophy of
Promising, 88 MICH. L. REV. 489 (1989).
20 For a survey of some of these theories, including the will, bargain, reliance, and fairness,
see Randy E. Barnett, A Consent Theory of Contract, 86 COLUM. L. REV. 269, 271–91 (1986).
21 For an early statement of the idea of promise as a speech act, see J. L. AUSTIN, HOW TO DO
THINGS WITH WORDS 156–57 (J.O. Urmson ed., 1962).
22 See CHARLES FRIED, CONTRACT AS PROMISE 17 (1981) (“There exists a convention that
defines the practice of promising and its entailments. . . . [I]t is wrong to invoke that convention
in order to make a promise, and then break it.”).
23 See Barnett, supra note 20, at 291–319.
24 See Scanlon, supra note 18, at 98–99.
25 See Seana Valentine Shiffrin, The Divergence of Contract and Promise, 120 HARV. L.
REV. 708, 732–33 (2007) [hereinafter Shiffrin, Divergence]. Shiffrin’s view is complicated by the
fact that she distinguishes between moral and legal reasons, with the latter being a sub-set of the
former. Morally, there is an advantage to specific performance over expectation damages, but
legally, she says, “legal” considerations such as the cost of supervision may trump the
desirability of specific performance. See also Seana Shiffrin, Could Breach of Contract Be
Immoral?, 107 MICH. L. REV. 1551, 1568 (2009) [hereinafter Shiffrin, Breach of Contract]
(“There may be distinctively legal reasons to reject [specific performance] given the difficulties
of judicial supervision, risks of arbitrary enforcement, and in some cases, the hazards of
involuntary servitude.”). Overall, I take her approach to be prima facie in favor of the legal
remedy of specific performance subject to circumstantial practical considerations.
Electronic copy available at: https://ssrn.com/abstract=1641438
2015] CONTRACT REMEDIES IN ACTION 377
incompatible with the moral judgments of a virtuous agent. A law allowing the
promisor a breach option runs afoul of her criteria.26
What should be the legal consequence of a breach of contract? It would
seem that the most natural implication of a promise to do X is a duty to do X
rather than deliver its monetary equivalent.27 And with the notable and widely
criticized exception of Charles Fried,28 most theorists agree that specific
performance is the preferred remedy.29 For these scholars the American law’s
approach of setting expectation damages as the default remedy in most breach
of contract cases is opposed to the dictates of morality, and perhaps even
undermines them.30
2. Common Assumptions
Despite the many differences between the theories, there are a few
assumptions commonly shared that are of interest here, and I will focus on
three. The first concerns the consequences of the specific performance
judgment. Close reading of many of the rights-based theories show that they
will often use specific performance as a shorthand for actual performance of the
contract.31 The difficulty of enforcing either a money judgment or specific
26 All of these views are heavily contested, even within class of rights-based theories, as
documented in Jody S. Kraus, The Correspondence of Contract and Promise, 109 COLUM. L.
REV. 1603 (2009).
27 Jody S. Kraus, A Critique of the Efficient Performance Hypothesis, 116 YALE L.J. POCKET
PART 423 (2007) (“[A] promise to do X imposes on the promisor an obligation to do X and
confers on the promisee a right to have the promisor do X.”). Similarly, Seana Shiffrin contends
that “[a]bsent the consent of the promisee, the moral requirement would not be satisfied if the
promisor merely supplied the financial equivalent of what was promised.” Shiffrin, Divergence,
supra note 25, at 722; see also Stephen A. Smith, Performance, Punishment and the Nature of
Contractual Obligation, 60 MOD. L. REV. 360, 361 (1997) (“The natural way to make good a
failure to do that which one has an obligation to do is to perform the obligatory action”).
28 See FRIED, supra note 22 (arguing for expectation damages), and the intermediate
approach taken by Thomas Scanlon, Promises and Practices, 19 PHIL. & PUB. AFF. 199, 205
(1990) (contending that if compensation and performance are of equal value to the promisee then
moral principles will be neutral between the two). For the critique of this approach, see, for
example, KAPLOW & SHAVELL, supra note 5, at 161 n.18, and Kraus, supra note 26, at 1605.
29 Notable in this regard is Dori Kimel who, while favoring specific performance in
principle, allows promisors a choice between specific performance and damages, in cases where
both are equally compensatory, as a means of minimizing the infringement on the promisor’s
autonomy. See DORI KIMEL, FROM PROMISE TO CONTRACT: TOWARDS A LIBERAL THEORY OF
CONTRACT 95–102 (2003).
30 See Shiffrin, Divergence, supra note 25, at 733 n.47 (arguing that law’s content should
promote a culture that would be acceptable by a morally decent person). See id. for my
interpretation of her argument.
31 See, e.g., SMITH, supra note 1, at 401 (“[W]hile it is true that late performance is not
identical to timely performance, in most cases this difference would seem to relate only to the
form of the obligation rather than its essence.”); Melvin Aron Eisenberg, The Bargain Principle
Electronic copy available at: https://ssrn.com/abstract=1641438
378 WEST VIRGINIA LAW REVIEW [Vol. 118
relief are abstracted at least in the general case, and it is assumed that the
absolute enforceability of both is high.
Second, and more common than the former, is the view that, even if
specific performance is not the same as performance, it will nonetheless better
protect the promisee’s interests than expectation damages.32 That is, even after
accounting for problems of enforceability, specific performance would yield
greater value to the promisee than would expectation damages, especially given
the problems of quantifying the latter. This assumes the relative enforceability
of specific performance to be higher than or equal to that of money judgments.
It implies that generally, promisees would opt for specific performance given
the choice.
The third is that the judgment will be used to obtain performance and
not some other ends. Specific performance is favored for awarding the
promisee with exactly what she expected to receive, i.e., performance.33 If the
promisee uses the right for some other end besides performance, then even if
this end is not objectionable in its own right, it would require a separate
justification besides expectation of performance.34
and Its Limits, 95 HARV. L. REV. 741, 744–45 n.10 (1982) (“[I]n those cases in which [specific
performance] is feasible, it is often simply a special technique for putting plaintiff in the position
he would have been in if the contract had been performed.”); Nathan B. Oman, The Failure of
Economic Interpretations of the Law of Contract Damages, 64 WASH. & LEE L. REV. 829, 869
(2007) (“[S]o long as damages compensate the promisee for her loss, we ought to choose the
remedy that intrudes on liberty the least.” This account implies that specific performance is
closer to the value of promised performance.); Shiffrin, Breach of Contract, supra note 25, at
1566 (“[T]he practice of making [contracts] could not flourish or perform its function if paying
expectation damages became the default method of their satisfaction. But, the practice would
flourish if performance were the default method of satisfaction.”).
32 See Michael D. Knobler, A Dual Approach to Contract Remedies, 30 YALE L. & POL’Y
REV. 415, 427 (2012) (arguing that specific performance is the solution for the under-
compensatory nature of expectation damages so that it will be in the promisee’s interest). Also,
most of the authors noted in the previous note can also be read in this light, as they are generally
aware of practical impediments to enforcement, although it is unclear whether these
considerations play more than a secondary role in their analysis.
33 See generally Shavell, supra note 11.
34 While in principle a right to something implies the power to sell it or use it in other ways,
this is not why most promise-based theories believe specific performance is appropriate. Using
the judgment for financial gain may actually be frowned upon. After all, if the goal was to give
the plaintiff greater bargaining power rather than the right to performance, these theories would
have advocated super compensatory remedies, which they do not. See KAPLOW & SHAVELL,
supra note 5, 161–62 (surveying the role of super compensatory remedies in promise based
theories).
Electronic copy available at: https://ssrn.com/abstract=1641438
2015] CONTRACT REMEDIES IN ACTION 379
B. Economic Theories
1. Common Structure
Normative economic theories are consequentialist moral theories that
adopt some variant of welfarism. As such, economic theories focus solely on
the consequences of legal rules and rank their desirability exclusively on the
basis of their effect on overall social welfare, however aggregated.35 In the
context of contract law, this leads to the claim that the choice of remedies
should be decided solely by what would maximize the parties’ joint interests at
the time of contracting.36
The exact role of specific performance within the economic framework
is complex: four decades of analysis have demonstrated that a myriad of
parameters are relevant to the choice of remedies.37 Opponents of specific
performance argue, for example, that this remedy can lead promisors to
perform even when it is inefficient for them to do so. While the promisee might
be willing to give up her right to performance in exchange for due
compensation, a right to specific performance could engender a hold-up
scenario where the promisee uses the judgment to extract high payments from
the promisor. To protect himself, the promisor would need to take wasteful ex-
ante measures against breach.38 Moreover, the enforcement of specific
performance is likely to be complicated and costly in cases involving the
rendering of a service or the production of goods (as opposed to the
35 See Amartya Sen, Utilitarianism and Welfarism, 76 J. PHIL. 463, 468 (1979). For a
development of these ideas, see KAPLOW & SHAVELL, supra note 5, at 15–85, 403–65, and Louis
Kaplow & Steven Shavell, Any Non-Welfarist Method of Policy Assessment Violates the Pareto
Principle, 109 J. POL. ECON. 281, 281–86 (2001) (explaining that non-exclusive approaches will
lead to prescriptions that would make some people worse off while not benefitting anyone).
36 For early proponents of the ex-ante joint interests perspective of contract damages, see
Steven Shavell, Damage Measures for Breach of Contract, 11 BELL J. ECON. 466 (1980), and
RICHARD A. POSNER, ECONOMIC ANALYSIS OF LAW (2d ed. 1977). In the past, some purportedly
economic analyses were focused on minimizing ex-post waste, failing to consider the ex-ante
effects of so doing. See the critical review in Robert E. Scott & Alan Schwartz, Market Damages,
Efficient Contracting, and the Economic Waste Fallacy, 108 COLUM. L. REV. 1610, 1614–16
(2008).
37 See Richard Craswell, Contract Remedies, Renegotiation, and the Theory of Efficient
Breach, 61 S. CAL. L. REV. 629 (1988) (arguing that choice of remedies has a variety of incentive
effects on all stages of contracting, from searching for partners to breach decisions); Eric A.
Posner, Economic Analysis of Contract Law After Three Decades: Success or Failure?, 112
YALE L.J. 829 (2003) (criticizing law and economics for not providing any determinate answers
to the core questions of contractual doctrine and using contract remedies as a key example).
38 See Shavell, supra note 11, at 844–45 (exploring wasteful precautions against breach
taken by the promisor).
Electronic copy available at: https://ssrn.com/abstract=1641438
380 WEST VIRGINIA LAW REVIEW [Vol. 118
conveyance of ready-made goods).39 Proponents, on the other hand, claim that
if performance is inefficient, the parties will trade in the specific performance
award, and the transaction costs involved will likely be low enough to facilitate
that.40 Specific performance should be preferred, on these views, because it can
capture the value of performance to the promisee while avoiding the costly
process of damages quantification.41 Finally, specific performance can be
desirable because it encourages breach only when breach is clearly efficient,
whereas expectation damages, which are often under-compensatory, could lead
to excessively frequent breach.
2. Common Assumptions
As noted, economic theory is far from settled on whether specific
performance is desirable. Of the various assumptions made, let me note three.
First, it is expected that parties would generally try to engage in some
form of post-judgment renegotiation. The fact of breach suggests that
performance is inefficient and therefore the parties could both benefit from
trading the right to specific performance for some payment.42 This would
require transaction costs to be low, but they usually are in contractual settings.43
Consequently, efficiency-minded judges need not overly worry about the
disposition of rights, as those rights will be efficiently traded.44 Indeed, these
39 See Alan Schwartz, The Case for Specific Performance, 89 YALE L.J. 271, 292–96 (1979)
(discussing various “administrative” costs of enforcing specific performance); Shavell, supra
note 11, at 833 (exploring the different costs of specific enforcement of contracts to produce
goods and contracts to convey property and arguing that costs would be significantly lower in the
latter case).
40 See, e.g., Ian R. Macneil, Efficient Breach of Contract: Circles in the Sky, 68 VA. L. REV.
947, 951–53 (1982).
41 See Schwartz, supra note 39.
42 See, e.g., Benjamin E. Hermalin et al., Contract Law, in THE HANDBOOK OF LAW AND
ECONOMICS 3, 117–18 (A. Mitchell Polinsky & Steven Shavell eds., 2007).
43 Most contractual disputes involve two to three direct parties, who knew each other well
enough to transact in the first place. See THOMAS J. MICELI, ECONOMICS OF THE LAW 88 (1997)
(“Presumably, transaction costs are low in most contract settings, given that the parties have
already demonstrated an ability to bargain.”); A. Mitchell Polinsky & Steven Shavell, Law,
Economic Analysis of, in THE NEW PALGRAVE DICTIONARY OF ECONOMICS 1, 19 (Steven N.
Durlauf & Lawrence E. Blume eds., 2d ed. 2008) (“[M]uch of the economics literature . . .
assumes that renegotiation always occurs.”).
44 The core idea stems from Ronald H. Coase, The Problem of Social Cost, 3 J. L. & ECON. 1
(1960), but is adapted to the legal context by the work of Guido Calabresi & A. Douglas
Melamed, Property Rules, Liability Rules, and Inalienability: One View of the Cathedral, 85
HARV. L. REV. 1089, 1106–10 (1972) (arguing that due to informational advantages parties have
over the social planner, liability rules should be assigned only in places where transaction costs
prohibit efficient negotiations between the parties), which was later expanded to the specific
Electronic copy available at: https://ssrn.com/abstract=1641438
2015] CONTRACT REMEDIES IN ACTION 381
negotiations might break down, but the expectation is that the parties will at
least attempt to renegotiate.45
Second, there is a common assumption, although not universal, that the
value of the renegotiated agreement would be equal to or exceed the value of
the performance to the promisee. If it would not, the promisee could simply
insist on performance and receive performance value. This is what underlies the
justification of specific performance as protecting the promisee’s subjective
value; the opposition to specific performance as engendering a hold-up
scenario; and the concern that if promisees will be given a choice, they will
flood the courts with specific performance suits.46
Third, there is much concern with which remedy would be more
efficient, but pronouncedly less interest in the effects of letting promisees
choose their remedies. Specifically, there is no account of how providing such a
choice could affect plaintiff-attorney or plaintiff-court interactions and strategic
behavior, either due to an oversight or to a more concrete assumption that such
effects are of marginal relevance.
III. THE LEGAL FRAMEWORK
In Common Law, expectation damages are the default remedy.47 The
hallmark of this preference is the oft-cited, and arguably misunderstood,48
quote of Justice Oliver Wendell Holmes that the duty to keep a contract “means
performance domain in Anthony T. Kronman, Specific Performance, 45 U. CHI. L. REV. 351,
351–55 (1978).
45 Most economic studies of specific performance make this assumption. See, e.g., Polinsky
& Shavell, supra note 43.
46 See, e.g., MICELI, supra note 43, at 88 (“[S]pecific performance protects the promisee’s
subjective valuation of performance.”); see also Hermalin et al., supra note 42, at 113 (“[I]f the
buyer has the threat of a remedy of specific performance, thereby requiring the seller to incur the
costs of performance, that should allow the buyer to capture more of the gains than he could if
his only legal threat were to hold the seller responsible for some smaller monetary remedy.”);
Harrison, supra note 15, at 196 (“Routine availability of specific performance means the worst-
case scenario for the non-breaching party will be full compensation while, in the case of
expectancy, it is merely a possibility.”); Jimenez, supra note 13, at 69 (arguing that specific
performance will lead to compensation over and above the value of performance to the
promisee).
47 This preference dates back to Lord Coke, in Bromage v. Genning (1616) 81 Eng. Rep.
540.
48 See Joseph M. Perillo, Misreading Oliver Wendell Holmes on Efficient Breach and
Tortious Interference, 68 FORDHAM L. REV. 1085, 1086 n.6 (2000) (quoting Holmes’ letter to Sir
Frederick Pollock, saying that “I don’t think a man promises to pay damages in contract any
more than in tort. He commits an act that makes him liable for them if a certain event does not
come to pass, just as his act in tort makes him liable simpliciter.” (quoting OLIVER W. HOLMES ET
AL., HOLMES-POLLOCK LETTERS: THE CORRESPONDENCE OF MR. JUSTICE HOLMES AND SIR
FREDERICK POLLOCK, 1874–1932, 233 (Mark DeWolfe Howe ed., Harvard Univ. Press 1941)).
Electronic copy available at: https://ssrn.com/abstract=1641438
382 WEST VIRGINIA LAW REVIEW [Vol. 118
a prediction that you must pay damages if you do not keep it,—and nothing
else.”49 As a result, specific performance is only awarded in cases in which
damages are deemed inadequate.50 Categories of such cases evolved over time,
some being mundane (e.g. sale of land) while others border on the esoteric (e.g.
contracts for the sale of standing timber).51 Even if damages are found to be
inadequate, specific performance will not be granted if it imposes a
disproportionate amount of hardship on the defendant, requires excess
supervision by the courts, or does not serve the public interest.52
While there is some debate on whether the granting of specific
performance has been liberalized by section 2-716(1) of the Uniform
Commercial Code,53 many still believe that specific performance is the
exception rather than the rule.54
For this reason, this study sought a jurisdiction which is similar enough
to the Common Law but has the Civil Law feature of setting specific
performance as the preferred remedy. This is at the behest of previous
scholarship that urged such an investigation.55 Israel provided exactly such an
opportunity, as it mixes Civil and Common Law elements. Importantly, Israeli
contract law is sufficiently close to United States law to draw meaningful
conclusions, and the rest of this Part will note the main points of similarity as
well as the role specific performance plays.56
49 Oliver Wendall Holmes, The Path of the Law, 10 HARV. L. REV. 457, 462 (1897).
50 RESTATEMENT (SECOND) OF CONTRACTS § 359 (AM. LAW INST. 1981).
51 See a review of some of the remedies in Thomas S. Ulen, The Efficiency of Specific
Performance: Toward a Unified Theory of Contract Remedies, 83 MICH. L. REV. 341, 364 n.83
(1984).
52 RESTATEMENT (SECOND) OF CONTRACTS §§ 362–66(a) (AM. LAW INST. 1981).
53 U.C.C. § 2-716(1) (AM. LAW INST. & UNIF. LAW COMM’N 1977) (allowing specific
performance when “the goods are unique or in other proper circumstances”).
54 See Peter Linzer, On the Amorality of Contract Remedies—Efficiency, Equity, and the
Second Restatement, 81 COLUM. L. REV. 111, 121 (1981) (viewing the UCC as a “modest
expansion”); Shiffrin, Divergence, supra note 27, at 722–23 (“Contract law’s dominant remedy
is not specific performance but expectation damages.”). But see Barbara H. Fried, What’s
Morality Got to Do with It?, 120 HARV. L. REV. F. 53 (2009) (criticizing Shiffrin for overlooking
modern trends in the availability of specific performance). There is also some empirical evidence
that supports the view that specific performance is liberally granted. See Douglas Laycock, The
Death of the Irreparable Injury Rule, 103 HARV. L. REV. 687, 707 (1990).
55 See Shavell, supra note 11, at 876 (“It would thus be fruitful for researchers in the future
to gather information about parties’ choice of remedy for breach . . . using social scientific
empirical methodology. Of particular value would be information about parties’ choice of
remedy in Germany for contracts to produce things or to perform services, since specific
performance is the general remedy there.”). Germany is similar to Israel in that specific
performance is the default remedy although Israel allows for specific performance in a broader
range of circumstances.
56 On the proximity of Israeli contract law to American contract law, see the analysis by
Daphne Barak-Erez, Codification and Legal Culture: In Comparative Perspective, 13 TUL. EUR.
Electronic copy available at: https://ssrn.com/abstract=1641438
2015] CONTRACT REMEDIES IN ACTION 383
Israeli contract law is an amalgam of statutory legislation and common
law.57 Like American Law, it is also largely substance centric, and much of the
modern law is judge-made. Israeli judges often cite to American law as a
source of inspiration, and many American doctrines and cases such as Hadley
v. Baxendale, Leonard v. Pepsico, and Carlill v. Carbolic Smoke Ball Co. are
routinely taught in law schools, analyzed in Israeli scholarship, and cited by
judges.58
If a contract is breached, the aggrieved party has the option of choosing
her remedies, including specific performance where feasible.59 If specific relief
is sought, it will be granted unless the defendant can prove that certain statutory
exceptions obtain, mainly that the relief would be “unjust” because, for
example, delay on the promisee’s part has made performance too costly.60
Specific performance is not only the default remedy, it is considered
morally superior to damages. As such, it is commonly referred to by courts and
scholars alike as being “the first and foremost” among all other remedies.61
Conversely, expectation damages are viewed as inducing morally wrongful
behavior, subjecting the promise to financial calculation by the promisor. This
sentiment is traceable to civil law and, presumably, has its roots in Canon
Law.62
To enforce a specific performance, three main venues exist.63 The
plaintiff could file a petition for an order of contempt, and the court has broad
formal discretion in choosing sanctions, whether financial or criminal.64
However, this is not a penal procedure and is only used to achieve performance
CIV. L.F. 125, 133 (1998) (“[T]he remedial scheme in Israeli contract legislation is highly
influenced by English and American law.”); see also Jonathan Yovel & Ido Shacham, An
Overview of Israeli Contract Law, in THE INTERNATIONAL CONTRACT MANUAL (2014).
57 For an overview of Israeli contract law, see Yovel & Shacham, supra note 56.
58 Leonard v. Pepsico, Inc., 88 F. Supp. 2d 116 (S.D.N.Y. 1999), aff’d, 210 F.3d 88 (2d Cir.
2000); Carlill v. Carbolic Smoke Ball Co. [1893] Q.B. 256 (C.A.); Hadley v. Baxendale (1854)
156 Eng. Rep. 145.
59 In my own analysis of 100 randomly chosen cases where specific performance was
sought, I found that specific performance was granted in 45% of the cases, and partial specific
performance in an additional 15% (for a total of 60%). For the methodology employed, see infra
note 82.
60 Contracts (Remedies for Breach of Contract) Law, 5731–1970, SH No. 610 § 3 (Isr.).
61 See CA 5131/10 Azimov v. Binyamini (not reported) (2013) (Isr.),
http://elyon1.court.gov.il/files/10/310/051/v08/10051310.v08.htm (emphasizing the moral value
of keeping promises and seeing specific performance as a tool for encouraging promise-keeping).
62 See JANWILLEM OOSTERHUIS, SPECIFIC PERFORMANCE IN GERMAN, FRENCH AND DUTCH
LAW IN THE NINETEENTH CENTURY 34 (2011).
63 See Stephen Goldstein, The Reciprocal Relationships Among Methods of Enforcing Non-
Monetary Court Orders: The Doctrine of the Least Harsh Alternative, 16 MISHPATIM 176 (1986)
(Isr.).
64 §6(1) Contempt of Court Ordinance, 5689–1929, SH No. 1 (Isr.).
Electronic copy available at: https://ssrn.com/abstract=1641438
384 WEST VIRGINIA LAW REVIEW [Vol. 118
and never to punish for non-performance.65 Courts are wary of this specific
power and tend to limit its use.66
Alternatively, the Enforcement and Collection Agency is a government
run agency that is designed to assist creditors in enforcing contractual
obligation, and has numerous powers, including the ability to foreclose and
seize property, as well as to place liens on bank accounts, to order wage
garnishment, and to limit international travel. Lastly, the plaintiff may file for
appointment as a receiver over the defendant’s assets or company, but this is
rarely invoked.67
In summary, while the general structure of Israeli law of contracts and
private law in general exhibits strong semblances to American law, the two
systems diverge on the prominence of remedies. The (arguable) liberalization
of contract remedies in American law further emphasizes the value of the study
of a jurisdiction where specific performance is unambiguously set as default.
IV. METHODOLOGY
The basis of the empirical investigation is an exploratory qualitative
study—interviews with relevant stakeholders in Israel.68 The choice of this
methodology is driven by the absence of previous empirical work of this kind
on this issue and the theoretical gap created by this omission, strongly felt by
prior scholarship.69 The goal here, in general terms, is to capture the law-as-it-
is-experienced,70 owing to the familiar insight that a great deal of individual
action takes place in the “shadow of the law.”71
65 See CrimA 6/50 Levitt v. Angel, 4 PD 5710 459 (1950) (Isr.).
66 See CC 6807/06 Kugler v. Kugler, (not reported) (2007) (Isr.).
67 See DAVID KATZIR, REMEDIES FOR BREACH OF CONTRACT, pt. A, at 356, 378–80 (1991)
(Isr.).
68 The interviews were conducted based on the ethical approval of the Institutional Review
Board (IRB), IRB protocol no. 15682.
69 See Shavell, supra note 11, at 876 (“It would thus be fruitful for researchers in the future
to gather information about parties’ choice of remedy for breach . . . using social scientific
empirical methodology.”).
70 See PIERGIORGIO CORBETTA, SOCIAL RESEARCH: THEORY, METHODS AND TECHNIQUES 264
(2003) (“[The interview’s] basic objective remains that of grasping the subject’s perspective:
understanding his mental categories, his interpretations, his perceptions and feelings, and the
motives underlying his actions.”).
71 The shadow of the law paradigm was coined by Robert H. Mnookin and Lewis
Kornhauser, Bargaining in the Shadow of the Law: The Case of Divorce, 88 YALE L.J. 950
(1979). A famous study in this vein is Stewart Macaulay, Non-Contractual Relations in Business:
A Preliminary Study, 28 AM. SOC. REV. 55 (1963) (studying through interviews contractual
behavior of businesspersons in Wisconsin). There are also studies that suggest that certain social
structures substitute the formal law, so that parties operate in the shadow of social norms. See
ROBERT C. ELLICKSON, ORDER WITHOUT LAW: HOW NEIGHBORS SETTLE DISPUTES 40–65 (1991)
Electronic copy available at: https://ssrn.com/abstract=1641438
2015] CONTRACT REMEDIES IN ACTION 385
Obtaining the cooperation of parties to private litigation and asking
them to volunteer sensitive private information is difficult.72 Acquiring a
random statistically representative sample was bound to fail; instead, a
“maximum variation” approach was employed, meaning that the group
assembled was meant to represent a heavily diverse group of participants.73 The
results should therefore be interpreted as providing insight into different groups
within the population, but not as being representative of the frequency of the
phenomena described.74
The relevant population from which the sample was drawn is
comprised of all cases reported to a commercial database (Nevo) matching
relevant general criteria, such as the dates and the subject matter of contracts.
These cases were ordered randomly, and in each case, at least one of the parties
or their lawyers were contacted. Consent to participate was acquired in 18 cases
(in approximately 60 cases contact was attempted, implying about 36%
response rate). The number of participants chosen reflects similar past scholarly
work in contracts and other fields of law.75
Demographics: 6 interviewees were private parties who had been
involved in specific performance litigation over the past 10 years (of which one
was a CEO of a company), 11 were lawyers, and 1 was a magistrate judge
acting as the head of a local office of the Enforcement and Collection
Agency.76 Of the private parties, five had prevailed in litigation as plaintiffs and
one had lost as a defendant. Of the lawyers, four lawyers were senior partners,
and one was a senior associate in one of Israel’s top law firms (all reported
heavy involvement, at least in the strategic management of the case); another
(providing evidence of social norms of dispute resolution that diverge from legal prescriptions);
Lisa Bernstein, Opting Out of the Legal System: Extralegal Contractual Relations in the
Diamond Industry, 21 J. LEGAL STUD. 115 (1992) (describing internal dispute resolution
mechanisms in the diamond industry).
72 Other obstacles included the acquisition of parties’ contact information from legal cases
and providing motivation to contribute their time for the sake of the study.
73 See SARAH J. TRACY, QUALITATIVE RESEARCH METHODS 135–36 (2013).
74 Such an approach is common in qualitative studies. See, e.g., CORBETTA, supra note 70, at
268 (stating that “the qualitative researcher does not follow a criterion of statistical
representativeness, but rather one of substantive representativeness, in that the aim is to cover all
the social situations that are relevant to the research, rather than attempting to reproduce the
characteristics of the population in full”); see also MATTHEW B. MILES, A. MICHAEL HUBERMAN
& JOHNNY SALDAÑA, QUALITATIVE DATA ANALYSIS 31 (3d ed. 2013) (“Qualitative samples tend
to be purposive rather than random.”).
75 See Keating, supra note 8, at 100 (13 interviewees); Farnsworth, supra note 9, at 382
(interviewing 20 attorneys). A relatively more comprehensive study was conducted by Stewart
Maculay and his research assistants, covering 68 interviewees. Macaulay, supra note 71.
76 See supra Part II.
Electronic copy available at: https://ssrn.com/abstract=1641438
386 WEST VIRGINIA LAW REVIEW [Vol. 118
four were affiliated with mid-sized law firms, whereas the remaining two
lawyers were employed by small law firms.77
The interviews were all conducted by the Author and followed a semi-
structured research protocol, which is a combination of standard questions,
specific inquiries concerning the case, and dynamic follow-ups to respondents’
responses. In the course of the interview, the facts of the case were reviewed;
then, the interviewee was asked about her motivations and experiences in both
the pre-trial and post-trial stage. Lawyers were asked about their own
motivations and that of their clients’. Hypothetical questions were used to elicit
information on the attitudes of the parties.
Before proceeding, the point should be restated that the current
methodology does not aim to represent the distribution of cases generally, but
only speaks to the existence of certain phenomena. Having said that, the
findings reported here are those that there is good reason to believe would be of
general application.
V. FINDINGS ON SPECIFIC PERFORMANCE PRE-JUDGMENT
With the theoretical background in mind, let us move now to describe
the findings. I start by examining how plaintiffs choose between remedies when
they litigate their case.
A preliminary finding is that plaintiffs opt-out of specific performance
in what seems like many cases. This is somewhat surprising as theory imputes a
higher value to specific performance than to money damages. To explain this
unlikely finding, the interviews suggest three reasons: low enforceability might
make specific performance inferior to expectation damages in terms of value;
attorneys are biased in favor of money damages, as they facilitate collection of
their own fees, so that they might consult the plaintiff to pursue this remedy
even when it runs counter to the client’s interests; and finally, litigation is
lengthy and plaintiffs’ preferences are dynamic—suing for money damages
might be safer for the plaintiff even when she currently prefers performance to
money damages.
But even when plaintiffs act consistent with theory and sue for specific
performance, their motivations are more involved than is generally appreciated.
Suing for specific performance may be motivated by a desire to signal to the
court something about the merits of the case, to minimize procedural costs and
delay, or to use as leverage in negotiations. These uses may or may not be
objectionable on their own right, but they clearly deviate from the common
justification of specific performance as giving the plaintiffs what was promised
in the contract.
77 Future endeavors to increase sample size should include a greater sample of people who
have lost in litigation and had to perform. This demographic proved especially interesting and
fruitful in this study.
Electronic copy available at: https://ssrn.com/abstract=1641438
2015] CONTRACT REMEDIES IN ACTION 387
A. Why Do Parties Not Sue More Frequently for Specific Performance?
When plaintiffs file a lawsuit for breach of contract, they have a choice
between various remedies, including specific performance and expectation
damages.78 The conventional wisdom in the literature is that, given the option,
plaintiffs would tend to sue for specific performance. First, promisees are
sometimes seen as the disappointed victims of a breach, which will not be
remedied by mere payment of money.79 Second, promisees are expected to
benefit from the judgment indirectly, even if they do not care about
performance, as they can use it as a bargaining chip to extract value from the
promisor.80
However, early in the process of the research, there were various
indications that parties regularly abstain from suing for specific performance,
despite having the right to do so.81 First, a sample analysis of contract cases
found that specific performance was only sought in a minority of these cases
(much fewer than 33%).82 By itself, however, this is an ambiguous finding, as it
does not convey information on the population of cases that settle.83 To
overcome this problem, and to get a sense of the overall population of cases, a
question was included on the choice of remedies for all the lawyers
interviewed, as they have been involved also in cases that settle. Consequently,
some of the lawyers reported that they frequently advise their clients to opt for
expectation damages over specific performance, and that, from their
78 See supra Part II.
79 See Shiffrin, Breach of Contract, supra note 25, at 1564 (“If the no-show plumber were to
appear next time matter-of-factly presenting you with a check or a discount reflecting the value
of your time that was wasted, I suspect that, after emerging from shock, the resentment would not
fully dissipate.”).
80 For the proposition that renegotiation with a specific performance judgment in hand would
yield high value to the promisee, see, for example, Daniel Markovits & Alan Schwartz, The
Expectation Remedy Revisited, 98 VA. L. REV. 1093, 1102 (2012) (“[T]he property rights
contract [i.e., specific performance] induces an ex post renegotiation, in which the promisee
releases the promisor from her trade obligation in exchange for a share of the gains that the
release engenders.”).
81 Importantly, note that as a general matter, laypersons tend to exaggerate the rates at which
specific performance will be given. See Tess Wilkinson-Ryan, Fault in Contracts: A
Psychological Approach, in FAULT IN AMERICAN CONTRACT LAW 289, 293, 298 (Omri Ben-
Shahar & Ariel Porat eds., 2010) (finding in an experiment run in the U.S. that respondents
believed a judge should and would award specific performance even in circumstances where
such a prediction was unlikely).
82 The methodology consisted of identifying a pool of 900 cases in one of the commercial
databases (Nevo) that met criteria indicating that they deal with contract remedies within a given
time range. Three hundred of the cases were analyzed, and in only 102 of them, specific
performance was sought. This indicates that, roughly, specific performance is sought in about
one-third of the cases.
83 See supra note 22.
Electronic copy available at: https://ssrn.com/abstract=1641438
388 WEST VIRGINIA LAW REVIEW [Vol. 118
experience, specific performance is frequently not sued. These findings are
bolstered by similar findings in civil law countries where expectation damages
are chosen over specific performance.84 The following sections explore several
reasons for this deviation from theoretical prediction.
1. Low Enforceability
Parts VI and VII detail various impediments to both post-judgment
renegotiation and the enforcement of judgments. For now, it should be noted
that the existence of such impediments has two implications: first, these
impediments mean that there is no guarantee that the judgment would
eventually be sold, so that if a party is not interested in performance, suing for
specific performance carries a risk. Second, the value of the sale of the
judgment in renegotiation might be low, as the threat of enforcement would
have a weak bite on the promisor. If the promisor knows he can effectively
avoid the enforcement of the judgment, he might be willing to pay a low sum in
exchange for release from it, an amount that might be lower than expectation
damages. That means that suing for specific performance in order to use it as a
bargaining chip to extract extra payments from the promisor might end up
being a losing proposition.
2. The Lawyers’ Agency Problem
An analysis of the interviews reveals an important contributor for low
rates of specific performance litigation: a conflict of interest of the plaintiff’s
attorney regarding their fees.85 For reasons presently explored, lawyers have a
systematic bias towards money damages, and this bias may lead them to sway
their clients in favor of seeking money damages even when the client’s best
interest is served by a specific performance award.86
84 A similar finding is noted in Henrik Lando & Caspar Rose, On the Enforcement of
Specific Performance in Civil Law Countries, 24 INT’L REV. L. ECON. 473, 486 (2004)
(“[Specific performance] is available but rarely sought in Germany and France.”); see also John
P. Dawson, Specific Performance in France and Germany, 57 MICH. L. REV. 495, 530 (1959)
(“But despite . . . formal limitations the damage remedy is in fact resorted to, by the choice of
litigants, in a high percentage of cases.”); Bernard Rudden & Philippe Juilhard, La Théorie de la
Violation Efficace, 38 REVUE INTERNATIONALE DE DROIT COMPARÉ 1015, 1035 para. 72 (1986)
(observing that, practically, damages are the most sought after remedy in France, despite the
general legal priority of specific performance).
85 See generally Herbert M. Kritzer, Lawyer Fees and Lawyer Behavior in Litigation: What
Does the Empirical Literature Really Say?, 80 TEX. L. REV. 1943 (2002) (discussing the various
effects of attorney fees on their behavior and noting the complexity of this question).
86 This may be considered malpractice, but proving this in court would be difficult, as
lawyers’ motives may be easily disguised.
Electronic copy available at: https://ssrn.com/abstract=1641438
2015] CONTRACT REMEDIES IN ACTION 389
One issue arises when lawyers are paid on the basis of a contingency
fee. Structuring a specific performance decree so it will be effective requires a
lot of dedicated work by the attorney, for which she is not compensated.
Moreover, assessing attorney fees requires the evaluation of the market value of
performance. This is difficult, costly, and open to conflicting interpretations,
and in fact, quite often plaintiffs sue for specific performance because they
wish to avoid these costs.87 One lawyer referred to this prospect as a “needless
headache.”88 Instead, lawyers can steer the client to sue for a damages suit,
where these issues are avoided.89
But even if attorneys are not paid on a contingency basis, specific
performance is less favorable, because of the problem of collecting the fees.90
With expectation damages, the client’s liquidity is assured, but this may not be
the case with respect to specific performance of a good or service. Moreover,
the lawyer enjoys a mechanic’s lien on damages awards, which guarantees her
fees.91 The lawyer would have a private incentive, again, to recommend suing
for specific performance.
3. Preferences over Time
People have different tastes and preferences at different times of their
lives. This is obviously a familiar point, but it is of special interest in the
context of specific performance litigation, due to an expected change in
preferences over both the performance and the relationship with the other
party.92
One of the lawyers related the case of a client who bought a brand new
model of a luxury car.93 The retailer committed an inventory mistake and could
not supply the car on time. The client and the lawyer decided jointly against
filing a claim for specific performance. Considering the fact that litigation
87 See, e.g., Kronman, supra note 44, at 362 (“In asserting that the subject matter of a
particular contract is unique and has no established market value, a court is really saying that it
cannot obtain, at a reasonable cost, enough information about substitutes to permit it to calculate
an award of money damages without imposing an unacceptably high risk of undercompensation
on the injured promisee.”).
88 Interview with Yaron Reiter, Esq., Ron Gazit, Rotenberg & Co. (Dec. 29, 2008)
[hereinafter Reiter, Interview].
89 Lawyers incentives have a marked effect on the choice of litigation strategy. See generally
Kritzer, supra note 85 (surveying the empirical literature).
90 Interview with Anonymous Lawyer #1, specializing in debt collection (Jan. 3, 2009).
91 The mechanic’s lien is provided for in Section 88 to the Chamber of Advocates Law,
5721–1961, SH No. 1678 (Isr.).
92 For a similar conclusion, see Lando & Rose, supra note 84, at 481–82.
93 Reiter, Interview, supra note 88.
Electronic copy available at: https://ssrn.com/abstract=1641438
390 WEST VIRGINIA LAW REVIEW [Vol. 118
would take a few years to resolve,94 the client would have no use for the car.
The parties contemplated the possibility of suing under the doctrine of cy-pres
or “approximate performance,” i.e., suing for another new car from the same
manufacturer.95 However, this option was rejected as well, because the client
was not sure whether he would still be interested in this brand of car in the
future.
Another change in preferences relates to the relationship between the
parties. At the time of contracting, the relationship is benign. However, the
litigation process is aimed at finding who is at fault and not to remedy the
pathologies of the underlying relationship. Consequently, some of the
interviewees reported that the litigation process exacerbated existing tensions
between the parties and created animosity;96 and when asked about the other
parties, one of the interviewees responded in the following typical way,
describing him as “stiff-necked and economical with the truth.”97
The adverse relational effect of litigation is of special concern in cases
of specific performance, as the decree implies greater future interaction than is
expected with a damages award. This issue reduces the relative value of
specific performance vis-à-vis expectation damages, even when the direct
financial value of performance is still higher.
In sum, change in preferences would reduce the value of specific
performance, as it requires plaintiffs to bear the risk that they would change
their mind over the course of litigation.
B. Why Do Parties Sue for Specific Performance?
Of course, there are also cases where specific performance is indeed
sought. As this is the basic premise of the literature, it may seem that it would
require no further justification. As the interviews reveal, however, parties sue
for specific performance not only for the reasons assumed in the literature, but
also for different reasons that are more strategic in nature: signaling of the
merit of the underlying case, the minimization of procedural costs and delays,
and leverage in post-judgment renegotiation.98
94 Contract litigation is relatively lengthy. An earlier study reports a median of 17.8 months
for cases that go to trial on the federal level (24.8 in the state level). See Theodore Eisenberg et
al., Litigation Outcomes in State and Federal Courts: A Statistical Portrait, 19 SEATTLE U. L.
REV. 433, 448 (1996).
95 The cy-pres doctrine is found in RESTATEMENT (SECOND) OF CONTRACTS § 358 (AM. LAW
INST. 1981).
96 Interview with Mike York-Reed, Esq., (Dec. 25, 2008) [hereinafter York-Reed,
Interview]; Interview with Omri Negev (Dec. 24, 2008) [hereinafter Negev, Interview].
97 Interview with Anonymous Party #1.
98 Two additional strategic reasons that were identified in the literature but could not be
verified in this study are spite (suing in order to inflict a loss on the other side) and creating
Electronic copy available at: https://ssrn.com/abstract=1641438
2015] CONTRACT REMEDIES IN ACTION 391
1. Signaling
For the plaintiff to be awarded a remedy for a breached contract, the
court must be first convinced that the plaintiff is in the right. This is often not a
simple task. Contractual breaches are typically a nuanced dynamic of escalating
breaches, which involve varying degrees of fault by both parties. It is common
in these situations that the plaintiff would face allegations of bad faith or prior
breach by the defendant, making it essential to prove the good faith of the
plaintiff.
When the plaintiff has a choice of remedies, the choice made can be
taken as a signal of the merits of the case.99 In this context, one of the lawyers
interviewed complained that it is difficult to opt for expectation damages
without sending an unwanted signal to the court. The concern is that the court
might infer that if the plaintiff opts for monetary compensation instead of
performance, she is not sincere in her motives and that she is “in it for the
money.”100 Since judges constantly extol the moral merits of specific
performance, choosing the “wrong” remedy might convey the wrong message.
In other words, by choosing to deviate from the default of specific
performance, the plaintiff signals that she no longer has interest in the contract,
which may weaken the plaintiff’s position in litigation. It may well be the case
that neither party is interested in the actual performance of the contract, yet the
benefits of signaling and thus winning the case may outweigh the costs of
performance to the plaintiff.
2. Achieving Faster, Cheaper Case Resolution
The procedure for specific performance actions is much faster and
cheaper than the corresponding procedure for damages. The reason is
straightforward: a specific performance case does not involve the quantification
of damages, which is a highly complex and expensive procedure that involves
experts, the introduction of various evidence, bringing witnesses, and so
forth.101
reputation as being performance-oriented. See Edward Yorio, In Defense of Money Damages for
Breach of Contract, 82 COLUM. L. REV. 1365, 1373 (1982).
99 It is rational for courts to draw this inference, because sending this signal is more costly
for someone who is not interested in the performance of the contract than it is for someone who
seeks performance. Alternative interpretation of opting for specific performance is that the
plaintiff places an especially high value on performance and inasmuch as it would increase her
odds of winning, we might expect this to contribute to the overuse of this remedy.
100 Interview with Ram Zan, Esq., Ron Gazit, Rotenberg & Co. (Dec. 29, 2008) [hereinafter
Zan, Interview].
101 If—as is the case under American law—the plaintiff has to show the inadequacy of
damages to receive specific performance, this will introduce additional costs that would reduce
the cost saving involved.
Electronic copy available at: https://ssrn.com/abstract=1641438
392 WEST VIRGINIA LAW REVIEW [Vol. 118
By opting for a specific performance suit, the plaintiff can economize
on litigation costs (for both himself and the defendant). The shorter period it
takes to litigate the case will reduce costs and might be beneficial to both the
parties and the public.102
This benefit may accrue even if the plaintiff intends to ultimately
renegotiate the decree, which means that quantification would be required (for
trade to occur). But it may still be beneficial to sue for specific relief and then
renegotiate if the parties have a comparative advantage over the court in
quantifying damages and a comparative disadvantage over the court in
assigning fault.103
Some of the interviewees reported suing for specific performance for
these reasons. For example, a lawyer reported that he was facing litigation that
combined both motions for specific performance and for damages. In litigation,
he tried to separate the proceedings despite the costs involved in handling two
separate suits, because he felt that the benefits of the quicker and cheaper
resolution of the specific performance suit outweighed the additional costs of
having two distinct cases.104
3. Post-Judgment Renegotiation
Finally, the interviews revealed that in some cases parties were at least
partially motivated by the ability to sell their rights to the other party ex-post.105
This is in line with much of economic theory that predicts such a result, but is
surprisingly at odds with a previous study (albeit in torts) that found that post-
judgment renegotiations are scarce.106
VI. POST-JUDGMENT RENEGOTIATION AND ITS FAILURES
With the judgment in hand, the parties may seek to renegotiate. A
common theme in economic analysis is the notion that if performance is
inefficient—which the fact of breach suggests it is—the parties may benefit
102 However, Alan Schwartz contends that specific performance decrees may be more costly
to issue than expectation damages, as the judge would have to spend considerable time
fashioning the decree. See Schwartz, supra note 39, at 293.
103 The theory of the bifurcation of the litigation process is complex and the merits of so
doing may depend on a broad set of parameters. See Kathryn E. Spier, Litigation, in THE
HANDBOOK OF LAW AND ECONOMICS 259, 293–95 (A. Mitchell Polinsky & Steven Shavell eds.,
2007) (reviewing some of the considerations that factor into the decision to bifurcate suits).
104 Interview with Avi Shachar, Dir., A.G.M.R. Eng’g & Inv. Co. Ltd. (Dec. 23, 2008)
[hereinafter Shachar, Interview].
105 Zan, Interview, supra note 100.
106 See Farnsworth, supra note 9.
Electronic copy available at: https://ssrn.com/abstract=1641438
2015] CONTRACT REMEDIES IN ACTION 393
from agreeing not to enforce the judgment in exchange for some payment.107
Despite that, the leading research on the topic of post-judgment renegotiation
(“PJR”) has found that in nuisance cases, no PJR took place. 108 This makes an
investigation of this issue in the context of specific performance especially
important.
The analysis finds that specific performance PJR sometimes takes
place: of the interviewees, two reported that they were engaged in successful
PJR.109 One was a defendant who lost in a specific performance suit and was
ordered to transfer title in a house to the plaintiff. He actively avoided the
enforcement of the judgment for a few years, and so the plaintiff found it
necessary to renegotiate the judgment, and they have settled for half the price
of the value of the judgment. In another case, the PJR failed apparently because
of mistrust and a hard bargain by the defendant.110 In addition, one lawyer
reported that he had been involved in “some” PJRs throughout his career.111
However, PJRs do not always occur—that is, in some cases, parties do
not even attempt to renegotiate the claim.112 As noted, this is puzzling from an
economic perspective. And while it is only indicative, the analysis of the
reasons for failure of PJR suggests that the failure has to do more with
psychological reasons than lack of potential gains from trade: animosity, the
endowment effect, and an incommensurability bias.
Consider first the issue of animosity. Breach of contract, and
specifically the process of litigation, can lead to the entrenchment of the
mistrust between the parties, making them skeptical of any new agreement.
Moreover, the mistrust may escalate to actual spite between the parties, which
will further motivate them not to negotiate.113 For example, in one of the cases,
the parties sat down and negotiated a settlement. The defendant asked, “How
much would you be asking in settlement?”; but the plaintiffs thought it was a
107 See supra note 106 and accompanying text.
108 See infra note 115 and accompanying text.
109 Zan, Interview, supra note 100; Negev, Interview, supra note 96.
110 York-Reed, Interview, supra note 96. The case referred to was CA 4018/03 Isodor Sharvit
v. Ben Aharon 49(4) PD 343 (2005) (Isr.).
111 Interview with Gerald Benichou, Esq., Burnstein-Benichou Law Firm (Jan. 10, 2009)
[hereinafter Benichou, Interview].
112 On the issue of failure of PJR from behavioral perspective, see Russell B. Korobkin &
Thomas S. Ulen, Law and Behavioral Science: Removing the Rationality Assumption from Law
and Economics, 88 CALIF. L. REV. 1051, 1138 (2000), and Christine Jolls, Cass R. Sunstein &
Richard Thaler, A Behavioral Approach to Law and Economics, 50 STAN. L. REV. 1471, 1497–
1500 (1998).
113 See Arthur Allen Leff, Injury, Ignorance and Spite—The Dynamics of Coercive
Collection, 80 YALE L.J. 1 (1970). Korobkin and Ulen argue that a general bias towards fair
outcomes will generally facilitate renegotiations. Korobkin & Ulen, supra note 112, at 1137–38.
But if litigation leads to spite, this may skew this tendency in the opposite direction.
Electronic copy available at: https://ssrn.com/abstract=1641438
394 WEST VIRGINIA LAW REVIEW [Vol. 118
legal trick, aimed at showing in court that the plaintiffs were cynically
motivated by financial calculations and did not care about the contract.
Therefore, the plaintiffs refused to answer and the negotiations broke down.114
In the case of specific performance, animosity has conflicting effects;
on the one hand, it makes it harder to reach an agreement, for the parties may
mistrust and dislike each other. On the other hand, it makes both parties want to
successfully negotiate, because failure in negotiation means that they both have
to contend with each other for a longer period, during the implementation of the
decree. The direction of the combined effect of these factors is hard to predict,
but in some cases, this may make parties reluctant to negotiate even when it is
in their best financial and emotional interests to do so.
Now consider the endowment effect. This is the name given to the
experimental result that subjects report higher value for things they own just by
virtue of owning them. The so-called endowment of a subject with an object,
changes none of the characteristics of this object, yet people often report that
they will require a high payment to trade it, higher than the maximum amount
they would be willing to pay for it. The problem, noted by legal behaviorists, is
that litigation seems to instill a sense of endowment in the litigants. Jolls,
Sunstein, and Thaler explain:
[T]he process of going through litigation may strengthen the
endowment effect. Experimental evidence suggests that there is
an especially strong endowment effect when a party believes
that he has earned the entitlement or that he particularly
deserves it. Of course someone who has received a court
judgment in his favor will believe that he has earned it. Such a
person may also believe strongly that this outcome is fair.115
This is expected to be of special relevance in the specific performance
context, as the judgment often represents an actual good or service (unlike
money damages in an ordinary judgment), to which the plaintiff may feel
entitled or otherwise connected. And while a study of this kind cannot prove
the existence of such bias, the impression from parties’ rhetoric is that some
sense of ownership underlies their reluctance to renegotiate. Parties often spoke
of their judgments as things “belonging to them,” which is in line with past
114 Interview with Ms. Tsipi Katz, Private Residence (Dec. 24, 2008) [hereinafter Katz,
Interview].
115 See Jolls, Sunstein & Thaler, supra note 112; see also George Loewenstein & Samuel
Issacharoff, Source Dependence in the Valuation of Objects, 7 J. BEHAV. DECISION MAKING 157,
159–61 (1994).
Electronic copy available at: https://ssrn.com/abstract=1641438
2015] CONTRACT REMEDIES IN ACTION 395
scholarship.116 Endowment effects have the potential for limiting the range of
possible settlements, thus leading to potential PJR failure.117
A final issue is what I term the incommensurability bias. All
throughout the interviews, parties’ responses indicated that they avoid thinking
of their judgment in terms of its monetary value. More precisely, they exhibit
an aversion to reducing the judgment to its monetary value, and attach
symbolic meaning to it. They tend to think of specific performance as
qualitatively different from damages. This finding also emerges in other
qualitative empirical works in other areas of law.118 As parties seem to perceive
it, specific performance is entitling the party to the fulfillment of the promise,
whereas damages only suggest entitlement to lost profits.119
When asked about their motivations, a recurring comment was that
“one wants a specific apartment, a specific type of a building.”120 And while
parties claimed that they wanted the specific good in question,121 when asked
whether they would have sold their right for a very large amount of money,
these plaintiffs all said that they would have; however, none of them actively
tried to negotiate such a high sum, and all relevant interviewees seemed to
think of the monetary aspect as qualitatively different from their contractual
entitlement. On the other hand, lawyers representing large firms all reported
that their clients had no problem renegotiating their judgments and reducing
them to their monetary value was “natural.” Since corporations are major
players in specific performance litigation,122 the implications of the
irreducibility problem are somewhat limited.
116 See Korobkin & Ulen, supra note 112, at 1107–12 (discussing the endowment effect and
its consequences for the ability of parties to renegotiate injunctions and judgments).
117 A subtle theoretical question is whether negotiation breakdown due to endowment effects
represent an efficiency loss or whether the effect actually creates subjective value. Id. at 1111.
118 See Farnsworth, supra note 9, at 392–94 (arguing that parties exhibit a refusal to
“commodify” injunctions in torts despite a financial incentive to do so).
119 Various psychological experiments seem to support the lay understanding of conceiving of
specific performance as being qualitatively different from expectation damages. See, e.g., Tess
Wilkinson-Ryan & David A. Hoffman, Breach Is for Suckers, 63 VAND. L. REV. 1003, 1016
(2010) (“Psychological evidence suggests that when individuals consider themselves to be in
certain kinds of reciprocal transactions, they are offended at a perceived downgrading or
commoditizing of the relationship.”); Wilkinson-Ryan & Baron, supra note 7, at 420–21 (finding
that the majority of participants in an experiment believed the promisor should perform rather
than pay damages, that the court should order specific performance and not damages, and that
even super-compensatory damages were inferior to performance).
120 Interview with David Zailer, Esq., Partner, Herzog, Fox, Neeman Law Firm (Jan. 29,
2008) [hereinafter Zailer, Interview].
121 Benichou, Interview, supra note 111; Katz, Interview, supra note 114.
122 I found corporations to be the plaintiffs in 35–40% of all contract litigation. This is based
on a random sample of 102 cases in Israel and on a survey made by the United States Department
Electronic copy available at: https://ssrn.com/abstract=1641438
396 WEST VIRGINIA LAW REVIEW [Vol. 118
VII. IMPLEMENTING SPECIFIC PERFORMANCE: PITFALLS AND OBSTACLES
What happens after a specific performance judgment is entered?
Surprisingly, we do not have systematic research data to answer this question.
Instead, reading the literature, one may get the impression that specific
performance judgments lead to more or less the same kind of result as was
promised in the original contract (i.e., performance), and issues relating to
implementation are only relevant in exceptional cases. This leads to the view
that the value to the promisee from a specific performance decree should be
greater than the value of expectation damages, given the known limitations on
the scope of these damages and how they systematically undercompensate
relative to actual profit expectations.123
Indeed, the law itself takes the view that specific performance has a
comparative advantage in terms of compensation. Under the Uniform
Commercial Code, specific performance is to be awarded “where the goods are
unique or in other proper circumstances.”124 The reason is that, in all non-
unique goods cases, damages are seen as providing “adequate” compensation,
and it is only in cases of unique goods or special circumstances that damages
are inadequate and specific performance is called for, under the theory that it
would provide a more adequate compensation.125 The Restatement echoes this
position.126
of Justice in 2005. This survey encompasses a representative sample of bench and jury trials
concluded in 156 counties. For a discussion of the methodology, see supra note 82.
123 See, e.g., Daniel Markovits & Alan Schwartz, The Myth of Efficient Breach: New Defenses
of the Expectation Interest, 97 VA. L. REV. 1939, 1964 (2011) (“[A] promisee with a property
right [i.e., specific performance] has as much power as a promisee who can enforce a very large
transfer term [i.e., money damages]. In both cases, the promisee can impose heavy costs on a
promisor who refuses to trade or to pay.”); Melvin A. Eisenberg, Actual and Virtual Specific
Performance, the Theory of Efficient Breach, and the Indifference Principle in Contract Law, 93
CALIF. L. REV. 975, 1018 (2005) (“In contrast [to expectation damages], specific performance
comes closer to giving the promisee just what he contracted for.”). Rarely the opposite option is
entertained; for example, Steven Shavell adumbrates the point. See Shavell, supra note 11, at 846
(“[P]roblems of administrability may be encountered under specific performance that would not
be experienced under the expectation measure.”).
124 U.C.C. § 2-716 (AM. LAW INST. & UNIF. LAW COMM’N 1977).
125 Laycock, supra note 54, at 689 (“The irreparable injury rule says that equitable remedies
are unavailable if legal remedies will adequately repair the harm. Frequent repetition of the rule
implies that legal remedies are generally adequate.”); Charles M. Thatcher, Specific Performance
as a Seller Remedy for Buyer’s Breach of a Sales Contract—The Availability of Judicial
Purchase Orders, 57 S.D. L. REV. 218, 233 (2012) (“Courts have traditionally insisted that the
claimant must establish the inadequacy of any award of damages to protect the claimant’s
expectation interest in order to make a prima facie showing of entitlement to specific
performance.”).
126 RESTATEMENT (SECOND) OF CONTRACTS § 359 (AM. LAW INST. 1981) (“[S]pecific
performance . . . will not be ordered if damages would be adequate.”).
Electronic copy available at: https://ssrn.com/abstract=1641438
2015] CONTRACT REMEDIES IN ACTION 397
The findings challenge this view because the implementation of
specific performance decrees is fraught with difficulties that decrease their
value. In general, most interviewees held negative opinions about the
effectiveness of specific performance awards. Only a few interviewees
responded positively and said that their experiences with specific performances
resulted in a timely and quality implementation.127 The majority, however,
faced difficulties in enforcing their judgment and, in some cases, it was never
fully implemented.128 The difficulties, presently described, suggest that in many
cases, specific performance would tend to be under-compensatory, relative to
both performance and expectation damages, thus making it not in the best
interests of the promisee in all cases.
Before describing these difficulties, let us first make explicit an oft-
neglected issue. It is well known that ordinary contracts are sometimes under-
performed (e.g., a plumber installs sub-standard pipes in the hope the
homeowner will not notice).129 Therefore, when we want to measure the value
of specific performance versus the ordinary performance of the contract, our
expectation should not be full and complete performance of the contract, for the
same powers and incentives that operate in the absence of judicial intervention
are likely to persist when a court steps in. What may reduce the value of
specific performance is, potentially, the cost of performance (the fact of breach
indicates that performance became more costly than anticipated, making the
promisor more likely to “cut corners”), and animosity between the parties
following litigation, which may make the promisor spiteful towards the
promisee. Importantly, the value of expectation damages, while under-
compensatory in many regards, is overly compensatory in that it assumes full
and complete performance, thus making it more likely to offer higher
compensation to the promisee than specific performance. 130
127 Katz, Interview, supra note 114; Interview with Nili Madar, Private Residence (Jan. 1,
2009) [hereinafter Madar, Interview]; Telephone Interview with Yiftach Naor, CEO, Carmelton
(Dec. 26, 2008) [hereinafter Naor, Interview]; Negev, Interview, supra note 96; Shchar,
Interview, supra note 104; York-Reed, Interview, supra note 96; Zan, Interview, supra note 100.
128 York-Reed, Interview, supra note 96. For the case, see CA 4018/03 Isodor Sharvit v. Ben
Aharon 49(4) PD 343 (2005) (Isr.); CC 1788/94 Beer-Tovia v. Omri Negev, (not reported)
(2001) (Isr.) (petition approved for specific performance of a sale of house to offset prior debts);
Negev, Interview, supra note 96; see also LCA 7478/04 Beer-Tovia Ltd. v. Omri Negev, (not
reported) (2005) (Isr.) (discussing a settlement agreement between the parties); CC (Rishon-
Lezion) 4616/02 Eshel Col v. Hahevra Hamerkazit (not reported) (2007) (Isr.) (this case did not
involve specific performance per se, but dealt with the collection of a bond which required the
construction of a building); Benichou, Interview, supra note 111; Zan, Interview, supra note 100.
129 As in the famous case of Jacob & Youngs, Inc. v. Kent, 129 N.E. 889 (N.Y. 1921).
130 The other reasons for why expectation damages tend to be under are calculation errors
(coupled with a bias against punitive damages), refusal to compensate for “unforeseen” (but
nonetheless real) damages; and the costs of litigation, especially the costs of proving the extent of
damages. See RESTATEMENT (SECOND) OF CONTRACTS §§ 351–53 (AM. LAW INST. 1981)
(excluding damages that are unforeseen, cannot be established with reasonable certainty, or only
Electronic copy available at: https://ssrn.com/abstract=1641438
398 WEST VIRGINIA LAW REVIEW [Vol. 118
The rest of this Part details the reasons that affect the implementation
of specific performance decrees in cases where the promisor sought to breach
the contract, because presumably performance was costly or difficult.
A. Animosity
As just noted, a primary reason for why we would expect a specific
performance judgment to be of lower value than actual performance is
animosity of the parties, which could lead to spite.131 But some of the findings
contradict either the existence of animosity or its practical importance.
In one of the cases, there was a dispute concerning the implementation
of a multi-million dollar finance agreement. The plaintiff sued and demanded
that the defendant, a bank, specifically perform it. The bank responded that the
deterioration of the parties’ relationships had made it impossible to continue
with the agreement, which required frequent interactions and adjustments. In
litigation the plaintiff prevailed, and in the interview the CEO of the plaintiff
was surprised when asked about the animosity with the bank. The CEO said
that he “knows a different bank than the one described in the judgment” and
that “de-facto, the relationship with the bank is excellent.” When pressed about
the cooperation with the bank and asked about its good will in case of need, he
said that on a daily basis consensual modifications to the agreements took
place, and that the cooperation with the bank is strong.132 A similar finding was
noted with respect to a consumer who ordered a custom-made entrance door to
her house from a small company that manufacturers such doors. The company
delivered a door that opens in the opposite direction to what was ordered, and
refused to offer a replacement. The plaintiff sued, won a specific performance
judgment, and the door was eventually delivered and installed—to the letter of
the judgment.133
These findings suggest that the role of animosity and spite can be easily
exaggerated, and in reality, the same drivers that would ensure performance in
the ordinary run of things would continue to hold even in contexts where a
judgment was rendered. Another potential characterization of these findings is
reflect emotional “disturbance”); Eisenberg, supra note 123, at 989–96; Schwartz, supra note 39,
at 276.
131 See Anthony T. Kronman, Paternalism and the Law of Contracts, 92 YALE L.J. 763, 783
(1983) (“If . . . the promisor is required to perform as he had originally agreed . . . his feelings of
regret are likely to be intensified, particularly when performance entails some ongoing personal
cooperation with the other party or subjection to his personal supervision.”).
132 Naor, Interview, supra note 127.
133 Madar, Interview, supra note 127.
Electronic copy available at: https://ssrn.com/abstract=1641438
2015] CONTRACT REMEDIES IN ACTION 399
that, in cases of parties which are businesses or firms, spite and animosity are
of lesser concern.134
B. Costly Supervision and Lack of Standards
The effectiveness of specific performance judgments depends, in part,
on the ability to verify the quality of performance and to punish deviations. The
common mechanism one finds in the literature is the on-going supervision of
performance (e.g., having a court bailiff monitor the plumber). This mechanism
is often criticized for its costliness. But an alternative approach is much
cheaper—verifying the quality of the finished product.135 If the promisor fails
to meet a given quality standard, the court can either order a full remake or the
modification of the non-conforming part.
The interviews provide an example of the effectiveness of this latter
approach. In the “wrong way door” case mentioned above,136 a lawsuit was
brought against a seller of designer doors who failed to provide the buyer with
a door that matched the buyer’s specifications. The specific performance decree
was effectively enforced without need of judicial supervision, despite the door
being non-standard, due to the existence of detailed product specification in the
order form.137
However, both of these mechanisms are inadequate when it is both
difficult to monitor performance and there is no clear standard for evaluating
the quality of the completed good or service. The latter problem may arise
when performance efforts are only weakly correlated with the quality of the
finished good or when the good has no close substitutes against which it could
be compared. This means that the uniqueness of the good—which is the initial
motivation to abandon expectation damages in favor of specific performance—
also provides a strong reason why specific performance may be ineffective and
therefore under-compensatory.138
Besides these two potential means for enforcement, there is a third
option that could overcome some of the problems just mentioned—the
134 The Restatement notes that “[e]xperience has shown that potential difficulties in
enforcement or supervision are not always realized and the significance of this factor is
peculiarly one for judicial discretion.” RESTATEMENT (SECOND) OF CONTRACTS § 366 cmt. a. (AM.
LAW INST. 1981).
135 See Shavell, supra note 11, at 845 (“To enforce specific performance, the court must
ensure that the stipulated performance is accomplished, meaning that the court must be able to
ascertain the quality of performance to guard against its being inadequate.”).
136 See supra note 133 and accompanying text.
137 Madar, Interview, supra note 127.
138 Melvin Eisenberg proposes that difficulty in the verification of quality may actually give
the promisee too much, as he could “opportunistically insist on a gold-plated performance,
threatening that if the performance is anything less, he will go back to the court for an order of
contempt.” See Eisenberg, supra note 123, at 1026.
Electronic copy available at: https://ssrn.com/abstract=1641438
400 WEST VIRGINIA LAW REVIEW [Vol. 118
appointment of a receiver over the promisor’s business. This is a useful method
even when the performance requires special expertise, since the receiver can
(sometimes) effectively direct the employees to employ their know-how. One
case analyzed involved this mechanism and it proved highly effective.139 There
are costs to this mechanism, but at least part of the appeal is that the receiver’s
salary is paid for by the defendant. Further analysis of this mechanism is
required.
C. Post-Judgment Costs and Liquidity
The law and parts of the legal literature recognize that there may be ex-
post costs of implementing the judgment and that these costs may be
substantial, but they focus on the burden to the court and the public purse.140 In
practice, however, the plaintiff is expected to bear costs after the judgment
relating to the enforcement of the judgment, and these are often higher under
specific performance than under expectation damages.
The interviews revealed that all successful collection attempts were
preceded by a plaintiff’s active approach to the defendant; and in the one case
where no action was taken by the plaintiff, the order was not performed.141
Indeed, formally, the plaintiff is not obligated to take any action after a
judgment is issued and the defendant will not be excused from her obligation to
perform just because the plaintiff failed to take action. However, in practice, if
the plaintiff is passive, the prospects of performance appear to be low.
Taking the requisite actions is costly for the plaintiff: coordination of
performance, and its administration and monitoring, requires time and money,
and importantly, tend to be more costly than an award of damages. Note that
while an extensive and broad industry exists for the enforcement of money
judgments and debts, none exists for the enforcement of specific relief.142
Given that the plaintiff’s liquidity may be jeopardized following costly
litigation, the costliness of enforcement can hamper the effectiveness of the
judgment. Note that even a fully rational plaintiff may fail to predict the full
costs of litigation and her financial solvency at the end of litigation, thus
making it possible that the judgment will not be realized. One such example is
139 Interview with A. Kahan, Esq. (Dec. 30, 2008). The relevant case is Bankruptcy Court
(Haifa) 1053/01 Receiver of Ramat Shlomi v. Shlali David (2004) (Isr.).
140 RESTATEMENT (SECOND) OF CONTRACTS § 366 (AM. LAW INST. 1981) (“A promise will not
be specifically enforced if the character and magnitude of the performance would impose on the
court burdens in enforcement or supervision that are disproportionate to the advantages to be
gained from enforcement and to the harm to be suffered.”); Linzer, supra note 54, at 131 (“[T]he
court should then balance the cost to the promisee of receiving money damages in the place of
performance against costs of judicial supervision.”).
141 See, e.g., Shachar, Interview, supra note 104.
142 For a review of the industry, see FED. TRADE COMM’N, THE STRUCTURE AND PRACTICES OF
THE DEBT BUYING INDUSTRY (2013).
Electronic copy available at: https://ssrn.com/abstract=1641438
2015] CONTRACT REMEDIES IN ACTION 401
a woman who filed a suit for specific performance of a promise to allot her a
parking space next to her home. After the judgment was delivered, she became
gravely ill and took no action to collect the judgment. Six years after the fact,
the judgment had still not been performed.143
D. Capitalization and the Judgment-Proof Problem
When the defendant’s wealth is low, theory has it that specific
performance will have an advantage over expectation damages, for the
defendant will be unable to repay the debt in full but could perform instead.144
The problem with this argument is that it does not fully consider the
mechanisms of enforcement. The main mode of enforcement of a specific
performance decree is through the threat of contempt of court.145 With
contempt, the court may impose either financial or criminal sanctions. But in
practice, courts are highly reluctant to jail those who do not meet contractual
obligations. This leaves only the threat of financial sanctions, but in cases of
low capitalization, this threat is obviously of limited value. Consequently, one
of the interviewees, a lawyer, called those defendants with low capitalization
“outlaws” in the literal sense of the word—as they are outside the law’s
ambit.146 In summary, the added value of specific performance over expectation
damages in cases of low financial exposure is likely to be small, if any.
E. Defendant’s Reputation
Besides financial capital, defendants may also have capital in the form
of reputation, which can be leveraged to enforce specific performance
judgments. This is useful because, as just noted, financial and criminal
sanctions are likely to be ineffective in cases of low capitalization, thus making
specific performance only marginally more enforceable than expectation
damages. Moreover, just as reputation concerns reduce the need for costly
143 Interview with Hayman (Jan. 6, 2009). The case was CC (TA) 63723/99 Lota Hayman v.
Moshe, (not reported) (2002) (Isr.).
144 The Restatement takes this approach when it considers factors that would favor specific
performance over expectation damages: “Even if damages are adequate in other respects, they
will be inadequate if they cannot be collected by judgment and execution.” RESTATEMENT
(SECOND) OF CONTRACTS § 360 cmt. d. (AM. LAW INST. 1981); see also Timothy J. Muris,
Opportunistic Behavior and the Law of Contracts, 65 MINN. L. REV. 521, 535 (1981) (“If, on the
other hand, the promisor is faced with a judgment-proof promisee desiring to work elsewhere, the
promisor may turn to other legal solutions, such as . . . specific performance of the original
contract.”); Shavell, supra note 11, at 855–56 (arguing that specific performance has an
advantage over expectation damages in cases of a judgment proof defendant).
145 See supra Part III.
146 Zailer, Interview, supra note 120.
Electronic copy available at: https://ssrn.com/abstract=1641438
402 WEST VIRGINIA LAW REVIEW [Vol. 118
performance monitoring in ordinary contracts, they will mitigate the need for
judicial supervision of the performance of the judgment.147
Many of the lawyers interviewed stressed this point, and indeed,
instances of successful performance were typified by the debtor having a strong
reputation.148 Consistent with this point, it was noted that having low reputation
concerns often leads to difficulty in enforcing decrees.149
These findings are consistent with similar findings in previous works
that also asserted that businessmen are highly sensitive to considerations of
reputation when choosing business partners,150 and that the reputation
mechanism may altogether substitute the need for the legal system in several
areas.151 Interestingly, in the cases analyzed, reputation did not have sufficient
force to preclude the breach from taking place, but was strong enough to ensure
obedience to the court order. This fact reinforces the notion that reputation is a
complex and nuanced concept that cannot be simply reduced to whether it
exists or not.152
F. Social Norms and Social Pressures
The final source of leverage is social pressure deriving from social
norms. In some settings, the defendant operates in a social environment where
norms may either encourage or discourage compliance with the judgment. As
the following example illustrates, the effects of social powers are complex and
context-dependent.
Mr. Negev was a member of a Moshav, an agricultural village
cooperative, who entered into an agreement with the Moshav that would
transfer his title in his house in exchange for debts owed to the Moshav.153
Negev did not uphold his end of the bargain, and the cooperative brought suit
for specific performance and prevailed. But Negev did not obey the judgment
147 See A. Mitchell Polinsky & Steven Shavell, The Uneasy Case for Product Liability, 123
HARV. L. REV. 1437, 1443–50 (2010) (listing evidence for how a vendor’s reputation affects
products’ price and the vendor’s market share).
148 CA 148/77 Rot v. Yeshupa, 33(1) PD 617 (1979) (Isr.); Madar, Interview, supra note 128
(litigation against a well-reputed door company); Interview with Michael Shachor, Esq., Michael
Shachor, Menes & Co. (Dec. 30, 2008) (large company operating bus stations).
149 Zan, Interview, supra note 100.
150 See Bernstein, supra note 71; Lisa Bernstein, Private Commercial Law in the Cotton
Industry: Creating Cooperation Through Rules, Norms, and Institutions, 99 MICH. L. REV. 1724
(2000); Macaulay, supra note 71.
151 See Polinsky & Shavell, supra note 147 (arguing that legal regulation of defective goods
may be unnecessary, if a robust market exists).
152 For a comparative assessment of legal versus reputation enforcement, see W. Bentley
MacLeod, Reputations, Relationships, and Contract Enforcement, 45 J. ECON. LITERATURE 595
(2007).
153 Negev, Interview, supra note 96.
Electronic copy available at: https://ssrn.com/abstract=1641438
2015] CONTRACT REMEDIES IN ACTION 403
either. At first, social pressures were such that he said he felt shame and guilt.
But as time passed, it turned out that he was not alone, and other Moshav
members had joined his position after having accumulated debts to the
cooperative. At this stage, “[t]he Cooperative was divided,” he explained,
“between the good and the bad people.”154 He added that, “When I was alone, I
was ashamed, but when other members joined I drew strength.” 155 At this
stage, Negev felt more secure in his position and held firm, until five years later
when a settlement offer was made by the cooperative, and the parties settled for
about half of the original debt.
This example suggests that social pressures can affect the likelihood of
implementation, but that their effect is complex and may work in different
directions, sometimes simultaneously. Therefore, social norms can be a
valuable force but should not be blindly trusted to facilitate enforcement, even
in those cases where social norms are of relevance.
VII. IMPLICATIONS FOR LAW AND THEORY
The preceding Parts have shown some of the unintended and under-
studied functions of specific performance based on the experiences of parties to
specific performance litigation. This Part explores the implications of these
findings to prevailing contract theories, and explains how studying the
phenomena described could challenge, enrich, and deepen different analytic
approaches. As in the theoretical introduction in Part II, this Part divides the
discussion into rights-based and consequentialist theories. It also includes a
discussion of some of the potential legal ramifications for current American
doctrine.
A. Rights-Based Theories of Contract
The relationship between rights-based theories and any kind of
empirical findings is not straightforward, given that many deontological claims
are deduced from a-priori principles.156 Having said that, when deontological
theories are applied to the law, they seem to be at least somewhat concerned
with the consequences of specific legal rules, even if these consequences are
measured solely in terms that are not conventionally understood as
consequentialist: enhancement (or reduction) of autonomy, self-determination,
freedom, etc., as opposed to the more explicit standard of social welfare in
economic analysis.157
154 Id.
155 Id. For the case, see CC (Ashdod) 1788/94 Beer-Tovia v. Omri Negev, (not reported)
(2001) (Isr.).
156 See generally Alexander & Moore, supra note 17.
157 See supra note 28 and accompanying text.
Electronic copy available at: https://ssrn.com/abstract=1641438
404 WEST VIRGINIA LAW REVIEW [Vol. 118
The first implication of this study for rights-based theories is that
instrumental use of specific performance decrees is a common motive, at least
in the sample analyzed. That is, plaintiffs sue for specific performance not only
because they perceive themselves as disappointed victims of a broken promise,
but also employ more sophisticated and calculated approaches than implicitly
assumed by these theories. Plaintiffs sometimes sue for specific performance
because they seek to hold-up the promisor, to signal intentions to the court, or
to accelerate the resolution of their case at a lower cost. And if promisees act
instrumentally and not for performance’s sake, it is no longer clear that the
breach of a promise should entail a right to any of these things; if one was
promised a table, then why would that imply that I have the right, in the case of
default, to receive through hold-up more than the value of the table?
To this, the deontologist may have two responses that are worth noting.
First, deontological analysis is justified in glossing over these instrumental uses
because they are morally impressible (even the term “hold-up” suggests moral
condemnation).158 It would be wrong of the promisee to use the remedy in this
fashion, and so, this impressible use should not affect the desirability of
specific performance. The second response is that such instrumental uses are
unavoidable by-products of an otherwise justified rule, and they are marginal
enough to be dismissed.
These deontological responses are inadequate. The first argument
misses the point that a legal right to specific performance is given precisely
because we cannot trust all people to do the (arguably) morally required
thing.159 There is no right of action against hold-up by the plaintiff. The second
response is only correct if one is determinedly indifferent to the consequences
of legal rights. If, as most deontologist contend, consequences have some
weight, then allowing these by-products can only be justified on the basis that
their frequency is low. Such an assumption is empirical; the evidence gathered
in this study, although partial, suggests that they are relatively frequent, but of
course, further investigation is necessary.
The second implication concerns the under-compensatory nature of
specific performance. As we have seen, some versions of rights-based
arguments advocate specific performance because expectation damages may
not fully compensate the victim due to evidentiary and doctrinal reasons.160
158 For stronger language, see Eisenberg, supra note 123, at 1025 (“[A] promisee may sue for
specific performance opportunistically, because specific performance offers the potential for a
kind of extortion.”).
159 As I mention in the text around note 26, accounts such as Shiffrin’s are concerned with the
environment that the law creates and whether it fosters virtuous choices by moral agents. See
supra text accompanying note 38. The discussion here raises concerns that awarding specific
performance may indeed foster unethical conditions.
160 See supra note 130 and accompanying text.
Electronic copy available at: https://ssrn.com/abstract=1641438
2015] CONTRACT REMEDIES IN ACTION 405
These approaches assume that specific performance is indeed compensatory.161
However, as this Article’s analysis shows, this is often not the case: because
enforcement is costly to police, promisors may be resistant to financial
sanctions, and promisees may lack the necessary liquidity to enforce their
claims. Even more important, specific performance will sometimes be under-
compensatory even relative to expectation damages, so a promisee may find
herself in a worse position with a specific performance judgment than with
expectation damages.
From a theoretical perspective, this suggests that if full compensation is
the goal, the promisee must at least be entitled to choose between expectation
damages and specific performance. But this solution, as will now be explained,
is far from being adequate. Alternatively, it may be that a combination of
specific performance and damages should be awarded more routinely.162 In any
event, rights-based theories should carefully reconsider making specific
performance categorically more available than expectation damages.
Alternatively, if the main purpose of specific performance is not compensation
but rather retribution for the moral wrong of breach, then the case for
expectation damages becomes even stronger, as that remedy is likely to exact a
higher punishment on the promisee.
The third implication concerns the question of whether specific
performance should be optional or a sole remedy. Because specific
performance is sometimes under-compensatory relative to expectation
damages, offering a choice would best protect promisees. However, theories
that hold that the goal of remedies is to hold promisors to their promises would
have hard time justifying the grant of an option besides specific performance.
And so these theories may make both promisees and promisors worse-off—an
unappealing feature.
Even for the theories that seek to compensate promisees, the fact that
introducing a choice leads to strategic effects should be of concern. If allowing
promisees choice can make them worse off due to signaling, the existence of a
choice can be sometimes detrimental.163 Similarly, attorneys may abuse this
161 A prime example of this notion is the following: “Because the normative goal of contract
remedies is compensation, specific performance should lie unless it can be shown that the costs
of specific performance would exceed the gains.” Schwartz, supra note 39, at 294; see also
Linzer, supra note 54, at 137.
162 The Restatement allows the judge to add damages to a specific performance decree. See
RESTATEMENT (SECOND) OF CONTRACTS § 345 cmt. a. (AM. LAW INST. 1981) (“Nor are the
remedies listed mutually exclusive, since a court may in the same action, for example, both
require specific performance of a promise and award a sum of money as damages for delay in its
performance.”).
163 See discussion supra Part V.B.1.
Electronic copy available at: https://ssrn.com/abstract=1641438
406 WEST VIRGINIA LAW REVIEW [Vol. 118
choice to sway their clients to sue for expectation damages even if it reduces
the client’s expected recovery, because it better protects attorneys’ interests.164
In conclusion, then, these implications suggest a necessary
modification of rights-based theories, to account for the fact that a grant of a
legal right to specific performance may produce unintended moral and
economic consequences. Specific performance and actual performance diverge
significantly, either because the promisee uses the judgment to obtain ends
other than performance or because enforcement problems render the value of
the judgment below that of performance. Rights-based theories should account
explicitly for this divergence.165
B. Economic Theories
For economic theories, the importance of empirical findings is much
more salient than it is for rights-based theories. For the economist, and the
consequentialist more generally, the success of a given policy prescription is to
be judged solely by its consequences, so it is vital to match assumptions with
actual practice. This Section focuses on the four major implications of the
Article’s finding for economic theories.
The first implication concerns the value of specific performance.
Economic theory often proceeds under the assumption that specific
performance would lead to a transfer of value equal to or greater than that of
performance by the promisor to the promisee. Either the promisor performs or
the deal is renegotiated under the threat of enforcement, in which case the
promisee can extract high payments from the promisor (the fact of breach
indicates high performance costs).166
The primary finding is the weakness of enforcement mechanisms that
deal with specific relief. Ordering specific performance is not the same as
actual performance. Nor does it result in compensation that is systematically
higher than expectation damages. Unlike damages, the enforcement of specific
relief requires expertise that is lacking in a system that is mostly geared
towards the enforcement of pecuniary obligations. This problem is especially
acute in cases when unique goods are involved, when either the plaintiff or
defendant has low wealth, or when reputation and social norms are not strong
164 See discussion supra Part V.B.2.
165 As noted, most theorists express some general awareness of the problems of enforcement,
and a few mention in passing instrumental uses; however, the systematic divergence of
performance and specific performance has not been fully accounted for.
166 Richard A. Posner, Let Us Never Blame a Contract Breaker, 107 MICH. L. REV. 1349,
1353 (2009) (“In the usual case of breach of contract the cost of performance to the defendant
would exceed the benefit to the plaintiff.”).
Electronic copy available at: https://ssrn.com/abstract=1641438
2015] CONTRACT REMEDIES IN ACTION 407
motivators. Consequently, specific performance decrees would under-deter
promisors from engaging in inefficient breaches.167
Theorists should be careful when they consider specific performance to
be similar to money damages, due to the important differences in enforcement.
Hence, one should approach with caution a statement such as “[s]pecific
performance is analogous to a punitive sanction that seeks to deter breach
absolutely,”168 as it may well be the case that punitive (or even expectation)
damages would be far more effective than specific performance.
Aside from deterrence, specific performance is also sometimes justified
on the basis of providing insurance for the subjective value the promisee
attaches to performance, and the same problem would be relevant here as
well.169 Therefore, both from deterrence and risk-aversion perspectives, the
under-compensatory nature of specific performance should be a concern.
The second issue of concern is the unwillingness to negotiate, which
was suggested to be partially motivated by animosity, endowment effects, and a
“commensurability bias.” Theory supposes that trade will occur unless
transaction costs are high. But in the contractual settings, negotiation costs are
typically expected to be low, as the parties already know each other and have a
history of negotiation. So we would expect very high rates of PJR. But these
issues, and especially the commensurability bias, may prevent negotiations
even in instances of low transaction costs. Specific performance decrees may
be “stickier” than originally supposed and consequently, they may lead to
inefficiencies if wrongly assigned. This suggests a greater role for expectation
damages or greater attention by judges when they award specific performance.
The third implication relates to the effects of the choice between
damages and specific performance on litigation dynamics.170 As discussed,
affording the plaintiff a choice among remedies has unintended consequences.
Judges may be led to see promisors deviating from the default remedy of
specific performance as signaling their lack of interest in the contract, which
may bolster an excuse by the defendant that the plaintiff is acting
opportunistically. Knowing that, plaintiffs may feel compelled to sue for
specific performance even when expectation damages would be more valuable
for them. Thus the introduction of the choice may be against the interest of
167 For the relationship between under-compensatory remedies and inefficient breach of
contract, see Hermalin et al., supra note 42, at 102–04.
168 See Mahoney, supra note 15, at 125. This statement expresses a widespread assumption in
the general literature on contract remedies.
169 See Hermalin et al., supra note 42, at 114.
170 There are other dimensions on which choice of remedies would affect parties’ welfare as
detailed in Ronen Avraham & Zhiyong Liu, Incomplete Contracts with Asymmetric Information:
Exclusive Versus Optional Remedies, 8 AM. L. & ECON. REV. 523, 524–25 (2006) (showing how
ex-post choice of remedies could improve parties’ ex-ante welfare and therefore be part of their
contractual design).
Electronic copy available at: https://ssrn.com/abstract=1641438
408 WEST VIRGINIA LAW REVIEW [Vol. 118
plaintiffs and will lead to an overall excessive number of specific performance
suits. In a different direction is the effect of this choice on lawyers, who may
try to steer the plaintiff into suing for expectation damages to guarantee their
fees and simplify calculation. Overall, introducing a choice has complex
effects, and its desirability should be analyzed within this more holistic view.
A fourth implication concerns the possible effects of routinely granting
specific performance. One might worry that doing so will lead to a flood of
litigation or to a rise in specific performance suits that would require substantial
court supervision. However, as was discussed in Part V.A, even in a
jurisdiction where specific performance is the default remedy, specific
performance suits are not common. Given similar findings from other civil law
countries,171 such concerns should be qualified.
A final point is that the difficulties identified in the enforcement of
specific performance decrees could be useful in further refining the domains in
which specific performance is likely to be preferable to expectation damages.
For example, specific performance could be granted or should be advocated
only in cases where clear standards exist to evaluate performance. 172
C. Legal Implications
There are also a few potential implications that relate to legal policy
and judicial decision-making. The first, and probably most important, is the
appreciation of the frailty of enforcement of specific performance decrees.
While it was expected in the theoretical literature that specific performance will
be difficult to enforce, this Article demonstrates this claim empirically and
highlights the importance of robust enforcement mechanisms. It follows from
the difficulties identified here that enhancing the effectiveness of specific
performance is going to be difficult, unless criminal sanctions will be allowed
(with all the moral and economic costs involved, and especially the costs of
legal errors that would inevitably ensue, leading to incarcerating the innocent).
Another option is to adopt a more liberal approach towards financial sanctions
and the appointing receivers. This will not solve the problem but might mitigate
several instances of it.
A related point concerns the circumstances under which specific
performance should be made available. Under current American law, specific
performance is most commonly available when the subject matter of the
contract is unique (e.g., custom made air pollution unit).173 However, in exactly
171 See Lando & Rose, supra note 84, at 486.
172 Steven Shavell has offered a first general refinement—a distinction between contracts to
produce and contracts to convey property. See Shavell, supra note 11, at 846. This very general
approach is useful but could potentially be narrowed down to allow for further categorization.
173 Colorado-Ute Elec. Ass’n v. Envirotech Corp., 524 F. Supp. 1152 (D. Colo. 1981)
(ordering specific performance).
Electronic copy available at: https://ssrn.com/abstract=1641438
2015] CONTRACT REMEDIES IN ACTION 409
these circumstances, it will be harder to judge the quality of performance by
comparing it with established standards. This challenges the idea that with
unique goods, specific performance most adequately compensates the
promisee. A judge seeking to compensate the promisee to the extent of her lost
value should comparatively assess the desirability of expectation damages and
specific performance in light of the specific circumstances of the case, factoring
in the ability to effectively discern sub-standard performance. Another issue is
that specific performance judgments are not a silver bullet against a defendant’s
insolvency. While section 360 of the Restatement provides that specific
performance would be adequate if “an award of damages could not be
collected,” it is unlikely that in the same circumstances specific performance
would be effective.
And since both remedies are likely to result in some form of under-
compensation in many cases, judges could correct for that by allowing
deficiency judgments, passing the costs of enforcement to the promisor, and
using other similar mechanisms that increase the promisee’s payoff.174 Another
option to ensure that specific performance decrees are effective is to create a
venue for the plaintiff to inexpensively complain about the low-quality
performance of the decree and to set adequate sanctions for sub-standard
performance. By creating such a venue, specific performance will become
much more effective. Such a venue could be implemented by outsourcing the
judicial work of supervision to an arbitrator or receiver, potentially at the
promisor’s expense.
Judges should also not trust plaintiffs to choose the best compensatory
remedy, as was already noted—due to the lawyer’s conflict of interest and
signaling motives. These two reasons, it should be noted, push in opposing
directions. Judges could correct for that, if it is believed necessary, by
employing judicial discretion in the award of remedies, using the broad latitude
provided by law.175
The change of preferences over time poses a difficult hurdle to
plaintiffs, and policy makers should be aware of this difficulty. If the goal is to
enhance the availability of specific performance, attention must be given to the
length of resolution of such cases and their priority in the system.176 This
174 Judges have broad latitude in the design of the specific performance remedy.
RESTATEMENT (SECOND) OF CONTRACTS § 358(1) (AM. LAW INST. 1981) (“An order of specific
performance . . . will be so drawn as best to effectuate the purposes for which the contract was
made and on such terms as justice requires. It need not be absolute in form and the performance
that it requires need not be identical with that due under the contract.”).
175 For example, RESTATEMENT (SECOND) OF CONTRACTS § 360(a) and § 364(1) (AM. LAW
INST. 1981), allow judges discretion to decide whether damages would be adequate based on “the
difficulty of proving damages with reasonable certainty” and allow the judge to over-ride specific
performance “if such relief would be unfair.”
176 This may lead to prolonging the time to resolve damage suits, but this problem can be
solved by pegging the sum of damages to a relevant price index.
Electronic copy available at: https://ssrn.com/abstract=1641438
410 WEST VIRGINIA LAW REVIEW [Vol. 118
problem could be mitigated by the use of interim remedies, but these types of
solutions should be examined in greater depth.
Finally, it is also important to recognize the lawyers’ agency problem
when they counsel their client on the choice of remedies. It should be
understood that they face a conflict of interest in this situation because a
damages suit will increase their remuneration potential. This agency problem
should be addressed, possibly by rules of professional ethics, to sanction them
for giving self-interested advice to their clients in this context.
X. CONCLUSION
This Article employs qualitative methodology to study contractual
practices “from the inside,” tracking the internal point of view of litigants and
their lawyers. The engagement with litigants has shown that contracting
practices are more complex and nuanced than conceptualized by prevailing
theories. Parties act and respond to myriad background incentives and
limitations, and the ways in which they employ and respond to various
remedies have various unintended consequences.
This approach has illuminated theoretical oversights and suggests
possibilities for future legal and theoretical revisions. However, this study is by
no means conclusive or exhaustive. The limited sample of interviewees and the
complexity of the issue require much more data before definitive measures
could be prescribed. It is hoped that this Article’s discussion paves the way for
a more focused analysis of the many issues presented. Specifically, it would be
useful for a larger sample to be gathered, potentially also including recipients
of money damages, a greater number of parties who have lost in litigation, and
both individuals and parties representing large and small corporations. It is also
hoped that the third generation discourse on specific performance will be
influenced by the empirical aspects of this issue and the findings discussed
here. Without the empirical elements and the sensitivity to the context, the
theoretical debate is bound to remain an intellectual exercise.
Electronic copy available at: https://ssrn.com/abstract=1641438

---

## ssrn-2820650: Shielding of Assets and Lending Contracts
Year: 2016
Authors: Yonathan Arbel
Source: papers/ssrn-2820650/paper.txt

Shielding of Assets and Lending Contracts
(Forthcoming, International Review of Law & Economics)
Yonathan A. Arbel*
ABSTRACT
The primary means of enforcement of legal liabilities is through the seizure of debtors’ assets.
However, debtors can shield their assets in various ways and thereby reduce the power of en-
forcement. This paper studies the circumstances under which a debtor would choose to shield as-
sets and the value of assets that would be shielded.
A key idea is that borrower’s wealth mutes shielding incentives. Intuitively, avoiding debts
through shielding requires that enough assets will be shielded, for else the debts can be collected
from exposed assets. A wealthier debtor would thus need to shield more assets, and at a greater
cost, than a debtor with limited wealth. Using this basic understanding, I develop a theory of asset
shielding and explore its implications for incomplete lending contracts, explaining the role of eq-
uity agreements, equity cushions and collateral, and debt forgiveness, and explore the some of the
policy implications.
1
Electronic copy available at: https://ssrn.com/abstract=2820650
1. INTRODUCTION
The primary means of enforcement of civil legal liabilities, such as debt contracts, taxes, or tort
judgments, is through the seizure of debtors’ assets. However, as Section 2 discusses, debtors are
often in a position to circumvent asset seizure by the use of such methods as hiding cash, transfer-
ring ownership of property to family members, and using shell corporations. After shielding,
creditors will be dissuaded from collecting their debts and debtors may file for bankruptcy and
discharge their obligations.
Despite the importance of shielding decisions to the modern economy, the literature has not pro-
vided an account of when shielding will take place and the magnitude of assets that would be
shielded. This paper develops a theory of asset shielding that explains shielding behavior and its
impact on the credit market. It argues that richer debtors would often not find it in their self-
interest to shield assets. Conversely, poorer debtors, even if formally solvent, pose a shielding
risk. This risk would tend to harm debtors by limiting their access to credit and therefore they
would benefit from being able to commit not to shield. Such a commitment is difficult to secure
and the paper explores several public and private strategies of limiting shielding risk.
The model, described in Section 3, is a stylized lending model with incomplete contracts where
an entrepreneur borrows money from a lender for an investment and then faces an opportunity to
shield the investment returns at some per-unit cost. The focus on incomplete contracts is relevant
to high transaction costs environments where more sophisticated contracts are unavailable. An
important benefit of this assumption is that it allows us to generalize much of the analysis to in-
clude non-contractual settings, such as accidents, fines, and taxes. The assumption that there is
sufficient opportunity to shield assets ex-post (due to Hart and Moore 1989) is motivated by the
relative simplicity and rapidness of various shielding techniques and the costliness of monitoring
borrowers.
We start by examining the question how much value a borrower who decided to shield assets
would choose to shield, because this will inform all other decisions. In answering it, it is useful
to dispel first two common perceptions. Firstly, the borrower may be thought to attempt to shield
the amount he owes. On reflection, however, such a decision is revealed to be irrational. If the
borrower only shields what he owes, than he will often leave other assets exposed. The (oft-
overlooked) recourse principle (Scott 1913) holds that a debt-holder has a right to substitute his
debt with those other assets. The lender will then be able to collect despite shielding effort, ren-
dering shielding pointless. Secondly, the borrower may be thought to choose an amount to shield
such that the marginal cost of shielding does not exceed the marginal benefit, understood as the
amount shielded after deducting shielding expenses. But this too is erroneous: It assumes the
costs are borne by the borrower, but they are in fact taken from what is owed to the lender.
With this in mind, the first contribution of this paper is in explaining that the choice of value to
shield depends on debtor’s wealth and the size of the debt—but not on shielding costs. More spe-
cifically, the lowest value that a debtor will find rational to spend on shielding is given by the
2
Electronic copy available at: https://ssrn.com/abstract=2820650
difference between debtor’s wealth and debt.1 To illustrate the intuition underlying this result,
suppose the borrower owes $10,000 and has $25,000. Spending only $12,000 on shielding, for
example, would leave more than $10,000 exposed, so the lender would be able to collect in full
despite shielding effort. It follows that if the borrower spends on shielding any positive amount, it
must be greater than $15,000 for else shielding effort would be moot—and this minimal value
that must be shielded holds regardless of shielding costs.
Understanding how much would be shielded helps to determine whether shielding will take place
at all. When deciding whether to shield, the borrower compares the costs involved in shielding
sufficient value to the cost of debt repayment. If shielding costs exceed the debt, the borrower
would be better off repaying the debt than shielding. Now, since a wealthier borrower would
have to shield more, he would face higher shielding costs. From this follows the second contribu-
tion of this paper: the wealthier the borrower is, the less rational shielding becomes.2
Anticipating the ex-post shielding decisions has important effects on project finance. On the one
hand, shielding risk can lead to outright credit denial even for profitable investments. While nor-
mally the lender can be compensated for default risk by charging a higher interest, this is not nec-
essarily the case here. This is because charging higher interest would result in greater shielding
incentives may thus reduce lender’s payoff. This will result in credit rationing for certain profita-
ble investments even in the absence of the conventional reasons of adverse selection and moral
hazard in effort (Stiglitz and Weiss, 1981).
On the other hand, the analysis also implies a strong limit on the incentive to shield. If borrower’s
ex-post wealth is high, shielding will be too costly. And if the investment has high expected re-
turns, the lender need not worry about default due to shielding. As a result, high yield invest-
ments, even if risky in terms of variability of returns (e.g., start-ups), can enjoy easy access to
credit even without collateral. Stated differently, a lender might perversely prefer a risky invest-
ment to a safer one with the same expected value. This is because the upside in the risky invest-
ment is more likely to surpass the wealth threshold.
Given the problems asset shielding creates, both the lender and the borrower will have an incen-
tive to limit shielding opportunities and the analysis compares two alternatives. In the one, the
borrower “ties his hands” and commits not to shield. Such a commitment is of limited credibility,
because contractual sanctions are pecuniary and so will not be effective in exactly those circum-
stances when the borrower breaches the contract. Still, it may be possible for the borrower to limit
future shielding by permitting the creditor to repossess assets soon after default or by placing fu-
ture revenues in a hard-to-access account. In the other alternative, the parties opt for an equity
agreement instead of a debt contract. I show that the first approach mitigates the problem of
1 In the body of the analysis I develop a stronger version of this conclusion, showing that it would pay the borrower to
shield all assets conditional on deciding to shield.
2 The intuition underlying this result can be easily illustrated. If a borrower who owes $10,000 has $15,000 in assets,
then the minimum he would have to spend on shielding is $5,000. If he has $80,000, he would have to spend at least
$70,000. The greater spending implies a greater cost and lesser incentive to shield.
3
Electronic copy available at: https://ssrn.com/abstract=2820650
shielding but will not solve it, whereas the second approach may indeed solve the problem of as-
set shielding but may not always be practical.
Section 4 analyzes a few extensions of the basic model. I explain the role of collateral—
possessory and nonpossessory, explicit and implicit—in mitigating shielding risk and how equity
cushions may be useful. I suggest another motive for debt relief agreements—avoiding shielding
behavior—and suggest the structure of such agreements. I then consider how collection costs
could affect shielding behavior and show that there is both substitution and complementarity be-
tween collection costs and shielding behavior. Finally I discuss ex-ante shielding and consumer
lending.
I close with a brief analysis of a few regulatory implications. To ward off shielding, the legal sys-
tem could attack the problem directly—by making it more expensive to shield through sanctions
on shielding and closing shielding loopholes—or it can do so indirectly, by requiring minimal
asset requirements for actors engaged in potentially dangerous activities or by limiting the fines
and judgments imposed on asset-constrained individuals. Section 5 concludes.
There is rich work dating back to Shavell (1986) that studies the effect of insolvency on injurers’
incentives to take care (the ‘judgment proof problem’). For example, Ganuza and Gomez (2008)
advocate the use of ‘soft’ liability standards for insolvent injurers. For the most part, work in this
area takes wealth levels as exogenously set (Summers 1983, Dari-Mattiacci and De Geest 2002,
Ganuza and Gomez, 2008, Dari-Mattiacci and Mangan 2008, Wickelgren 2011) although some
important work considers the possibility that firm capitalization may be the result of strategic be-
havior (Shavell 2005, Che and Spier 2008, Veld and Hutchinson 2009, Ganuza and Gomez 2011).
However, even the latter strain in the literature only studies ex-ante moral hazard.3 This paper
complements this body of work by considering the ex-post moral hazard inherent in asset shield-
ing, which is of relevance regardless of ex-ante capitalization.
Other related work comes from the literature on credit. However, this scholarship too has largely
abstracted away from shielding decisions and focused instead on the costs and choice of default
(e.g., Leff 1970, Schwartz 1983, Gross and Souleles 2002, White 2007). In the recent contribu-
tion of Ellingsen and Kristiansen, they allow borrowers to “divert” assets, but this is different
from shielding as it is assumed to come at no cost besides the risk of enforcement (Ellingsen and
Kristiansen 2011). In practice, however, shielding is quite costly and generally goes unpunished.4
The part of the literature that relates most closely to asset shielding is the theory of costly state
falsification (owing to Lacker and Weinberg 1989). This work studies contracting in the face of
an ex-post moral hazard of asset hiding, similar to the inquiry at hand. However, this literature
focuses on sophisticated contracts and does not consider simpler contracts which are common in
practice (as noted by Lacker himself 1991). Moreover in many settings where shielding opportu-
nities are present—e.g., torts, civil judgments, fines, and taxes—contracting is impossible, so that
the study of shielding behavior with incomplete contracts becomes important.
3 Shavell (2005) adumbrates this possibility of ex-post moral hazard but does not analyze it.
4 See discussion in section 2.
4
Electronic copy available at: https://ssrn.com/abstract=2820650
The primary contributions of this paper relative to existing literature stem from the analysis of
optimal asset shielding decisions and the identification of the relationship between these decisions
and borrower’s wealth. The implications of this analysis on the credit market and on rich and
poor borrowers are likewise new. Similarly novel are the ideas that shielding is generally an all-
or-nothing proposition,5 that high wealth mutes the incentive to shield, and the interpretation of
the incentive to enter into debt relief contracts.
2. SHIELDING ASSETS FROM ENFORCEMENT
The term asset shielding (or equivalently, asset protection) is used here expansively, to account
for any action or omission by an individual that takes place after the creation of a specific debt
6
and that is intended to limit the lender’s ability to seize assets in case of default. Thus defined,
some examples are the case of Charles Kallestad, a borrower who was found to be shielding as-
sets worth hundreds of thousands of dollars through multiple transfers to an accomplice (U.S. v.
Kallestad 51 F.3d 1044 and trial documents); O.J. Simpson and Paul Bilzerian, who moved to
multi-million mansions in Florida after accruing millions of dollars in debts; and Jimmy Jen, a
debtor from California who was found to have shielded over $6 million using secret vaults, shell
corporations, and a sham divorce (Elinson 2010).7
The primary forms of shielding are consumption (e.g., purchasing perishable goods or expensive
dinners, giving to charity), concealment (e.g., hiding cash, mock transfers, failing to disclose in-
come), legal asset protection (e.g., investing in bankruptcy exempt property, creating special
trusts, and forming corporate structures), or obstruction of enforcement efforts (e.g., transferring
assets to foreign havens or changing addresses). The literature abounds with techniques and cas-
es (e.g., Che and Spier 2008, White 2007, Vandervort v. Vandervort, 134 P.3d 892, (Okla. Civ.
App. 2005)). Many of these techniques—although by no means all—are simple and rapid to af-
fect and do not require extensive advance planning, most notably asset concealment. This means
that a debtor would often be in a position to shield assets before the creditor seeks repayment.
This is especially true in loan agreements where the moment of realization of investment returns
is not precisely known in advance.
Shielding is costly. Some costs are direct—such as setting a shelter or retaining a lawyer—but
others are indirect—such as the opportunity cost of shielding and the cost involved in not being
able to freely use one’s assets. Whether the marginal cost of shielding increases or declines with
the amount shielded is hard to tell a-priori, but it will clearly be positive in most cases.
5 Ellingsen and Kristiansen (2011) reach a similar result but for a different reason.
6 Hence, I do not consider “preparatory” asset protection that takes place before the borrower has a specific debt.
7 O.J. Simpson escaped a $33.5 million judgment while residing in a Florida mansion and receiving a $25K monthly
pension, taking advantage of Florida’s generous homestead protection laws and the federal retirement laws (Alper
2007); Bilzerian defaulted on $140 million debts while residing in an 11 bedroom home in Florida taking advantage of
similar protections (Shenon, 2001); Jimmy Jen hid over $6 million dollars in vaults, shell corporations, and in his
wife’s possession following a sham divorce (Elinson 2010);
5
Electronic copy available at: https://ssrn.com/abstract=2820650
There are also two other types of costs: legality and reputation (Arbel, 2015). As a general matter,
shielding assets with the intention of avoiding a specific debt exposes the debtor to both civil and
criminal liability. Civil liability is seemingly somewhat effective,8 although the bringing of such a
lawsuit requires evidence of fraudulent transfer, which can be hard to obtain, and the successful
implementation of the judgment depends on the assets still being in jurisdiction.9 Moreover, even
preliminary steps, such as locating the debtor, prove difficult in practice (Stephen, Avril, and
Wrapson 2013). Criminal sanctions are seemingly much less effective (e.g., McCullough 1997).
In 2011 there were 1.3 million bankruptcy filings (U.S. Courts 2012), but the Executive Office of
10
the US Trustees (EOUST) referred only 1,968 cases to criminal proceedings (DOJ 2012) and in
only about 20 cases formal charges were filed.11 This is despite evidence noted below by the
EOUST itself that bankruptcy fraud is pervasive.
Another cost is reputation (e.g., loss of credit score or lending relationships). Reputation is like-
wise limited because it is often hard to observe whether the borrower defaulted strategically or
due to real financial inability. The multiplicity of credit channels further dilutes reputational ef-
fects, as information, even if obtained, may not fully propagate to all other lenders.
Overall, shielding is somewhat prevalent and seemingly highly effective. While we do not have
good data, one indication comes from reports of the EOUST, which is the agency in charge of
investigating bankruptcy fraud. In a random sample of 102 cases, they found that 17% of the
12
debtors “materially misstated” the true extent of their assets. This evidence joins other studies
that find strategic behavior in bankruptcy and in judgment enforcement (Fay, Hurst and White
2002 and Ning Zhu 2011, but see Sullivan, Westbrook and Warren 1989; Arbel, 2015), suggest-
13
ing that some debtors use bankruptcy to protect assets. The size of the debt collection industry
is also indicative, as their main service is collection from reluctant debtors. This industry collects
14
over 50 billion dollars annually (PWC 2008, EY 2012).
8 Creditor’s right to reverse fraudulent transfers stems, mainly, from either § 9 of the UFTA or §548 of the Bankruptcy
Code. Both Westlaw and LexisNexis record only about 450 cases in 2011 that cite to § 548.
9 In FTC v. Affordable Media, LLC 179 F. 3d 1228 (9th Cir. 1999), the debtors placed their assets in an offshore ac-
count. When ordered by a US judge to repatriate their assets, they faxed a request to the offshore trustee who refused to
implement it, because the trust mandate gave him the power to refuse requests made under duress.
10 The EOUST collects information from trustees who are required to inform the EOUST of all suspicions of criminal
activity (Handbook 2012)
11 Similarly, the database TracFed shows that over the last decade, there was a yearly average of about 60 cases prose-
cuted where the main charge was 8 USC §152 (the main section concerning asset fraud in bankruptcy). For the same
criteria, Westlaw records 56 open dockets in 2012 and the IRS reports opening investigations in only 44 cases in 2014
(http://www.irs.gov/uac/Statistical-Data-Bankruptcy-Fraud).
12 Of the cases referred, the causes for referral was: false oath or statement (33.2%), concealment of assets (24.8%), and
other bankruptcy fraud schemes (21.5%) (each case may have more than one allegation).
13 There are also reports of trillions of dollars hidden in offshore accounts, but it is unclear which part is motivated by
asset protection and which by the desire to avoid taxes and other laws.
14 Analysis of the Federal Reserve reports show that in the 10 years between 2003 to 2013, commercial banks have
reported average charge-offs of 5.5% (credit cards) and 0.91% (residential real estate) (Federal Reserve Website,
http://www.federalreserve.gov/releases/chargeoff/chgallnsa.htm) Similarly, in total, corporations write off an average
6
Electronic copy available at: https://ssrn.com/abstract=2820650
In sum, then, from the debtor’s perspective, the shielding of assets is a viable strategy with low
chance of criminal sanctions, but with some cost due to limited reputational effects and some risk
of reversal of the shielding if it is not executed carefully.
3. MODEL AND ANALYSIS
The asset shielding model spans four dates (see Figure 1) and involves two risk-neutral parties. At
Date 1, one of the parties (‘borrower’) has a positive-expected value investment that requires a
fixed investment of b. The borrower has no wealth,15 and seeks a loan from the other party (‘lend-
er’), in a competitive lending market with costs of capital normalized to zero. The parties negoti-
ate the interest on the loan r, so that the amount due at Date 4 is b + r. 16 If the lender agrees to
provide the loan at this price, the funds are invested.
If the investment is made, the earnings, e, are realized at Date 2 and are taken from the probabil-
ity distribution function f(e), and e is in [e̲, ē], with 0< e̲ <ē.
At date 3, the borrower decides whether to repay or shield. This is given by the amount t (t≥0)
the borrower spends on shielding, with t=0 being no-shielding. There is a shielding ‘technology’,
described by the function s(.), which gives the amount shielded by spending t. It is assumed that s'
is strictly increasing, continuous, and with s'<1.17
The borrower’s choice at Date 3 of the amount to shield implicitly defines the amount he leaves
exposed. At Date 4 the lender collects and by the recourse principle, the lender may collect from
all exposed assets up to the amount owed, i.e., Min(e-t, b+r). After that, the debt is discharged in
bankruptcy or the creditor gives up on collecting.
of 4.8% of their accounts receivable, which in 2009 totaled $253 billion (IRS Statistics, http://www.irs.gov/uac/Tax-
Stats-2). Note that this figure includes loss from debtors who are genuinely unable to repay, so it should only be under-
stood as a rough estimate on the upper limit of strategic debt avoidance.
15 This assumption bars the use of collateral and it is relaxed in the extensions of the model.
16 I restrict attention here to simple loan contracts, where the parties set a non-contingent payment schedule. I also ab-
stract from criminal sanctions, as Section 2 suggests they are rare; civil sanctions that reverse shielding are more com-
mon and they can be conceptualized as part of the expected cost of shielding.
17 This assumption captures the idea that there is always some cost to shielding, such as the opportunity cost involved
in losing interest on one’s savings, for otherwise the assets would be shielded in the baseline and the inquiry would be
trivial. I further assume here that there are no fixed shielding costs. I relax this assumption below.
7
Electronic copy available at: https://ssrn.com/abstract=2820650
Figure 1: Timing of the Model
Finally, the measure of social welfare adopted is the total utility of the parties, which in light of
the risk neutrality assumption, is simplified to their joint wealth. At the end of the Date 4, the so-
cial benefits from the investment, if made, are its earning e, and the social costs are the costs of
making the investment b as well as shielding costs c(s).
Timing, Information, and Order of Analysis: the game is solved by backwards induction. It is
assumed that all information is common knowledge, although shielding may not be verifiable to a
third party. The analysis starts with the shielding and collection stage (Dates 3 & 4), when the
amount of earning e and the interest r are fixed. The analysis then goes backwards to analyze the
parties’ decisions in the first stage (Date 1) when the investment contract, and more specifically r,
is negotiated. The results of the analysis will be compared to both the social optimum and to a
situation where shielding is limited and costly—either by law, technology, or borrower’s com-
mitment.
3.1. Stage 2 Analysis: Shielding
At stage 2, the borrower’s objective is to maximize profits by choosing t, the amount to spend on
shielding. This makes borrower’s payoff:
𝑠(𝑡)+max(0, 𝑒−𝑡−(𝑏+𝑟)) (1)
The first term here is the value to the borrower of shielded assets. By the recourse principle, all
exposed assets are potential substitutes for the debt. This means that after shielding, the lender
will collect the debt from exposed assets, leaving the borrower with what remains (with a lower
bound of zero). We then have the following result.
Proposition 1
1.1. If the borrower chooses to shield any positive amount of wealth, the optimal shielding sum,
t*, will be equal to his entire wealth; t*=e.
1.2. There exists a unique critical level of wealth e* that if e < e*, all of e is used in shielding, so
no debt is collected, and if e > e*, nothing is shielded. However, e* is an increasing function of r
and may exceed e̅.
Proof: See Appendix.
8
Electronic copy available at: https://ssrn.com/abstract=2820650
The intuition behind this proposition is as follows. The borrower has at this stage a debt of b+r
and a fixed wealth of e. We are assuming the borrower decided to shield assets and we are look-
ing to see how much value he would like to shield. This decision can be thought of as involving
two steps. First, the borrower contemplates whether spending on shielding a small amount is de-
sirable. If that amount is small indeed, the remaining assets would exceed the debt: i.e., e-t>b+r.
On reflection, shielding such a small amount is undesirable, for it leaves exposed enough value so
that despite shielding efforts, the debt will be collected in full. This is a direct implication of the
recourse principal. Understanding that, the borrower might seek to shield some larger amount, but
perhaps something that still falls short of his entire wealth (i.e, e-(b+r)<t<e). This would have
the benefit of avoiding some of the debt, but it will also—by definition—leave some assets ex-
posed. The lender will collect these assets which will satisfy only part of the debt. But with re-
spect to these exposed assets, the borrower reasons that leaving them exposed would mean that
they will be lost; if, instead, the borrower would shield them as well, he will retain some of their
value, and however small that is, it is still better than losing them to the lender. Hence, shielding
these assets too is in the borrower’s interests. We conclude that if shielding takes place, it would
be rational to shield all of the borrower’s assets.
Example 1. The borrower owes $6,000 and the project earned $10,000. For every dollar
spent on shielding, the borrower retains 20 cents. At first, the borrower contemplates spending
$3,000 on shielding (securing him a value of 0.20*3,000=$600). But since that would leave ex-
posed $7,000, the lender will be able to collect the debt in full. Then the borrower considers
spending $7,000 on shielding (securing him a value of 0.2*7,000=$1,400). This is preferable, but
still leaves $3,000 that will be collected. If the borrower shields these $3,000 too, he can further
increase his payoff by 0.2*3,000=$600, which is clearly superior to leaving them exposed. As a
result, if the borrower chooses to shield assets, he will spend the full $10,000 on shielding.
It is important to note that this conclusion is general. Even if shielding is very costly, it will still
be the case that if shielding takes place, the borrower’s entire wealth would be spent on shielding,
i.e., t=e. But of course, this does not mean that shielding will always take place. With this in
mind we turn to the other part of Proposition 1.
At the beginning of Stage 2 the borrower may either shield or repay, depending on his payoff
from each option. Repayment costs b+r while shielding will cost, based on the previous analysis,
e-s(e). There is some positive marginal cost to shielding due, for example, to the loss of interest
or asset mobility. This implies that when the amount spent on shielding is large enough, call it e*,
we will have e*-s*(e)=b+r; i.e., it will cost the same amount to shield one’s assets as it would
cost to repay the debt. In other words, e* is a wealth threshold; having more wealth than e* means
that it would cost more to shield than to repay, so that it will no longer be rational to shield assets.
We note three implications of the wealth threshold: shielding assets can be irrational if borrower’s
wealth is sufficiently high, for then shielding costs may exceed the cost of repayment.18 Addition-
18 Of course, the project may not produce sufficient earnings to pass this threshold (i.e., e*< ē), which can be very high
if it easy to shield. In this case, we shall see, the project will not be financed.
9
Electronic copy available at: https://ssrn.com/abstract=2820650
ally, e* is increasing in r –that is, a higher debt increases the incentive to shield assets. Lastly, if
shielding technology is inefficient and costly, due to legal or market conditions, that would have
the effect of increasing e-s(e), implying a lower wealth threshold. Taken together, the incentive to
shield increases in debt but decreases in wealth and enforcement.
Example 2. Consider the same borrower as before. If the project earns $7,000, spending
this entire amount on shielding would cost 0.8*7,000=$5,600, relative to a debt repayment cost of
$6,000. Hence, shielding would be preferable. But if the project earns $10,000, shielding would
cost $8,000, making it more costly than repaying $6,000. In fact, for every amount above $7,500,
it would cost the borrower more to shield than to repay—making it the wealth threshold. In other
words, if the return on the investment exceeds $7,500, the borrower would favor repayment to
shielding. The wealth threshold would change if the shielding technology were to become less
efficient, such that shielding would only leave 10 cents on the dollar (instead of 20). In that case,
the wealth threshold would fall to only $6,666.
It is of interest to note the relationship between the wealth threshold and the concept of solvency.
The borrower is technically solvent if e>b+r. However, this is not enough to surpass the wealth
threshold; that will happen only if e-s(e)>b+r, or e>b+r+s(e). Hence, borrower’s wealth must be
greater than the concept of solvency would imply by s(e) for repayment to take place.19 In other
words, solvency is a necessary but insufficient condition for debt repayment. The flip side of this
conclusion is that if the borrower chooses to repay, this will only happen when he can repay in
full – so that the lender can expect either no payment or full repayment.
The following figure illustrates these points:
19 This follows from Proposition 1.1: If borrower’s wealth falls below b+r, his entire wealth will be taken by the credi-
tor, so even if shielding is very wasteful, it is still better to shield and retain some value than lose all value.
10
Electronic copy available at: https://ssrn.com/abstract=2820650
Figure 2: Borrower’s Payoff under Shielding or Repayment as a Function of Earnings
As the figure shows, as the investment earnings rise, the borrower finds shielding more and more
costly. When earnings pass the e* threshold, the shielding costs exceed the costs of repaying the
debt and the borrower finds repayment optimal. As noted, having b+r in earning is insufficient to
warrant repayment, and the earnings must be greater than b+r by s(e*) for the borrower to repay.
Lastly, from the creditor’s perspective, repayment is binary due to the cliff’s edge nature of
shielding: For every e≤e*, the lender is not paid at all, and for every e>e* the creditor is repaid in
full.
Social Optimum. The social optimum is defined as the sum of the parties’ joint wealth:
𝑒−𝑏−(𝑡−𝑠(𝑡)) (2)
That is, the returns from the investment less the costs of making the investment and the costs in-
20
volved in shielding. Since (2) is strictly decreasing in t, it will be socially desirable that t=0, so
that no assets will be shielded; the simple reason is that asset protection absorbs resources but
creates no value aside from shifting wealth between the parties.
Private Decisions with Limits on Shielding. In some situations, shielding may be less effective
and more costly—either because the legal system makes shielding difficult or because the bor-
rower was able to “tie his hands” and make it more difficult to shield. To capture that, we will
consider a competing shielding technology s (), such that s '(t)<s(t) for all t, with full inability to
c c
shield being s '(t)=0 for all t. Under limited shielding, borrower’s payoff is given by:
c
𝑠 (𝑡)+max(0, 𝑒−𝑡−(𝑏+𝑟)) (3)
𝑐
And since s '(t)<s (t) for all t, it follows that the return on shielding will be lower, thus limiting
c c
the desirability of ex-post shielding. This is a reflection of the earlier point that if shielding tech-
20 The interest r does not factor in the parties’ joint wealth since it is a payment made between the parties.
11
Electronic copy available at: https://ssrn.com/abstract=2820650
nology is less effective, the wealth threshold decreases. In the extreme, when shielding is una-
vailable (i.e., s'(t)=0 for all t), the wealth threshold becomes zero, leading the borrower to never
shield, thus aligning his behavior with what the social optimum.
From the lender’s perspective, limits on shielding lower the wealth threshold implying a higher
probability of repayment. In the extreme, when the wealth threshold is zero, the lender receives a
payment of min(e, b+r) (compared to b+r only for e>e*).
Equity Agreement. We compare now the simple debt contract with a simple equity agreement
where the lender buys a stake in the borrower. Under this agreement, the borrower owes the lend-
er a fraction f of all earnings. To simplify the discussion of equity agreements, we will make the
fairly strong assumption that t-s(t)=kt for all t¸ that is, that the marginal cost of shielding is fixed
at k.
Proposition 2.
2. If the equity stake is small, i.e., if f<k, there will be no incentive to shield assets, but if it is
higher, the borrower would always rather shield than pay.
Proof: The proof is straightforward and so is its underlying intuition. Because of 1.1., if the bor-
rower decides to shield assets, he would attempt to shield all of them, which will come at a cost
of ke. Under equity, the borrower can meet his obligations by paying fe. It follows then that the
borrower would rather pay than shield if f<k. On the other side, if k<f, it will always be cheaper
to shield than to repay. The intuition being that because all assets are shielded, shielding imposes
a per-unit of wealth cost. Equity also imposes a per-unit of wealth cost. If the equity stake is
small, the cost per-unit of repaying the debt is lower than the cost of shielding assets. We con-
clude that a low equity interest can mitigate shielding incentives and, under the assumption of
fixed marginal cost, may solve them completely. QED.
The following figure illustrates this proposition. As can be seen, an equity agreement that requires
a fraction of costs that lies below the marginal shielding cost would provide the borrower an in-
centive to repay even in bad states of the world. Unlike a debt contract, the lender is thus assured
payment in all states.
12
Electronic copy available at: https://ssrn.com/abstract=2820650
Figure 3: Repayment and Shielding Costs as a Function of Earnings, Debt versus Equity
3.2. Stage 1 Analysis: Loan Negotiation
Let us examine now the parties’ decision regarding lending and borrowing in the first stage.
Based on the analysis just made, the parties negotiate with the expectation that the borrower
would repay only if e>e*. The parties negotiate over r and since the analysis implies that e* de-
pends on r, it will be useful to describe e* as e*(r).
The lender thus expects full repayment if, and only if, e>e*(r), making his expected payoff:
𝑒
∫ (𝑏+𝑟) 𝑓(𝑒)d𝑒 (4)
𝑒∗(𝑟)
The following proposition summarizes parties’ decisions in this model.
Proposition 3.
If assets can be shielded, then:
3.1. If the returns on the investment are expected to be sufficiently high –i.e., 𝐹(𝑒∗(𝑟)) < 1−
𝑏
, for some r, lending will take place despite the potential for asset shielding;
𝑏+𝑟
3.2. Asset shielding may result in denial of credit to net positive value investments through two
channels:
13
Electronic copy available at: https://ssrn.com/abstract=2820650
3.2.1. Value Reduction. Shielding reduces the expected value of the investment to a potentially
e∗(r)
negative value due to shielding costs(=∫ t(e) 𝑓(𝑒)d𝑒); or,
𝑒̲
3.2.2. Feedback Effect. Increasing interest may reduce expected payments, thus making interest
adjustments insufficient to compensate the lender for shielding risk, making it so that there will
not be an equilibrium interest rate.
Proof. See Appendix.
The first part of Proposition 2 reflects the notion that when wealth is high, shielding becomes ir-
rational. The lender will only lend if his participation constraint is met, that is, if the lender can
expect to recoup her investment b. This will happen when there is sufficient probability of the
wealth threshold being met, because then the debt plus interest are paid in full. As is familiar, the
potential for shielding in the other cases could be compensated through the higher interest rate.
And if the investment returns are expected to be high in all states of the world, it may be that the
interest charged would be at the risk-free rate, despite borrower’s technical ability to shield assets.
This result—that lending is rational even in the presence of effective shielding technology—could
partially explain credit markets in jurisdictions with poor enforcement and the practice of mostly
unsecured loans to high-payoff investments, such as start-ups. The following example illustrates:
Example 3: The borrower seeks a loan of $6,000 and the investment is certain to earn at
least $8,000. Since this earning amount is greater than the wealth threshold identified above of
$7,500, the lender knows, with certainty, that the borrower will have an incentive to repay.
Hence, even with an interest of 0, the lender will be able to recover the full $6,000.
Example 3a: Now the investment is expected to earn an amount between $0-30,000 with
a uniform distribution. If the interest is set at $6,000, the wealth threshold becomes $15,000 (for
the cost of shielding that amount is $12,000, the same as the debt plus interest). Since there is
50% chance of exceeding the wealth threshold, this secures the lender an expected payment of
0.5*12,000=$6,000. So the lender should be willing to lend even if shielding is expected to take
place in some states of the world. Borrower’s payoff below the wealth threshold has an expected
value of 0.2*7,500, and above the threshold of 22,500-12,000, for a total expected payoff of
0.5*0.2*7,500+0.5*(22,500-12,000)=$6,000.
The second part of the Proposition indicates two channels by which asset shielding destroys value
ex-ante. The first is the fact that shielding assets consumes resources that would otherwise be
available to the parties. If the expected surplus of the investment is $3,000, but the expected
shielding cost is $5,000, then the investment no longer has a positive expected value.
The second channel is subtly different. As was just noted, the risk of shielding means that a high-
er interest must be charged. But recall that the incentive to shield rises with the debt (e* is in-
creasing in r). Increasing r in (4) has the double effect of increasing payment conditional on re-
payment, but reducing the overall probability of repayment (by increasing the lower bound of the
integral). To compensate for the higher incentive to shield, an even higher interest may be
charged. But this can create a feedback effect, with higher interest increasing shielding incentives,
14
Electronic copy available at: https://ssrn.com/abstract=2820650
requiring higher interest, etc. And so, for various investments, there may not exist any equilibri-
um interest rate for which the lender will be willing to lend and the borrower willing to borrow.
An implication of this Proposition concerns the lender’s preference between safe and risky pro-
jects of the same expected value. Safer projects are characterized by lower variability of returns,
which also entails a lower probability of exceeding the wealth threshold. This would mean that a
lender my have a perverse preference to risky projects in the presence of asset shielding risk.
Note that denial of credit through these channels operates through a different mechanism than that
identified by Stiglitz and Weiss (1981). Instead of ex-ante moral hazard or adverse selection, here
the problem is one of ex-post moral hazard.
Social Optimum. At the beginning of the Date 1, the revenue from the investment is uncertain
and has an expected value of E(e). The net value of the investment is E(e) - b, which is assumed
to be positive. It was noted above that during the second stage, it is socially desirable for assets
not to be shielded. Therefore, assuming t=0, it is socially desirable for the positive expected value
investment to be undertaken. When assets may be shielded ex-post, the value of the investment
𝑒∗(𝑟)
becomes 𝐸(𝑒)−𝑏−∫ 𝑡(𝑒) 𝑓(𝑒)𝑑𝑒 , that is, the expected value falls by the costs of shield-
𝑒
ing. Hence, an otherwise socially desirable investment may become undesirable if shielding is
expected.
Private Decisions when Shielding is Limited. Lender’s payoff in this akin to (4):
𝑒
∫ (𝑏+𝑟) 𝑓(𝑒)d𝑒 (5)
𝑒∗(𝑟)
We have noted that e* decreases for lower s'(), i.e., if shielding technology is limited, the wealth
threshold will be lower. A lower threshold implies a higher probability of repayment, thus reduc-
ing interest rates and mitigating the problems just identified. Importantly, however, these prob-
lems may not be completely solved as long as s'()>0, for there could still be some incentive to
shield. The following example illustrates
Example 4. Suppose the same circumstances as in 3a. only that now shielding technolo-
gy is limited so that the borrower retains only 10 cents on each dollar shielded, instead of 20.
With this change, if the interest is set at $3,000, the wealth threshold is $10,000 (for
0.9*10,000=6000+3000). There is 2/3 chance of exceeding this threshold, thus securing the lend-
er an expected return of 2/3*9,000=6,000, so the lender would indeed be willing to lend at this
rate. This also means that the borrower pays $3,000 less in interest in this case, due to the limited
ability to shield. Borrower’s expected payoff under this example would be 1/3 * 0.1*5,000+ 2/3 *
(20,000-9000)=$7,500. This is an improvement of $1,500 over example 3a, all due to the limited
ability to shield assets.
The analysis changes when shielding is completely ineffective. In this case, the borrower is indif-
ferent between repaying and shielding for low earnings, e≤b+r, and will strictly prefer repaying
when earnings are high, e>b+r. This implies an expected return to the lender of min(e, b+r),
leading to a familiar prediction: while the interest rate may be positive, lending to a positive ex-
15
Electronic copy available at: https://ssrn.com/abstract=2820650
pected value investment will always take place. This is in contrast to the shielding model, where
lending to such projects was not guaranteed.
We see then that a credible commitment not to shield, and likewise effective enforcement tech-
nology, would lead to lower interest and can solve credit denial problems. This is clearly in the
borrower’s self-interest, ex-ante, to be able to commit to not shielding thus securing finance when
he otherwise would not and keeping a greater share of the investment surplus. The difficulty is
that standard contractual mechanisms involve only pecuniary sanctions, and thus provide no teeth
to a commitment not to shield
Equity Agreement. We turn now to examine the possibility of an equity agreement instead of a
debt contract. At Stage 1, the parties set f or r endogenously. Based on Proposition 2, it is an eq-
uity agreement will dominate ex-ante a debt contract from both the borrower’s and lender’s per-
spective.
Suppose first that there exists f<k that meets the lender’s participation constraint (i.e.,
𝑒̅
∫ 𝑓𝑒 𝑓(𝑒)𝑑𝑒 = 𝑏, recalling that for f<k there is no shielding). The lender would then find it ra-
𝑒
tional to lend, and the borrower would enjoy from improved access to credit at lower rates.
If it is impossible to set such f, then it will also be impossible to find r that would permit lending.
This is because for the debt contract to meet the lender’s participation constraint, there must be
some e'≥e*(r) for which ke'≥b+r. That is, there must be some of level of wealth for which the
borrower prefers repayment to shielding. But if this is the case, it is possible to set f=k, and offer
the lender a return that is at least as large as under debt. Hence, if the lender is willing to lend
with debt, he should be willing to lend with equity as well.
This conclusion, that equity stakes dominate debt contracts is strong and so it is important to note
its limits. The literature on costly-state falsification analyzes the optimality of such “shielding-
proof” contracts (Lacker and Weinberg 1989). As this literature highlights, the optimality of equi-
ty agreements is limited. While they eliminate waste due to shielding, they force allocations that
the parties may not find optimal ex-ante.
4. EXTENSIONS
I will now relax some of the assumptions made in the basic model, seeking to explore its rele-
vance to the use of collateral, debt relief, imperfect shielding techniques, and the shielding of in-
vestment proceeds.
4.1. Secured Credit, Collateral, and Equity Cushions
Parties sometimes often secured credit as means of reducing lending risk. Using this technique,
the lender receives a security interest in the borrower’s assets. How would that affect shielding
behavior?
Despite their name, security interests do not resolve the problem of asset shielding. While securi-
ty interests are generally effective in affecting the priorities among creditors in bankruptcy, they
16
Electronic copy available at: https://ssrn.com/abstract=2820650
only have a limited effect on shielding behavior. If the borrower owns a consumer good with a
lien on it, he may still sell it to a third party or hide it. The lien cannot prevent it and, in fact, a
third party may retain ownership of the assets despite creditor’s objection. This is not to say that a
lien is of no value: liens may make shielding more complicated and costly. But, as we saw, a
more expensive shielding technology does not necessarily solve the problem of asset shielding.
A much more effective mechanism is the use of possessory collateral. Suppose now that the bor-
rower starts with some positive wealth w. If the lender is in possession of the collateral, the bor-
rower will not be able to shield it. Hence, default will imply a cost of w on the borrower (loss of
collateral). This has two consequences. First, the wealth threshold is now implicitly given by e-
s(e)-w=b+r, which is lower than otherwise, meaning less shielding risk and, consequently, lower
interest rates and less credit denial. Second, because shielding costs w, it means that if w≥b+r,
there will be no incentive to shield when the collateral is large, as the cost will always be higher
than that of repayment. But possessory collateral is very costly to pledge and involves high and
sometime debilitating operational costs, making it of limited use.
Interestingly, even nonpossessory collateral is valuable in mitigating shielding risk – despite bor-
rower’s ability to shield it. The reason it is useful is that shielding the collateral itself is costly,
and this costs is added to the rest of the shielding costs. The wealth threshold is then implicitly
given by e+w-s(e+w)=b+r which is lower than otherwise (but higher than under possessory col-
lateral).21 This can be interpreted more broadly, as an advantage of equity cushions. Due to the
recourse principle, all of borrower’s equity cushion acts as implicit nonpossessory collateral, thus
reducing the incentive to shield. This means that collateral need not be pledged explicitly to be
effective.
Overall, this implies that high-wealth individuals pose a lesser lending risk, allowing them greater
access to credit markets. Additionally, this analysis highlights the function of nonpossessory col-
lateral, not only in the relationship between creditors but also between the debtor and the creditor.
4.2. Renegotiation and Debt Forgiveness
In situations where the borrower has a credible threat ex-post to shield assets, the parties may
want to renegotiate the debt. The lender would find such a renegotiation desirable, as with asset
shielding the lender is not repaid at all. This presents an opportunity for the lender to offer some
‘debt relief’ in exchange for partial payment.
From the borrower’s perspective, debt relief is beneficial if the lender is willing to accept an
amount that is equal or lower than borrower’s cost of shielding assets. That is, if the lender is
willing to forgo the debt claim in exchange for an amount no greater than e-s(e). if the lender is
21 An indirect effect is due to the somewhat lower marketability of secured assets, which will increase the marginal cost
of shielding those assets.
17
Electronic copy available at: https://ssrn.com/abstract=2820650
willing to accept that amount, the borrower would avoid the original debt at a lower cost than by
shielding assets. Hence, both parties can be made better off by ex-post debt relief.22
Is such an agreement realistic? If the borrower approaches the lender demanding debt relief,
would not the lender, who knows the debtor can pay, try to enforce the debt at that moment?
While plausible, we observe in practice many instances of debt relief where some debt is forgiven
or “settled” (NY City Bar 2012). Such agreements are generally based on the implicit under-
standing that the debtor is not giving literally everything he has, and instead, the parties negotiate
some lesser amount.23 This lends realism to the asset-shielding avoiding motive.
Ex-ante, the prospect of debt relief will mitigate the problems caused by asset shielding, but will
not solve them completely. First because of the transaction costs involved in ex-post renegotiation
and second because the lender will not be able to receive more than the cost of shielding in bad
states of the world (relative to project’s full returns in the case of no shielding), so the return may
still be insufficient to induce lending. Stated more abstractly, debt relief is akin to an equity
agreement in bad states of the world and a debt contract in good states of the world.
4.3. Costly Collection, Uncertain Collection, and Collection of Shielded Assets
In the main analysis, collection of exposed assets was certain. Relaxing this assumption may af-
fect the magnitude of assets that the borrower would seek to shield.24
Suppose first that collection has a fixed cost of c. 25 The lender will not find collection profitable
unless e-s(e)>c. This will allow the borrower to leave c in asset value exposed without fear of
collection. For the borrower, shielding costs are then reduced by c-s(c), thus further exacerbating
shielding incentives and their resultant negative effects.26
It may also be that collection costs depend on the amount collected. Let l(m) be the cost function
of collecting an amount m. Suppose that l(m) is either everywhere increasing or decreasing. Let
m* be the value of m for which l'(m*)=1. If collection costs are decreasing, the borrower could
leave up to m* in assets exposed and they will be essentially protected. This reduces the amount
the borrower needs to shield by m*, having a similar effect to that of a positive c.
If collection costs are increasing, collecting more than m* would be unprofitable. This implies for
the borrower that leaving assets exposed is akin to losing m* in value. Now, if m*>b+r, this will
not change the analysis. However, if m*<e-s(e), the borrower will find it better to leave some as-
22 The enforceability of debt relief agreement itself is not a problem, if debt relief is conditional on the payment being
made. If the borrower breaches, then he will have to incur the higher costs of shielding.
23 This is not intended to imply that the primary motivation for debt relief agreement is the avoidance of asset shielding.
There are other motivations for such agreements, such as saving collection costs. Whichever of these motivations plays
a more dominant role is an open empirical question.
24 An option that I do not address here directly is that shielded assets will be “de-shielded” by creditor’s efforts. This
option could be simply conceptualized as a higher cost of shielding.
25 Some fixed collection costs are court and sheriff fees, information requests, time spent on collection, and profession-
al assistance fees.
26 If e<b+r+c, the borrower may choose to repay only e-c.
18
Electronic copy available at: https://ssrn.com/abstract=2820650
sets exposed than to shield them. Note that in practice, lenders often pay a contingency fee to
debt-collectors, so that lenders may have an incentive to pursue all debts, regardless of costs, alt-
hough the debt collectors themselves may employ similar reasoning to this just noted.27
Let us examine now the situation where exposed assets are not always be collected due, for ex-
ample, to legal limitations or the difficulty of locating them. Suppose that assets exposed are col-
lected with a probability p. In this case, the borrower will compare his payoff conditional on
complete shielding s(e) with the payoff from leaving assets exposed, pe.28 If, for simplicity, mar-
ginal shielding cost is fixed at k, shielding will only be rational if k<p. From the lender’s perspec-
tive, not shielding is better than shielding, as expected recovery becomes (1-p)e instead of 0.
Finally, let us consider the case where assets can be ‘de-shielded’. If there is some probability that
assets that were shielded can be uncovered, then this risk can be conceptualized as part of the cost
of shielding, making shielding costs t-s'(t) instead of t-s(t). The implications of this were already
discussed above.
4.4. Ex-Ante Shielding
It is possible that the borrower could also shield the loan proceeds b. However, this possibility
will not change the analysis. A risk-neutral borrower would be better off investing the proceeds
and then shielding the greater expected returns than shielding the lower proceeds of the loan.
5. CONCLUSION AND POLICY IMPLICATIONS
This paper emphasizes the point that shielding is not worthwhile unless the borrower leaves ex-
posed fewer assets than his debt. A chief implication of this point is that shielding would not be
worthwhile if a borrower has high wealth, either due to high returns or to initial endowment. On
the other hand, a poorer borrower, even if solvent, may find shielding rational. Therefore, the so-
cial problems associated with asset shielding, wasted resources, and denial of credit, would be of
greater relevance for either poor borrowers or investments that do not succeed.
The conclusions of the analysis are quite general and tend to hold even when collection is costly
or uncertain and when the borrower has opportunity to shield prior to making the investment. Re-
negotiation mitigates some of the social problems of asset shielding, but still involves higher in-
terest and some degree of credit denial. Collateral can be used to further ameliorate the problem,
but it will not generally solve it. Equity agreements do provide a promising solution, although
they may not always be feasible in practice.
In closing, I would like to briefly highlight a few regulatory implications of this analysis. As the
analysis shows, asset shielding can lead to a social loss. The parties may not always be able to
solve it directly. One reason can be transaction costs, but a more interesting problem is that con-
27 The debt collection industry commission average is reported to be around 19% (Fedaseyeu 2013)
28 The actual decision may be more complicated, as it may be rational to shield only some assets but leave others ex-
posed. But this will not change the qualitative nature of the conclusion to follow.
19
Electronic copy available at: https://ssrn.com/abstract=2820650
tractual sanctions are mostly pecuniary. As a result, in exactly those circumstances when a party
shields assets, these sanctions would be irrelevant.
Given those limitations, the most direct means of controlling the problem is making shielding
more costly, by, for example, reversing suspicious transactions, extending clawback periods, us-
ing criminal sanctions more extensively, or limiting bankruptcy exemptions.29 More generally,
the recourse principle limits shielding and so exceptions to this rule (as in non-recourse loans)
should be carefully considered.
Another possible mechanism is insurance requirements and use of vicarious liability (as in Pitch-
ford 1995 and Mattiacci and Parisi 2003). Having a third-party involved, such as an insurance
company, would reduce lender’s risk, but will not necessarily solve the problem, as the borrower
may still be able to shield assets. It is only if third parties have an advantage over creditors in
monitoring borrowers—which they might have as in the case of multiple lenders—that third party
involvement may be a solution to this problem. Future work may develop the conditions under
which such a system can be useful.
The legal system may also control the problems of asset shielding more indirectly, by manipulat-
ing the wealth threshold. This can be done by requiring actors engaged in dangerous activities to
meet a minimal capital requirement. Such an equity cushion, we have noted, reduces shielding
incentives by reducing the wealth threshold. The legal system may also reduce shielding incen-
tives by imposing lower fines on under-capitalized debtors (in the spirit of Ganuza and Gomez
2008), or, similarly, order the payment of fines in installments over a long period of time. We
noted that the wealth threshold is lower if the debt is lower, so that such solutions may mitigate
the problem.
This outline of policy interventions suggest that there is much that can be done to control shield-
ing risk. Understanding the problem of ex-post asset shielding and the underlying incentives
could inform work in these areas.
* I thank Christopher Avery, Oren Bar-Gill, Osnat Jacobi, Louis Kaplow, Roy Shapira, Steven
Shavell, and Kathryn Spier for valuable comments. I would also like to thank the John M. Olin
Center for Law, Economics, and Business at Harvard Law School for financial support.
APPENDIX
Proof of Proposition 1.
1.1. I will now show that it is optimal to set t* at either 0 or e (i.e., there are no intermediate values of
t). To see the first case, suppose that a low t is considered such that t < e - (b + r), i.e., t is less
than borrower’s ex-post wealth less the debt obligation. This means that the second term in (1) is
positive (i.e., max(0, e-t-(b+r))>0). We can therefore simplify (1) to s(t) + e - t - b – r. And be-
cause s(t)-t<0,it would be best to set t=0. If, instead, a higher t is considered, such that t > e - (b
29 When shielding leads to suboptimal care, the legal system may seek to directly
20
Electronic copy available at: https://ssrn.com/abstract=2820650
+ r), that would make borrower’s payoff in (1) =s(t), which is clearly optimal to set at its highest
30
value, i.e., e. QED.
Note: the proof is relatively general and it holds regardless of the marginal cost of shielding (as
long as it is positive), so that it applies even if the marginal cost of shielding exceeds the marginal
amount shielded.
1.2. By 1.1., the optimal level of t, conditional on shielding, is e.. Hence, shielding costs can be
expressed as e-s(e). As s'(e)<1, Shielding costs are increasing in e. This implies that for some
level of e, we will have e-s(e)=b+r. let e* denote this level. The benefit of shielding is avoiding
up to b+r in costs, so when e>e*, the costs of shielding exceed the benefit. It is straightforward
to see from this formulation that for higher r the level of e* also increases.
1.3. Because the cost of shielding for any e>e* is greater than b+r, the borrower will be better off
paying b+r and retaining e-(b+r) than shielding. QED.
Proof of Proposition 2.
2.1. Let us look at the case where, for simplicity, r=0 and e>e*(0). In all states of the world bor-
rower’s wealth exceeds the threshold identified in 1.2., so shielding will not take place, and the
expected return in (5) becomes simply b+0. Hence, the loan is guaranteed to be repaid in full and
the interest would be indeed set at zero.
If, however, e<e*(0), it is still possible that the loan will be provided. This will be the case if
there exists r for which:
ē
∫ (𝑏+𝑟) 𝑓(𝑒)d𝑒 ≥ 𝑏
𝑒∗(𝑟)
But it must be that r >0 in this case, because there will not be any payment in the states of the
world when e<e*(0).31
Note. For lending to take place despite shielding risk, the expected investment earnings have to
𝑒∗(𝑟)
be higher than they would be under no asset shielding by ∫ e 𝑓(𝑒)𝑑𝑒, which reflects the re-
𝑒
duction in repayments due to asset shielding. This provides one measure of assessing the social
cost of shielding.
2.2.1. The value of the investment is reduced in all cases where e<e*(r) because the borrower
𝑒∗(𝑟)
spends e-s(e) on shielding. This reduces the (joint) value of the investment by ∫ (𝑒−
0
𝑠(𝑒)) 𝑓(𝑒)d𝑒; hence, if the net value of the investment, 𝐸(𝑒)−𝑏, is lower than this expected re-
duction, the investment will have a negative expected value and there will not exist a level of in-
terest for which the lender would be willing to lend.
30 The same result of full shielding applies, and for the same reason, when borrower’s wealth is low, i.e., e<b+r.
31 For example, suppose c(p) is a constant $0.5 per dollar, b = $10,000, and there is a 20% chance that e̲=$1,000 will
be realized and a 80% chance that e̅=$40,000 will be realized. If r=$2,500, then e*=$37,500 and there is 80% chance
that $12,500 will be repaid, meaning an expected payment of 0.8*12,500=$10,000 – enough to induce the lender to
lend.
21
Electronic copy available at: https://ssrn.com/abstract=2820650
2.2.2. Suppose first that the parties contemplate setting r=0 and that e<e*(0). The amount repaid
ē
is given by (3) as ∫ (𝑏) 𝑓(𝑒)d𝑒. Since this will be lower than b due to shielding, the interest
𝑒∗(0)
must be increased to some higher level, denoted as r1>0. By slightly increasing the interest, the
lender increases his expected payoff by the probability of repayment times the higher payment,
i.e., (1-F(e*(r1))(b+r1). At the same time, however, the higher debt would reduce the probability
of repayment, so that the expected repayment falls by the lost revenues, i.e., F(e*(r1)-F(e*(0)))b.
Now, if under the new schedule the net amount received (the gain from the higher interest less the
loss from the lower probability of repayment) falls below b, r1 would have to be set even higher.
It is plain to see now that further increasing the interest may repeat this dynamic, so that r would
need to be further and further increased. At the extreme, r could be set any arbitrarily high level,
r≥e̅, but then surely no payments will be made, because if the debt is greater than borrower’s
wealth it always pays to shield (by 1.1.). Hence, it may be that no interest rate would exist such
that the necessary amount will be repaid, and the loan will be denied (even if, after deducting the
costs of shielding, it has a positive value).32 QED.
* Terence M. Considine and Private Law Fellow, Harvard Law School. yar-
bel@sjd.law.harvard.edu. I would like to thank I thank Christopher Avery, Oren Bar-Gill, Louis
Kaplow, Koby Kastiel, Roy Shapira, Steven Shavell, Henry Smith, and Kathryn Spier for valua-
ble comments, as well as to the anonymous reviewer. I would also like to thank the John M. Olin
Center for Law, Economics, and Business at Harvard Law School for financial support.
REFERENCES
Alper, Elijah, M. 2007. Opportunistic Informal Bankruptcy: How BAPCPA may Fail to Make
Wealthy Debtors Pay Up. Columbia Law Review 107(8):1908-1943
NY City Bar. 2012. “Profiteering from Financial Distress: An Examination of the Debt Settle-
ment Industry”, available at
http://www2.nycbar.org/pdf/report/uploads/DebtSettlementWhitePaperCivilCtConsumerAffairsR
eportFINAL5.11.12.pdf
Che, Yeon Koo, and Kathryn E. Spier. 2008. “Strategic Judgment Proofing.” RAND Journal of
Economics 39 (4): 926–48.
Dari-Mattiacci, Giuseppe, and Gerrit De Geest. 2005. “Judgment Proofness Under Four Different
Precaution Technologies.” Journal of Institutional and Theoretical Economics 161 (1): 38–56.
32 For example, suppose shielding cost is a constant $0.5 per dollar, the loan is $10,000 and that there is equal probabil-
ity of returns being either $10,000 or $30,000—i.e., expected return is $20,000. If r=0, the critical level is $30,000, so
there is %50 chance of the borrower repaying, implying an expected return to the lender of $5,000. To adjust, the inter-
est must be set to some positive amount, but this will only increase the critical level to be above $30,000, implying 0
overall returns to the lender.
22
Electronic copy available at: https://ssrn.com/abstract=2820650
Dari-Mattiacci, Giuseppe, and Barbara Mangan. 2008. “Disappearing Defendants Versus Judg-
ment Proof Injurers.” Economica 75 (300): 749–65.
Dari-Mattiacci, Giuseppe, and Francesco Parisi. 2003. “The Cost of Delegated Control: Vicarious
Liability, Secondary Liability And Mandatory Insurance.” International Review of Law and Eco-
nomics 23 (4): 453–75.
Elinson, Zusha 2010. “City Finds Millions, but Reaps Little in Case,” New York Times, Decem-
ber, 11 2010.
Arbel, Yonathan A., 2015. “Contract Remedies in Action: Specific Performance”, West Virginia
Law Review 118:100-141.
Ellingsen, Tore and Eirik Gaard Kristiansen 2011. “Financial Contracting Under Imperfect En-
forcement,” The Quarterly Journal of Economics 126 (1): 323-371.
Ernest & Young (EY). 2012. “The Impact of Third Party Debt Collection on the National and
State Economies”.
Fay, Scott, Eric Hurst, and Michelle White. 2002. “The Household Bankruptcy Decision,” Ameri-
can Economics Review 92:706–718.
Ganuza, Juan-José, and Fernando Gómez. 2008. “Realistic Standards: Optimal Negligence with
Limited Liability.” The Journal of Legal Studies 37 (2): 577–94.
Ganuza, Juan José, and Fernando Gomez. 2011. “Soft Negligence Standards and the Strategic
Choice of Firm Size.” Journal of Legal Studies 40 (2): 438–66.
Gross, David B. and Nicholas S. Souleles. 2002. “Do Liquidity Constraints and Interest Rates
Matter for Consumer Behavior? Evidence from Credit Card Data,” Quarterly Journal of Econom-
ics 117 (1): 149-185.
Hart, Oliver and John Moore. 1989. Default and Renegotiation: A Dynamic Model of Debt, Quar-
terly Journal of Economics 113(1): 1-41.
Lacker, Jeffery M. 1991. “Why is there Debt? Economic Review,” July-Aug:3–19.
Lacker, Jeffery M. and John A. Weinberg. 1989. “Optimal Contracts under Costly State Falsifica-
tion,” Journal of Political Economy, 97(6):1345-1363.
Leff, Arthur A. 1970. “Injury, Ignorance and Spite — The Dynamics of Coercive Collection,”
Yale Law Journal 80 (1):1-46.
McCullough, Ralph C. 1997. “Bankruptcy Fraud: Crime without Punishment II,” Commercial
Law Journal 102:1-54.
Pitchford, Rohan. 1995. “How Liable Should a Lender Be? The Case of Judgment-Proof Firms
and Environmental Risk.” American Economic Review 85 (5): 1171–86.
Price Waterhouse Coopers (PWC) 2008, “Value of Third-party Debt Collection to the US. Econ-
omy in 2007: Survey and Analysis.”
Schwartz, Alan. 1983. “The Enforceability of Security Interests in Consumer Goods,” Journal of
Law & Economics 26(1): 117-162.
Scott, Austin W. 1913. “The Right to Follow Money Wrongfully Mingled with Other Money,”
Harvard Law Review 27(2): 125-138.
Stephen, Lea E. G, Avril J. Mewse, and Wendy Wrapson. 2013. “The Psychology of Debt in
Poor Households in Britain” in A Debtor World (Ralph Brubaker, Robert M. Lawless, and
Charles J. Tabb eds.).
23
Electronic copy available at: https://ssrn.com/abstract=2820650
Shavell, Steven. 1986. “The Judgment Proof Problem.” International Review of Law and Eco-
nomics 6. Springer: 45-68.
Shavell, Steven. 2005. “Minimum Asset Requirements and Compulsory Liability Insurance as
Solutions to the Judgment-Proof Problem.” The RAND Journal of Economics 36 (1): 63.
Shenon, Philip. 2001. “Home Exemptions Snag Bankruptcy Bill.” New York Times, April 6 2001.
Sullivan, Teresa A., Jay L. Westbrook, and Elizabeth Warren. 1989. As We Forgive Our Debtors:
Bankruptcy and Consumer Credit in America. New York, NY: Oxford University Press.
Summers, John. 1983. “The Case of the Disappearing Defendant: An Economic Analysis.” U.
Penn. L. Rev 1422 (1979): 145–72.
Stiglitz, Joseph E. and Andrew Weiss. 1981. “Credit Rationing in Markets with Imperfect Infor-
mation,” The American Economic Review 71 (3):393-410.
US Courts. 2012. Bankruptcy Statistics.
http://www.uscourts.gov/Statistics/BankruptcyStatistics/12-month-period-ending-march.aspx.
US DOJ. 2012. Public Report: Borrower Audits by the United States Trustee Program.
Veld, van’t Klaas, and Emma Hutchinson. 2009. “Excessive Spending by Firms to Avoid Acci-
dents: Is It a Concern in Practice?” International Review of Law and Economics 29 (4): 324–35.
White, Michelle J. 2007. “Abuse or Protection: The Economics of Bankruptcy Reform under
BAPCPA.” University of Illinois Law Review 2007 (1):275-304.
Wickelgren, Abraham L. “Settlement and the Strict Liability-Negligence Comparison.” U of Tex-
as Law, Law and Econ Research Paper No. 213.
Zhu, Ning. 2011. “Household Consumption and Personal Bankruptcy”, Journal of Legal Studies,
40 (1): 1-37
24
Electronic copy available at: https://ssrn.com/abstract=2820650

---

## ssrn-2835482: VILLANOVA
Year: 2016
Authors: Yonathan Arbel
Source: papers/ssrn-2835482/paper.txt

VILLANOVA
Public Law and Legal Theory Working Paper Series
Tort Reform through the Backdoor:
A Critique of Law and Apologies
By
Yonathan A. Arbel
and
Yotam Kaplan
September 9, 2016
Villanova University Charles Widger School of Law
Public Law and Legal Theory
Working Paper No. 2016-1030
This paper can be downloaded without charge from the
Social Science Research Network Electronic Paper
Collection at http://ssrn.com/abstract=2835482
Electronic copy available at: https://ssrn.com/abstract=2835482
Tort Reform through the Backdoor:
A Critique of Law and Apologies
Yonathan A. Arbel & Yotam Kaplan*
In this Article we show how the biggest tort reform of the
last decade was passed through the backdoor with the
blessing of its staunchest opponents. We argue that the
widely-endorsed apology law reform-----a change in the
national legal landscape that privileged apologies-----is, in
fact, a mechanism of tort reform, used to limit victims’
recovery and shield injurers from liability. While legal
scholars overlooked this effect, commercial interests seized
the opportunity and are in the process of transforming state
and federal law with the unwitting support of the public.
* Postdoctoral Fellow, Harvard Law School and Visiting Assistant Professor,
Villanova University School of Law; Private Law Fellow, Harvard Law School. We wish to
thank Janet Freilich, Meirav Furth, Oren Bar-Gill, John C.P. Goldberg, Patrick Goold, Kobi
Kastiel, Louis Kaplow, Steven Shavell, Yahli Shereshevsky, Henry E. Smith, Kathryn Spier,
and Gabriel Teninbaum for insightful comments and discussions. We are also thankful for
the suggestions of the participants at the Harvard John M. Olin Center Fellows Colloquium.
Generous financial support was provided by the Project on the Foundations of Private law at
Harvard Law School. Comments are welcome at yarbel@mail.law.harvard.edu.
Electronic copy available at: https://ssrn.com/abstract=2835482
8-Sep-16] Arbel & Kaplan - Draft 1
INTRODUCTION ........................................................................................................ 2
I. STRANGE BEDFELLOWS: OF ETHICISTS AND TORT REFORMERS ..................... 6
A. Apologies in Legal Scholarship .................................................................................. 6
B. Tort Reform .............................................................................................................. 12
C. How Tort Reformers Fought and Won the Apology Battle in State Legislatures ..... 15
II. COMMERCIAL APOLOGIES: THEORY AND PRACTICE ..................................... 20
A. A Theory of Apologies ............................................................................................. 20
1. The Goals of Tort Law and Apologies ................................................................ 20
2. A Unified Theory of Apologies in Tort Law ....................................................... 25
B. Commercial Apologies in Practice ........................................................................... 30
1. Delegation & Specialization................................................................................ 30
2. Professionalization & Training ........................................................................... 32
3. Diffusion of Responsibility ................................................................................. 33
4. Corporate Culture ................................................................................................ 34
C. Effectiveness of Commercial Apologies .................................................................. 36
III. CRITICAL ANALYSIS AND POLICY IMPLICATIONS ......................................... 39
A. Better Sorry than Safe .............................................................................................. 40
B. The Paradox of Excessive Apologies ....................................................................... 42
C. Apology as Disclosure .............................................................................................. 43
D. The Deficit of Apology Deficit ................................................................................ 45
E. Policy Implications ................................................................................................... 46
IV. CONCLUSION ........................................................................................... 48
V. APPENDIX: A MODEL OF LIABILITY FOR ACCIDENTS WITH APOLOGIES ....... 50
Electronic copy available at: https://ssrn.com/abstract=2835482
2 Draft, [8-Sep-16
INTRODUCTION
‘‘Capping malpractice payments . . . would do nothing to prevent unsafe practices or
ensure the provision of fair compensation to patients . . .
Apology offered by a health care provider during negotiations shall be kept confidential
and could not be used in any subsequent legal proceedings’’
--- Hillary Clinton & Barack Obama1
Why do large commercial interests-----insurance companies,
manufacturers, hospitals-----pledge millions of dollars to lobby for laws that
encourage apologies? What may explain this very recent interest of
commercial firms in the virtue of apologies? Why did tort reformers come
to adopt the rhetoric of regret, consilience, and penance? And how did the
largest tort reform of the last decades passed with the blessing of its
staunchest opponents?
Tort reform is a highly contentious social agenda. It is based on a
belief that litigation is inherently biased in favor of plaintiffs and must
therefore be reined-in by measures such as damage caps and screening
panels.2 Opponents of tort reform dispute this basic premise; they worry
that limitations on liability would unduly deprive accident victims of much-
needed compensation and would encourage negligent and reckless behavior.
The political pendulum slowly swings between these two positions.
In recent years, tort reformers have found a new and powerful
platform to advance their position, one that allowed them to strike a major
victory in their war against what they perceive as excessive liability.
Apology laws; laws designed to privilege apologies made by injurers,
making them inadmissible at trial. By co-opting the rhetoric and discourse
on apologies and the law-----independently developed by ethicists, dispute
resolution specialists, and legal theorists-----they found a way into the hearts
of legislators and the public. This maneuver has been so effective that even
long-standing opponents of tort reform, such as President Barack Obama,
express support for these reforms.3 In only two decades, 36 states have
adopted apology laws and there is currently a strong push to expand apology
1 Hillary Rodham Clinton & Barack Obama, Making Patient Safety the
Centerpiece, 354 N. ENG. J. MED. 2205, 2205 (2006).
2 See infra section I.B.
3 See infra section I.C.
Electronic copy available at: https://ssrn.com/abstract=2835482
8-Sep-16] Arbel & Kaplan - Draft 3
law reform to the federal level and other area of law.4
This Article argues and demonstrates that despite appearances,
apology laws are de-facto tort reform. Looking beyond the virtuous
rhetoric, the effect of apology laws on commercial actors is similar to that
of damages caps.5 At the heart of our argument is the overlooked claim that
apology laws undercut the deterrent effect of tort liability.6 We base our
argument on tort theory as well as research in psychology, economics,
sociology, and marketing. We contend that apology laws encourage
strategic apologies by commercial actors who do not express a real
commitment to avoid future wrongdoing. Commercial apologies exploit the
human tendency to forgive, which has myriad psychological, social, and
evolutionary reasons. For any of these reasons, victims forgive and settle
for a fraction of the value of their claims, foregoing hundreds of thousands
of dollars in compensation. Because commercial actors can anticipate in
advance that they will pay victims low amounts, they have less of an
incentive to invest in precautions that would prevent accidents in the first
place. In other words, apologies dilute deterrence, making it better to be
sorry than safe. We further argue that new market solutions and new trends
‘‘professionalize’’ and facilitate the tender of apologies by commercial
actors, thus greatly amplifying their harmful effects.7
4 See e.g., Dan M. Kahan & Eric A. Posner, Shaming White-Collar Criminals: A
Proposal for Reform of the Federal Sentencing Guidelines, 42 J. L. ECON. 365 (1999)
(calling to use shaming and apologies as a substitute to criminal sanctions); Chandler Farmer,
Striking a Balance: A Proposed Amendment to the Federal Rules of Evidence Excluding
Partial Apologies, 2 BELMONT L. REV. 243 (2015) (calling to create federal apology laws);
Lauren Gailey, “I’m Sorry” as Evidence? Why the Federal Rules of Evidence Should Include
a New Specialized Relevance Rule to Protect Physicians, 82 DEF. COUNS. J. 172 (2015);
Michael B. Runnels, Apologies All Around: Advocating Federal Protection for the Full
Apology in Civil Cases, 46 SAN DIEGO L. REV. 137 (2009). See also infra note 77 and
accompanying text.
5 Indeed, to the economist, apologies are a puzzle as ‘‘they must be regarded as
cheap talk’’ as ‘‘the only thing that is relevant is the expected magnitude of penalties.’’
Murat C. Mungan, Don’t Say You're Sorry Unless You Mean It: Pricing Apologies to
Achieve Credibility, 32 INT. REV. L. ECON. 178, 178 (2012). For this reason, Mungan
proposes that a special penalty will be levied on those who apologize. Id., at 179. Our
approach here is broader and we acknowledge the cost of delivering an apology, although
we believe that it is much smaller for commercial actors.
6 See infra section II.A.
7 We also explain that even if apologies are not merely strategic, i.e., they have a
real cost for the injurer, they may be socially undesirable. The reason, which we explain in
Electronic copy available at: https://ssrn.com/abstract=2835482
4 Draft, [8-Sep-16
The policy implications of our argument flow from understanding
the democratic gap inherent in these laws, as well as their potential harmful
implications for victims’ safety and welfare. Because our points here were
overlooked and avoided public scrutiny or scholarly analysis, we believe
that as a first measure, all planned future expansions of these laws-----to more
states, the federal level, and other areas of law-----should be suspended. The
effect of these laws on safety must be carefully evaluated, especially in the
context of medical malpractice where apologies are becoming
institutionalized and streamlined. Public discourse should internalize the
homomorphism of apology laws and tort reform and judge them
accordingly. Finally, judges should be made aware of the side effects of
apologies and learn to approach them with greater caution in commercial
settings.
Our argument explains, among other things, why we suddenly
witness deep interest from commercial actors in the virtues of apologies in
the context of private law.8 These reformers realized that by using the
uncontroversial rhetoric of apologies and penance they can mobilize
legislators from both parties. Hence, the support of apology laws by
commercial interest should not be viewed as a commendable fusion of social
and moral norms with business practices, but rather a self-interested
decision with potentially harmful social effects.
To provide a sense of the magnitude of the effect commercial
apologies have on victims, it is useful to consider the results of studies done
on payments to victims in states that enacted apology laws.9 These studies,
concentrating on hospitals, show a reduction of as much as 60% in payments
to victims. This translates to a reduction of $32,000-$65,000 in legal
payouts per case,10 which for many victims marks the difference between
greater detail in Section II.A.2, is that damages payments are transfers between individuals
which are, largely, socially neutral. Apologies, per this assumption, have real costs. While it
would be undesirable to replace a costless transfer with a costly action, injurers may
nonetheless do so, especially if they are encouraged by law.
8 We do not address in this paper the topic of public apologies or those made by
states, which raises distinct issues, see MARTHA MINOW, BETWEEN VENGEANCE AND
FORGIVENESS (1998); and Michael R. Marrus, Official Apologies and the Quest for
Historical Justice (Munk Centre, Occasional Paper III 2006).
9 See infra section II.C.
10 See Benjamin Ho & Elaine Liu, What’s an Apology Worth? Decomposing the
Effect of Apologies on Medical Malpractice Payments Using State Apology Laws, 8 J. EMPIR.
LEG. STUD. 179, 192 (2011) ($32,665); Benjamin Ho & Elaine Liu, Does Sorry Work? The
Electronic copy available at: https://ssrn.com/abstract=2835482
8-Sep-16] Arbel & Kaplan - Draft 5
being able to afford proper treatment for their accidents or suffering from
disability and poverty. For firms, on the other hand, the costs of apologies
are relatively marginal, and there is a large consensus that apologies are
cost-saving devices that can cut down costs by millions of dollars in
regulatory fines, judgments, and public outrage.11
The Article has three Parts. In Part I we explore the unexpected
camaraderie of ethicists and tort reformers. We show how the legal apology
movement was co-opted by the tort reform lobby to successfully effect tort
reform across the nation. Part II grounds apologies in tort theory and
explains how apologies can undermine deterrence in commercial settings.
Our theoretical analysis suggests that the problem is most acute if apologies
are cheap to produce and have a strong effect on victims. We then survey
recent developments in commercial apologies that show that commercial
apologies have indeed become cheaper and are highly effective. Part III
examines the theoretical and policy implications of these developments. We
argue that the evidence in support of apology law reform is weak and while
much empirical evidence is needed, the existing evidence is consistent with
the concern that apology laws undermine liability. After a brief conclusion,
an Appendix details our analysis using a formal economic model.
Impact of Apology Laws on Medical Malpractice, 43 J. RISK UNCERTAIN. 141 (2011)
($58,000-$73,000 for severe cases, $16,989-$24,017 for less severe cases, but -$3,132-$431
for insignificant cases, suggesting a potential increase in payouts for those cases). See also
Benjamin J. McMichael et al., Sorry is Never Enough: The Effect of State Apology Laws on
Medical Malpractice Liability Risk, manuscript (2016)
https://www.owen.vanderbilt.edu/faculty-and-research/upload/Apology-Paper-032516.pdf
($65,000).
11 See e.g., Erin O’hara O'Connor, Organizational Apologies: BP as a Case Study,
64 VAND. L. REV. 1957, 1977-1979 (2011) (discussing the role and effect of corporate
apologies).
Electronic copy available at: https://ssrn.com/abstract=2835482
6 Draft, [8-Sep-16
I. STRANGE BEDFELLOWS: OF ETHICISTS AND TORT REFORMERS
In recent decades, legal scholars from distinct disciplines-----ethicists,
dispute resolution experts, and sociologists-----have formed a movement that
challenged the traditional approach of the law to apologies. This Part tracks
the rise of this movement and its internal discourse. It then shows how the
rhetoric developed by this movement was co-opted by commercial interests
who lobbied for apology laws in state legislatures. These attempts were
immensely successful, and this part concludes by documenting the change
in the legal landscape.
A. Apologies in Legal Scholarship
In the early 90s, a movement of loosely formed ‘‘Legal Apologists’’
started to gain traction.12 The Legal Apologists critiqued the resolution of
conflict by the legal system for being overly abrasive to the relationship of
the parties. Instead, they argued that apologies can provide an effective and
wholesome solution to disputes. Despite the perception that apologies are
private and informal acts, they argued that the law has an important
facilitative role.13 In their view, the law should encourage individuals to
apologize or, at the very least, not stand in the way of those who wish to
apologize.
The Legal Apologists claimed that apologies have a wide-array of
benefits. When an individual is wronged, an apology by the responsible
party may acknowledge the harm done to the victim and the victim’s
12 See Hiroshi Wagatsuma & Arthur Rosett, The Implications of Apology: Law and
Culture in Japan and the United States, 20 L. & SOC'Y REV. 461, 487-88 (1986) (arguing
that incorporation of apologies into the American legal culture would reduce litigation and
repair relationships); Aviva Orenstein, Apology Excepted: Incorporating A Feminist
Analysis Into Evidence Policy Where You Would Least Expect It, 28 SW. U. L. REV. 221, 247
(1999) (advocating legal protection of apologies); Jonathan R. Cohen, Advising Clients to
Apologize, 72 S. CAL. L. REV. 1009 (1999). (Explaining the benefits to clients from
apologies). On the trend, see Aaron Lazare, The Healing Force of Apology in Medical
Malpractice and Beyond, 57 DEPAUL L. REV. 251, 251 (2008) (“Beginning in the early
1990s, there was a surge of academic and public interest in apologies.”).
13 See, e.g., Cohen, supra note 12, at 1011 (“Although a physician may wish to tell
a patient when he has made a mistake, lawyers often order doctors to say nothing.”); See also
Farmer, supra note 4, at 249 (calling apologies “legally dangerous”).
Electronic copy available at: https://ssrn.com/abstract=2835482
8-Sep-16] Arbel & Kaplan - Draft 7
agency;14 reduce feelings of anger and aggression by the victim;15 control
the attribution of fault to the responsible party;16 and start the process of
healing.17 As a consequence, apologies are said to mend the social fabric
14 See AARON LAZARE, ON APOLOGY 107 (2004) (considering acknowledgment of
harm as the foundation of an apology); Michael C. Jones, Can I Say I’m Sorry?: Examining
the Potential of an Apology Privilege in Criminal Law, 7 ARIZ. SUMMIT. L. REV. 563, 567
(2014) (by apologizing “[t]he offender acknowledges the harm he caused”).
15 See Erin A. O'Hara & Douglas Yarn, On Apology and Consilience, 77 WASH. L.
REV. 1121, 1124 (2002) (“In the face of a heartfelt apology, victims, . . . report feeling a near
instantaneous erosion of anger and pain.); Ken’ichi Ohbuchi et al., Apology as Aggression
Control: Its Role in Mediating Appraisal of and Response to Harm, 56 J. PERS. SOC.
PSYCHOL. 219 (1989) (testing empirically the effects of apologies on victim’s aggression,
finding soothing effects).
16 Psychologists find that apologies have a paradoxical effect. On the one hand,
apologies imply guilt and responsibility but on the other hand, experiments consistently find
that apologies reduce the attribution of fault to the wrongdoer and increase the belief that the
wrong happened for reason outside the wrongdoer’s control, See Bruce W. Darby & Barry
R. Schlenker, Children’s Reactions to Apologies, 43 J. PERS. SOC. PSYCHOL. 742, 745, 749
(1982) (finding that children attribute less responsibility to apologizing transgressors); and
Bernard Weiner et al., Public Confession and Forgiveness, 59 J. Pers. 281, 308 (1991)
(“confession alter perceptions of the confessor's moral character and causal attributions for
the negative action.”). On the paradox, see Jennifer K. Robbennolt, Apologies and
Reasonableness: Some Implications of Psychology for Torts, 59 DEPAUL L. REV. 489, 492
(2010).
17 See LAZARE, supra note 14, at 263 (listing the healing properties of apologies);
Margareth Etienne & Jennifer K. Robbennolt, Apologies and Plea Bargaining, 91
MARQUETTE L. REV. 295, 297 (2007) (arguing that victims of crimes find “emotional
restoration” and a “re-established sense of security” when receiving apologies). See also
Stephanos Bibas & Richard A. Bierschbach, Integrating Remorse and Apology into Criminal
Procedure, 114 YALE L.J. 85, 90 (2004) (apologies “heal offenders, victims, and
communities. Remorse and apology would teach offenders lessons, vindicate victims, and
encourage communities to welcome wrongdoers back into the fold”); Brent T. White, Say
You’re Sorry: Court-Ordered Apologies as a Civil Rights Remedy, 91 CORNELL L. REV.
1261, 1273-74 (2006); Deborah L. Levi, Note, The Role of Apology in Mediation, 72 N.Y.U.
L. REV. 1165, 1176-77 (1997) (arguing that apologies can be viewed as a form of
compensation as they heal part of the harm).
Electronic copy available at: https://ssrn.com/abstract=2835482
8 Draft, [8-Sep-16
torn by the transgression,18 restore prior relationships;19 and facilitate
negotiation.20 Importantly, the apology expresses a reestablished obligation
to refrain from future transgressions.21
For the Legal Apologists, all these advantages link to one
18 NICHOLAS TAVUCHIS, MEA CULPA: A SOCIOLOGY OF APOLOGY 13 (1991)
(“An apology thus speaks to an act that cannot be undone but that cannot go unnoticed
without compromising the current and future relationship of the parties, the legitimacy of the
violated rule, and the wider social web in which the participants are enmeshed.” He also
argues that apologies serve to reaffirm the victim’s membership in the community.); Barry
R. Schlenker & Bruce W. Darby, The Use of Apologies in Social Predicaments, 44(3) SOCIAL
PSYCHOLOGY QUARTERLY 271, 354 (1981) (noting that by apologizing the offender
“reaffirms the values of the rules that have been broken”); Erving Goffman, On Face-Work,
18 PSYCHIATRY 213, 220 (1955) (the apology is intended to “correct for the offense and
reestablish the expressive order”). See also Samul Oliner, Altruism, Apology, Forgiveness,
and Reconciliation as Public Sociology, in HANDBOOK OF PUBLIC SOCIOLOGY 375, 380
(“Through genuine apology and forgiveness, harmony may be restored”).
19 See Orenstein, supra note 12, at 241 (“apologies can transform individuals and
regenerate relationships.”). According to equity theory, individuals strive to a sense of equity
in their relationship which is disturbed by wrongdoing. The sense of imbalance is reported
to create anxiety, see generally Brad R.C. Kelln & John H. Ellard, An Equity Theory Analysis
of the Impact of Forgiveness and Retribution on Transgressor Compliance, 25 PERSONALITY
& SOC. PSYCHOL. BULL. 864 (1999). Apologies are found to restore the sense of equity by
demonstrating that the offender suffers too, See Robbennolt, supra note 16, at 492 and the
sources cited there. See also Kish Vinayagamoorthy, Apologies in the Marketplace, 33 PACE
L. REV. 1081, 1105 (2013) (arguing that the apology “reminds the transgressor of the value
of the relationship”) (citations omitted).
20 See Cohen, supra note 12, at 1020 (Indignity can be a large barrier to compromise,
and in many cases, an apology is needed”); Robin E. Ebert, Attorneys, Tell Your Clients to
Say They’re Sorry: Apologies in the Health Care Industry, 5 IND. HEAL. L. REV. 337, 339
(2015) (advocating apologies as a settlement strategy); Nancy L. Zisk, A Physician’s
Apology: An Argument Against Statutory Protection, 18 RICH. J.L. PUB. INT. 369, 390 (2015)
(arguing that because of the “powerful empirical data suggesting that physicians can reduce
their chances of being sued by communicating openly and honestly with their patients, . . . .
the conclusion seems inescapable that physicians must disclose mistakes and admit
responsibility for those mistakes.”). For a general discussion of research in emotion in
negotiations, see Max H. Bazerman et al., Negotiation, 51 ANN. REV. PSYCHOL. 279, 285-86
(2000).
21 See Gregg J. Gold & Bernard Weiner, Remorse, Confession, Group Identity and
Expectancies About Repeating Transgression, 22 BASIC APPL. PSYCHOL. 291 (2000);
Runnels, supra note 4, at 143-44 (“The apologetic offender will therefore be perceived as
less likely to engage in similar offending behavior in the future.”); Mihaela Mihai, Apology,
INTERNET ENCYCLOPEDIA OF PHILOSOPHY (2015) http://www.iep.utm.edu/apology/ (noting
that to be considered valid, the apology must imply an intention to refrain from similar
actions in the future).
Electronic copy available at: https://ssrn.com/abstract=2835482
8-Sep-16] Arbel & Kaplan - Draft 9
overarching theme: apologies facilitate dispute resolution in an effective
manner.22 By defusing victims’ desire for vindication,23 apologies avoid
disputes and encourage settlements, thus saving protracted legal proceedings
with their emotional and pecuniary costs.24
To demonstrate that these benefits are not merely theoretical, the
Legal Apologists have set to prove them empirically, mostly in lab settings.
The resulting studies have shown that victims of wrongful conduct report a
strong desire to receive an apology, express satisfaction once this need is
met, and, as a result, manifest a high willingness to settle and forego
litigation.25 A leading example is Jennifer Robbennolt’s work. In a series of
22 See Cohen, supra note 12, at 1061 (“encouraging apologies to occur early on may
prevent many injuries from escalating into legal disputes”); Farmer, supra note 4, at 244 (“A
sincere apology can help promote judicial economy by unlocking stalled settlement
negotiations . . . [and] can help ensure that impasse is avoided altogether.”); Ebert, supra
note 20, at 339 (noting that apologies can reduce litigation Jeffrey S. Helmreich, Does
“Sorry” Incriminate? Evidence, Harm and the Protection of Apology, 21 CORNELL J.L. PUB.
POL’Y 567, 567 (2012) (“Apology has proven a dramatically effective means of resolving
conflict and preventing litigation”);Orenstein, supra note 12, at 242 (“apologies can
substitute for costly litigation”); Zisk, supra note 20, at 390 (“In light of the powerful
empirical data suggesting that physicians can reduce their chances of being sued by
communicating openly and honestly with their patients, . . . . the conclusion seems
inescapable that physicians must disclose mistakes and admit responsibility for those
mistakes.”).
23 See supra note 17.
24 Steven Shavell and Mitchell Polinsky estimate that the costs of the legal system
absorb almost 50% of payments made by plaintiffs to defendants. Steven Shavell & A.
Mitchell Polinsky, The Uneasy Case for Product Liability, 123 HARV. L. REV. 1437, 1470
(2010) (“for each dollar that an accident victim receives in a settlement or judgment, it is
reasonable to assume that a dollar of legal and administrative expenses is incurred”).
25 See Thomas H. Gallagher et al., Patients' and Physicians' Attitudes Regarding
the Disclosure of Medical Errors, 289 JAMA 1001 (2003) (finding that patients expressed a
desire to receive an apology following a medical error); Gerald B. Hickson et al., Factors
That Prompted Families to File Medical Malpractice Claims Following Prenatal Injuries,
267 JAMA 1359, 1361 (1992) (noting that 24% of patients filed claims "when they realized
that physicians had failed to be completely honest with them about what happened, allowed
them to believe things that were not true, or intentionally misled them"); Marlynn L. May &
Daniel B. Stengel, Who Sues Their Doctors? How Patients Handle Medical Grievances, 24
L. & SOC’Y REV. 105 (1990) (finding that absence of apology motivates patients to bring
suit); Charles Vincent et al., Why Do People Sue Doctors? A Study of Patients and Relatives
Taking Legal Action, 343 LANCET 1609, 1612 (1994) (finding that 37% of respondents said
that they would not have sued had there been a full explanation and an apology and 14%
indicated that they would not have sued had there been an admission of negligence); Amy
B. Witman et al., How Do Patients Want Physicians to Handle Mistakes? A Survey of
Electronic copy available at: https://ssrn.com/abstract=2835482
10 Draft, [8-Sep-16
experimental studies, Robbennolt found that apologies increase victims’
belief that they would win their lawsuits, but, paradoxically, that they had
more favorable view of the injurer, were more willing to settle, and were
more receptive to lower settlement offers.26 Robbennolt also found that
victims who received an apology believed that the injurer is more likely to
be careful in the future.27
Armed with theory and evidence, the Legal Apologists quickly swept
legal academia. As others recently noted: “In the last two decades, apology
legal scholarship has become increasingly robust.”28 We found in our
analysis of the literature hundreds of articles on the issue, starting mostly in
the 90s and peaking in popularity in the 2000s.29
The ideas inspired by the movement quickly spread to other areas of
law, with apologies becoming the main item on the agenda for advocates of
Internal Medicine Patients in an Academic Setting, 156 ARCHIVES OF INTERNAL MED. 2565,
2566 (1996) (finding that 98% of respondents "desired or expected the physician's active
acknowledgement of an error.” And that "patients were significantly more likely to either
report or sue the physician when he or she failed to acknowledge the mistake."). See also
Nathalie Des Rosiers et al., Legal Compensation for Sexual Violence: Therapeutic
Consequences and Consequences for the Judicial System, 4 PSYCHOL. PUB. POL'Y & L. 433,
442 (1998) (survey of victims of sexual abuse that finds a desire for apologies); Piper Fogg,
Minnesota System Agrees to Pay $ 500,000 to Settle Pay-Bias Dispute, CHRON. HIGHER
EDUC., Feb. 14, 2003, at A12 (describing class-action plaintiff's disappointed reaction to the
settlement: "I want an apology," she said, "and I am never going to get it") (internal quotes
omitted); Editorial, The Paula Jones Settlement, WASH. POST, Nov. 15, 1998, at C6.
26 See Jennifer K. Robbennolt, Apologies and Settlement Levers, 3 J. EMPIRICAL
LEGAL STUD. 333 (2006); Jennifer K. Robbennolt, Apologies and Legal Settlement: An
Empirical Examination, 102 MICH. L. REV. 460, 462 (2003). See also Russell Korobkin &
Chris Guthrie, Psychological Barriers to Litigation Settlement: An Experimental Approach,
93 MICH. L. REV. 107, 148-50 (1994) (finding, but with low statistical significance, that
apologies affect willingness to settle).
27 See Robbennolt, supra note 16, at 506. For the effect of apologies outside the lab,
see infra section II.C..
28 Xuan-Thao Nguyen, Apologies as Intellectual Property Remedies: Lessons from
China, 44 CONN. L. REV. 883, 891 (2012) (“In the last two decades, apology legal scholarship
has become increasingly robust”).
29 Data acquired from Lexis Advance Search, Search terms: title(apolog*) OR
summary(apolog*) in title or summary of all Law Review and journal articles between 1984-
2015. A total of 326 results were found.
Electronic copy available at: https://ssrn.com/abstract=2835482
8-Sep-16] Arbel & Kaplan - Draft 11
‘‘restorative justice’’,30 ‘‘therapeutic jurisprudence’’,31 and alternative
dispute resolution, with special emphasis on mediation.32 Apologies were
offered as a mean of reforming diverse areas of law, such as criminal law,33
medical malpractice,34 tort law,35 and intellectual property.36 It was even
suggested that part of the Federal Register (‘‘probably one of the driest
publications ever printed’’) would include a section for governmental
apologies.37
This account of the literature will not be complete without
mentioning the internal divisions within the Legal Apologists. The most
common objections are that providing legal protection to apologies would
negate their moral value,38 that people would fake apologies and courts
would be ill-positioned to verify their authenticity,39 or that frequent
30 See Bibas & Bierschbach, supra note 17, at 103 (“Restorativists consider apology
and remorse important as part of a holistic process”); Alana Saulnier & Diane
Sivasubramaniam, Effects of Victim Presence and Coercion in Restorative Justice : An
Experimental Paradigm, 39 L. HUM. BEHAV. 378, 379 (2015). (“apology is central to
restorative justice”).
31 See Jones, supra note 14, at 565-68 (2014) (surveying therapeutic justice and
apologies in criminal law); See also Susan Daicoff, Apology, Forgiveness, Reconciliation &
Therapeutic Jurisprudence, 13 PEPP. DISP. RESOL. L.J. 131, 153-57 (2013) (surveying the
field of therapeutic jurisprudence).
32 See Bibas & Bierschbach, supra note 17, at 130-35 (advocating greater role for
mediation in criminal settings because it encourages apologies and remorse); Angela M.
Eastman, The Power of Apology and Forgiveness, 36 VT. B.J. 55 (2014). (Discussing the
effectiveness of apologies in dispute resolution); Levi, supra note 17, at 1165.
33 See generally Bibas & Bierschbach, supra note 17 (calling for a fuller integration
of apologies and expressions of regret into criminal procedure).
34 See Gailey, supra note 4, at 177-78.
35 See e.g., Daniel W. Shuman, The Role of Apology in Tort Law, 83 JUDICATURE
180 (2000).
36 See Nguyen, supra note 28.
37 See Eugene R. Fidell, Sorry, 71 Fed. Reg. 1 (2006), 8 GREEN BAG 155, 156
(2005).
38 See, e.g., TAVUCHIS, supra note 18, at 34 (explaining that the potential for
negative repercussions is an essential part of apologies); Lee Taft, Apology Subverted: The
Commodification of Apology, 109 YALE L. J. 1135, 1142 (2000) (arguing that the morality
of apologies derive from the exposure of the apologizing party to the consequences of the
wrongful act). Interestingly, victims may also abuse apologies by refusing to accept
apologies in order to use them as a basis for a lawsuit, see O'Hara & Yarn, supra note 15.
For a critique stating that apologies are helpful even when they do not admit blame, see
Helmreich, supra note 22, at 609.
39 On strategic apologies, see Ebert, supra note 20, at 364 (“a wrongdoer might
Electronic copy available at: https://ssrn.com/abstract=2835482
12 Draft, [8-Sep-16
apologies would lead victims to accept settlements that do not compensate
them fully.40 Despite these challenges, the movement itself is still going
strong, seemingly in the belief that none of these challenges is
insurmountable-----which, as we will argue, is most understandable if the
literature is read as focusing on interpersonal apologies.
B. Tort Reform
Moving from the high-minded Legal Apologists and their concern
with nuances of ethics, we consider the seemingly unrelated world of tort
reform. Tort reformers, known mostly for their activism in medical
malpractice and product liability, fight to limit the costs imposed on
defendants as a result of litigation, which they believe is excessive and
biased. They argue that the specter of excessive liability affects the industry
and especially physicians who are pressured to engage in so-called
apologize for the wrong reasons”); O'Hara & Yarn, supra note 15, at 1186 (“[A]pology can
be used as a tool for organizations to strategically take advantage of individual victims'
instincts to forgive in the face of apology.”); and Daniel Eisenberg, When Doctors Say,
“We're Sorry,” TIME, Aug. 15, 2007, at 50 (observing that many believe that “[a]pology laws
. . . could just usher in an epidemic of playacting.”). In one case, for example, a defendant
who was ordered by the court to apologize published an ad in the newspaper—later on the
same day—saying he was not really sorry. Amanda Garrett, Apologize or Go to Jail, Judge
Orders Criminals to Say, ‘I'm Sorry,’ to Victims, PLAIN DEALER, Oct. 9, 1999, at 1B. But
see Cohen, supra note 12, at 1065-66 (assuaging the concern that lawyers will advise clients
to strategically apologize because of their ethical obligations). Others believe that even
strategic apologies serve a useful social function. See Kahan & Posner, supra note 4
(advocating apologies as a shaming sanction); Orenstein, supra note 12, at 223 (“Even
apologies that originate from self-protection, which are not entirely sincere or fully contrite,
serve a vital social purpose.”). On courts’ ability, See Bibas & Bierschbach, supra note 17,
Jeffrie G. Murphy, Well Excuse Me! -- Remorse, Apology, and Criminal Sentencing, 38 ARIZ.
STATE L. J. 371, 376 (2006). (“[expressions of remorse] are matters about which the state is
probably incompetent to judge--it cannot even deliver the mail very efficiently”); Michael
M. O’Hear, Remorse, Cooperation, and “Acceptance of Responsibility”: The Structure,
Implementation, and Reform of Section 3E1.1 of the Federal Sentencing Guidelines, 91 NW.
U. L. REV. 1507, 1564 (1997) (expressing skepticism of courts’ ability to detect dishonest
apologies).
40 See Levi, supra note 17, at 1171 (“For instance, critics might ask, if a plaintiff
settles because she's emotionally fulfilled by an apology, isn't she being duped out of her
legal entitlement --an entitlement that the apology itself makes concrete?”); Gabriel H.
Teninbaum, How Medical Apology Programs Harm Patients, 15 CHAPMAN L. REV. 307, 309
(2011) ("modern apology programs appear to cool their marks out as a means of preventing
them from speaking to a lawyer and becoming educated about their legal rights.")
Electronic copy available at: https://ssrn.com/abstract=2835482
8-Sep-16] Arbel & Kaplan - Draft 13
‘‘defensive medicine’’, i.e., prescribing tests and procedures for the sole
purpose of reducing liability risk.41 Both the costs of liability and those of
defensive medicine are then passed on to the public in the form of higher
health costs (or, in other fields, in the form of higher costs of products and
services). To contain these costs, tort reformers suggest a series of methods
that would curb the threat of excessive liability, such as damages caps.
Opponents challenge these ideas, arguing that there is no evidence that
liability is excessive, that defensive medicine is prevalent, or that tort
reforms have any positive effects on the costs or quality of healthcare.42
To be clear-----and clarity is often lacking in this debate-----tort reform
is not about making the tort system more efficient.43 Both reformers and
their opponents are open to making the system work better at a lower cost.44
The focal point of contention is tort reform’s objective to reduce the
deterrent effect of tort liability. Tort reformers believe that damages in
litigation are too high and so overly-deter potential injurers, such as
physicians, which is the cause of ‘defensive medicine’ practices. Therefore,
their call is to cap money damages as means of curbing the over-deterrent
effect of litigation.45
41 David M. Studdert et al., Defensive Medicine Among High-Risk Specialist
Physicians in a Volatile Malpractice Environment, 293 JAMA 2609 (Finding in a survey of
824 physicians that 93% practice defensive medicine).
42 See, e.g., Myungho Paik et al., Will Tort Reform Bend the Cost Curve? Evidence
from Texas, 9 J. EMPIR. LEG. STUD. 173, 176-81, 209-11 (2012) (reviewing the literature and
conducting an empirical analysis of the effect on costs).
43 See generally Carl T Bogus, Syposium: Introduction: Genuine Tort Reform, 13
ROGER WILLIAMS U. L. REV. 1 (2008) (tracking the history of the tort reform movement and
noting the specific political meaning of the term). See also Rachel M. Janutis, The Struggle
Over Tort Reform and the Overlooked Legacy of the Progressives, 39 AKRON L. REV. 943
(2006).
44 For example, the leading Democratic legislation of the past decade, § 6801 to the
Patient Protection and Affordable Care Act (“Obamacare”), explicitly endorses efficiency
oriented reforms to tort law (“develop and test alternatives to the existing civil litigation
system as a way of improving patient safety, reducing medical errors, encouraging the
efficient resolution of disputes, increasing the availability
of prompt and fair resolution of disputes, and improving access
to liability insurance, while preserving an individual’s right to
seek redress in court.”).
45 See, e.g., Michael P Allen, A Survey and Some Commentary on Federal “Tort
Reform”, 39 AKRON L. REV. 909, 910 (2006) (“arguments about tort reform are really
arguments about restricting tort recoveries in one form or another.” Incidentally, the author
nonetheless uses a more expansive definition); Rachel M Janutis, The Struggle Over Tort
Electronic copy available at: https://ssrn.com/abstract=2835482
14 Draft, [8-Sep-16
In terms of political economy, the tort-reform debate pits consumers
and trial attorneys against professional, commercial, and business
interests.46 These opposing camps have mapped into political parties, with
Republicans being strong proponents of tort reform against the opposition
of Democrats, a somewhat ironic division in light of the history of tort law.47
Most notably, President George W. Bush has strongly favored tort reform
at the Federal level, calling to cap all money damages at $250,000,48 while
President Barack Obama has been largely opposed to damage caps.49
Tort reform has marked significant success. According to data
collected by Ronen Avraham in 2012, 21 states have a cap on non-economic
Reform and the Overlooked Legacy of the Progressives, 39 AKRON L. REV. 943, 944 (2006)
(explaining that tort reformers seek to “limit[] the availability of relief and the amount of
relief in personal injury actions”); Geoff Boehm, Debunking Medical Malpractice Myths :
Unraveling the False Premises Behind “Tort Reform”, 5 YALE J. HEAL. POL’Y, L. ETHICS
357, 358 (2005) (explaining tort reform as an attempt to limit victims’ rights through caps
on damages). Another pillar of tort reform is the screening of frivolous lawsuits, which tort
reformers believe are common. This would seem to be an attempt to make the system more
efficient, but opponents view this measure as an attempt to curb all litigation, regardless of
merit. See David A. Hyman & Charles Silver, Medical Malpractice Litigation and Tort
Reform: It’s the Incentives, Stupid, 59 VAND. L. REV. 1085, 1086-87 (2006) (arguing that
the true intent of tort reformers in this area is to make “the system less remunerative”).
46 See Todd J. Zywicki, Public Choice and Tort Reform. LAW AND ECONOMICS
WORKING PAPER (2000) (arguing that lawyers are pushing for expansion of tort liability),
Paul H. Rubin, Public Choice and Tort Reform, 124 PUBLIC CHOICE 223, 230 (2005)
(describing the tension between the different groups). See also Rachel M Janutis, The
Struggle Over Tort Reform and the Overlooked Legacy of the Progressives, 39 AKRON L.
REV. 943, 945-46 (2006).
47 See Stephen D. Sugarman, Ideological Flip-Flop : American Liberals Are Now
the Primary Supporters of Tort Law, in ESSAYS ON TORT, INSURANCE, LAW AND SOCIETY IN
HONOUR OF BILL W. DUFWA 1105 (Jure Forlag ed., 2006) (Identifying tort law with
conservative values and suggesting that the Democratic support of the tort system is a recent
one), Paul H. Rubin, Public Choice and Tort Reform, 124 PUBLIC CHOICE 223, 230-31
(2005) (explaining the mapping of these interests in partisan terms).
48 George W. Bush, Remarks at the University of Scranton in Scranton
Pennsylvania, January 16, 2003 (“for the sake of affordable and accessible health care in
America, we must have a limit on what they call non-economic damages. And I propose a
cap of $250,000”).
49 CBS, 60 Minutes, September, 11, 2009 (“"What I would be willing to do is to
consider any ideas out there that would actually work . . . [damages] caps will not do that.”).
In this interview, President Obama clarified a statement he gave to the congress,
acknowledging the potential importance of defensive medicine, see White House, Remarks
by the President to a Joint Session of Congress on Health Care, September, 9th, 2009.
Electronic copy available at: https://ssrn.com/abstract=2835482
8-Sep-16] Arbel & Kaplan - Draft 15
damages, 18 on punitive damages, and 22 on total compensation.50 Matter
and Stutzer recently found that Republican leadership in a state leads to a
large jump in the probability that tort reform will be undertaken.51
According to our own analysis, states that voted Republican in the 2012
election were far more likely to have some damages caps than those that
voted Democratic. Specifically, out of 24 Republican states, 19 had caps,
whereas out of 26 Democratic States, only 16 had caps.
Tort reform has made considerable inroads, but it also faces strong
opposition. First, politically, as we noted Democratic States are traditionally
averse to tort reform. Second, consumer and attorney lobby mounts a strong
opposition. And third, various courts have held damages caps
unconstitutional, mostly due to concerns of their limiting effect on the right
to a trial by jury.52 These challenges limit the ability of tort reformers to
push forward. The difficulty of advancing their agenda through ‘‘the front
door’’ has put pressure on reformers to find alternative venues for progress,
ones that could sidestep the political, interest-group, and legal obstacles.
Realizing this, reformers formed a new alliance with unlikely partners --- the
Legal Apologists.
C. How Tort Reformers Fought and Won the Apology Battle in State
Legislatures
Much to the envy of legal scholars everywhere, the Legal Apologists
have had a tremendous impact on policy. These ethicists and dispute
resolution specialists found surprising support from the pragmatic and well-
funded tort reform advocates.53 With the rhetoric of the legal apologists and
50 Ronen Avarham, Database of State Tort Law Reform, Version 5.1 (Clever),
https://law.utexas.edu/faculty/ravraham/dstlr.php.
51 See Ulrich Matter & Alois Stutzer, The Role of Party Politics in Medical
Malpractice Tort Reforms, 42 EUR. J. POLIT. ECON. 17 (2016),
52 See Bryan J Chase et al., Are Non-Economic Caps Constitutional?, 1 DEF.
COUNS. J. 154 (2015) (reviewing the judicial battle of the constitutionality of non-economic
damages caps).
53 NICK SMITH, JUSTICE THROUGH APOLOGIES: REMORSE, REFORM, AND
PUNISHMENT 283 (2015) (Arguing that “Tort reformers often bundle apology legislation
within” other tort reform measures”); Cohen, supra note 12, at 856 (2002) (suggesting that
apology laws depend on support by “insurance companies, medical associations and Fortune
500 companies”); Teninbaum, supra note 40, at 311 (“industry lobbyists exerted influence
on lawmakers to create special medical apology shield laws”); See also Runnels, supra note
4, at 484-85 (2011) (noting the lobby efforts of Sorry Works!, a coalition of physicians,
Electronic copy available at: https://ssrn.com/abstract=2835482
16 Draft, [8-Sep-16
the lobby efforts of tort reformers, the movement struck a chord with
legislators and judges across the country, prompting them to reform the law
to accommodate the use of apologies.
The same supporters of tort reform back apology laws: insurance
companies, medical associations, and large companies in diverse
industries.54 However, they do so using a new rhetoric, clearly
differentiating between apology laws and tort reforms.55 In Madison,
Wisconsin, for example, ‘‘[t]he medical lobby, supported by powerful
business groups, outmaneuvered trial lawyers . . . and won passage of the
‘I'm sorry" bill’.’’56 This lobby adopted a new rhetoric, arguing that apology
laws are useful not because they curb liability but because ‘‘at these difficult
times, people want, need and deserve compassion.’’57 Similarly, in
Massachusetts, various healthcare organizations lobbied for apology laws
explaining this as a move towards ‘‘a very proactive system where
physicians can advocate for patients who are injured rather than being told
they can't even talk to them.’’58
Tort reformers borrowed from Legal Apologists both the means and
the rhetoric to advance their goals. The most important item on the agenda
of reformers was the creation of ‘‘safe harbor’’ for apologies.59 Apologies
insurers, hospital administrators and patients).
54 Id.
55 Doug Wojcieszak et al., The Sorry Works! Coalition: Making the Case for Full
Disclosure., 32 JT. COMM’N J. QUAL. PATIENT SAF. 344, 344 (2006) (portraying apology
laws as a “middle-ground” approach to the “medical malpractice crisis”).
56 Cary Spivak & Kevin Crowe, ‘I’m Sorry’ Bill Latest Example of Doctors’ Clout,
June 28, 2014, JOURNAL SENTINEL.
57 Patrick Marley & Jason Stein, “Senate Passes Chemotherapy, Cannabis Oil Bills,
(Apr. 1, 2014), Journal Sentinel (quoting Sen. Leah Vukmir (R-Wauwatosa)).
58 Massachusetts Medical Society, Disclosure, Apology and Offer: A New
Approach to Medical Liability (June, 2012) http://www.massmed.org/News-and-
Publications/Vital-Signs/Back-Issues/Disclosure,-Apology-and-Offer--A-New-Approach-
to-Medical-Liability/.
59 See Peter H. Rehm & Denise R. Beatty, Legal Consequences of Apologizing, 1996
J. DISP. RESOL. 115, 128-29 (1996) (providing early support to apology safe harbor laws),
Orenstein, supra note 12 (calling for safe harbor laws). The nation’s apology laws originate
in Massachusetts. MASS. GEN. LAWS ANN. CH. 233, § 23D (West Supp. 1998). A retired
legislator’s daughter was hit by a car but the driver refused to apologize because of fear of
legal liability. This led to the adoption of the first apology law. See Taft, supra note 38, 1051-
52 (2000).
Electronic copy available at: https://ssrn.com/abstract=2835482
8-Sep-16] Arbel & Kaplan - Draft 17
often convey evidence of fault and are therefore admissible at trial.60
Reformers adopted the discourse and rhetoric of the Legal Apologists, who
argued that it would be wrong to punish people who ‘‘did the right thing’’
and apologized.61 The Legal Apologists further argued that existing
evidentiary rules make defendants fear apologies are ‘‘legal suicide’’62 and
provide an undue and unfair barrier to injurers from apologizing.63
The second item on the reformers’ agenda was the promotion of
apologies in less formal settings. Both reformers and legal apologists sought
to promote-----for very different reasons, of course-----the role of apologies in
mediation,64 settlement procedures,65 and the early stages of trial.66 Finally,
the third item was more institutional-----providing judges with the power to
mandate apologies as an additional or substitute aspect of sanctions.67
60 FED. R. EVID. 801(d)(2). Federal law only protects apologies if they are made
during settlement negotiations. See FED R. EVID. 408; Cohen, supra note 12, at 1032-36
(1999). An apology might also be inadmissible if it is implied from an offer to cover medical
expenses, FED R. EVID. 409. The rationale for this rule is that “such payment or offer [to pay
the victim's medical expenses] is usually made from humane impulses and not from an
admission of liability, and that to hold otherwise would tend to discourage assistance to the
injured person.” FED. R. EVID. 409 advisory committee's note.
61 See Cohen, supra note 12, at 864 ("The law should not punish people for taking
a moral step"); Orenstein, supra note 12, at 235-36 (“[A] justification for [these rules] arises
from a desire to reward goodness . . . . We do not want to punish the ‘blessed peacemakers[.]’
We certainly do not want to disadvantage individuals who do the right thing.”).
62 Eisenberg, supra note 39.
63 See Robbennolt, supra note 26, at 465 (“The conventional wisdom among legal
actors has been that an apology will be viewed as an admission of responsibility and will
lead to increased legal liability”, although she also notes that there is no empirical research
to supports this perception). Cohen, supra note 12, at 1010 (1999) (“If a lawyer contemplates
an apology, it may well be with a skeptical eye: Don't risk apology, it will just create
liability”).
64 See Levi, supra note 17.
65 See Elizabeth Latif, Apologetic Justice: Evaluating Apologies Tailored toward
Legal Solutions, 81 BOST. UNIV. L. REV. 289, 292 (2001).
66 See Etienne &. Robbennolt, supra note 17, at 299 (“encouraging apologies in
earlier stages of the criminal law process may be a laudable goal”); Bibas & Bierschbach,
supra note 17, at 128-29 (advocating that the tender of an apology would lead to lenient
charges, forego arrests, and deferral of prosecutions).
67 Cfr. White, supra note 17, at 1297 (“Requiring unrepentant officials to endure a
small amount of psychological discomfort [by coerced apologies] is a small price to pay to
help injured individuals”), and Latif, supra note 65, at 311 (forced apologies “can mitigate
anger, shame or educate the offender, or improve prospects for settlements”); Sharon
Elizabeth Rush, The Heart of Equal Protection: Education and Race, 23 N.Y.U. REV. L. &
Electronic copy available at: https://ssrn.com/abstract=2835482
18 Draft, [8-Sep-16
Reformers have been extremely successful, conquering 36 state
legislatures in only a decade.68 Additionally, courts have seemed to
internalize apology norms.69 Some courts are said to apply these norms
‘‘with gusto’’,70 leading them to treat apologies as valid grounds for
mitigating money damages,71 lowering sentencing,72 and exempting legal
SOC. CHANGE 1, 50-57 (1997) (advocating an equitable remedy of apologies in civil
litigation) with Pennsylvania Human Relations Comm'n v. Alto-Reste Park Cemetery Ass'n,
306 A.2d 881, 891 (1973) (Justice Pomeroy concurring) (“An apology is a communication
of the emotion of remorse for one's past acts. To order up that particular emotion, or any
other emotion, is beyond the reach of any government”. ); Levi, supra note 17, at 1178 (1997)
(arguing that involuntary apology is “just talk”), Nick Smith, Against Court-Ordered
Apologies, 16 NEW CRIM. L. REV 1 (2013) (arguing that court-ordered apologies serve little
function).
68 See Latif, supra note 65, 301 (reporting on California, Massachusetts, and Texas
in 2001). Compared with 36 states today, see EBS CONSULTING, Apology Protection Laws
in 36 States Letting Physicians be Human Again, Aug. 18, 2015, http://blog.ebs-
consulting.com/apology-protection-laws-in-36-states-letting-physicians-be-human-again.
See also Zisk, supra note 20, at 390 at 375 and n. 43; Ebert, supra note 20, at 366. The most
prevalent form of apology laws is safe-harbor to expressions of sympathy and empathy (e.g.,
“I am sorry you were hurt”), see, e.g., MONT. CODE. ANN. §26-1-814 (providing safe harbor
for a statement “expressing apology, sympathy, commiseration, condolence, compassion, or
a general sense of benevolence relating to the pain, suffering, or death of a person.”),
although several states provide a more robust protection and make inadmissible even
liability-assuming apologies (e.g., “I am sorry I hurt you through my negligence“).
69 Judges show reluctance to allow an apologetic admission of guilt to be the sole
basis for establishing the breach of a duty of care. In the medical context, see Ebert, supra
note 20, at 349 (“the use of apologies and other extrajudicial statements made by the
physician following a medical error are not alone sufficient to prove negligence.”). See also
Lashley v. Koeber, 156 P.2d 441, 445 (Cal. 1945) (physician’s admission that the mistake is
“all my own” is “insufficient to establish negligence”), Phinney v. Vinson, 605 A.2d 849,
850 (Vt. 1992) (Doctor’s apology is insufficient to establish a breach of standard of care).
But see Senesac v. Assocs. in Obstetrics & Gynecology, 449 A.2d 900, 901 (Vt. 1982) (“It
is conceivable that in some circumstances the extrajudicial admission of a defendant
physician could establish a prima facie case of negligence”). For more examples see Dan M.
Kahan, What Do Alternative Sanctions Mean?, 63 U. CHI. L. REV. 591, 634 & nn.171-72
(1996) (citing various examples of court-ordered apologies).
70 White, supra note 17, at 1268-69. See also Latif, supra note 65, at 296-98.
71 See, e.g., Groppi v. Leslie, 404 U.S. 496, 506 n.11 (1972) (providing mitigated
penalties for contempt due to an apology); Johnson v. Smith, 890 F. Supp. 726, 729 n.6 (N.D.
Ill. 1995) (apology mitigated punitive damages). See also Peter H. Rehm & Denise R.
Beatty, Legal Consequences of Apologizing, 1996 J. DISP. RESOL. 115 (1996) (reviewing
the legal effects of an apology).
72 See U.S. Sentencing Guidelines Manual § 3E1.1, cmt. n.3 (2003) (providing a
sentence reduction of two to three levels for clear demonstrations of acceptance of
Electronic copy available at: https://ssrn.com/abstract=2835482
8-Sep-16] Arbel & Kaplan - Draft 19
liability for crimes.73
This fast adoption amazed many: ‘‘Shortly after the idea of excluding
apologies from admissibility into evidence was raised in academic circles .
. . it rapidly spread to the policy arena’’.74 Yet, this success has not satiated
reformers’ appetite; they now seek to expand the scope of apology laws,75
apply them to other areas of civil and criminal law,76 enact them at the
federal level,77 and make them more uniform.78 Additionally, some
advocate that judges be able to compel the government to apologize in civil
rights cases.79
Tort reformers managed an impressive feat. On the one hand, they
draw on the resources and financial support of business interests that invest
hundreds of millions of dollars each year to advance tort reform.80 On the
other hand, they garnered large, bipartisan support. They even swayed
consumer advocates and lawyers which were willing to withdraw their
traditional opposition to tort reform in this context.81 Perhaps more
responsibility); Bibas & Bierschbach, supra note 17, at 92-95 (showing how criminal law
positively accounts for apologies in sentencing).
73 See, e.g., Kahan & Posner, supra note 4 (reporting of a judge substituting a 10
year punishment for embezzlement with an apology).
74 Cohen, supra note 12, at 819. See also Gailey, supra note 4, at 178-81 (surveying
the development of state apology laws).
75 See, e.g., Matthew Pillsbury, Say Sorry and Save: A Practical Argument for a
Greater Role for Apologies in Medical Malpractice Law, 1 S. NEW ENG. ROUNDTABLE
SYMP. L.J. 171, 200 (2006) (“As for situations where apologies are admissible, courts and
lawmakers across the country can learn from the strides made by their counterparts in other
states [where apologies are protected]”).
76 See, e.g., Jones, supra note 14, at 580-81(advocating an ‘apology privilege’ that
would create a safe harbor for apologies in criminal proceedings).
77 See supra note 4. See also Cohen, supra note 12, at 1061; Helmreich, supra note
22.
78 See Zisk, supra note 20, at 377-78 (noting that in Iowa, chiropractors are
protected, but chefs are not); See also Iowa Code § 622.31 (protecting only licensed
professionals).
79 See White, supra note 17 (advocating court-coerced apologies as a civil right
remedy).
80 Ronen Avraham, An Empirical Study of the Impact of Tort Reforms on Medical
Malpractice Settlement Payments, 36 J. LEGAL STUD. 183, 184 (2007).
81 PUBLIC CITIZEN, MEDICAL MALPRACTICE BRIEFING BOOK 85 (2004) (suggesting
apology laws as an alternative to tort reform); Pennsylvania Governor Signs Benevolent
Gesture Medical Professional Liability Act (Oct. 25, 2013), CLAIMS JOURNAL (reporting that
after a decade of back and forth battle between doctors and lawyers “the two professions
recently changed lobbying tactics by mutually agreeing on a new reform that both sides say
Electronic copy available at: https://ssrn.com/abstract=2835482
20 Draft, [8-Sep-16
remarkable is that despite his known opposition to tort reform, Barack
Obama co-signed a bill he authored with Hillary Clinton that sought to
establish federal apology safe harbors.82 Democratic lawmakers seem as
keen to adopt apology laws as Republican lawmakers, as evident by wide
adoption in both blue and red states.83
In sum, apology laws are promoted using the rhetoric of virtue,
improved communications, and ethics developed by legal intellectuals.
What is never explicitly noted, let alone considered, is the broader effects
of apology laws on incentives, harms, and other social costs. These issues
are simply suppressed and instead apology laws are framed as a neutral
measure that improves dispute resolution without sacrificing victims’ rights.
The acceptance of these laws by those who traditionally oppose tort reform
thus presents somewhat of a paradox. It is our task now to show why
apology laws undercut deterrence and are thus, in effect, comparable to
other measures of tort reform.
II. COMMERCIAL APOLOGIES: THEORY AND PRACTICE
We have seen that tort-reformers have joined hands with legal
scholars and have managed to change the law in most states. This Part first
provides a theoretical framework that allows evaluating the effect of
apologies on behavior. This theory highlights the importance of the cost of
apologies and their effectiveness; given that, this Part considers separately
both issues, showing how the costs of commercial apologies are declining
while their effectiveness remains considerable.
A. A Theory of Apologies
1. The Goals of Tort Law and Apologies
The two primary goals of tort law are compensation of victims and
will help.”)
82 See S.1784: National MEDiC Act, 109th Congress, 2005-2006
https://www.govtrack.us/congress/bills/109/s1784; Runnels, supra note 4, at 156 (discussing
the bill), Clinton & Obama, supra note 1, at 2206 (discussing the bill).
83 See Benjamin Ho & Elaine Liu, Does Sorry Work? The Impact of Apology Laws
on Medical Malpractice, 43 J. RISK UNCERTAIN. 141, 144 note 5 (2011) (noting that
regression analysis shows that “political composition in the State Senate and State House has
no significant explanatory power on the passage of apology laws.” They also find that
apology laws are not correlated with other tort reforms.).
Electronic copy available at: https://ssrn.com/abstract=2835482
8-Sep-16] Arbel & Kaplan - Draft 21
deterrence of wrongdoers; an important secondary goal is the reduction of
litigation costs.84
Controlling the costs of disputes, and litigation in particular, has
been the prominent theme in the writing of the Legal Apologists.85 They
argued that apologies help reduce litigation through the dissipation of
victim’s anger or need for vengeance. For the most part, the evidence seems
to support this assertion, although recent empirical work casts some doubt.86
From a cost-perspective, then, apologies seem to have a positive effect. If
one approaches a case after a dispute had already arisen, it may be appealing
to focus on controlling its costs. And indeed, most of the Legal Apologists
are conflict resolution experts who meet disputes after they arise.87 But tort
law adopts a broader perspective, and in this view, controlling litigation
costs is generally a secondary consideration.
What has been missing from the Legal Apologists’ analysis is the
effect of apologies on deterrence. In a fundamental oversight, the Legal
Apologists have failed to account for this central goal of tort law. Thus,
they have never accounted for the ex-ante effects of apologies on primary
behavior, namely, how does the possibility of apologizing after the fact
affect injurers’ decisions to engage in harmful activities in the first place?
How do apologies change the level of behavior? Would a more favorable
treatment of apologies by the legal system induce or suppress accidents?
Once considered, reflection reveals a tension between apologies and
deterrence. To the extent that apologies reduce the cost of an accident for
the injurer-----which is the point just discussed-----they provide the injurer with
less of a reason to avoid the accident. Put differently, if apologies allow the
injurer to limit exposure to liability, then the injurer has-----all other things
84 See generally STEVEN SHAVELL, FOUNDATIONS OF ECONOMIC ANALYSIS OF
LAW 192-93 (2004); Mark A Geistfeld, Compensation as a Tort Norm, in PHILOSOPHICAL
FOUNDATIONS OF THE LAW OF TORTS 65 (2013) (advancing compensation as the central
goal of tort law); Guido Calabresi, Some Thoughts on Risk Distribution and the Law of
Torts, 70 YALE L.J. 499 (1961) (loss spreading). See also Steven Shavell & A. Mitchell
Polinsky, The Uneasy Case for Product Liability, 123 HARV. L. REV. 1437 (2010)
(critically assessing the effectiveness of tort law in meeting these goals in the context of
product liability)
85 See supra note 22.
86 See infra II.C.
87 For example, Deborah L. Levi is a practicing mediator; Jennifer K. Robbennolt
is an expert on dispute resolution; and Robyn Carroll is an expert on dispute resolution and
mediation.
Electronic copy available at: https://ssrn.com/abstract=2835482
22 Draft, [8-Sep-16
being equal-----much lesser incentive to avoid the activity or to invest in
precautions. This does not mean that the injurer will not care at all or that
the effect of apologies is necessarily negative, but it does imply that injurers
will have less incentive to take care than they would otherwise.88
The other primary goal, compensation, fails to provide clear
guidance. The goal of compensating a victim is to restore her to her status
prior to the accident, by providing her with value that is as close as possible
to her loss.89 On first blush, apologies seem to undercut this goal, because-----
as demonstrated by the apologists themselves-----victims are willing to accept
lower payments in settlements when an apology is tendered.90 However, the
Legal Apologists emphasized that victims care for much more than financial
compensation and the positive emotional and expressive effect of an apology
may well be more important than the payment of money. The contention
here is that apologies are healing and valuable to the victim more than a
monetary payment. Let us call this view the therapeutic value theory of
apologies.
There are strong reasons to be skeptical of the therapeutic value
theory, particularly in the context of commercial apologies. While the
adherents of the therapeutic value theory argue that victims’ acceptance of
apologies is evidence of their value, there are several alternative, less
benign, reasons why victims might accept them and forgo sometimes
hundreds of thousands in compensation.91 We cover five reasons here.
The first two reasons why a victim may be accepting an apology
unwillingly has to do with pressure and manipulation. Gabriel Teninbaum
recently argued, for example, that apologies are used by sophisticated
commercial firms as means of beguiling victims.92 Teninbaum highlighted
certain practices of apologies used by firms that are meant to create
emotional pressure on victims to accept them, a decision that the victims
88 Of course, it may well be that there is too much deterrence in the baseline, so
the change will be favorable. However, there are many reasons to believe that the tort
system is generally under-deterrent, especially given injurers ability to shield assets after
an accident. See generally Yonathan A. Arbel, Shielding of Assets and Lending Contracts,
48 INT’L REV. L. & ECON. 26 (2016)
89 Livingstone v Rawyards Coal Co (1880) 5 App Cas 25,39 (‘‘Tort seeks to put
the victim in the position he was in before the tort.’’)
90 See e.g., supra note 26.
91 See infra section II.C.
92 See generally Teninbaum, supra note 40.
Electronic copy available at: https://ssrn.com/abstract=2835482
8-Sep-16] Arbel & Kaplan - Draft 23
will later come to regret.93 The strategic, deliberate use of apologies by
commercial firms is designed to maximize this effect and victims are
employing only limited agency in their decision to accept the apology. A
second reason concerns pressure that comes from sources besides the injurer
itself. Pursuant to an apology, victims may still wish to sue; however, they
are often subject to social or internal pressure to avoid doing so, lest they
be perceived as vengeful, unrelenting, or ungrateful. Research in
psychology shows that failure to accept an apology is associated with a
negative perception of the victim.94 Similarly, victims may experience an
internal or social pressure (perceived or real) not to sue, due to the social
norm of accepting apologies.95
The two other reasons are more epistemological. There is a real
question as to whether people understand the meaning of commercial
apologies and how they are different from interpersonal ones. When a firm
apologizes through one of its proxies, is that an expression of guilt? Of
whom? Given how dispersed the decisions and actions in a commercial firm
are, even an apology by the CEO reflects a sliver of the actual responsibility
(aside from the very general sense in which the CEO is the personification
of the firm, a loaded idea by itself).96 What does the apology say about the
future? Would a commercial firm be less likely to recidivate after an
93 Id., at 332 (“On its own, convincing an individual not to sue is no different than
any other “bad” settlement. What makes this different is the appearance of a system of
methods designed to dissuade patients from actually considering their rights before settling
for short money.”)
94 See Mark Bennett & Christopher Dewberry, ‘‘I’ve said I'm Sorry, Haven't I?’’
A Study of the Identity Implications and Constraints That Apologies Create For Their
Recipients, 13 CURR. PSYCHOL. 10 (1994). See also Joost M. Leunissen et al., The apology
mismatch: Asymmetries between victim's need for apologies and perpetrator's willingness
to apologize, 49 J. Exp. Soci. Psy. 315, 315 (2013) (‘‘Victims of transgressions are, in
turn, socialized into graciously accepting such apologies’’). This is in line with the view of
some economists that apologies create a “psychic cost” to suing. See Benjamin Ho & Elaine
Liu, Does Sorry Work? The Impact of Apology Laws on Medical Malpractice, 43 J. RISK
UNCERTAIN. 141, 148 (2011).
95 Some moral philosophers believe that there exists a duty to forgive, see
CHARLES GRISWOLD, FORGIVENESS: A PHILOSOPHICAL EXPLORATION, 67 (2007) (‘‘under
certain conditions it would be blameworthy not to forgive’’); and Espen Gamlund, The
Duty to Forgive Repentant Wrongdoers, 18 INT. J. PHILOS. STUD. 651 (2010) (arguing that
a limited duty to forgive exists), and so it is possible that some people have a mistaken
sense of duty to accept apologies, even when they are not genuine.
96 On diffusion of responsibility in firms, see infra section II.B.1 and II.B.3.
Electronic copy available at: https://ssrn.com/abstract=2835482
24 Draft, [8-Sep-16
apology? The meaning of this apology is an open question, and this leads
us to the fourth reason which has to do with firm anthropomorphism. It is
well known that people do not maintain a clear distinction between
individuals and firms, tending to endow brands and firms with personality.97
Humans have a strong tendency-----potentially related to evolutionary
reasons-----to accept apologies from other humans.98 The concern is that this
instinctive reaction is carried over to brands and firms without proper
reflection. People may intuitively interpret an apology by a firm in a similar
way to how they interpret an apology by a person, much like how
individuals feel that certain brands and companies are ‘warm’ or ‘evil’-----a
phenomenon known as brand personification.99
The final flaw, and perhaps the most fundamental one, is the
unrealistic magnitude of the hypothesized therapeutic effect. Even if
apologies have some healing effect, there must be some limit to the size of
this effect. If victims are willing to forgo small or perhaps even moderate
value claims in exchange for an apology, then it may be that they engage in
a conscious trade-off of pecuniary and non-pecuniary benefits, preferring
the latter to the former. However, the greater the amount the victim forgoes,
the less persuasive is the idea that there is a real trade-off of benefits. It is
less persuasive, we think, to argue that a disabled victim of an accident
prefers an apology to amounts large enough to considerably alleviate her
suffering. As we shall show, the effect of commercial apologies can be
measured sometimes in the hundreds of thousands of dollars, a fact that puts
considerable pressure on the therapeutic value theory.100
Overall, we think that there is good reason to suspect the therapeutic
theory of apologies, at least in commercial settings. We cannot completely
overrule the possibility that victims are sophisticated and fully understand
the difference between commercial and personal apologies and find them
97 See Martin Eisend & Nicola E. Stokburger-Sauer, Brand Personality: A Meta-
Analytic Review of Antecedents and Consequences, 24 MARK LETT 205, 205 (2013) (‘‘In
their pursuit of fulfilling self-definitional needs, individuals tend to increasingly perceive
brands as relationship partners.’’). Brand personality is understood as ‘‘the set of human
characteristics associated with a brand’’, Jennifer Aaker, Dimensions of Brand Personality,
34 J. MARK. RES. 347, 347 (1997).
98 See Yohsuke Ohtsubo & Esuka Watanabe, Do Sincere Apologies Need to be
Costly? Test of a Costly Signaling Model of Apology, 30 EVOL. HUM. BEHAV. 114 (2009)
(considering apologies as an evolutionary adaptation).
99 See generally Ronal Jay Cohen, Brand Personification: Introduction and
Overview, 31 PSYCHOL. MARK. 461 (2010).
100 See infra section II.C.
Electronic copy available at: https://ssrn.com/abstract=2835482
8-Sep-16] Arbel & Kaplan - Draft 25
nonetheless satisfying-----so satisfying that they are willing to forgo very large
amounts of money in exchange for an apology. Yet, we find this possibility
less probable than the other explanations proposed here. The following
thought experiment might elucidate our skepticism. Consider the common
victim of medical malpractice, who suffered a great harm from negligent
treatment. Suppose that after the accident, she receives an apology from the
hospital staff or the physician, and as a consequence, she is dropping the
lawsuit. Going back in time but knowing what the patient knows now, would
the patient undergo the same procedure again? If the answer is negative,
then it is unlikely that the apology really mended the harm, that it genuinely
compensated the victim for her loss.
Overall, we see tension between the goals of tort law. Cost-reduction
is seemingly favorable to apologies whereas deterrence argues against
apologies. Compensation fails to point in any clear direction, so it does not
provide guidance on how to resolve the tension. To account for this
complexity, we need a theory that accounts for the combined effects of cost-
reduction and deterrence.
2. A Unified Theory of Apologies in Tort Law
To evaluate the combined effect of apologies on behavior, we extend
the traditional model of accidents in tort law to account for apologies. An
informal presentation follows here and the interested reader would find the
formal explication in the Appendix.
In the basic model of tort liability, a potential injurer chooses
whether to engage in a risky activity. The activity has some benefit to the
injurer but may cause harm to the victim. The prototypical example of this
model is driving and the risk of an accident to a pedestrian. An important
aspect of the model is that litigation over the accident is costly. To win the
case, each party has to expend resources on retaining lawyers, hiring expert
witnesses, producing evidence, etc. In addition to these litigation costs,
there are also liability costs, which reflect the payments the injurer would
have to pay the victim if found liable (or if the parties settle). The social
goal is to find rules that minimize costs.101 On this point, it is worth
emphasizing that the economic analysis does not consider the payment of
liability costs to have any direct effect on social welfare --- when a person
pays an amount to another person, then the second person becomes richer
(a social benefit), but this benefit is completely offset by the loss of the first
person.
101 See supra note 84.
Electronic copy available at: https://ssrn.com/abstract=2835482
26 Draft, [8-Sep-16
To account for apologies, we add to the model the possibility that if
an accident occurs, the injurer may choose to apologize. In order to do that,
it is important to clearly identify the benefits and costs of apologies. On the
side of benefits, the literature points out to two potentially distinct effects:102
the victim is willing to settle more often and is demanding a lower amount
in settlement negotiations.103 The costs are those of tendering an apology,
which may involve loss of face, social stature, or reputation.104 Tendering
an apology is a private cost that is borne by the injurer.
Are apologies after an accident socially desirable? Based on the
extended model, we will now argue that the injurer will tend to apologize
either more or less often than is socially optimal, a point that was not fully
recognized in the literature.105 To see that, consider first the private
incentive to apologize, the way the injurer sees it. From this perspective,
the tender of the apology will involve a cost that the injurer bears, but the
apology will also have a double benefit----- the savings on the injurer’s
litigation and liability costs. If the benefits exceed the cost of apologizing,
the injurer would have an incentive to apologize.
From a social perspective, the calculus is different. From this point
of view, we would again count the cost of tendering the apology. However,
the benefits will be very different. First, the savings on liability costs will
not be counted. As noted, from the social perspective, the fact that the
injurer will save money by not paying the victim the full amount is not a
social benefit, as the injurer’s gain is the victim’s loss. At the same time,
the benefit of reducing litigation costs involves a saving to both the victim
and the injurer, but the injurer will only count her savings, whereas society
will care about the joint savings. We see there is reason for the private
incentive to apologize to diverge from the social optimum, leading the
102 See infra section II.C.
103 Alternatively, apologies reduce payments because juries and judges are more
lenient towards repentant injurers.
104 For example, one public official preferred being sent to prison than a halfway
house because he did not want to apologize, White, supra note 17, at 1269. See also Ebert,
supra note 20, at 334-35 (discussing ego and the difficulty physicians face in admitting their
professional shortcomings).
105 For a similar argument in the broader context of litigation, see Steven Shavell,
The Fundamental Divergence Between the Private and the Social Motive to Use the Legal
System, 26 J. LEGAL STUD. 575 (1997) (explaining that there would generally be too little or
too much litigation because parties’ private incentives to bring suit will often be too weak or
too strong relative to the social optimum).
Electronic copy available at: https://ssrn.com/abstract=2835482
8-Sep-16] Arbel & Kaplan - Draft 27
injurer to apologize too much or too little.106
Example 1. Suppose that an accidental poisonous leak from a nearby
factory caused the victim a harm of $5,000. Further suppose that tendering
an apology would cost $500, but that through this apology, the parties settle
the case-----thus each avoiding $200 in litigation costs. Finally, suppose that
because of the apology, the victim is willing to accept a payment of $2,500,
rather than the $5,000 the victim would have received in litigation. In this
example, an apology will not be socially desirable, as it costs $500, but only
saves $400 in litigation costs. (Recall that the $2,500 saving to the offender
is equal to the victim’s loss). On the other hand, by apologizing the injurer
could save $2,700 (2500+ 200) at a cost of only $400, thus giving her an
incentive to apologize. Since the private incentive to apologize exceeds what
is socially desirable, there will be too much of an incentive to apologize.
Example 1a. Suppose now that the apology costs only $300 to tender
but that it does not reduce the amount in settlement. In this case, the apology
will be socially valuable, as by investing $300, a total of $400 in litigation
expenses could be saved. The injurer, however, will not have an incentive
to invest $300 as this will only help her save her own litigation costs of
$200.
We see that the social and private incentive to apologize may
diverge. We would expect there to be too many apologies under a
combination of the following circumstances: apologies have a strong effect
on victims’ willingness to forgo parts of their claims, injurer’s own litigation
costs are high, and apologies are cheap. Indeed, there may also be cases
where injurers will have too little incentive to apologize, in which case,
apology laws would be desirable. Which of these two options is more
probable has to do with one’s assessment of the magnitude of the cost of
tendering an apology relative to the effect of apology on the victim. The
stronger the effect, or the lower the cost of apologies, the more we will be
concerned with having too many apologies.
The analysis should not stop here. How would the ability to
apologize affect the decision to undertake the risky activity in the first place?
Tort theory recognizes that injurer’s decision will be affected by how much
the injurer anticipates they would have to pay should an accident occur.
106 Note that at this stage, we do not take into account the possibility that making
the injurer pay will reduce her incentive to harm in the future. The analysis so far is made
‘‘ex-post’’, that is, under the assumption that an accident has already happened.
Electronic copy available at: https://ssrn.com/abstract=2835482
28 Draft, [8-Sep-16
Under the standard analysis, it is suggested that if the expected payment will
be equal to the harm, the injurer would have optimal incentives.107 With a
sanction equal to the harm, a factory will not produce goods with a value of
$5,000 if the expected harm from a pollution-related accident exceeds
$5,000. Making the factory owner pay $5,000 in the event of an accident
would make sure she would only have an incentive to produce when the
value of the goods exceeds $5,000.
This result changes when we consider apologies. When
contemplating the possibility of an accident, the injurer would take into
account several costs. If no apology is tendered, these costs include the
expected costs of litigation and the costs of liability (e.g., $5,000).108 And
if the injurer decides to tender an apology, then as just analyzed, the injurer
will save some of the costs of litigation and liability, but will have to pay
for the apology itself. In this sense, the cost of delivering the apology can
be thought of as a self-inflicted punishment. Nonetheless, the injurer does
not have to apologize, and she will only do so if the apology is, on net,
privately beneficial. It follows that the injurer will only apologize if she
expects that to reduce her costs. This point emphasizes that the only
potential effect of apologies is to reduce liability.
Part of this reduction in payments is benign, as apologies encourage
settlement of cases that would otherwise litigate. The savings on litigation
due to greater propensity to settle is thus a positive feature of apologies. But
apologies do more than encourage settlements: they also reduce payments
the injurer would have to make to victims. Because the injurer cares about
her own private costs in the event of an accident, this reduction means that
the injurer has less to worry about an accident and less interest to take
precautions against such an accident. Overall, then, apologies dilute
deterrence.
Example 2. Suppose now that a factory owner thinks about using a
production technique that would save $4,000 in production costs-----but will
cause a harm of $5,000 from pollution to one of the neighbors. Suppose, as
before, that apology costs $400 to tender and that it leads to a settlement for
107 See Richard A. Posner, A Theory of Negligence, 1 J. LEGAL STUD. 29 (1972);
William M. Landes & Richard A. Posner, The Positive Economic Theory of Tort Law, 15
GA. L. REV. 851 (1981). See also Allan E. Farnsworth, Your Loss or My Gain? The Dilemma
of the Disgorgement Principle in Breach of Contract, 94 YALE L.J. 1339 (1985) (discussing
optimal remedies in the context of contract law).
108 We are assuming, as is conventional, that liability is set to equal the harm, but
not the harm plus litigation costs, See generally A. Mitchell Polinsky & Steven Shavell,
Costly Litigation and Optimal Damages, 37 INT. REV. L. ECON. 86 (2014).
Electronic copy available at: https://ssrn.com/abstract=2835482
8-Sep-16] Arbel & Kaplan - Draft 29
$2,500, thus saving $200 in litigation costs for both the factory owner and
the neighbor. We have already noted that the factory owner will have an
incentive to apologize in this case. Given that, the factory owner knows that
if she decides to use this production technique, she will gain $4,000 in
savings and her costs from an accident would be $2,900 (apology cost and
the settlement payment). Hence, the factory owner will have an incentive to
undertake the activity, pocketing the $1,100 difference. From a social
perspective, however, the activity causes a harm of at least $5,000 and only
has a benefit of $4,000,109 thus making it undesirable.
Example 2a. Suppose, as in 1a, that the apology costs $300 to tender
and that it does not reduce the amount in settlement. In this case, we have
seen, the injurer will not apologize, hence apologies will not have any
effects on behavior. More generally, if apologies are very costly to make,
they will not influence behavior.
Tying the analysis together, apologies may lead to unwanted
behavior when they are cheap and effective. After an accident, there may
be an excessive incentive for the injurer to apologize. This concern will be
most pressing when, among other things, apologies are cheap and effective
in terms of their effect on victims’ demands in settlement negotiations.
Before an accident occurs, apologies would tend to reduce the injurer’s
incentive to take care, a problem that is again most pressing when apologies
are cheap and effective. It should be emphasized that this does not mean
that apologies are always undesirable; if the apology reduces the cost of an
accident to the injurer by less than the savings it entails in litigation costs to
both parties, it is desirable. However, once the effect of an apology exceeds
that amount, apologies are no longer socially desirable, as the
encouragement of risky behavior exceeds the value of saving on litigation
costs. The main conclusion here is worth repeating: if apologies are cheap
and effective (in terms of reducing the amounts victims ask for), they are
undesirable.
The analysis also carries a strong normative message. The law
influences the ‘‘cost’’ of apologies, because making them privileged reduces
their downside, thus making them cheaper. The literature showed no
appreciation to the notion that there is a benefit to the cost of apologies and
that there may be excessive apologies. Because of that, the central theme in
the literature is that apologies should unconditionally be made cheaper --- an
idea that should be rejected on grounds of public safety. The analysis further
109 To be precise, the total harm given an apology is $5,800, which includes the
litigation costs of both parties and the cost of tendering the apology.
Electronic copy available at: https://ssrn.com/abstract=2835482
30 Draft, [8-Sep-16
suggests that there is an optimal level of cost of apologies: to the extent that
legislators can influence apology costs, they should set apology costs cheap
enough to encourage apologies to reflect the savings from litigation costs,
but no more than that.
B. Commercial Apologies in Practice
For individuals, sorry may be the hardest word. But when
commercial players enter the arena and the stakes are high, the balance of
costs and benefits of apologies changes.110 As the theoretical framework
highlights the importance of the costs of apologies, we move now to
illustrate how these costs tend to be (relatively) low or are on the decline,
through four different mechanisms.
1. Delegation & Specialization
When an individual tries to render an apology, she is limited by her
own abilities. If she is a bad communicator, seems insincere, or is
uncharismatic, then she may easily botch the apology. She only has herself
to work with; it will normally not do for her to send someone else to
apologize on her behalf.111 With commercial apologies, the situation is
markedly different. Corporations, by necessity, always delegate their tasks
to individuals. The ability to delegate confers on corporations an advantage
in apologizing, as it allows them some leeway in the choice of the individual
to tender the apology.112 By selecting the best apologizers, a firm’s apology
can be made as good as its best employee. This can be crucial, as different
individuals have remarkably different abilities when it comes to apologies.
Here, the BP oil spill case is especially illustrative. After having recognized
that the CEO apology did not go over well,113 the company realized that its
apology is ineffective because the CEO was not an American and thus was
110 See, e.g., Yonathan A. Arbel, Contract Remedies in Action: Specific
Performance, 118 W. VA. L. REV. 369, 398-99 (Finding that animosity plays a lesser role
between commercial parties).
111 See, e.g., Holley S. Hodgins and Elizabeth Liebeskind, Apology versus Defense:
Antecedents and Consequences, 39 J. EXPERIMENTAL SOC. PSYCHOL. 297, 310 (2003).
112 In some cases, it may be expected that the CEO or a specific employee will make
the apology. But it seems that in practice most corporate apologies are delivered various
other employees, including customer representatives.
113 See O’hara supra note 11, 1985.
Electronic copy available at: https://ssrn.com/abstract=2835482
8-Sep-16] Arbel & Kaplan - Draft 31
not viewed as part of the affected group.114 The company pivoted and
delegated the task of apologizing to local, ethnically diverse employees,
who were members of communities affected by the spill.115 BP ran
television ads featuring these employees representing the company, who
clearly identified themselves as locals to the Gulf Coast area and
communicated their personal grief as a result of the accident.116
Certain social expectations may be seen as constraining corporate
leeway in delegate apology tasks, such as the expectation that the
apologizing party will be the wrongdoer (say the attending physician) or that
the CEO will assume residual responsibility in the spirit of President
Truman’s famous plaque ‘‘the buck stops here’’.117 On reflection, however,
this constraint leaves much slack. In many corporate settings, each action
of the corporate is a composite of many different actions and decisions taken
by a diffused mass. There is no natural way to assign blame to a single
employee for a defective automobile coming out of the assembly line. This
entails that there will not be any natural person from whom to demand the
apology. Likewise, some medical procedures involve one physician, but
many involve more than one, which allows the hospital to make a choice
between the medical personnel. Even apologies by corporate leaders leave
room for discretion, as the company can hire managers that are especially
adept at apologizing and may create corporate positions that are mostly
symbolic to fulfill functions such as PR, social responsibility, and apologies.
Finally, Commercial entities are not even limited to their current staff. They
can, and routinely do, retain specialized experts for the management of
crises, such as mediators, actors, and celebrities. A company may choose
to install, for example, a personable CEO in times of crisis. Likable
employees have significant effect; as one medical malpractice practitioner
reported patients ‘‘never sue the nice, contrite doctors. Their patients never
call our offices.’’118
114 Id. at 1986.
115 Id. at 1989.
116 Id. at 1989; BP, BP Gulf Coast Update: Our Ongoing Commitment, YOUTUBE,
https://www.youtube.com/watch?v=hoOfIR4Vk1o (“I was born here, I’m still here, and so
is BP. We’re committed to the gulf. For everyone who loves it and everyone who calls it
home”, apology presented by Iris Cross, BP Community Outreach).
117 Harry S. Truman Library & Museum, ‘The Buck Stops Here’ Desk Sign,
https://www.trumanlibrary.org/buckstop.htm (last visited Aug. 8, 2016).
118 Wojcieszak et al., supra note 55, at 347. See also Bruce W. Neckers, The Art of
Electronic copy available at: https://ssrn.com/abstract=2835482
32 Draft, [8-Sep-16
2. Professionalization & Training
To be effective, an apology needs to be, or at least appear to be,
sincere. However, sincerity is never observed, only inferred --- the victims
cannot look into the psyche of the injurer and must rely on signals and
heuristics. By studying these heuristics using modern scientific methods, a
body of scholarship developed that focuses on identifying and exploiting
their weaknesses. Experts have shown, for example, how injurers can
structure apologies for maximal effect by leveraging in-group bias,119 using
effective language,120 choosing the right employees for the task, 121 and
timing apologies correctly.122
These lessons are transferred to commercial actors by specialized
firms through seminars and workshops. These firms help organizations
implement apologies as part of their workflow, suggest ways to streamline
the process of apologies, and offer best practices.123 One such example is
Sorry Works!—an advocacy organization and a training company—claiming
to have “trained thousands of healthcare, insurance, and legal professionals
from coast to coast and around the world” on how to use disclosure and
the Apology, 81 MICH. B.J. 11 (2002) (recounting the story of a client who said that an
apology would substitute a lawsuit).
119 For example, Erin O'Hara suggests that corporate wrongdoers may use local
spokespeople in their apologies, to maximize effect. O’Hara, supra note 11, at 1986 (noting
that the corporate apology was ineffective because the CEO has “thick British accent” which
“probably exacerbated the negative connotations of his resentful statements because it
pegged him and the company as foreign”)
120 See, e.g., Ameeta Patel & Lamar Reinsch, Companies Can Apologize: Corporate
Apologies and Legal Liability, 66 BUS. COMMUN. Q. 9, 21-22 (arguing that corporations can
reap the benefits of apologies with diminished legal exposure by switching from active
language—“I am sorry for hurting you”—to passive language—“I am sorry you were hurt”).
121 See generally Leanne Ten Brinke & Gabriella S. Adams Saving Face? When
Emotion Displays During Public Apologies Mitigate Damage to Organizational
Performance, 130 ORG. BEHAV. & HUM. DEC. PROCESSES 1 (2015) (studying the market
effects of facial cues given by corporate wrongdoers).
122 See generally Jochen Witrz & Anna S. Mattila, Consumer Responses to
Compensation, Speed of Recovery and Apology after a Service Failure, 15 INT. J. SERV.
IND. MANAG. 150 (2004) (studying the effects of timing on apologies).
123 For example, many corporations have strict guidelines on complaint handling
that include guidelines on apologies. See Christian Homburg & Andreas Fürst, How
Organizational Complaint Handling Drives Customer Loyalty: An Analysis of the
Mechanistic and the Organic Approach, 69 J. MARK. 95 (2005).
Electronic copy available at: https://ssrn.com/abstract=2835482
8-Sep-16] Arbel & Kaplan - Draft 33
apology to combat medical malpractice suits.124 The experience of the “3Rs
Program” instituted by the physician-trust COPIC is another telling example:
As part of the program, physicians are coached on effective apologies,
training them on timing, structure, and content.125
The professionalization and training in the area of apologies give
commercial actors a unique advantage. They allow these commercial actors
to apologize more effectively and at a lower cost, benefitting from the
accumulated knowledge and experience.
3. Diffusion of Responsibility
Commercial entities enjoy a psychological advantage, as the
psychological cost for the employee to deliver the apology tends to be lower
than that of delivering a personal one. Psychologists argue that an effective
apology requires a person to create the impression of separate parts of her
personality-----a past offender, who committed a wrong and is thus worthy of
scorn, and a present repentant apologizer, who deserves forgiveness.126 This
is a challenging task because the more one accepts responsibility, the more
she might inspire indignation, whereas assuming too little responsibility
may be taken as a failure to take ownership of the wrongdoing. For a
diffused commercial entity, this difficulty may be less severe, because the
party apologizing and the party at fault are not necessarily the same person.
We have noted above how corporate actions are a composite of many
different decisions of various individuals, which dilutes the responsibility of
every single actor. To the extent that the party apologizing and the victim
are not the same, the dissociation makes it much easier to apologize. First,
because it is always easier to admit that someone else was wrong rather than
oneself,127 and second, because the offender may be cast in a bad light
124 SORRY WORKS!, http://www.sorryworks.net/.
125 See Teninbaum, supra note 40, at 317.
126 See generally Peter H. Kim et al., Removing the Shadow of Suspicion: The
Effects of Apology Versus Denial For Repairing Competence- Versus Integrity-Based Trust
Violations, 89 J. APPL PSYCHOL. 104 (2004). A famous articulation of this idea is by
sociologist Erving Goffman, writing: “an apology is a gesture through which an individual
splits himself into two parts, the part that is guilty of an offense and the part that dissociates
itself from the delict and affirms a belief in the offended rule", ERVING GOFFMAN,
RELATIONS IN PUBLIC 113 (1971). On the relationship between apology and guilt, see Bruce
N. Waller, Sincere Apology Without Moral Responsibility, 33 SOC. THEORY & PRAC. 441
(2007).
127 Apologies are sometimes coupled with some remedial action. Here, again,
Electronic copy available at: https://ssrn.com/abstract=2835482
34 Draft, [8-Sep-16
without negative implications for the image of the apologizing party.128
For example, when Mary Barra, GM’s CEO, took office she
immediately had to start apologizing for the company’s faulty ignition
switches incident---a horrible accident that claimed the lives of 124
individuals.129 Barra had no personal role in the incident, and therefore she
was able to apologize profusely without admitting any personal fault (or
harming her reputation); indeed, she apologized so effectively that she was
heaped with praise at her congressional hearing: ‘‘God bless you, and you’re
doing a good job’’ replied Senator Baxter to Barra’s apology.130 Even in a
closer case, such as BP’s oil spill, CEO Tony Hayward was not personally
responsible for the explosion; the company claimed that it was mostly its
subcontractors who were to blame, and even though the court found the
company was grossly negligent, the blame is not rested solely with the
CEO.131
4. Corporate Culture
Scholars studying corporate culture and crisis management argue
commercial actors have more options than individuals. As William Benoit noted: “It may be
possible to limit damage by firing one or more employees, but Hugh Grant cannot fire
himself”, WILLIAM L. BENIOT, ACCOUNTS, EXCUSES, AND APOLOGIES: A THEORY OF IMAGE
RESTORATION STRATEGIES 48 (2015).
128 An unexpected advantage commercial entities have is related to the
standardization of apologies. It may seem that spontaneous apologies are more powerful than
scripted ones. If this were the case, corporations might have been limited in their ability to
control the provision of apologies. However, research shows that strict guidelines actually
result in more effective apologies. One study finds that apologies by the call center for
reservation or billing mistakes have strong and significant effect on consumer satisfaction.
See Anna S. Mattila & Daniel J. Mount, The Role of Call Centers in Mollifying Disgruntled
Guests, 44 CORNELL HOTEL RESTAUR. ADM. Q. 75 (2003). In another large qualitative study,
researchers in the area of marketing found that corporations with stricter guidelines and rules
on apologies and complaint management result in greater consumer satisfaction and sense of
justice. See Christian Homburg & Andreas Fürst, How Organizational Complaint Handling
Drives Customer Loyalty: An Analysis of the Mechanistic and the Organic Approach, 69 J.
MARK. 95 (2005).
129 See Danielle Ivory and Bill Vlasic, $900 Million Penalty for G.M.’s Deadly
Defect Leaves Many Cold, N.Y. TIMES, Sept. 17, 2015.
130 Ben Geier, Why do Some People Love GM’s CEO Mary Barra, FORTUNE, Aug.
9th, 2014, (quoting Senator Barbara Boxer (D, CA)).
131 Campbell Robertson & Clifford Krauss, BP May Be Fined Up to $18 Billion for
Spill in Gulf, N.Y. TIMES, Sept. 4, 2014.
Electronic copy available at: https://ssrn.com/abstract=2835482
8-Sep-16] Arbel & Kaplan - Draft 35
that before the 1990s, commercial apologies were seen as stigmatizing.132
The 1990s saw a deep change in the stigma and reputational effects of
commercial apologies. The reasons are complex and many explanations are
offered:133 the creation of a broader ‘‘new culture of apology’’,134 the rise
of the internet, and the introduction of relationship management strategies
in the 1990s.135 Another potential driver of these changes is the discovery
in the marketing literature of the ‘‘recovery paradox’’, whereby apologizing
may actually improve consumer relations relative to their level prior to the
adverse incident.136 Whatever the true explanation is, experts see a strong
change in the way apologies are treated today relative to the 1990s.137 Today
the ‘‘[c]onventional wisdom’’ among scholars in business administration and
branding ‘‘holds that public apology in response to accusations of corporate
misconduct is one of the most important ways to restore a company's
reputation’’.138 Today the default has reversed, and it is expected that
companies would apologize: if in the past only the guilty apologized, today
not apologizing is a violation of consumers’ expectations.139 Moreover,
132 See LAZARE, supra note 14, at 7.
133 For other explanations, see Zohar Kampf, The Age of Apology: Evidence from
the Israeli Public Discourse, 19 SOC. SEMIOT. 257 (2009).
134 See Nicolaus Mills, The New Culture of Apology, 48 DISSENT 113, 114 (2001);
Mihai, supra note 21 (“A gesture formerly considered a sign of weakness has grown to
represent moral strength and a crucial step towards potential reconciliation”). See also Jeffrie
G. Murphy, Well Excuse Me!—Remorse, Apology, and Criminal Sentencing, 38 ARIZ. STATE
L.J. 371 (2006) (noting, and criticizing, the proliferation of apologies).
135 See Jan Breitsohl et al., Online Complaint Communication Strategy: An
Integrated Management Framework for E-Businesses, HANDB. E-BUS. STRATEG. MANAG.
907, 908 (2014); Michael Volkov, Successful Relationship Marketing: Understanding the
Importance of Complaints in a Consumer-Oriented Paradigm, 2 PROBL. PERSPECT. MANAG.
113 (2004).
136 See, e.g., James G. Maxham & Richard G. Netemeyer, A Longitudinal Study of
Complaining Customers’ Evaluations of Multiple Service Failures and Recovery Efforts, 66
J. MARK. 57 (2002) (showing in a longitudinal study the existence of a recovery paradox, but
also noting that it disappears if there are multiple adverse events).
137 See, e.g., Patel & Reinsch, supra note 120, 14-15 (noting that hard data is hard
to find but the impression is that commercial apologies are frequently used).
138 John G. Knight, Damien Mather, and Brianne Mathieson, The Key Role of
Sincerity In Restoring Trust In a Brand With a Corporate Apology, in MARKETING
DYNAMISM & SUSTAINABILITY: THINGS CHANGE, THINGS STAY THE SAME 192 (2015)
139 See Sean Tucker et al, Apologies and Transformational Leadership, 63 J. BUS.
ETHICS 195 (2006).
Electronic copy available at: https://ssrn.com/abstract=2835482
36 Draft, [8-Sep-16
apologies are taken to be a sign of strength and leadership.140 An employee
would thus find the personal costs of apologizing much lower than in the
past; institutions, like hospitals and insurance companies, often provide a
support system, assuring the injurer an apology is the right and honorable
thing to do. The increased popularity of apologies makes their social cost
lower, as the reputational effect is diminished (and per the recovery
paradox, actually becomes positive).
C. Effectiveness of Commercial Apologies
Commercial actors, we just argued, enjoy important advantages with
respect to tendering apologies. It is, therefore, natural to doubt whether
these apologies have an effect on victims. Would not individuals reject
apologies in commercial settings, seeing them as strategic, profit-
maximizing decisions? Would not the making of repeated apologies by the
same institution adulterate their effect?
In fact, commercial apologies are highly effective. Researchers
studying commercial entities in online settings puzzlingly noted after finding
strong effects that it seems ‘‘as if customers do not realize that they are
interacting with an employee who is paid to send apology emails and not
with an individual who experiences shame when apologizing.’’141 The
researchers concluded their field test by noting that ‘‘[we] find that a cheap-
talk apology yields significantly better outcomes for the firm than offering
a monetary compensation.’’142 The effectiveness of commercial apologies
can be learned from their prevalence,143 but it would be useful to look at
more direct evidence, which also gives a sense of the magnitude of the
effect.
The best evidence comes from the healthcare industry, which is the
best-studied area of commercial apologies, due to the large stakes involved
and the tragic frequency of accidents.144 Starting in the 1990s, hospitals
140 Id. at 195 (Finding that “ethical leaders who attempt to do the right thing with
their words and actions will be perceived as better leaders by followers … ethical leaders
apologize.”
141 See Johannes Abeler et al., The Power of Apology, 107 ECON. LETT. 233, 235
(2010).
142 Id., at 107.
143 See, e.g., BENIOT, supra note 127, at 61 (noting the pervasiveness of corporate
apologies).
144 THE NATIONAL PRACTITIONER DATA BANK,
Electronic copy available at: https://ssrn.com/abstract=2835482
8-Sep-16] Arbel & Kaplan - Draft 37
became aware that many patients sue for emotional reasons, as they resent
the lack of apology.145 This realization led to a series of successful
experiments with institutionalizing apologies.146 An example is the pioneer
program of The University of Michigan Health System. The university
adopted a policy of disclosure and apology that required hospital personnel
and physicians to disclose mistakes and apologize for them. A detailed
before-after analysis of this program reveals significant effects. First, the
monthly rate of claims (defined as requests for monetary compensation) has
fallen by 36%.147 This means that about one-third of the victims gave up
their claims in their entirety. Second, the number of lawsuits has fallen by
65%.148 Third, the cost per lawsuit has fallen from $405,921 to $228,308,
a saving of $177,603 (44%). Fourth, the costs of lawsuits have not only
fallen due to savings on legal costs; the hospital saved about 59% of the
compensation costs it would have had to pay patients.149
Another example is COPIC, an insurance trust founded by
physicians that designed the ‘‘3Rs Program’’: Recognition of the patient’s
harm, Response to the issue in a timely manner, and Resolution-----through
apology and a small offer of compensation. Looking at the data, the offers
of compensation are indeed small: in most cases, no payment is made at all
and in the rest, the payment is for only $5,300.150 The program led to
striking results-----a reduction of 50% in the number of malpractice claims
http://www.npdb.hrsa.gov/analysistool/ (reporting about 50,000 medical malpractice
payments and adverse events in 2014).
145 See supra note 25.
146 See, e.g., Steve S. Kraman & Ginny Hamm, Risk Management: Extreme Honesty
May be the Best Policy, 131 ANNALS OF INTERNAL MEDICINE 963 (finding financial savings
in hospitals that implemented a disclosure and compensation policy). See also ROBERT D.
TRUOG ET AL., TALKING WITH PATIENTS AND FAMILIES ABOUT MEDICAL ERROR 52–56
(2011).
147 See Allen Kachalia et al., Liability Claims and Costs Before and After
Implementation of a Medical Error Disclosure Program, 153 ANN. INTERN. MED. 213, 215
(2010). See also Michelle M Mello, David M Studdert & Allen Kachalia, The Medical
Liability Climate and Prospects for Reform, 312 JAMA 2146, 2149 (2014).
148 Kachalia et al., supra note 147, at 215.
149 Id.
150 See Richard C. Boothman et al., A Better Approach to Medical Malpractice
Claims? The University of Michigan Experience, 2 J. HEALTH LIFE SCI. L. 125, 147-48
(2009). Compare with average case costs of medical malpractice lawsuits of about $300,000,
see Seth Seabury et al., Defense Costs of Medical Malpractice Claims, 366 N. ENG. J.
MED. 1354, 1354 (2012).
Electronic copy available at: https://ssrn.com/abstract=2835482
38 Draft, [8-Sep-16
against COPIC physicians and a reduction in the costs of payments in
settlement of 23%.151 In one of the case records, a 66-year-old patient
suffered from an error that led to the removal of part of her ureter, which
required a painful invasive procedure for its treatment. The program settled
the entire case by paying her $3,898 to account for her out-of-pocket
expenses and, ‘generously’, also for her ‘‘gardening/lawn bills’’.152 These
two apology programs reduced significantly the number of compensation
requests, the number of lawsuits, and, most importantly for our purposes,
the amounts paid to patients.
Looking more broadly, economists Benjamin Ho and Elaine Liu find
that commercial apologies are highly effective. The two have investigated
how apology safe-harbor laws affect malpractice lawsuits. Their studies are
based on the fairly innocuous assumption that apology laws increase the
frequency of apologies. Because of that, if we see a change in outcomes
following the legislation of an apology law, that change would be
attributable to the effect of apologies. Based on this methodology, they find
that a state that adopts an apology law sees a reduction of about 17% in
payments for severe medical injuries,153 which is equivalent to a reduction in
payments of $58,00-73,000.154 This is remarkable, as the averages come
from all hospitals—not necessarily those who instituted an apology policy—
which suggests that the real effect can be much larger. Consistent with that,
a recent working paper found that apology laws lead to a reduction of $65,000
in payments to victims across all injury levels.155
Apologies in a commercial setting are effective beyond the medical
context. In a vignette study, researchers found that consumers express
greater willingness to purchase from companies which apologized in a way
that was perceived as sincere.156 In the commercial context of housing,
Russell Korobkin and Chris Guthrie find that participants playing the role
151 See Boothman et al., supra note 150, at 147-48; Wojcieszak et al., supra note
55, at 346.
152 See Richert E. Quinn & Mary C. Eichler, The 3Rs Program: The Colorado
Experience, 51 CLIN. OBSTET. GYNECOL. 709, 715 (2008).
153 See Benjamin Ho & Elaine Liu, Does Sorry Work? The Impact of Apology Laws
on Medical Malpractice, 43 J. RISK UNCERTAIN. 141, 143 (2011).
154 Id.
155 See McMichael et al., supra note 10.
156 See Denghua Yuan et al., Sorry Seems to be the Hardest Word : The Effect of
Self-Attribution when Apologizing for a Brand Crisis, (HKIBS Working Paper Series 073-
1314 (2014).
Electronic copy available at: https://ssrn.com/abstract=2835482
8-Sep-16] Arbel & Kaplan - Draft 39
of tenants were more likely to accept a settlement offer for an infraction of
landlord’s duties if they were told that the landlord apologized.157 These
results seem to carry over to the market: in market settings, e-apologies led
disappointed consumers to retract unfavorable reviews, at a rate much
greater than when they were offered monetary settlements.158 Moreover,
firms are said to perform better in the stock market after taking
responsibility for past failures.159
III. CRITICAL ANALYSIS AND POLICY IMPLICATIONS
The normative framework we provide in Part Error! Reference
ource not found. demonstrates that apologies can have detrimental social
157 See Korobkin & Guthrie, supra note 26, at 148 (reporting a 12% increase, but
note that this effect failed to reach statistical significance. Nonetheless, the size and sign of
the effect are consistent with our argument).
158 On eBay, customers can leave negative responses which can later be withdrawn
if seller’s feedback satisfies the consumer. A group of researchers collaborated with a very
large seller and randomly modified its response to a negative review left by a customer on
transactions with average value of 23.5 Euros: small monetary compensation (2.5 Euro);
large monetary compensation (5 euros), and an apology, electronically delivered by one of
the employees, without admitting to any legal liability and without any monetary
compensation. They found that small monetary compensation yields forgiveness (i.e.,
retraction of the negative review) in 19.3% of the cases; doubling the amount of
compensation only slightly increases forgiveness to 22.9%. The tender of apology outdid
both measures, with a forgiveness rate of 44.8%. See Abeler, supra note 141, 234.
159 Consider, for example, the Domino’s 2009 crisis, when a disgruntled employee
publicized a video of himself committing what we can euphemistically call “health code
violations” of customers’ pizzas. Soon after, Twitter was flooded with tweets deriding the
company and its products. Patrick Doyle, the company’s President, uploaded a response
video to YouTube, in which he said that he is sickened by the act, apologized and reported
corrective action. See Domino's President Responds to Prank Video, YOUTUBE (June 3,
2010) https://www.youtube.com/watch?v=dem6eA7-A2I. An empirical analysis of 20,773
tweets discovered that this was highly effective and the corporate brand, as reflected by
tweets, was restored to its original levels, See Hoh Kim et al., The Effect of Bad News and
CEO Apology of Corporate on User Responses in Social Media., 10 PLOS ONE e0126358
(2015). Others in the field reflected similar appreciation of the effectiveness of this apology,
and although far from being necessarily causally related, the brand is thriving. Domino’s
stock price is about ten times its value in 2009 . On firms’ performance, see Don Chance,
James Cicon, and Stephen P. Ferris, Poor Performance and the Value of Corporate Honesty,
33 J. CORP. FIN 1 (2015). Indeed, the return on investment in apology mechanisms was
estimated by researchers as being greater than 100% in some cases. See Christian Homburg
& Andreas Fürst, How Organizational Complaint Handling Drives Customer Loyalty: An
Analysis of the Mechanistic and the Organic Approach, 69 J. MARK. 95, 95 (2005).
Electronic copy available at: https://ssrn.com/abstract=2835482
40 Draft, [8-Sep-16
implications unless certain conditions are met. We have also shown that
commercial apologies are both cheap to tender and highly effective. In light
of this, we move to critically analyze the movement that transformed the
law and to outline necessary policy changes in response to this reform.
A. Better Sorry than Safe
Our theoretical analysis demonstrates that apologies are socially
undesirable if they are relatively cheap to tender and if they have strong
effects on the amounts victims seek. When these conditions obtain, the
problem is that sophisticated commercial actors would be able to anticipate,
before they engage in dangerous activities, that an apology would reduce
their exposure to liability for any ensuing accidents. Because of that, they
would have less incentive to be careful, which may increase the level of
accidents. Hence, they would find it preferable to be sorry rather than safe.
Indeed, if apologies are costly to tender or only mildly effective, this
concern does not arise. However, we believe our analysis above strongly
suggests the possibility of a problem, as commercial apologies are likely to
be both effective and cheaper to deliver in commercial settings. To
illustrate, in one case, a patient was willing to settle after the apology simply
because she felt the hospital took her case seriously.160 The hospital, on the
other hand, saved an approximate $3 million in liability payments in a
lawsuit that, according to the hospital’s estimation, was highly likely to
win.161 Of course, the apology itself had some cost, but nothing in the
evidence indicates this cost was large; indeed, this case is touted for its cost-
saving effect.162
A clear prediction that follows from our analysis is that apology laws
will increase the level or severity of accidents in states that adopt them
relative to non-apology laws states. This is in contrast to the hypothesis of
the Legal Apologists, which stipulates that apology laws will reduce levels
of litigation without a corresponding increase in the level of accidents. The
implications of our prediction are disconcerting. If commercial injurers can
easily escape liability, they would not have a real incentive to be safe. A
food company may employ less quality assurance procedures, a hospital
may order less expensive tests, and a large polluter may install fewer filters
and smoke scrapers than otherwise. To assess the validity of each
hypothesis, we need empirical data; unfortunately, the empirical data we
160 Boothman et al., supra note 150, at 157.
161 Id.
162 Id.
Electronic copy available at: https://ssrn.com/abstract=2835482
8-Sep-16] Arbel & Kaplan - Draft 41
have from the two studies on the topic is inconclusive, although it is largely
consistent with our prediction.
The most rigorous analysis to date was conducted by economists Ho
and Liu, who looked at the effect of apology laws on the level of disposed
medical malpractice claims.163 They find that apology laws increase the
number of disposed claims involving severe injuries by 21-27% and that
payments for severe injuries increase by 20-28%. This would seem to
suggest a rise in accidents and their severity, but the problem is that the data
consists only of disposed cases and the definition of disposed cases makes
it hard to draw any conclusions. In fact, Ho and Liu argue that the rise is
mostly attributable to the greater speed of processing claims and that over
time, there are fewer claims.164 But this conclusion is constrained by the
meaning and interpretation of disposed claim, a problematic category that
only includes complaints with positive money payments and so it does not
include all, if not most, of the accidents or all the cases where no payment
was made.165 Another limitation is that it is possible to make unreported
payments, and some hospitals seem to be doing so.166
Another problem is the tension between their findings and those of
another, more recent working paper.167 In this study, researchers obtained
data from an insurer that accounts not only for disposed claims with positive
payments, but for all claims that were filed with the insurer. Indeed, this
does not account for accidents that do not result in a formal claim, but it
163 Benjamin Ho & Elaine Liu, Does Sorry Work? The Impact of Apology Laws on
Medical Malpractice, 43 J. RISK UNCERTAIN. 141 (2011).
164 They indeed find that over time apology law states see a significant reduction in
disposed claims for non-severe injuries, but they also find an increase in the level of severe
injuries, which they interpret as resulting from a staggered effect of the apology law.
However, these findings are also consistent with the theory that apology laws increase the
severity of accidents. Id. at 162.
165 This is especially a problem, since most cases are disposed without payment, see
McMichael, supra note 10, at 16 (“Analysis of our data indicates that excluding claims that
involved no payment to a claimant results in excluding over half of all malpractice claims.”)
166 See Teninbaum, supra 40, at 316-17 (discussing rules in an apology program
that are designed to circumvent reporting requirements). See also Amitabh Chandra,
Shantanu Nundy, and Seth A. Seabury, The Growth Of Physician Medical Malpractice
Payments: Evidence From The National Practitioner Data Bank, HEALTH TRACKING, May
31, 2005 (estimating underreporting in data of about 20% of malpractice payments).
167 See McMichael, supra note 10.
Electronic copy available at: https://ssrn.com/abstract=2835482
42 Draft, [8-Sep-16
does provide a broader approach to the issue.168 The authors of the study
find that apology laws reduce payments to patients by 82%, which is
equivalent to a reduction of $65,000 in the average payment.169 They
explain this result as driven mostly by the increase of claims that do not
result in payment. In other words, they find that apologies mainly increase
the level of claims where no payment is made, but do not affect the level of
payments in other cases. They also find, however, that claims are more
likely to turn into a lawsuit under apology laws-----which is clearly
inconsistent with the goals of apology laws. Both these studies provide much
needed insight, but they do not clearly illuminate the key variable of
interest: the level of accidents. The lack of more focused research is
potentially attributable to the misunderstanding of the potential negative
effect of apologies on incentives, and we hope that this Article will spur
future research in this area.
B. The Paradox of Excessive Apologies
At the heart of the apology law reform is the argument that injurers
are wary of apologizing due to the legal ramifications of exposing
themselves to liability.170 To overcome this fear-----the argument goes-----
apologies should be privileged, shielding injurers from the evidentiary
implications of potential admission of fault. The Legal Apologists argue that
privileging apologies would encourage injurers to apologize, thus leading to
important benefits, most importantly, the control of litigation costs.171
This statement involves a potential paradox with no easy resolution.
The first argument-----that injurers do not apologize for fear of legal
liability-----assumes that unprivileged apologies encourage litigation. But at
the same time, the main reason that Legal Apologists argue that apologies
are desirable is that they encourage settlement and therefore discourage
litigation. It is seemingly paradoxical to argue that apologies both encourage
and discourage litigation. Resolving this paradox comes at a price.
For example, perhaps unprivileged apologies have disparate effect;
they reduce the incentive to bring suit but increase the probability that the
victim will prevail in a lawsuit by having better evidence. While coherent,
168 Id. at 10. On the other hand, their data is limited to only one specialty area,
which may introduce other kind of unanticipated bias.
169 Id. at 27.
170 See supra notes 62-63.
171 See supra note 22.
Electronic copy available at: https://ssrn.com/abstract=2835482
8-Sep-16] Arbel & Kaplan - Draft 43
this resolution also raises problems. It is unclear why the evidentiary
advantage of apologies does not entice more victims to file lawsuits. More
importantly, if privileging apologies will not reduce the level of litigation
but will only reduce the likelihood that the victim will prevail, then
apologies lose much of their luster.
Another possibility is to argue that apologies have a heterogeneous
impact on victims. Some victims will sue unless they receive an apology,
so apologies would reduce litigation in their case and are thus desirable.
Other victims would only sue if they receive an apology (as the apology will
provide them with sufficient evidence) and for this class of victims,
privileging apologies will reduce litigation costs. While coherent, this
resolution is also problematic, as it omits the class of victims who would
sue even in the presence of an apology. Privileging apologies will reduce
the likelihood that this class of victims will prevail in litigation, and thus
involves a cost.172 Whether this cost exceeds the benefit of controlling
litigation from the other group is an empirical question, which admits the
possibility that apologies will be undesirable.
C. Apology as Disclosure
A recurrent narrative, especially among medical professionals, is
that apologies help because they facilitate the communication of mistakes,
as put by Clinton and Obama:
Under our proposal, physicians would be given certain
protections from liability within the context of the
program, in order to promote a safe environment for
disclosure. By promoting better communication, this
legislation would provide doctors and patients with an
opportunity to find solutions outside the courtroom.173
On this account, privileging apologies would mean that injurers
would be more willing to admit their mistakes. The reason why admitting
172 To be clear, injurers would save a corresponding amount, as they would be
more likely to prevail in litigation. However, if we make the (natural) assumption that the
likelihood of prevailing at trial corresponds to the culpability of the injurer, then privileging
apologies would benefit mostly with culpable injurers, thus undermining deterrence.
173 See Clinton and Obama, supra note 1, at 2207.
Electronic copy available at: https://ssrn.com/abstract=2835482
44 Draft, [8-Sep-16
mistakes is important is an instrumental one; by recognizing mistakes, the
parties can learn and do better in the future.174
This logic may be applicable in many interpersonal settings, but it
transfers poorly to a commercial environment. Before touching on this
point, it should be noted that the basic assumption here --- that mistakes are
not divulged due to liability-----is doubted by many who believe the main
causes for hiding mistakes are factors such as culture and social norms,175
and indeed, studies comparing the rate of disclosure of errors in the United
States and countries with lower levels of liability for medical malpractice
find no difference in error reporting in hospitals.176 Adeeper problem is the
assumption that once identified, mistakes will be corrected. In many
commercial settings, learning from one’s mistakes is not simple. Taking
precautions will often involve investment in machinery, staff, and strict
regulation. These costs can be very high-----consider the cost of purchasing
an MRI machine or even of standard bloodwork procedures if done on a
large scale-----and it will certainly be contradictory to our approach in most
other areas of law to believe that actors will have sufficient incentive to
internalize the costs of their actions without the threat of any legal action.177
This inconsistency was noted by David Hyman and Richard Silver:
[I]t is naïve to think that error reporting and health care quality
would improve automatically by removing the threat of
liability. . . . No statistical study shows an inverse correlation
between malpractice exposure and the frequency of error
reporting, or indicates that malpractice liability discourages
providers from reporting mistakes.178
174 Id. at 2205.
175 TOM BAKER, THE MEDICAL MALPRACTICE MYTH 97 (2005) (arguing that “you
first have to prove that mistakes would be out in the open if there were no medical
malpractice lawsuits. That is clearly not the case.”).
176 Amy Widman, Liability and the Health Care Bill: An “Alternative” Perspective,
1 CAL. L. REV. CIRCUIT 57, 59 (2010); George J. Annas, The Patient’s Right to Safety —
Improving the Quality of Care Through Litigation Against Hospitals, 354 NEW ENG. J.
MED. 2063, 2065-66 (2006) (comparing with New Zealand)
177 Clinton and Obama proposed that savings from apology programs will be used
to reduce the premiums doctors pay-----but this would the equivalent of transferring money
from victims of accidents to physicians. They also proposed that some of the savings will
be used to ‘‘foster patient-safety initatives’’. Id. at 2207.
178 David A. Hyman & Charles Silver, The Poor State of Health Care Quality in the
U.S.: Is Malpractice Liability Part of the Problem or Part of the Solution?, 90 CORNELL L.
REV. 893, 898–99, 914 (2005)
Electronic copy available at: https://ssrn.com/abstract=2835482
8-Sep-16] Arbel & Kaplan - Draft 45
D. The Deficit of Apology Deficit
Motivating the entire movement of the Legal Apologists is the belief
in an apology deficit. The concern is that injurers have too little incentive
to apologize and therefore they need encouragement. It may seem odd in
retrospect, but besides anecdotal evidence, the point that there is a deficit
in apologies was never proven. Do we really have a deficit of apologies?
Are commercial actors shying away from apologizing?
The core problem is that even without any reform, commercial
injurers should have a strong incentive to apologize. As we have noted,
apologies create value to injurers by suppressing their litigiousness. If
apologies are value-creating, then just like any other goods, profit-
maximizing companies would seek to ‘‘produce’’ them. Indeed, given the
many benefits Legal Apologists ascribe to apologies, it would be odd if
companies would not provide them. The literature is in agreement that there
is a marked transition among companies from the age of ‘‘deny and defend’’
to ‘‘apologize and settle’’.179 Today, commentators agree, commercial
apologies have become commonplace.180 As early as 2002, well before most
states adopted apology laws, a survey of hospital risk managers revealed
that 68% would respond to a mistake with an apology, which suggests a
broad appreciation of the commercial benefits of apologies.181
Psychiatrist Aaron Lazare conducted a casual empirical analysis to
develop a basic intuition of the prevalence of commercial apologies, by
looking at the discourse on apologies in the media.182 To expand his
analysis, we reanalyzed the data using a larger database. Consistent with his
findings, Figure 1 illustrates the findings on the basis of a broad range of
media reports acquired from the EBSCO database, which includes 25
million media articles from the relevant time period.183 As can be seen, until
179 See Sandra Harris, Karen Grainger & Louise Mullany, The Pragmatics of
Political Apologies 17(6) DISCOURSE & SOCIETY 715 (2006).
180 Roy L. Brooks, The Age of Apology, in WHEN SORRY ISN’T ENOUGH: THE
CONTROVERSY OVER APOLOGIES AND REPARATIONS FOR HUMAN INJUSTICE, 8–11 (1999,
Roy L. Brooks, ed.).
181 See Rae M. Lamb, et al., Hospital Disclosure Practices: Results of a National
Survey, 22 HEALTH AFFAIRS 73 (2003)
182 LAZARE, supra note 14, at 6-7.
183 The Methodology consisted of search results for apology or sorry or related
Electronic copy available at: https://ssrn.com/abstract=2835482
46 Draft, [8-Sep-16
the 90s, apologies were hardly considered in the media. But starting in the
90s, there has been a growing interest that persists till today.
Figure 1: Apologies in Print: Mentions by Year
Data: EBSCO, 1971-2015
250
200
150
100
50
0
1 3 5 7 9 1 3 5 7 9 1 3 5 7 9 1 3 5 7 9 1 3 5
7 7 7 7 7 8 8 8 8 8 9 9 9 9 9 0 0 0 0 0 1 1 1
9 9 9 9 9 9 9 9 9 9 9 9 9 9 9 0 0 0 0 0 0 0 0
1 1 1 1 1 1 1 1 1 1 1 1 1 1 1 2 2 2 2 2 2 2 2
Overall, the consensus in the literature on the ‘‘age of apologies’’ is
well reflected in this analysis. While this does not amount to a rigorous
analysis of the topic, it does suggest that the apology deficit may not exist.
E. Policy Implications
The on-going tort reform through apology laws is politically and
legally problematic. There are currently calls to further expand the ambit
of apology laws,184 and to encourage mediators and arbitrators, judges, and
juries to account for them.185 If past success and momentum are any
words in title or subject terms, restricted to magazines, newspapers, reviews and trade
publications, in the English language, between 1971 and 2015. A total of 4967 results were
located, which, after removing duplicates, was narrowed to 3747. Permalink to results:
http://search.ebscohost.com/login.aspx?direct=true&db=aph&bquery=(TI+apology)+OR+(
SU+apology)+OR+(TI+sorry)+OR+(SU+sorry)&cli0=LA99&clv0=Eng&type=1&site=eh
ost-live&scope=site (gated). To account for a potential bias due to the fact that more media
is produced today than in the past, we validated our findings by limiting search to the New
York Times, the Economist, New York Times Magazine, and the New Yorker – all existing
prior to 1971.
184 See Runnels, supra note 4, at 148 (2009); Cohen, supra note 12, at 1061. See
generally Gailey, supra note 4; Jones, supra note 14, at 580-81.
185 See, e.g., Robyn Carroll, Apologies as a Legal Remedy, 35 SYD. L. REV. 317
(2013).
Electronic copy available at: https://ssrn.com/abstract=2835482
8-Sep-16] Arbel & Kaplan - Draft 47
indication, these calls are likely to be translated into legislation in the near
future. Our analysis suggests that the case presented by reformists is lacking
in theoretical and empirical support. There is a question whether there is an
apology deficit and there is a real concern that apologies will be used to
circumvent legal liability for accidents by strategic actors. Politically, we
expressed the concern that apology laws have been used as a covert tort
reform, avoiding public scrutiny. These issues raise a few policy
implications.
First order of business is transparency. Apologies laws should be
understood-----and debated-----in terms of tort reform. The public, advocates,
and legislators, should be made aware of the social effects of apology laws.
This does not mean that apology laws should never be enacted-----the debate
on tort reform is an active one. However, the debate should be conducted
transparently, not in terms of virtue or penance, but in the more real terms
of reducing compensation to victims which may or may not be excessive.186
Second, a moratorium should be placed on all future expansions of
apology safe harbor laws. Besides the political concern, there are the social
concerns. Apology laws make the tender of apologies ‘‘cheaper’’ from the
viewpoint of the injurer, and the analysis demonstrates that reducing the
costs of apologies can lead to socially harmful outcomes, in the form of
risky behavior. The evidence we gathered suggests that this risk is real,
given the effectiveness of commercial apologies and their low cost.
Third, there is a push to encourage judges and juries to show
leniency in their judgments towards remorseful injurers.187 In a sense, these
186 Supporters of tort reform would also benefit from a better recognition of the
effect of apologies. There are many tools in the tort reformers’ toolkit, such as damages
caps, procedural adjustments, and panel screening of cases. Each of these tools has its own
advantages and shortcomings. Compared with damages caps, for example, apology laws
have the disadvantage of being impossible to calibrate. If one thinks that the true harm
from a medical accident is $250,000, then a damages cap at this level could rein in courts.
But the effect of apologies on victims is highly idiosyncratic and it does not allow for easy
corrections. On the other hand, apology laws encourage informal settlements, and this may
have merit of its own. Either way, a candid evaluation of alternatives would be prudent.
187 See, e.g., Bibas & Bierschbach, supra note 17, at 128-29 (advocating lenient
treatment of remorseful offenders). Interestingly, a new study provides preliminary evidence
suggesting that apologies have little effect on judges. See Jeffrey J. Rachlinski, Chris Guthrie
& Andrew J. Wistrich, Contrition in the Courtroom: Do Apologies Affect Adjudication?, 98
CORNELL L. REV. 1189 (2013) (finding in a vignette study that “a defendant's apology in
court is generally ineffective, sometimes counterproductive, and only occasionally
Electronic copy available at: https://ssrn.com/abstract=2835482
48 Draft, [8-Sep-16
initiatives are even more troublesome than the safe harbor laws, as safe
harbor laws protect apologies that can prevent litigation, but this policy
encourages apologies that do not even have this effect. Indeed, some have
argued that there is a case for treating apologizing defendants more
severely.188 We recognize that it may seem counter-intuitive to treat
remorseful and unremorseful injurers equally,189 but it is important to
remember that our discussion is limited only to commercial actors such as
companies, for whom the expression of remorse is at least suspect. In sum,
there should be a presumption against the preferential treatment of
commercial actors who apologize during trial.
Finally, the questions we raised here touch on important social
policies, but the data we currently have is limited. It will be important for
policymakers to devote funds and grants for studies in this area, and perhaps
there is room to use funding from Obamacare’s special allotment to this
end.190
IV. CONCLUSION
Over the last three decades, apology law reform has swept the
nation. Tort reformers and commercial interests provided funding to a
strong lobby that co-opted the rhetoric and discourse developed by a
movement of legal scholars we called the Legal Apologists. The work of
the Legal Apologists has contributed greatly to our philosophical, social,
and psychological understanding of the role of apologies in both the law and
in our daily lives. However, they have failed to articulate an account of
apologies in commercial settings and have not considered the potentially
socially harmful effects of apologies of this type. This oversight has not
been lost on tort reformers, who advocated apology law reformers to
effectively achieve tort reform through the backdoor.
We argued that making apologies cheaper may lead to socially
harmful outcomes. To support our claims, we developed a new model for
beneficial”).
188 Mungan argues that treating apologies more harshly helps differentiate between
sincere apologies (which are meant to relieve guilt) and non-sincere apologies. See Mungan,
supra note 5, at 179.
189 For the moral argument that it is wrong for the law to treat equally repentant and
unrepentant transgressors, see supra note 61 and accompanying text.
190 Under The Patient Protection and Affordable Care Act § 42 USC 280g-15
grants are awarded to states for ‘‘the development, implementation, and evaluation of
alternatives to current tort litigation for resolving disputes’’.
Electronic copy available at: https://ssrn.com/abstract=2835482
8-Sep-16] Arbel & Kaplan - Draft 49
tort liability with apologies, which we used to show that injurers may have
an excessive incentive to apologize if apologies are cheap and effective.
Based on the evidence we gathered, we found that commercial actors
professionalize and institutionalize the tender of apologies and they use them
for great effect. This suggests that apologies may actively undermine
deterrence and lead to risky behavior. On the basis of our analysis, we call
for a moratorium on apology laws and a political and legal revaluation of the
ones that currently exist. Through a transparent and honest assessment of
apology laws, based on an understanding of these laws as means of tort
reform, we can reach informed and democratic decisions on their desirability.
This Article should spark a much needed discussion on apologies,
commercial interests, tort reform, and liability for harms. From an ethical
perspective, there is still much to be said on the ethical value of apologies
by incorporeal entities such as corporations. We are especially hoping that
future empirical research would devote more specific attention to the
relationship between apology laws and medical malpractice.
Electronic copy available at: https://ssrn.com/abstract=2835482
50 Draft, [8-Sep-16
V. APPENDIX: A MODEL OF LIABILITY FOR ACCIDENTS WITH APOLOGIES
The Legal Apologists argue that apologies curb litigation. However,
they have failed to consider the full implications on ex-ante behavior. In this
Section we provide a model designed to articulate the implications of this
distinction in terms of the social desirability of apologies, with a focus on
the problem of deterrence.
To fit apologies within the framework of the incentive to take care,
we take the conventional model of accidents.191 In the model, a potential
injurer chooses a level of precautions for an activity. These precautions are
costly, but reduce the risk of an accident. If an accident occurs, then the
injurer faces liability for the harm caused by the accident. Alternatively, the
injurer may choose to apologize, which is privately costly (e.g., loss of
face, humiliation, reputation, the time involved, or other psychological
considerations). Making an apology affects the level of liability, because the
victim may be more willing to settle, less interested in litigation, the jury
may be more forgiving, or the judge less likely to attribute fault.
Additionally, there are some administrative costs involved in litigation, such
as the costs of operating the court.192 Because apologies reveal information,
induce settlements, and reduce the necessary expenses on trials, making one
reduces the administrative cost. With this in mind, we introduce the
following notation:
c: cost of precautions (c ≥ 0);
h: harm;
q(c): probability of harm (q(0)=1, q'< 0, q''< 0); 193
T: the injurer’s choice regarding apology: T= 1 if apology is
tendered, T= 0 otherwise;
a: the cost of making an apology;
s(T): social cost of enforcement (s(.) ≥ 0);
l(T): injurer’s liability.
Based on our assumptions, we note that l(0) = h and s(1) < s(0).
191 See Steven Shavell, Liability for Accidents, in HANDBOOK OF LAW &
ECONOMICS, 142, 143-44 (A. Mitchell Polinsky & Steven Shavell eds., 2007).
192 See Shavell, supra note 191, at 150.
193 We make the conventional assumption that precautions reduce the probability of
harm, but that there are diminishing marginal returns to investment in precautions.
Electronic copy available at: https://ssrn.com/abstract=2835482
8-Sep-16] Arbel & Kaplan - Draft 51
To say, the liability for the accident, absent an apology, is equal to the
harm, and the social cost of administering punishments is lower when an
apology is made. Looking ex-post (after harm has occurred), we make the
following argument:
Proposition 1: The private incentive to apologize diverges from the
social interest in apologies. [i] Injurers will have an incentive to apologize
even when it is not socially desirable, and [ii] may fail to apologize even
when an apology is desirable.
Proof:
Consider first the private cost of the activity for the injurer, denoted
as ϕ:
(1) 𝜙 = −𝑐 −𝑞(𝑐)(𝑇𝑎+𝑙(𝑇))
That is, the injurer bears the cost of precautions. If an accident
occurs, the injurer further bears the cost of apology if one is made and the
costs of liability-----which also depend on whether an apology was made.
The injurer will choose to apologize (T = 1) if the cost of the activity
when making an apology (ϕ) is lower than the cost of the activity without
1
one (ϕ):
0
𝜙 < 𝜙 =
1 0
(2) 𝑎 < 𝑙(0)−𝑙(1)
We see that an apology is only privately desirable if it reduces
liability by more than its cost. The social cost of the activity is different. It
consists of the harm to the victim, the cost of enforcement, and also the
costs of the apology, if made:
(3) 𝜃 = −𝑐 −𝑞(𝑐)(𝑇𝑎+ℎ+𝑠(𝑇))
Therefore, apology is socially desirable only if the cost from making
one (θ) is lower than the social costs in its absence (θ):
1 0
𝜃 < 𝜃 =
𝑡 0
(4) 𝑎 < 𝑠(0)−𝑠(1)
This means (from 2 and 4) that the injurer will have an excessive
incentive to apologize whenever:
(5) 𝑠(0)−𝑠(1) < 𝑎 < 𝑙(0)−𝑙(1)
That is, if the cost of apology exceeds it social benefits, but liability
is reduced by a greater amount, the injurer will have an incentive to
apologize when it is socially undesirable. Symmetrically, the injurer will
Electronic copy available at: https://ssrn.com/abstract=2835482
52 Draft, [8-Sep-16
not apologize, even though an apology is socially desirable, if:
(6) 𝑙(0)−𝑙(1) < 𝑎 < 𝑠(0)−𝑠(1)
QED
Proposition 2: If apologies are privately beneficial for the injurer:
[i] the injurer will choose a level of precautions that is lower than the
socially optimal level, [ii] the harms from the activity will be higher than
the social optimum, and [iii] the more favorable is the treatment of apologies
by the legal system, the less care and more harm injurers will create.
Proof:
The injurer chooses the level of precautions based on the expected
costs of the activity, given by (1). When the injurer expects apology to be
a beneficial option for her (from 2) the level of care is given by the first
order condition:
−1
(7) 𝑞′(𝑐) =
𝑎+𝑙(1)
Let 𝑐∗ be the solution to (7). Note that the socially desirable level of
precautions, from (3), is:
−1
(8) 𝑞′(𝑐) =
𝑎+ℎ+𝑠(1)
Comparing the two, we can see that a + l(1) < a + h + s(1). To
see that, recall that an apology is only made if (2) holds, i.e., a < l(0) -
l(1), from which follows directly that l(1) < l(0). Therefore, and because
l(0) = h, it can be shown that l(1) < h. It then follows that the inequality
necessarily holds. Note that this is true even if the injurer would bear the
social cost of enforcement s(1). Even if that was the case, still 𝑎+𝑙(1)+
𝑠(1) < 𝑎+ℎ+𝑠(1), as long as apologies help injurers reduce liability
(𝑙(1) < 𝑙(0) = ℎ). Given the concavity of q, it follows that the solution to
(8) is greater than c*.
To verify [iii], note that the greater the difference between l(0) and
l(1) becomes (i.e., the more favorable treatment to apologizers is given by
the legal system), the more the gap between optimal and actual precautions
increases.
QED
Finally, we consider the possibility some injurers do not apologize,
and the possibility it would be worthwhile to lower liability to encourage
them to apologize.
Electronic copy available at: https://ssrn.com/abstract=2835482
8-Sep-16] Arbel & Kaplan - Draft 53
Proposition 3: Providing preferential treatment to apologies is only
socially desirable if: [i] the costs of apologies currently not rendered are
lower than their benefit of reducing administrative costs, and [ii] the
decrease in the administrative costs is not outweighed by an increase in the
harms from the injurer’s activity.
Proof:
A socially desirable apology will not be made only if (6) holds, so
part [i] follows directly. To verify [ii], note that if (6) holds true, the injurer
will not apologize, and take precautions accordingly. The cost of the activity
for the injurer, from (1), would be:
(9) 𝜙 = −𝑐 −𝑞(𝑐)(𝑙(0))
So that the level of precautions is determined by:
−1
(10) 𝑞′(𝑐) =
𝑙(0)
Let 𝑐∗∗ be the solution to (9). This means that the social cost of the
activity if apology is not given would be:
(11) 𝜃 = −𝑐∗∗ −𝑞(𝑐∗∗)(ℎ+𝑠(0))
0
Conversely, if apology is given, the social cost of the activity is:
(12) 𝜃 = −𝑐∗ −𝑞(𝑐∗)(𝑎+ℎ+𝑠(1))
1
Lowering l(1) to make apology privately beneficial is socially
desirable only if θ< θ.
0 1
(13) −𝑐∗∗ −𝑞(𝑐∗∗)(ℎ+𝑠(0)) < −𝑐∗ −
𝑞(𝑐∗)(𝑎+ℎ+𝑠(1))
Or after rearranging, if:
(14) 𝑞(𝑐∗)(𝑎+𝑠(1))−𝑞(𝑐∗∗)𝑠(0) < 𝑐∗∗ −𝑐∗ +
𝑞(𝑐∗∗)ℎ−𝑞(𝑐∗)ℎ
That is, apology has the benefit of reducing the administrative cost
in the event of an accident. It also has a cost due to the increase in net harm
from the activity, because of the diluted deterrence. The apology is only
desirable if its benefits exceed these costs.
QED
Electronic copy available at: https://ssrn.com/abstract=2835482

---

## ssrn-3015569: Arbel_Galley (Do Not Delete) 1/2/2018 4:17 PM
Year: 2018
Authors: Yonathan Arbel
Source: papers/ssrn-3015569/paper.txt

Arbel_Galley (Do Not Delete) 1/2/2018 4:17 PM
Adminization:
Gatekeeping Consumer Contracts
Yonathan A. Arbel*
Large companies and debt collectors frequently file
unmeritorious claims against consumers. Recent high-profile actions
brought by the Consumer Financial Protection Bureau against J.P.
Morgan, Citibank, and other large debt collectors illustrate the breadth
and importance of this phenomenon. Due to the limited financial power
of individuals, consumers often do not defend against such baseless
claims, which results in the entry of millions of default judgments every
year. To combat this problem, policymakers and scholars have explored
a variety of court-based solutions that would make it easier for
consumers to defend in court, but these prove ineffectual.
To solve the problem of unmeritorious claiming, this Article
proposes a budget-friendly solution called “Adminization.” This novel
approach uses an administrative agency as a gatekeeper to civil
litigation that is tasked with detecting and sanctioning the filing of
baseless claims. The agency samples cases, using statistical methods
and potentially deep-learning algorithms, and then investigates selected
cases using agency auditors. When the auditors find wrongdoing, they
are instructed to levy large fines against wrongdoers. Unlike the current
system, Adminization subjects every plaintiff to the risk of thorough
investigation and large fines, thus undercutting the financial incentive
to engage in wrongful behavior. The importance of Adminization lies in
its cost-effectiveness, practicality, and political feasibility relative to the
court-based approaches that dominate the discussion today.
* Assistant Professor, University of Alabama School of Law. For insight and comments, I
am indebted to Aharon Barak, Oren Bar-Gill, I. Glenn Cohen, Andrew Crespo, Jesse Fried, Janet
Freilich, John Goldberg, John Golden, Patrick Goold, Richard Hynes, Louis Kaplow, Kobi Kastiel,
Jody S. Kraus, Duncan Kennedy, Ronald Krotoszynski, Ethan J. Leib, Andrew Lund, Gideon
Parchomovsky, David Rosenberg, Ronald J. Scalise, Steven Shavell, Ted Sichelman, Henry Smith,
Matthew Stephenson, Cass Sunstein, Daphna Renan, Duane Rudolph, and W. Mark C.
Weidemaier. I am deeply grateful for the wise advice I received from participants in the
Southeastern Workshop at Washington University at St. Louis and Villanova Business
Colloquium, and to the dedicated work of the editors at the Vanderbilt Law Review. The Harvard
Foundations of Private Law Center provided generous research support.
121
Electronic copy available at: https://ssrn.com/abstract=3015569

<<PAGE_BREAK>>

Arbel_Galley(Do Not Delete) 1/2/2018 4:17 PM
122 VANDERBILT LAW REVIEW [Vol. 71:1:121
INTRODUCTION ............................................................................. 122
I. ABUSE AND FRAUD IN CONSUMER CREDIT CONTRACTS....... 130
A. Abuse and Procedural Violations ........................... 132
B. Justice, Inaccessible ............................................... 137
C. Lack of Judicial Oversight ..................................... 140
II. ADMINIZATION................................................................... 142
A. Adminization: High-Level Outline ......................... 142
B. Main Features of Adminization .............................. 144
1. Audits and Fines ......................................... 144
2. Sampling, Artificial Intelligence,
and Resource Management ......................... 146
3. Third-Party Communications ...................... 151
C. Adminization of Consumer Credit Litigation ......... 152
III. THE FAILURE OF PARTICIPATION-BASED SOLUTIONS .......... 157
A. Lawyering Up ........................................................ 158
B. Throwing Judges into the Fray .............................. 163
C. Modifying the Legal Process ................................... 164
D. Arbitration and Class-Defense ............................... 167
E. A Pyrrhic Victory ................................................... 169
IV. CHALLENGES ..................................................................... 171
A. Legal Authority ...................................................... 171
B. Feasibility of Adminization & Political Economy ... 173
C. Regulatory Capture ................................................ 174
D. Costs and Incidence ............................................... 175
CONCLUSION ................................................................................ 177
INTRODUCTION
When Margaret Donnelly, an eighty-five-year-old widow
suffering from a congestive heart disease, woke up that morning, she
did not realize she was hours away from facing a warrant for her
arrest.1 But that was the message the county sheriff had for her. He
explained to her that a lawsuit was filed against her for a debt of $1,471
in the local court.2 He also informed her that because she failed to
appear in court, the judge entered a default judgment against her,
which she now had to pay from her meager income. This news caught
Ms. Donnelly by surprise—she never heard about the lawsuit.
1. Beth Healy, Dignity Faces a Steamroller, BOS. GLOBE (July 31, 2006),
https://www.bostonglobe.com/metro/2006/07/31/dignity-faces-
steamroller/SoK0TBVHzOzjLEpNqNrVYN/story.html [https://perma.cc/7MW9-AWX4].
2. Id.
Electronic copy available at: https://ssrn.com/abstract=3015569

<<PAGE_BREAK>>

Arbel_Galley(Do Not Delete) 1/2/2018 4:17 PM
2018] ADMINIZATION 123
Admittedly, even if she had, there was little she could do, as hiring a
lawyer would overextend her budget. This is despite the fact that the
case had no merit whatsoever: the debt was paid in full many years ago
and, in any event, no evidence was brought to support the claim.3
Worryingly, the lawsuit was part of a pattern of abusive lawsuits filed
by a local law firm that targeted over one hundred thousand consumers,
a practice facilitated by the difficulty consumers like Ms. Donnelley face
in accessing the courts and challenging these unmeritorious lawsuits.4
A large body of evidence shows that millions of others in the courts also
face “a silent, shameful crisis that inflicts suffering and costs the nation
money, legitimacy, and decency.”5
Open doors, they say, may tempt the saints. Every year, about
eight million debt claims are filed by large companies and debt buyers
against consumers.6 Of those, over six million lawsuits turn into default
judgments, with little, if any, judicial oversight.7 One in three
consumers is estimated to be at risk of facing such a lawsuit.8 As with
Ms. Donnelly’s case, many of these debt claims lack merit and involve
debts that are resolved, expired, inflated, and in some cases, outright
fraudulent.9 A recent study found, for example, that debt buyers
knowingly purchase debts that are well beyond the statute of
limitations, with at least twelve percent of the debt portfolio of large
debt buyers consisting of stale debt.10 In 2016, Citibank and two of its
3. Id.
4. The case is known to have lacked merit because of its unusual circumstances: Ms.
Donnelley decided to represent herself in court against this lawsuit. This required her to litigate
the case for over a year and travel twice to the courthouse—not an easy task for a person in her
circumstances—but finally the judge was convinced that the case lacked merit. Id. The same law
firm that unsuccessfully sued her had successfully sued thousands of others “by demanding money
they had no right to collect and on the basis of debts they could not prove.” See Press Release,
Attorney Gen. Maura Healey, AG Healey Sues Major Debt Collection Law Firm Over Widespread
Consumer Abuses (Dec. 23, 2015), http://www.mass.gov/ago/news-and-updates/press-
releases/2015/2015-12-23-debt-collection-lawsuit.html [https://perma.cc/23KS-R82L].
5. Martha Minow, Opinion, We Must Ensure Everyone Has Access to Equal Justice, BOS.
GLOBE (Oct. 23, 2014), https://www.bostonglobe.com/opinion/2014/10/23/must-ensure-everyone-
has-access-equal-justice/pZxzjjHhR0GI89o0lZTnhP/story.html [https://perma.cc/U79G-VK34].
Dean Minow is the vice chair of the Legal Services Corporation (“LSC”), an independent nonprofit
established by Congress to provide financial support for civil legal aid. See LEGAL SERVS. CORP.,
https://www.lsc.gov/ (last visited Oct. 22, 2017) [https://perma.cc/AS3N-BXJD].
6. This estimate is based on data on the overall volume of civil litigation and estimates taken
from different studies regarding the number of consumer debt cases on the docket. See infra note
42.
7. See infra notes 92–95 and accompanying text.
8. See infra note 42.
9. See infra Section I.A.
10. See FED. TRADE COMM’N, THE STRUCTURE AND PRACTICES OF THE DEBT BUYING INDUSTRY
T-12 (2013), https://www.ftc.gov/sites/default/files/documents/reports/structure-and-practices-
debt-buying-industry/debtbuyingreport.pdf [https://perma.cc/S8YY-Z479] [hereinafter FTC DEBT
Electronic copy available at: https://ssrn.com/abstract=3015569

<<PAGE_BREAK>>

Arbel_Galley(Do Not Delete) 1/2/2018 4:17 PM
124 VANDERBILT LAW REVIEW [Vol. 71:1:121
affiliates were ordered to pay $11 million and forego the collection of
$34 million in consumer debt for the filing of false affidavits which
misstated both the size of the debt and its age.11 J.P. Morgan Chase
reached a $136 million settlement for its role in selling debts that were
legally uncollectable to debt buyers.12 The Consumer Financial
Protection Bureau (“CFPB”) also recently took action against a large
debt buyer who was ordered to pay over $2.5 million for its attempt to
knowingly collect on “fraudulent debts, debts that consumers had paid
or settled, and debts that were so old that they could no longer be legally
collected.”13 The regulator itself concluded that “[t]he system for
resolving disputes about consumer debts is broken.”14
To solve the problem of such unmeritorious claiming, this Article
proposes the “Adminization” of civil litigation. Adminization places a
gatekeeper administrative agency between consumers and debt
collectors, which is tasked with autonomously investigating and finding
bad cases before they reach court. After filing and before litigation, a
sample of cases will be audited by an administrative agency, and where
fraud is found, large fines can be issued against the offender. Both
economic analysis and psychology suggest that the mere prospect of
detection can deter wrongful behavior, and much more so when it is
coupled with severe fines.15 Using samples, audits, and fines,
Adminization will provide a fresh and cost-effective solution to
consumer credit contracts litigation—the most common form of all civil
litigation.
A few different institutional arrangements could support
Adminization, such as federal agency review through one of the existing
INDUSTRY REPORT) (reporting that 9.2 million cases, or 12.1 percent of the debts in portfolios
purchased by six large debt buyers, involved debts that are six years and older).
11. See Citibank, N.A., CFPB No. 2016-CFPB-0004 (Feb. 22, 2016).
12. See Press Release, Consumer Fin. Prot. Bureau, CFPB, 47 States and D.C. Take Action
Against JPMorgan Chase for Selling Bad Credit Card Debt and Robo-Signing Court Documents
(July 8, 2015), http://www.consumerfinance.gov/newsroom/cfpb-47-states-and-d-c-take-action-
against-jpmorgan-chase-for-selling-bad-credit-card-debt-and-robo-signing-court-documents/
[https://perma.cc/HL2U-EFHR].
13. Press Release, Consumer Fin. Prot. Bureau, CFPB Takes Action Against Debt Collector
for Pursuing Disputed and Unverified Cellphone Debts (Dec. 7, 2015),
https://www.consumerfinance.gov/about-us/newsroom/cfpb-takes-action-against-debt-collector-
for-pursuing-disputed-and-unverified-cellphone-debts/ [https://perma.cc/ER3N-N55G]; see CFPB
v. Collecto, Inc., No 1:15-cv-14024 (D. Mass. Dec. 8, 2015).
14. FED. TRADE COMM’N, REPAIRING A BROKEN SYSTEM: PROTECTING CONSUMERS IN DEBT
COLLECTION LITIGATION AND ARBITRATION, at i (2010),
https://www.ftc.gov/sites/default/files/documents/reports/federal-trade-commission-bureau-
consumer-protection-staff-report-repairing-broken-system-protecting/debtcollectionreport.pdf
[https://perma.cc/FP8S-T2GD] [hereinafter FTC PROTECTING CONSUMERS REPORT].
15. See Gary S. Becker, Crime and Punishment: An Economic Approach, 76 J. POL. ECON.
169, 170 (1968) (developing the foundations for the theory of optimal fines given limited
enforcement resources).
Electronic copy available at: https://ssrn.com/abstract=3015569

<<PAGE_BREAK>>

Arbel_Galley(Do Not Delete) 1/2/2018 4:17 PM
2018] ADMINIZATION 125
consumer protection agencies (the Federal Trade Commission (“FTC”)
or the CFPB); state attorney general offices and state level consumer
agencies; or some combination thereof.16 More important than the
institutional locus is the process itself. In a nutshell, the agency would
be notified of every incoming lawsuit.17 Using its administrative
powers, the agency will select claims to be audited by competent agency
investigators; where wrongdoing and abuse are found, the agency will
use its statutory powers to levy fines against wrongdoers.18 To manage
the millions of cases that are filed every year, the agency will select for
audit only a small fraction of the cases, similar to the Internal Revenue
Service (“IRS”).19 The selection of cases will be random—to expose every
creditor to a potential risk of detection—although the Article also
explains how machine learning and algorithmic analysis could be used
to improve the accuracy of the selection process by focusing the auditors’
attention on the cases that are statistically most likely to involve
16. For the CFPB’s powers, see Dodd-Frank Wall Street Reform and Consumer Protection
(Dodd-Frank) Act, Pub. L. No. 111-203, 124 Stat. 1376 (2010) (codified in scattered sections of title
12 of the United States Code), and in particular 12 U.S.C. § 5511 (2012) (authorizing the CFPB to
“seek to implement and, where applicable, enforce Federal consumer financial law,” and assigning
it the function of “collecting, investigating, and responding to consumer complaints.” The
provisions codified at 12 U.S.C. §§ 5562–65 provide the agency with the requisite regulatory
powers to “engage in investigations and request information from covered persons, issue
subpoenas or civil investigative demands, conduct hearings and adjudication proceedings, and
commence civil actions in federal court seeking any appropriate or equitable relief against any
person that violates a federal consumer financial law.”). For the FTC’s powers, see the Fair Debt
Collection Practices Act, 15 U.S.C. § 1692l (2012), which also provides federal protection from
unlawful debt collection activity in state courts, as expounded in numerous cases. See, e.g., Phillips
v. Asset Acceptance, LLC, 736 F.3d 1076, 1079 (7th Cir. 2013) (suing for stale debt in a state court
is an “unfair” debt collection practice); Kimber v. Fed. Fin. Corp., 668 F. Supp. 1480 (D. Ala. 1987)
(same); Fox v. Citicorp Credit Servs., Inc., 15 F.3d 1507 (9th Cir. 1994) (filing a writ of garnishment
can itself be unlawful); Morgan v. Credit Adjustment Bd., 999 F. Supp. 803 (E.D. Va. 1998)
(threatening to sue, without such an intention, is unlawful). It should be noted that at the time of
writing, there is a growing uncertainty over the future of the CFPB and the Dodd-Frank Act, but
nothing in what follows depends specifically on the CFPB itself. See Excerpts from the Times’s
Interview with Trump, N.Y. TIMES (July 19, 2017),
https://www.nytimes.com/2017/07/19/us/politics/trump-interview-transcript.html?mcubz=3
[https://perma.cc/A2W7-MZ24] (reporting President Trump’s remark that “Dodd-Frank is going to
be, you know, modified, and again, I want rules and regulations. But you don’t want to choke,
right?”).
17. For a chart illustrating the process, see infra Section II.A. A similar system exists in
employment discrimination cases, where plaintiffs (employees) file their claims first with an
administrative agency. See Age Discrimination in Employment Act of 1967, 29 U.S.C. § 626(d)
(2012); Civil Rights Act of 1964, 42 U.S.C. § 2000e-5 (2012); Americans with Disabilities Act of
1990, 42 U.S.C. § 12117(a) (2012).
18. See 12 U.S.C. § 5565 (outlining the CFPB’s statutory powers). On the magnitude of fines,
see infra note 116. Between 2012 and 2016, the CFPB issued over $5 billion in penalties. Doug
Johnson, Total CFPB Penalties Top $5B, INSIDEARM (Mar. 24, 2016, 8:18 AM),
https://www.insidearm.com/news/00041798-total-cfpb-penalties-top-5b/ [https://perma.cc/CH6F-
FWGP].
19. The IRS audits only 0.8 percent of all individual filings. See infra note 112.
Electronic copy available at: https://ssrn.com/abstract=3015569

<<PAGE_BREAK>>

Arbel_Galley(Do Not Delete) 1/2/2018 4:17 PM
126 VANDERBILT LAW REVIEW [Vol. 71:1:121
wrongdoing. Fraud detection analysis is used extensively and fruitfully
by credit card companies to detect real-time fraud, and these techniques
hold great promise for application to Adminization. Until such
algorithms are proven in practice, however, Adminization can fully
depend on random selection.
Adminization employs an administrative agency to gatekeep
civil litigation, thus departing from traditional approaches focused on
finding solutions within the court system. Ultimately, these approaches
fail because the adversarial model requires information sourced and
presented by the parties.20 However, getting consumers to participate
in the process is an elusive problem of immense proportions.21 This
Article criticizes the pretension of participation-based solutions to
meaningfully solve the problems at hand by relying on a pure litigation
model. To affect real change, participation-based solutions would
require prohibitively costly reforms,22 a dramatic expansion of the legal
system, and the creation of impossible delays to all other civil matters.23
To illustrate, recall that there are eight million cases filed every year,
with about 6.4 million resulting in a default judgment.24 Any change
that would lead to the screening of even half of these 6.4 million cases
would require state courts—which are already clogged—to handle an
additional 3.2 million cases every year.
20. See ROBERT A. KAGAN, ADVERSARIAL LEGALISM: THE AMERICAN WAY OF LAW 117 (2003)
(“[A]dversarial legalism often transforms the civil justice system into an engine of injustice . . . .”);
infra Part I.
21. See, e.g., ACCESS TO JUSTICE INITIATIVE, U.S. DEP’T OF JUSTICE, FOUR-YEAR ANNIVERSARY
ACCOMPLISHMENTS (2014) https://www.justice.gov/sites/default/files/atj/legacy/2014/03/14/
accomplishments.pdf [https://perma.cc/H49U-JXDK] (“[T]he current deficiencies in . . . legal
services for the poor and middle class constitute not just a problem, but a crisis. And this crisis
appears as difficult and intransigent as any now before us.” (internal quotation marks omitted)
(quoting Eric Holder, Attorney Gen., Remarks at the Shriver Center Awards Dinner (Oct. 14,
2010))); The Obama White House, The White House Forum on Increasing Access to Justice,
YOUTUBE (Apr. 19, 2016), https://www.youtube.com/watch?v=162foSVT2Uk [https://perma.cc/
T5W9-HN5M] (recording conference at the White House with leading politicians, jurists, and
businesspeople, aimed to explore avenues of increasing access to justice, emphasizing the need for
innovation); see also DIRECTV, Inc. v. Imburgia, 136 S. Ct. 463, 471 (2015) (Ginsburg, J.,
dissenting) (choosing the contractual interpretation that would promote access to justice);
Memorandum on Establishment of the White House Legal Aid Interagency Roundtable, 2015
DAILY COMP. PRES. DOC. 643 (Sept. 24, 2015) https://obamawhitehouse.archives.gov/the-press-
office/2015/09/24/presidential-memorandum-establishment-white-house-legal-aid-interagency
[https://perma.cc/G3PR-S36Y] (ordering the establishment of a large interagency work group
designed to “enhance access to justice in our communities”).
22. Deborah L. Rhode, Whatever Happened to Access to Justice?, 42 LOY. L.A. L. REV. 869,
869 (2009) (“[D]espite [the] efforts [of legal professionals], an estimated four-fifths of the individual
legal needs of the poor, and a majority of the needs of middle-income Americans, remain unmet.”).
23. For a discussion and critique of participation-oriented solutions and their limitations, see
infra Part III.
24. See infra note 42.
Electronic copy available at: https://ssrn.com/abstract=3015569

<<PAGE_BREAK>>

Arbel_Galley(Do Not Delete) 1/2/2018 4:17 PM
2018] ADMINIZATION 127
The Trump Administration is placing tremendous pressure on
the legal aid project as a whole, as most clearly demonstrated by a
recent budget proposal that seeks to eliminate funding to the Legal
Services Corporation—the nonprofit organization tasked with
supporting legal aid.25 In contrast to the traditional legal aid model,
Adminization avoids the need to subsidize consumer participation or to
review millions of cases, thus presenting the most economically and
politically appealing solution. The use of sampling techniques for case
audits—techniques used extensively by agencies but almost never by
courts—allows the managing of cases on a large scale with a limited
budget. With the potential for large fines, Adminization will deter the
initial filing of wrongful suits, thus reducing the volume of claims
overall and offsetting its operational costs. Synergistically, the
reduction in case volume will free up the courts to screen more closely
the cases that do come before them, further bolstering the effectiveness
of the process. The existence of long-standing federal agencies, such as
the FTC, the cost-effectiveness of Adminization, and the direct control
Congress can exert on the budget dedicated to Adminization (compared
with court budgets, which are harder to control), promises a real
potential for bipartisan appeal.26
This Article’s contribution may be understood on four levels of
abstraction. First, Adminization presents a normatively attractive and
politically feasible solution to the pressing problem of unmeritorious
claiming in the context of consumer litigation. Second, Adminization
provides a model for reducing abusive claiming in other areas of civil
litigation that suffer from systemic power asymmetries, such as
housing, social benefits, elder law, and employee rights. Third, the
Article explores a particularly promising implementation of artificial
intelligence that is well within our current technological abilities: case
selection. Machine learning algorithms have made significant strides
over the last decade, with the latest among many previously
unfathomable advances being the triumph of software in the intractable
25. Charles Toutant, Legal Services Worried That Trump Will Take Ax to Agency, LAW.COM
(Jan. 25, 2017), http://www.law.com/sites/almstaff/2017/01/25/legal-services-worried-that-trump-
will-take-ax-to-agency/?slreturn=20170109141618 [https://perma.cc/34YH-TUR7] (also available
at http://www.njlawjournal.com/id=1202777693184/Legal-Services-Worried-That-Trump-Will-
Take-Ax-to-Agency?slreturn=20170814123738 [https://perma.cc/XLA8-PKAW]); Debra Cassens
Weiss, Trump Budget Eliminates Legal Services Corp. Funding, A.B.A. J. (Mar. 16, 2017, 8:45
AM), http://www.abajournal.com/news/article/trump_budget_eliminates_funding_for_legal
_services_corp/ [https://perma.cc/47QS-K537].
26. Dave Boyer, Consumer Financial Protection Bureau in Jeopardy Under Donald Trump,
WASH. TIMES (Nov. 29, 2016), http://www.washingtontimes.com/news/2016/nov/29/consumer-
financial-protection-bureau-in-jeopardy-u/ [https://perma.cc/6C37-BCCF].
Electronic copy available at: https://ssrn.com/abstract=3015569

<<PAGE_BREAK>>

Arbel_Galley(Do Not Delete) 1/2/2018 4:17 PM
128 VANDERBILT LAW REVIEW [Vol. 71:1:121
game of Go.27 Concurrently, there is a growing strain on judicial
resources,28 and full civil trials are becoming nearly extinct.29 These two
trends suggest the need, and promise, of utilizing algorithmic
decisionmaking within the legal process.30 Fourth, drawing on David
Engstrom’s recent Litigation Gatekeeper theory,31 business and startup
theory,32 and institutional economics, Adminization creates a new
model of regulation and demonstrates the important, yet unexplored,
complementarities between courts and agencies. This is in contrast to a
pervasive view, prominent in the writings of Jerry Mashaw for
example,33 that administration and civil litigation are somehow
inconsistent with each other.34 By looking past this illusory dichotomy,
27. See Artificial Intelligence: Google’s AlphaGo Beats Go Master Lee Se-dol, BBC (Mar. 12,
2016), http://www.bbc.com/news/technology-35785875 [https://perma.cc/AS5C-ZF3Z] (describing a
computer program’s defeat of a master Go player). On recent applications of artificial intelligence
to the law, see JUDICIAL APPLICATIONS OF ARTIFICIAL INTELLIGENCE (Giovanni Sartor & Luther
Branting eds., 2013).
28. See I. Glenn Cohen, Rationing Legal Services, 5 J. LEGAL ANALYSIS 221, 221 (2013)
(comparing methods of distributing access to legal assistance); Matthew J.B. Lawrence, Procedural
Triage, 84 FORDHAM L. REV. 79, 82 (2015) (considering a method of distributing access to hearings).
29. See infra note 92.
30. See RICHARD SUSSKIND & DANIEL SUSSKIND, THE FUTURE OF THE PROFESSIONS: HOW
TECHNOLOGY WILL TRANSFORM THE WORK OF HUMAN EXPERTS 128 (2016) (“[T]here is a new
generation of machines in action now, and these are systems . . . that can replace parts of, and
sometimes all of, certain kinds of professional work.”).
31. See David Freeman Engstrom, Agencies as Litigation Gatekeepers, 123 YALE L.J. 616
(2013) (developing a theory of the functions agencies can play in husbanding litigation).
Importantly, Engstrom’s focus is not participation problems, but how agencies can address
inefficiencies in private enforcement that would tend to result in excessive litigation. In an
important sense, his perspective is plaintiff-centric and not, as in here, defendant-centric. Despite
these differences, his view of the symbiotic relationships between agencies and courts in private
litigation and his core typology provide a foundation for the proposal outlined here.
32. See ERIC RIES, THE LEAN STARTUP: HOW TODAY’S ENTREPRENEURS USE CONTINUOUS
INNOVATION TO CREATE RADICALLY SUCCESSFUL BUSINESSES 4 (2011) (presenting a new “lean
startup” approach to business). Recently, various government officials have started experimenting
with methods inspired by the lean startup model. See Justine Brown, Governments Take a Lean
Startup Approach, GOV’T TECH. (Aug. 23, 2012), http://www.govtech.com/pcio/Governments-Take-
a-Lean-Startup-Approach.html [https://perma.cc/PTD3-K33H] (describing Ries’s work with
United States Chief Technology Officer Aneesh Chopra).
33. See JERRY L. MASHAW, BUREAUCRATIC JUSTICE: MANAGING SOCIAL SECURITY DISABILITY
CLAIMS 222 (1983) (concluding that societal ideals represented by courts and legislatures
contradict bureaucratic rationality).
34. See, e.g., KAGAN, supra note 20, at 125 (arguing, critically, that the persistence of the
adversarial system is due to a tradition of suspicion toward “any alternative that smacks of
hierarchically organized bureaucratic legalism or expert judgment”). Furthermore, Lon Fuller
argued that the morality of adjudication itself depends on procedural passiveness and on not
considering any evidence not presented by the parties themselves. LON FULLER, THE PROBLEMS
OF JURISPRUDENCE 706–07 (1949). This is inconsistent with the active role of agencies, as shall be
elaborated. More recently, David Engstrom noted a tendency in recent scholarship to place
“exclusively administrative regulation on the one hand and unbridled private enforcement on the
other.” Engstrom, supra note 31, at 622.
Electronic copy available at: https://ssrn.com/abstract=3015569

<<PAGE_BREAK>>

Arbel_Galley(Do Not Delete) 1/2/2018 4:17 PM
2018] ADMINIZATION 129
it is possible to conceive of solutions that will better serve both our
individualistic and democratic ideals of justice.35
The design of Adminization is calculated to avoid some of the
major legal and economic hurdles that threaten alternative proposed
solutions. By using already existing regulatory agencies to support the
platforms, most legal and constitutional concerns are assuaged, as
these agencies already investigate fraud and have enforcement powers.
Admittedly, the audit process is costly, but the use of case selection
minimizes the costs, and, perhaps even more significantly, the expected
benefit of Adminization—deterring the filing of unmeritorious claims—
could completely offset those costs. That Adminization is budget
friendly is especially important in light of the costs involved in the
alternatives, which are almost prohibitively high. Regulatory capture
is always a concern with agencies, but here, the concern is minimized
because Adminization diversifies regulatory activity between the court
and the agency. Diversifying our modes of regulation has the benefit of
requiring lobbyists to spread their efforts thin, thus reducing the
effectiveness of their investments. Finally, certain aspects of
Adminization are designed to appeal to creditors, thus promising the
possibility of building a large supporting coalition. Creditors, at least
those with a long-term view of the market, would find value in a system
that garners greater consumer confidence and legitimacy in the credit
market, as such attitudes are linked to a higher propensity to borrow
and repay debts. Compared to both the participation-based solutions
and the status quo, Adminization prevails in terms of effectiveness,
cost, and most importantly, justice.
The Article unfolds in four main parts. Part I describes the
problem of abuse in consumer credit litigation. Part II lays out the
Adminization framework, outlines its general principles, and applies it
to consumer credit litigation. Part III explains why participation-based
solutions are unlikely to solve the problem at hand. Part IV examines
some of the main challenges to Adminization. The Article concludes by
reflecting on the contribution of Adminization to civil litigation and
considering some future applications.
35. See Engstrom, supra note 31, at 622 (proposing that civil litigation and administration
are not “either/or options, but rather the outer poles of a rich continuum”). For other leading
examples of the view that litigation is the exclusive domain for private disputes, see ERNEST J.
WEINRIB, THE IDEA OF PRIVATE LAW 10 (1st rev. ed. 2012) (arguing that the harms individuals
suffer must be resolved within private law institutions, and that deviating from that would be
“fundamentally at odds with the nature of the entire [private law] enterprise”); and Owen M. Fiss,
Against Settlement, 93 YALE L.J. 1073, 1078–82 (1984) (rejecting out-of-court settlement of
disputes on the grounds that they fail to respect procedural rights).
Electronic copy available at: https://ssrn.com/abstract=3015569

<<PAGE_BREAK>>

Arbel_Galley(Do Not Delete) 1/2/2018 4:17 PM
130 VANDERBILT LAW REVIEW [Vol. 71:1:121
I. ABUSE AND FRAUD IN CONSUMER CREDIT CONTRACTS
Consumer credit contracts are the result of the ubiquitous and
valuable agreements made between consumers and businesses that
allow consumers to pay in the future for services or products tendered
today, which typically involve credit cards, hospital bills, and utilities.36
If a consumer fails to pay (“defaults”), creditors will often engage in
some type of informal collection methods before they file a claim,
consisting of dunning letters,37 phone calls, and quite rarely, face-to-
face collection attempts.38 The main leverages used at this stage are
credit reporting,39 psychological pressure, and social and peer
pressure.40 While not all uncollected debts result in a lawsuit, many
do.41 In fact, most civil litigation consists of these lawsuits, with eight
36. The most common sources of consumer debt are motor vehicle loans and credit card,
student, and medical debts. See, e.g., Marina Vornovytskyy et al., Household Debt in the U.S.: 2000
to 2011, U.S. CENSUS BUREAU 2–3 (2013), https://www.census.gov/content/dam/Census/library/
working-papers/2011/demo/debt-highlights-2011.pdf [https://perma.cc/3U99-27U3] (reporting the
composition of secured debt, which includes motor vehicle loans, and unsecured debt, which
includes credit card, student, and medical debts). The average consumer owes mostly mortgage
debt and then student loans, auto loans, and credit card debts. See FED. RESERVE BANK OF N.Y.,
QUARTERLY REPORT ON HOUSEHOLD DEBT AND CREDIT 3 (May 2013),
https://www.newyorkfed.org/medialibrary/Interactives/householdcredit/data/pdf/DistrictReport_
Q12013 [https://perma.cc/YSG2-S89B].
37. To dun is “[t]o demand payment from (a delinquent debtor).” Dun, BLACK’S LAW
DICTIONARY (10th ed. 2014).
38. As early as 1968, it was observed: “Debt-collection involves the very minimum of face-to-
face contact.” P.E. Rock, Observations on Debt Collection, 19 BRIT. J. SOC. 176, 178 (1968).
39. The cost of a bad credit score can be substantial. To give an example, a thirty-year-old
consumer with a car loan of $18,000, $5,000 in credit card debt, and a $400,000 mortgage will pay
$250,000 more in interest if she has the worst credit score relative to a consumer with the best
credit score. See Kathy Kristof, An Easy Way to Figure the Cost of Bad Credit, CBS NEWS (Oct. 22,
2014, 5:20 AM), http://www.cbsnews.com/news/new-tool-calculates-the-cost-of-bad-credit/
[https://perma.cc/Y7JY-7TTY].
40. The collection of debt is fraught with difficulty, because even when consumers have
assets, they may choose to hide and shield them from collection. See generally Yonathan A. Arbel,
Shielding of Assets and Lending Contracts, 48 INT’L REV. L. & ECON. 26 (2016) (surveying asset-
shielding techniques and proposing a theory of consumer behavior). Creditors, on the other hand,
often attempt to collect debt using abusive and potentially illegal techniques, as evidenced by the
large volume of consumer complaints. See Consumer Complaint Database, CONSUMER FIN.
PROTECTION BUREAU, http://www.consumerfinance.gov/data-research/consumer-complaints/ (last
visited Oct. 22, 2017) [https://perma.cc/U9DJ-YTKJ] (recording thousands of consumer complaints
submitted weekly). There is some mixed evidence to suggest that the stigma associated with the
inability to pay one’s debt is on the decline. See David B. Gross & Nicholas S. Souleles, An
Empirical Analysis of Personal Bankruptcy and Delinquency, 15 REV. FIN. STUD. 319, 345 (2002)
(finding evidence suggestive of a decline in stigma). But see Kartik Athreya, Shame as It Ever Was:
Stigma and Personal Bankruptcy, FED. RES. BANK RICHMOND ECON. Q., Spring 2004, at 1, 3
(arguing that the decline in stigma is not supported by an expected rise in interest rates).
41. Payday lending is an industry that specializes in low-stakes, low-duration, high-risk
loans to consumers without access to more formal credit. In this industry, where consumers are
frequently underfunded and the stakes are low, about ten percent of the cases go to litigation. See
Amanda E. Dawsey et al., Non-Judicial Debt Collection and the Consumer’s Choice Among
Electronic copy available at: https://ssrn.com/abstract=3015569

<<PAGE_BREAK>>

Arbel_Galley(Do Not Delete) 1/2/2018 4:17 PM
2018] ADMINIZATION 131
million filings a year, and one in three Americans facing a potential
lawsuit.42
Consumer credit litigation is handled by an adversarial system
that espouses the “sporting theory of justice,”43 the idea that truthful
information will emerge from the clash of self-interested participation
by the parties. The adversarial system imagines a judge who “views the
case from a peak of Olympian ignorance,” and “[t]he ignorance and
Repayment, Bankruptcy and Informal Bankruptcy, 87 AM. BANKR. L.J. 1, 4 n.12 (2013) (finding
that, in Virginia in 2008, only 11,717 of 104,832 uncollectable checks resulted in consumers being
sued for nonpayment); see also Richard M. Hynes, Broke but Not Bankrupt: Consumer Debt
Collection in State Courts, 60 FLA. L. REV. 1, 21–24 (2008) (arguing that civil lawsuit filings have
been stable despite an increase in borrowing); Robert A. Kagan, The Routinization of Debt
Collection: An Essay on Social Change and Conflict in the Courts, 18 LAW & SOC’Y REV. 323, 325–
26 (1984) (showing a decline in debt collection litigation in various state supreme courts).
42. In 2010, about fifteen million lawsuits were filed in U.S. civil courts, with 1.8 million in
small claims courts alone. See Small Claims Fall Sharply in Last Two Years, CT. STAT. PROJECT,
http://www.courtstatistics.org/Civil/2012W5CIVIL.aspx (last visited Oct. 22, 2017)
[https://perma.cc/NG6X-N9TX]. The most common claims were for consumer credit, accounting for
forty to sixty percent of the docket. Hynes, supra note 41, at 49 (reporting rates of at least sixty
percent in Virginia); Mary Spector, Debts, Defaults and Details: Exploring the Impact of Debt
Collection Litigation on Consumers and Courts, 6 VA. L. & BUS. REV. 257, 273 (2011) (finding
similar rates in Texas); Healy, supra note 1 (finding sixty percent); see also URBAN JUSTICE CTR.,
DEBT WEIGHT: THE CONSUMER CREDIT CRISIS IN NEW YORK CITY AND ITS IMPACT ON THE WORKING
POOR 8 (2007), https://cdp.urbanjustice.org/sites/default/files/CDP_Debt_Weight.pdf
[https://perma.cc/25B4-CFBZ] [hereinafter DEBT WEIGHT] (reporting that over fifty percent of total
filings in New York City were for consumer credit transactions); Due Process and Consumer Debt:
Eliminating Barriers to Justice in Consumer Credit Cases, APPLESEED 1 (2010),
https://www.appleseednetwork.org/wp-content/uploads/2012/05/Due-Process-and-Consumer-
Debt.pdf [https://perma.cc/G5YS-JVDJ] [hereinafter Due Process and Consumer Debt] (“Hundreds
of thousands of consumer credit cases are filed and adjudicated each year in the five boroughs of
New York City alone . . . .”). This rate amounts, in New York City alone, to at least 300,000
lawsuits annually. DEBT WEIGHT, supra, at 1 (reporting 320,000 cases annually in five New York
City boroughs); Conor P. Duffy, A Sum Uncertain: Preserving Due Process and Preventing Default
Judgments in Consumer Debt Buyer Lawsuits in New York, 40 FORDHAM URB. L.J. 1147, 1148
(2013) (finding a range of 100,000 to 300,000 lawsuits by debt buyers); Michael Virtanen, New
Rules Established for NY Debt Collection Cases, WASH. TIMES (Sept. 16, 2014),
http://www.washingtontimes.com/news/2014/sep/16/new-rules-established-for-ny-debt-collection-
cases/ [https://perma.cc/9L2S-S857] (estimating 160,000 annual lawsuits in New York City in
2013). For context, the total amount of consumer debt in 2015 was $3.4 trillion, which suggests
the overall economic significance of this field of law. Federal Reserve Statistical Release: Consumer
Credit July 2017, FED. RES. 1 (Sept. 8, 2017), http://www.federalreserve.gov/releases/g19/
current/g19.pdf [https://perma.cc/GA89-NEYX]. Additionally, one in three Americans has an
account in collections and one in twenty has a credit obligation that is thirty days past due. See
FED. RESERVE BANK OF N.Y., QUARTERLY REPORT ON HOUSEHOLD DEBT AND CREDIT, at i (May
2016), https://www.newyorkfed.org/medialibrary/interactives/householdcredit/data/pdf/HHDC
_2016Q1.pdf [https://perma.cc/JD7F-TCHC] (reporting five percent of debts in delinquency,
accounting for $613 billion); Caroline Ratcliffe et al., Delinquent Debt in America, URB. INST. 4, 9
(July 30, 2014), https://www.urban.org/sites/default/files/publication/22811/413191-delinquent-
debt-in-america.pdf [https://perma.cc/WJR8-K9LJ] (using data from Transunion).
43. See Roscoe Pound, The Causes of Popular Dissatisfaction with the Administration of
Justice, 40 AM. L. REV. 729, 738 (1906).
Electronic copy available at: https://ssrn.com/abstract=3015569

<<PAGE_BREAK>>

Arbel_Galley(Do Not Delete) 1/2/2018 4:17 PM
132 VANDERBILT LAW REVIEW [Vol. 71:1:121
unpreparedness of the judge are intended axioms of the system,”44
because the parties are supposed to be the source of all information.45
However, when consumers systematically underparticipate—as is the
case with consumer credit litigation—this entire edifice crumbles,
inviting fraud, abuse, and overall nonmeritorious claiming.
A. Abuse and Procedural Violations
The general view among specialists and practitioners in the field
of consumer credit litigation is that abuse is pervasive, with multiple
pieces of evidence showing both procedural and substantive
violations.46 First, regulators consistently find banks and debt buyers
filing abusive and nonmeritorious lawsuits on a mass scale, forging
affidavits, inflating amounts owed, pursuing debt claims whose veracity
they themselves have reason to doubt, and filing questionable lawsuits
that have long passed the statute of limitations.47 These regulatory
findings often translate to fines in the tens of millions of dollars, and
they reveal broad practices. For example, the FTC found that twelve
percent of all the debts handled by large debt buyers lie beyond the
statute of limitations, which often also implies that neither the debt
buyer nor the consumer have a clear sense of whether the debt is real.48
Second, and highly revealing, is the number and nature of
consumer complaints about debt collection practices.49 Before debt
44. Marvin E. Frankel, The Search for Truth: An Umpireal View, 123 U. PA. L. REV. 1031,
1042 (1975).
45. See, e.g., William B. Rubenstein, The Concept of Equality in Civil Procedure, 23 CARDOZO
L. REV. 1865, 1874 (2002) (noting that in adversarial adjudication, equal participation is
“important . . . because it is thought to contribute to accurate and acceptable dispute resolution”).
46. See Judith Fox, Rush to Judgment: How the Fair Debt Collection Practices Act Fails to
Protect Consumers in Judicial Debt Collection, 13 FLA. ST. U. BUS. REV. 37, 37 (2014) (“The shoddy
evidence commonly presented to Indiana courts . . . is at the very least deceptive, and is often
abusive.”); Sam Glover, Has the Flood of Debt Collection Lawsuits Swept Away Minnesotans’ Due
Process Rights?, 35 WM. MITCHELL L. REV. 1115, 1117 (2009) (“Forty-one percent of the total
default judgments . . . were filed by debt buyers who probably could not prevail on the merits in
most, if not all, of those lawsuits.”); Lauren Goldberg, Dealing in Debt: The High-Stakes World of
Debt Collection After FDCPA, 79 S. CAL. L. REV. 711, 741–45 (2006) (arguing that lower standards
in small claims courts “offer collection lawyers a swift sword of judgment against debtors and give
lawyers leeway to file cases that would not survive in general civil court”); Peter A. Holland, Junk
Justice: A Statistical Analysis of 4,400 Lawsuits Filed by Debt Buyers, 26 LOY. CONSUMER L. REV.
179, 198–203 (2014) (reviewing the literature).
47. See supra notes 11–13 and accompanying text. Another recent example includes an action
against two law firms that turned a large volume of unverified lawsuits into default judgments.
See New Century Fin. Servs., Inc., CFPB No. 2016-CFPB-0010 (Apr. 25, 2016).
48. See FTC DEBT INDUSTRY REPORT, supra note 10, at iv–v, T-12 (finding that twelve percent
of debts are over six years old and that most states imposed three- to six-year statutes of
limitations).
49. Fred Williams, FIGHT BACK AGAINST UNFAIR DEBT COLLECTION PRACTICES 5 (Jeanne
Glasser et. al eds., 2011) (“The number-one complaint is that collectors are demanding money that
Electronic copy available at: https://ssrn.com/abstract=3015569

<<PAGE_BREAK>>

Arbel_Galley(Do Not Delete) 1/2/2018 4:17 PM
2018] ADMINIZATION 133
claims become lawsuits they undergo a debt collection process, and
consumers can file a complaint to the regulator if their debt is unfairly
handled. In 2014, hundreds of thousands of complaints were filed with
the FTC,50 and an additional eighty-five thousand with the CFPB.51 In
terms of substance, the bulk of these complaints concern allegedly
invalid or unverified debts, abusive communications, and illegal
threats.52 This conforms with the view of experts that the debt collection
process is rife with abuse, fraud, and unfair practices,53 and the results
of a financial survey where thirty-seven percent of respondents reported
being overcharged or deceived by a financial institution.54 Worryingly,
weak demographics, such as the elderly, are reported to be targeted
specifically.55
people do not even owe . . . .”). But see Letter from Donald S. Clark, Sec’y, Fin. Trade Comm’n, to
Richard Cordray, Dir., Consumer Fin. Prot. Bureau (Feb. 21, 2014),
https://www.ftc.gov/system/files/documents/reports/federal-trade-commission-enforcement-fair-
debt-collection-practices-act-report-consumer-financial/140305debtcollectionletter.pdf
[https://perma.cc/CD95-6E35] (reporting that in 2013, misrepresentation of debt is second most
common to repeated calls by debt collectors).
50. The FTC reports 280,998 complaints in 2014. Press Release, Fed. Trade Comm’n, Identity
Theft Tops FTC’s Consumer Complaint Categories Again in 2014 (Feb. 27, 2015),
https://www.ftc.gov/news-events/press-releases/2015/02/identity-theft-tops-ftcs-consumer-
complaint-categories-again-2014 [https://perma.cc/ZU7N-K8DS]. There have been some doubts
raised as to the accuracy of the FTC reports, because they are unverified and may include multiple
complaints made by the same debtor. Michael Klozotsky, The Facts Behind the Fantasies About
Debt Collection Complaints, FORBES (June 22, 2012, 11:26 AM),
http://www.forbes.com/sites/insidearm/2012/06/22/the-facts-behind-the-fantasies-about-debt-
collection-complaints/print/ [https://perma.cc/EJ3K-VBK5].
51. CONSUMER FIN. PROT. BUREAU, SEMI-ANNUAL REPORT OF THE CONSUMER FINANCIAL
PROTECTION BUREAU 26 (2015), http://files.consumerfinance.gov/f/201506_cfpb_semi-annual-
report-spring-2015.pdf [https://perma.cc/F42B-MDJS]. The CFPB database lists 39,148
complaints in 2014 regarding debt collection. Consumer Complaint Database, supra note 40 (click
“View complaint data” then filter the “Data received” to be between Jan. 1, 2014 and Dec. 31, 2014,
and filter the product column to “Debt collection”).
52. See FED. TRADE COMM’N, CONSUMER SENTINEL NETWORK DATA BOOK FOR JANUARY–
DECEMBER 2014, at 77 (2015), https://www.ftc.gov/system/files/documents/reports/consumer-
sentinel-network-data-book-january-december-2014/sentinel-cy2014-1.pdf
[https://perma.cc/9U86-T9GW].
53. See Goldberg, supra note 46, at 713 (“[C]orruption is running rampant in the collection
industry and federal collection law is ill-equipped to stop it.”); Justin P. Nichols, Dumping the Fair
Debt Collection Practices Act, 16 J. CONSUMER & COM. L. 26, 26 (2012) (noting the corruption in
the debt collection industry); Note, Improving Relief from Abusive Debt Collection Practices, 127
HARV. L. REV. 1447, 1447 (2014) [hereinafter Improving Relief] (arguing that millions of Americans
have been subject to predatory litigation techniques).
54. Telephone Survey of Likely Voters, AMS. FOR FIN. REFORM & CTR. FOR RESPONSIBLE
LENDING 27 (2013), http://www.responsiblelending.org/sites/default/files/uploads/2013-crl-afr-full-
poll-results-toplines-july-12.pdf [https://perma.cc/Z5UE-5SQ3].
55. See Matthew W. Ludwig, Abuse, Harassment, and Deception: How the FDCPA Is Failing
America’s Elderly Debtors, 16 ELDER L.J. 135, 151–56 (2008) (detailing the targeted abuse of the
elderly); see also Goldberg, supra note 46, at 736–39 (describing targeted debt collection based on
sex, age, and income).
Electronic copy available at: https://ssrn.com/abstract=3015569

<<PAGE_BREAK>>

Arbel_Galley(Do Not Delete) 1/2/2018 4:17 PM
134 VANDERBILT LAW REVIEW [Vol. 71:1:121
The third piece of evidence of the level of abuse comes, ironically,
from the lack of evidence in a large fraction of all lawsuits.56 One judge
estimated that plaintiffs lack necessary evidence in ninety percent of
the cases,57 and another judge mused that many claims “lack a nano of
a modicum of a scintilla of a prima facie case so as to be entitled to a
judgment whether it be by default or otherwise.”58 An empirical study
found no evidence at all in forty-six percent of cases,59 and a recent
study showed that many debt buyers do not bother to acquire evidence
in the first place, buying debts that they have never verified
themselves.60 When evidence is produced, its quality tends to be very
poor. One study found a breakdown of the claimed debt to its principal,
interest, and other charges in only five percent of the cases. Information
regarding payment history and the date of default were likewise
missing.61 Moreover, much (arguably most) of the evidence that is
brought is “facially invalid,” as a study of six hundred cases found.62
This is congruent with the (potentially illegal) practice of “robo-
signing,” namely the automated signing of mass volumes of documents
without actual review, which many view as a major concern.63 Of
56. The lack of evidence is part of a broad industry practice of not producing evidence to
support debts. See Duffy, supra note 42, at 1162 (“Portfolios often lack essential collection
information . . . .”).
57. See Holland, supra note 46, at 184 (citing Jessica Silver-Greenberg, Problems Riddle
Moves to Collect Credit Card Debt, N.Y. TIMES: DEALBOOK (Aug. 12, 2012, 9:09 PM),
https://dealbook.nytimes.com/2012/08/12/problems-riddle-moves-to-collect-credit-card-debt/
[https://perma.cc/LTX8-HX42], which quotes Noach Dear, a civil court judge in Brooklyn). This
should not be read as saying that ninety percent of cases are fraudulent, only that creditors do not
find it cost-effective to produce evidence in light of the low rates of defendants’ appearances.
58. Am. Express Bank, FSB v. Dalbis, No. 300082/10, 2011 WL 873512, at *12 (N.Y. Civ. Ct.
Mar. 14, 2011) (internal quotation marks omitted).
59. Fox, supra note 46, at 45–46. Fox further notes that in the remaining cases, evidence was
sometimes completely fabricated. Id. at 46.
60. CONSUMER FIN. PROT. BUREAU, STUDY OF THIRD-PARTY DEBT COLLECTION OPERATIONS
22 (2016), http://files.consumerfinance.gov/f/documents/20160727_cfpb_Third_Party_Debt
_Collection_Operations_Study.pdf [https://perma.cc/3UWJ-VVG8] (finding in a survey of debt
buyers that evidence beyond that required to identify the debtor is often not acquired); see also
Peter A. Holland, The One Hundred Billion Dollar Problem in Small Claims Court: Robo-Signing
and Lack of Proof in Debt Buyer Cases, 6 J. BUS. & TECH. L. 259, 262 (2011) (discussing lack of
evidence); Rachel Terp & Lauren Bowne, Past Due: Why Debt Collection Practices and the Debt
Buying Industry Need Reform Now, CONSUMERS UNION 4–5 (Jan. 2011),
http://consumersunion.org/pdf/Past_Due_Report_2011.pdf [https://perma.cc/C3CS-WMEF]
(same).
61. Spector, supra note 42, at 291. Even attorney fees were explicitly itemized in only thirty
percent of the cases. Id. at 292.
62. DEBT WEIGHT, supra note 42, at 7, 9 (reporting that in “99.0% of the cases where default
judgments were entered, the materials underlying those applications constituted inadmissible
hearsay”). The main fault in most cases was affidavits signed by people with no personal
knowledge of the underlying debt. Id. at 20.
63. See 1 ROBERT J. HOBBS ET AL., NAT’L CONSUMER LAW CTR., FAIR DEBT COLLECTION
§ 5.5.2.13.4 (7th ed. 2011 & Supp. 2013) (noting that courts are split on whether robo-signing
Electronic copy available at: https://ssrn.com/abstract=3015569

<<PAGE_BREAK>>

Arbel_Galley(Do Not Delete) 1/2/2018 4:17 PM
2018] ADMINIZATION 135
course, absence of evidence is not evidence of absence.64 After all,
evidence is costly to produce, and so it may not pay to produce it if cases
are not scrutinized.65 Nonetheless, the reality is that a great deal of debt
is owned by parties who did not take part in the original transaction
and have no knowledge that the debt is real but at the same time have
strong financial incentive to try to collect it. The lack of evidence is thus
strongly suggestive of nonmeritorious lawsuits.
Finally, there is strong evidence of abuse in the process of
notifying consumers of lawsuits. As a rule, plaintiffs are required to
notify consumers of the lawsuit by serving them with a court
summons.66 Unfortunately, this rule engenders perverse incentives: if
the consumer fails to attend the hearing, the plaintiff is almost assured
to win the case. The result of this badly designed system of incentives
is manifested in the phenomenon of “sewer service”: the practice among
debt collectors of figuratively dumping the summons in the sewer while
signing an affidavit that alleges actual service. While it is hard to
gather evidence on the scope of this phenomenon,67 the evidence that
does exist points at a broad problem. For example, the New York Bar
estimates that each year sewer service affects “tens of thousands” of
New Yorkers,68 and a New York judge said that, in his view, an
violates the FDCPA); Matthew J. Petrozziello, Note, Who Can Enforce? The Murky World of Robo-
signed Mortgages, 67 RUTGERS U. L. REV. 1061, 1082 (2015) (finding limited judicial acceptance of
robo-signing as a serious violation of FDCPA); see also Improving Relief, supra note 53, at 1450
(“Robosigning represents a particularly significant threat to consumers . . . .”); Press Release,
Consumer Fin. Prot. Bureau, supra note 12 (reporting on banks allegedly involved in robo-signing).
64. However, lack of evidence may be suggestive of lack of merit and is obviously consistent
with it. For similar reasoning, see, for example, DEBT WEIGHT, supra note 42, at 7 (“[T]he debt
buyers’ consistent failure to provide relevant evidence in support of their claims suggests that they
do not possess such evidence.”). But this conclusion is too strong; evidence is costly to produce and
if most consumers do not contest cases, it is not worthwhile to produce it, even for cases with merit.
65. From an economic standpoint, evidence is only valuable instrumentally as measured by
its ability to influence outcomes. Because evidence is costly to produce, when we require evidence
from the parties, we face a trade-off between greater accuracy and greater costs. See Louis Kaplow,
Information and the Aim of Adjudication: Truth or Consequences?, 67 STAN. L. REV. 1303 (2015)
(arguing that overall consequences of judicial decisions, not the pursuit of truth, should be the
primary goal of the legal system).
66. FED. R. CIV. P. 4(c)(1) (“The plaintiff is responsible for having the summons and complaint
served within the time allowed by Rule 4(m) and must furnish the necessary copies to the person
who makes service.”). Notice is an essential part of due process. See Administrative Procedure Act,
5 U.S.C. §§ 554, 556–557 (2012) (requiring notice to parties to an agency hearing of the time, place,
and nature of the hearing; legal authority under which the hearing is held; and matters of fact and
law asserted); Goldberg v. Kelly, 397 U.S. 254, 266–70 (1970) (holding that procedural due process
requires adequate notice before terminating public welfare program).
67. Spector, supra note 42, at 287 (“Little information regarding non-service exists . . . .”).
Consumers may have an incentive to exaggerate claims of service failures.
68. N.Y.C. BAR ASS’N, OUT OF SERVICE: A CALL TO FIX THE BROKEN PROCESS SERVICE
INDUSTRY 11–12 (2010), http://www.nycbar.org/pdf/report/uploads/ProcessServiceReport4-10.pdf
[https://perma.cc/ 76KJ-G3P4] [hereinafter OUT OF SERVICE].
Electronic copy available at: https://ssrn.com/abstract=3015569

<<PAGE_BREAK>>

Arbel_Galley(Do Not Delete) 1/2/2018 4:17 PM
136 VANDERBILT LAW REVIEW [Vol. 71:1:121
“astonishing” amount of default judgments are the result of faulty
service.69 Indeed, a recent class action alleging sewer service in New
York recently settled for $59 million.70 More systematic studies found
similar indications. In one study of 350 consumers, none were properly
served.71 Another found service in only twelve percent of the cases,72
and a larger one found that faulty service was a cause for dismissal in
about twenty-one percent of the cases studied.73 This problem is hardly
new; a report from 1968 made by the U.S. Attorney’s Office for the
Southern District of New York claims that at least half of all default
judgments entered in the Civil Court for the County of New York were
supported by false affidavits of service.74 Even when service takes place,
it is poorly done. One study finds in a sample of ninety-one cases that
almost no summonses were served in person. Instead, the vast majority
of summonses were served either by “nail and mail” (i.e., affixing the
summons to the defendant’s door) or by delivery to a different individual
in the household.75 These methods were designed as last resorts, but
apparently some servers practice them frequently. This study showed
that while two law firms did not serve any debtor in person, another—
which presumably tried harder—successfully served eighteen percent
of its sample cases personally.76
Taken together, this evidence suggests a serious problem.
Skeptics, however, may worry that some of the evidence is only
anecdotal, that some of the violations are only formal, and that some of
the research is subject to methodological problems. Primarily, the
absence of evidence, and even sewer service, is not definite proof that
the underlying claim is unmeritorious. These concerns are not without
merit individually, but a broader look may assuage them. The
69. Due Process and Consumer Debt, supra note 42, at 12.
70. Benjamin Mueller, Victims of Debt Collection Scheme in New York Win $59 Million in
Settlement, N.Y. TIMES (Nov. 13, 2015), https://www.nytimes.com/2015/11/14/nyregion/victims-of-
debt-collection-scheme-in-new-york-win-59-million-in-settlement.html [https://perma.cc/S8D4-
QKV2]. The relevant class action is Sykes v. Mel S. Harris & Associates LLC, 780 F.3d 70 (2d Cir.
2015).
71. Justice Disserved, MFY LEGAL SERVS. 2 (2008), http://mobilizationforjustice.org/wp-
content/uploads/reports/Justice_Disserved.pdf [https://perma.cc/Q4C3-T4AN]. Another study
found that four out of fifteen surveyed consumers were not served. Hillard M. Sterling & Philip G.
Schrag, Default Judgments Against Consumers: Has the System Failed?, 67 DENV. U. L. REV. 357,
370 (1990).
72. Spector, supra note 42, at 287 (studying a sample of 507 cases).
73. Holland, supra note 46, at 210 (finding dismissal for lack of service in 925 out of 4,400
sampled cases).
74. Frank M. Tuerkheimer, Service of Process in New York City: A Proposed End to
Unregulated Criminality, 72 COLUM. L. REV. 847, 849 (1972).
75. Justice Disserved, supra note 71, at 5.
76. Id. The study also indicates that creditors vary considerably in their service method,
whether in person or by “nail and mail.” Id.
Electronic copy available at: https://ssrn.com/abstract=3015569

<<PAGE_BREAK>>

Arbel_Galley(Do Not Delete) 1/2/2018 4:17 PM
2018] ADMINIZATION 137
consistency of the evidence across studies, cases, and even anecdotes,
coupled with the experience of industry insiders and regulators, all
point toward the conclusion that fraud and abuse in consumer credit
litigation is a serious problem. The absence of contrary studies is not
strong evidence, but it is also relevant. And perhaps strongest of all, on
simple theoretical grounds of moral hazard, we would expect the
existence of financial incentives combined with weak consumer and
judicial supervision to breed significant abuse. It is with this in mind
that I now turn my attention to the role of consumers and judges in
providing adequate monitoring of creditor behavior.
B. Justice, Inaccessible
Consumers often find the courts inaccessible, resulting in low
levels of response to claims, appearance in court, and legal
representation. Even the most basic step of responding to lawsuits is
rarely taken: consumers respond to only five to twenty-three percent of
lawsuits77 (compared to seventy-two percent in tort cases78). Similarly,
consumers appear in only seven to twenty percent of cases.79
Representation rates stand at a much lower rate of only two to 8.7
percent overall (but forty-three percent of cases where the defendant
77. The defendant normally has three weeks to file an answer. See FED. R. CIV. P. 12(a)(1)
(twenty-one days); Fed. Mar. Comm’n v. S.C. State Ports Auth., 535 U.S. 743, 757 (2002) (noting a
common twenty-day period in Federal Maritime Commission administrative proceedings). This is
viewed as an important right. See Nelson v. Adams USA, Inc., 529 U.S. 460, 466 (2000) (“[The]
opportunity to respond, fundamental to due process, is the echo of the opportunity to respond to
original pleadings secured by Rule 12.”). On answer rates, see Judith Fox, Do We Have a Debt
Collection Crisis? Some Cautionary Tales of Debt Collection in Indiana, 24 LOY. CONSUMER L. REV.
355, 377 (2012) (3.6 percent); Holland, supra note 46, at 186 (less than twenty percent); Spector,
supra note 42, at 288 (22.87 percent); Due Process and Consumer Debt, supra note 42, at 2 (0.8 to
7.2 percent). In arbitration, consumers answer in roughly seventy percent of the cases. See CAROL
J. DEFRANCES & STEVEN K. SMITH, U.S. DEP’T OF JUSTICE, CONTRACT CASES IN LARGE COUNTIES
6 (1995), https://www.bjs.gov/content/pub/pdf/ccilc.pdf [https://perma.cc/LT4U-RYS2].
78. STEVEN K. SMITH ET AL., U.S. DEP’T OF JUSTICE, TORT CASES IN LARGE COUNTIES 1 (1995),
https://www.bjs.gov/content/pub/pdf/TCILC.PDF [https://perma.cc/Z9TL-ZXZT].
79. See Holland, supra note 46, at 208 (ten percent); Spector, supra note 42, at 288 (twenty
percent); see also SUSAN SHIN & CLAUDIA WILNER, NEW ECON. PROJECT, THE DEBT COLLECTION
RACKET IN NEW YORK: HOW THE INDUSTRY VIOLATES DUE PROCESS AND PERPETUATES ECONOMIC
INEQUALITY 14 (2013), http://www.neweconomynyc.org/wp-content/uploads/2014/08/
DebtCollectionRacketUpdated.pdf [https://perma.cc/CBF4-KZZV] (noting that eighteen percent of
consumers sued in New York City appeared in court and only seven percent of consumers sued
outside of New York City appeared in court); Sterling & Schrag, supra note 71, at 361 (finding
twenty-two percent appearance rate). But see Mary Spector & Ann Baddour, Collection Texas-
Style: An Analysis of Consumer Collection Practices in and out of the Courts, 67 HASTINGS L.J.
1427, 1462 (2016) (finding in Texas courts appearance in fifty-two percent of the cases).
Electronic copy available at: https://ssrn.com/abstract=3015569

<<PAGE_BREAK>>

Arbel_Galley(Do Not Delete) 1/2/2018 4:17 PM
138 VANDERBILT LAW REVIEW [Vol. 71:1:121
chose to appear).80 For a sense of magnitude, in the state of New York
alone, 1.8 million litigants proceeded pro se in 2014.81 At the same time,
creditors are almost always represented, an advantage that carries over
to settlement agreements.82 For example, Jeff Cook, an unemployed
plumber, signed off $651 out of his (legally protected and uncollectable)
unemployment benefits due to ignorance of his legal rights and pressure
from the creditor.83 Moreover, pro se debtors also impose costs on the
system, as the court has to deal with motions and requests which often
deviate from the standard of filings common among lawyers.84 Even the
more informal small claims courts present access problems, as they
relax traditional procedural safeguards, such as the rule prohibiting
hearsay, while allowing the plaintiff legal representation.85
There are several complementary explanations for participation
gaps: the lack of resources, sophistication, and legal knowledge;86
80. DEBT WEIGHT, supra note 42, at 16 (two out of 600 cases); Holland, supra note 46, at 187
(less than two percent); Spector, supra note 42, at 289 (8.68 percent, but 43.14 percent of those
who appeared).
81. PERMANENT COMM’N ON ACCESS TO JUSTICE, STATE OF N.Y. UNIFIED COURT SYS., REPORT
TO THE CHIEF JUDGE OF THE STATE OF NEW YORK 3, 24 (2015), http://nylawyer.nylj.com/adgifs/
decisions15/122915report.pdf [https://perma.cc/JV5C-FVQQ] [hereinafter N.Y. ACCESS TO JUSTICE
REPORT].
82. See DEBT WEIGHT, supra note 42, at 16 (“[One hundred percent] of plaintiffs initiating
consumer credit transaction cases reviewed in our study were represented by counsel . . . .”); Duffy,
supra note 42, at 1175 (noting that in New York courts, “100% of debt collector plaintiffs are
represented by counsel”). On abuse in settlements, see Jessica Silver-Greenberg, In Debt
Collecting, Location Matters, WALL ST. J. (July 18, 2011), https://www.wsj.com/articles/
SB10001424052702303365804576433763597389214 [https://perma.cc/6FXR-295D] (describing a
debtor having an unsupervised meeting with the creditor’s attorney, leading to the debtor letting
the creditor tap into his unemployment benefits); Due Process and Consumer Debt, supra note 42,
at 18 (observing that “[p]laintiffs’ counsel may pressure unrepresented defendants into
unfavorable settlements”). See also Fiss, supra note 35, at 1078–82, for a criticism of settlements
in civil trials generally, partly on the ground of imbalance of powers between the parties.
83. See Silver-Greenberg, supra note 82.
84. See MASS. PROB. & FAMILY COURT DEP’T, PRO SE LITIGANTS: THE CHALLENGE OF THE
FUTURE 12–16 (1997), http://www.mass.gov/courts/docs/courts-and-judges/courts/probate-and-
family-court/prosefinalreport.pdf [https://perma.cc/BR7A-6K6M] (discussing problems with pro se
litigants).
85. See Holland, supra note 60, at 263. In most states, plaintiffs may be represented by a
lawyer even in a small claims court, and while defendants may also be represented, this is
infrequent. See NAT’L INST. OF JUSTICE, U.S. DEP’T OF JUSTICE, SMALL CLAIMS COURT REFORM 6
(1983), https://www.ncjrs.gov/pdffiles1/Digitization/93351NCJRS.pdf [https://perma.cc/8LUV-
BF9J] (noting the power asymmetry between plaintiffs and pro se defendants in small claims
courts).
86. See KAGAN, supra note 20, at 122–24 (analyzing asymmetries in knowledge, wealth, and
sophistication); Victoria J. Haneman, The Ethical Exploitation of the Unrepresented Consumer, 73
MO. L. REV. 707, 711 (2008) (arguing that the current adversarial system exacerbates power
imbalances between represented creditors and unrepresented debtors); David Rosenberg &
Kathryn E. Spier, Incentives to Invest in Litigation and the Superiority of the Class Action, 6 J.
LEGAL ANALYSIS 305 (2014) (analyzing stake asymmetry and its distortive effects). See generally
Marc Galanter, Why the “Haves” Come Out Ahead: Speculations on the Limits of Legal Change, 9
Electronic copy available at: https://ssrn.com/abstract=3015569

<<PAGE_BREAK>>

Arbel_Galley(Do Not Delete) 1/2/2018 4:17 PM
2018] ADMINIZATION 139
problems with service;87 psychological barriers and biases;88 and power
asymmetries. But beyond this, perhaps the deepest reason for consumer
apathy to the legal process is that such apathy is often rational. That
is, the costs of full participation often exceed the potential benefits. A
first obstacle for most Americans is time. Appearing in court involves
taking a day off work, which spells a potential loss of $136 to the median
American, assuming she can obtain her employer’s permission. Besides
this cost, individuals must pay for travel, preparation, and most
significantly, representation. The average hourly cost of a consumer law
attorney is $361.89 Even assuming one finds a cheaper attorney with a
rate of, say, $200 per hour, handling a standard case will often take four
to eight hours, thus leading to a total cost of $800–$1,600 for an average
case. This cost is very close to the value of the case itself—a typical case
involves a debt of $3,000 ($820 in a small claims court).90 And because
lawyers do not guarantee a win, but must be paid in advance, their
value to consumers is quite doubtful, especially when one takes into
account risk aversion and liquidity constraints. Overall, then,
participation is a very costly and doubtful endeavor for many.
Proceeding pro se may save costs—and indeed, many consumers choose
this option—but it is still an involved and stressful experience that
presents consumers with many potential pitfalls.
LAW & SOC’Y REV. 95 (1974) (arguing that litigation gives a systematic advantage to sophisticated
players).
87. See supra notes 66–75 and accompanying text.
88. Sterling and Schrag tell of a case where a default judgment was entered despite the debtor
being present in court: when her name was called, the debtor got too nervous and preferred to stay
quiet. See Sterling & Schrag, supra note 71, at 369. One dominant psychological bias which may
be of relevance here is the tendency to overly discount future outcomes. See David Laibson, Golden
Eggs and Hyperbolic Discounting, 112 Q.J. ECON. 443, 445–46 (1997).
89. RONALD L. BURDGE, UNITED STATES CONSUMER LAW ATTORNEY FEE SURVEY REPORT
2013–2014, at 11 (2015), http://burdgelaw.com/NACA/US-Consumer-Law-Attorney-Fee-Survey-
Report-2015.pdf [https://perma.cc/Z7UV-XRV7]. The typical fee charged by an attorney “can range
from $500 to negotiate a simple credit card debt to more than $5,000 for more complex
negotiations.” Baran Bulkat, How Much Will a Lawyer Charge to Negotiate with My Creditors?,
NOLO, http://www.nolo.com/legal-encyclopedia/how-much-will-lawyer-charge-negotiate-with-my-
creditors.html (last visited Oct. 22, 2017) [https://perma.cc/D85K-U44M].
90. See Suzanne E. Elwell & Christopher D. Carlson, The Iowa Small Claims Court: An
Empirical Analysis, 75 IOWA L. REV. 433, 510 (1990) ($820 in small claims, CPI adjusted); Holland,
supra note 46, at 206 ($2,993.17). The average value of debts in collection is $1,387. Ctr. for
Microeconomic Data, Data Bank, FED. RES. BANK N.Y., https://www.newyorkfed.org/
microeconomics/databank.html (last visited Oct. 22, 2017) [https://perma.cc/4UAB-YKYK] (under
the “Credit Cards” section, click on “Delinquencies,” then click on the first link, “Quarterly Report
on Household Debt and Credit,” which will open an Excel spreadsheet, then go to page 18 of the
spreadsheet).
Electronic copy available at: https://ssrn.com/abstract=3015569

<<PAGE_BREAK>>

Arbel_Galley(Do Not Delete) 1/2/2018 4:17 PM
140 VANDERBILT LAW REVIEW [Vol. 71:1:121
C. Lack of Judicial Oversight
In the current system, the main safeguard against the filing of
abusive claims is judicial screening, but most cases are reduced to
default judgments with little judicial oversight.91 Civil trials are on the
verge of extinction, with full trials taking place in less than two percent
of cases,92 and judges doubting the need for factual examinations in
cases of consumer credit.93 Even more rudimentary examinations are
rare, and while the rates of default judgment vary considerably, it is
common to find that eighty percent of cases result in default
judgments.94 If multiplied by all relevant cases, this implies that 6.4
million cases of consumer credit every year turn into default judgments
with little judicial scrutiny.95 The minority of cases that are heard do
not follow any clear pattern, and it is unclear whether those are the
most deserving ones or simply ones where the consumer had sufficient
resources, grit, or conviction to appear. This leads to highly limited
judicial oversight.
Three factors contribute to limited oversight: First, the
adversarial nature of the process limits judges’ investigative authority,
thus exacerbating the informational problems resulting from consumer
91. Robert G. Bone, Procedure, Participation, Rights, 90 B.U. L. REV. 1011, 1015–16 (2010)
(considering the role of accuracy and procedural participation rights under various theories of
procedure).
92. On the “vanishing trial” phenomenon in civil litigation, see generally Marc Galanter, The
Vanishing Trial: An Examination of Trials and Related Matters in Federal and State Courts, 1 J.
EMPIRICAL LEGAL STUD. 459 (2004). See also John H. Langbein, The Disappearance of Civil Trial
in the United States, 122 YALE L.J. 522, 551–53 (2012) (noting the trend and claiming pretrial
procedure has made trials obsolete). Since the publication of Galanter’s work, the rate of civil trials
has declined from 0.6 percent in state courts to around 0.27 percent. See Court Statistics Project,
Court Statistics Project Data Viewer, NAT’L CTR. ST. CTS., http://www.ncsc.org/Sitecore/Content/
Microsites/PopUp/Home/CSP/CSP_Intro (last visited Oct. 22, 2017) [https://perma.cc/SYJ6-
PFAU]. In the consumer credit context, see SHIN & WILNER, supra note 79 (0 out of 200,000 cases);
Fox, supra note 46, at 44 (0 out of 1,000 cases); Holland, supra note 46, at 213 (21 out of 2,947
cases); Spector, supra note 42, at 297 (1 out of 446 cases); Debt Deception: How Debt Buyers Abuse
the Legal System to Prey on Lower-Income New Yorkers, LEGAL AID SOC’Y ET AL. 8 (May 2010),
http://mobilizationforjustice.org/wp-content/uploads/reports/DEBT-DECEPTION.pdf
[https://perma.cc/LY2Z-HRE4] [hereinafter Debt Deception] (0 cases in a sample of 336 cases in
New York courts). Taken together, this amounts to 22 out of 204,729 cases where a trial was
conducted.
93. See FTC PROTECTING CONSUMERS REPORT, supra note 14, at 7 & n.18 (estimated default
judgment rate of sixty to ninety-five percent); DEBT WEIGHT, supra note 42, at 9 (eighty percent
default judgment rate); Spector & Baddour, supra note 79, at 1449 (31.6 percent default judgment
rate in Texas). Most remaining cases are dismissed (commonly without prejudice), transferred, or
settled.
94. See supra note 93.
95. See supra note 42.
Electronic copy available at: https://ssrn.com/abstract=3015569

<<PAGE_BREAK>>

Arbel_Galley(Do Not Delete) 1/2/2018 4:17 PM
2018] ADMINIZATION 141
inexperience, rational apathy, and psychological barriers.96 Second,
creditors are repeat players and can more effectively scale their
experience and engage in forum shopping.97 Third, the overload of civil
courts’ dockets makes it difficult for judges to spend sufficient time
scrutinizing cases.98 All of these structural issues contribute to a low
level of judicial scrutiny.
On the outskirts of the judicial process are private settlements
in the courthouse. Troublingly, these often produce worse results for
consumers than they could expect under the law.99 Plaintiffs’ attorneys
are reported to often play a negative role in such settlements,
misinforming debtors of their rights and applying pressure.100 Judges
rarely scrutinize the resulting agreements and often rubberstamp
them, turning them into enforceable agreements.101
Overall, the system of handling consumer debt is an incubator
of abuse. Consumers are largely apathetic to the process and do not
respond to lawsuits or show up to hearings. Creditors routinely bring
nonmeritorious lawsuits that are neither verified nor supported by
evidence, and judges do not try cases or provide judicial oversight of
cases. The few cases that do receive scrutiny are haphazardly chosen
with no rationale or logic. This provides companies and debt collectors
with incentive to inflate their claims and bring bogus charges, and the
evidence we have suggests that this happens on a large scale. The
system affects millions of consumers and yet is deeply and inexcusably
96. See Haneman, supra note 86, at 720–21 (exploring how the adversarial system harms
unrepresented consumers); see also Amalia D. Kessler, Our Inquisitorial Tradition: Equity
Procedure, Due Process, and the Search for an Alternative to the Adversarial, 90 CORNELL L. REV.
1181, 1183–87 (2005) (tracing the origins of the adversarial procedure in American law).
97. See, e.g., Glover, supra note 46, at 1125 (“In Hennepin County, 76% of the total filings
were by original creditors or debt buyers who filed twenty-five or more lawsuits as of August
2008.”). On repeat players, see Galanter, supra note 86, at 97–104 (explaining that repeat players
enjoy advantages in litigation and have a systematic advantage over one-shotters); Leslie G.
Kosmin, The Small Claims Court Dilemma, 13 HOUS. L. REV. 934, 942–43 (1976) (explaining that,
even in small claims courts, unsophisticated debtors face a disadvantage). But see Assaf Hamdani
& Alon Klement, The Class Defense, 93 CALIF. L. REV. 685, 689–90 (2005) (proposing consolidation
of defendants to increase the incentive to defend them).
98. See Suein Hwang, Once-Ignored Consumer Debts Are Focus of Booming Industry, WALL
ST. J. (Oct. 25, 2004, 11:59 PM), https://www.wsj.com/articles/SB109865776922954118
[https://perma.cc/Z6W3-P6K].
99. See supra note 42.
100. See Russell Engler, Out of Sight and Out of Line: The Need for Regulation of Lawyers’
Negotiations with Unrepresented Poor Persons, 85 CALIF. L. REV. 79, 82 (1997) (reviewing
attorneys’ roles in improper negotiations with poor debtors).
101. Russell Engler, And Justice for All—Including the Unrepresented Poor: Revisiting the
Roles of the Judges, Mediators, and Clerks, 67 FORDHAM L. REV. 1987, 2019–20 (1999).
Electronic copy available at: https://ssrn.com/abstract=3015569

<<PAGE_BREAK>>

Arbel_Galley(Do Not Delete) 1/2/2018 4:17 PM
142 VANDERBILT LAW REVIEW [Vol. 71:1:121
flawed. As the FTC recognized: “[N]either litigation nor arbitration
currently provides adequate protection for consumers.”102
II. ADMINIZATION
Adminization is a model of civil litigation that is designed to
cost-effectively add oversight to the system. Section A lays out the main
principles of Adminization, Section B explores its main features, and
Section C applies it to consumer credit litigation.
A. Adminization: High-Level Outline
Parallel to civil litigation, we have an administrative system
that does not depend on user participation for its operation and
acquisition of information. When the police, the IRS, the Securities and
Exchange Commission (“SEC”), or the United States Department of
Agriculture—to give but a few examples—engage in their regulatory
activities, they do so on their own initiative, harnessing their expertise
and investigative powers.103 They do not wait for the regulated entities
to “participate”; rather, they independently seek and gather relevant
information. These agencies do not even need a complaint to start their
process; it is the agency itself that chooses when to intervene. Because
administrative agencies do not depend on participation to identify and
screen bad cases, they offer great promise for a system that suffers from
a participation problem.
The core idea underlying Adminization is that by tapping into
the powers of agencies, it will be possible to provide a threshold level of
consumer protection that is independent of consumer participation.
Adminization consists of a gatekeeper agency that uses its
administrative powers—most notably sampling, audits, and fines—to
investigate cases and sanction plaintiffs who file baseless claims. This,
in a nutshell, protects consumers and reduces the volume of unwanted
litigation. The following figure illustrates the operation of the agency in
the context of consumer credit litigation, with each of the steps and
features explained in detail later in this Part.
102. Holland, supra note 46, at 188 (quoting FTC PROTECTING CONSUMERS REPORT, supra note
14).
103. See, e.g., How Criminal Investigations Are Initiated, INTERNAL REVENUE SERV.,
https://www.irs.gov/uac/how-criminal-investigations-are-initiated (last visited Oct. 22, 2017)
[https://perma.cc/5678-6SBN] (explaining the process for initiating criminal investigations).
Electronic copy available at: https://ssrn.com/abstract=3015569

<<PAGE_BREAK>>

Arbel_Galley(Do Not Delete) 1/2/2018 4:17 PM
2018] ADMINIZATION 143
FIGURE 1: THE ADMINIZATION WORKFLOW
Before moving to cover the details, it is worth considering
Adminization from a jurisprudential perspective. The idea of
Adminization challenges the traditional view that posits a tension
between the “individualized justice” of civil litigation and the generic
and less equitable “bureaucratic management” by agencies.104 Under
this view, administration and litigation are understood as
multidimensional polar opposites, each on the other side of ex ante vs.
ex post regulation, proactive vs. reactive, rule-driven vs. standard-
driven, specialized vs. generalist judgment, public vs. private
enforcement, and government vs. individual disputes.105 However, this
emphasis on tensions hides much that is complementary between the
two systems. Recently, David Engstrom developed a theory of agencies
as litigation gatekeepers, which is focused on the productive coexistence
of courts and agencies.106 There are many instances of such peaceful
104. See MASHAW, supra note 33, at 222; see also JERRY L. MASHAW ET AL., ADMINISTRATIVE
LAW, THE AMERICAN PUBLIC LAW SYSTEM: CASES AND MATERIALS 310 (7th ed. 2014).
105. Richard A. Posner, Regulation (Agencies) Versus Litigation (Courts): An Analytical
Framework, in REGULATION VS. LITIGATION: PERSPECTIVES FROM ECONOMICS AND LAW 11, 13
(Daniel P. Kessler ed., 2011); see also Steven Shavell, A Fundamental Enforcement Cost Advantage
of the Negligence Rule over Regulation, 42 J. LEGAL STUD. 275, 275–76 (2013) (“Under regulation,
compliance with standards tends to be assessed before, or independently of, the occurrence of
harm . . . . Under the negligence rule, in contrast, compliance with standards is examined only on
the condition that harm transpires . . . .”). Administrative law scholars do not generally focus on
adjudicative processes. Michael Asimow, Five Models of Administrative Adjudication, 63 AM. J.
COMP. L. 3, 5 (2015) (“[A]djudication is not the glamor area of contemporary administrative
law . . . . Adjudication is administrative law at the retail rather than the wholesale level.”). When
they do, they mostly focus on individuals protecting themselves from the wrongdoings of
government agencies, legitimacy, judicial independence from agency heads, separation of powers,
and congressional ability to implement policies. While Adminization touches on these issues, its
focus is on the optimal design of institutions that promote due process, efficiency, and justice.
106. Engstrom, supra note 31, at 622 (“A systematic accounting of agency gatekeeping helps
us to see [the choice between private enforcement and regulation] not as either/or options, but
rather the outer poles of a rich continuum of institutional designs that tap agencies’ unique
position and capacity to engage with and rationalize private litigation efforts.”). Notably, Engstrom
is largely critical of “retail” (i.e., case-by-case) administrative processes. Additionally, he generally
Electronic copy available at: https://ssrn.com/abstract=3015569

<<PAGE_BREAK>>

Arbel_Galley(Do Not Delete) 1/2/2018 4:17 PM
144 VANDERBILT LAW REVIEW [Vol. 71:1:121
cooperation, such as administrative adjudication (workers’
compensation, social security, and asbestos claims tribunals107) and
specialized courts (drug, mental health, and domestic violence courts).
These examples are useful, especially in assuaging constitutional
concerns, but it should be noted that they do not fully capture the goal
of Adminization—to enhance civil litigation by augmenting it with
agency functions.108
B. Main Features of Adminization
Adminization involves three central features run by a central
agency: audits and fines, sampling, and third-party communications.
1. Audits and Fines
To overcome the participation gap in civil litigation, a core
feature of Adminization is agency-run audits and fines. The agency
takes claims and, by its own initiative, investigates the case, collects
evidence, interviews witnesses, gathers documents, and locates
relevant industry standards. An auditor reaches out to the parties, asks
them about the case, asks for evidence such as receipts and credit card
charges, and presents them with questions. The goal of the agency’s
investigations is to assess the validity and reasonableness of the claim,
and the process is akin to that of audits run by other agencies. One close
analogy is the Equal Employment Opportunity Commission (“EEOC”).
When employees file charges of discrimination in the workplace, the
EEOC is empowered to conduct investigations on behalf of the
employee.109 Like consumer credit litigation, these cases also involve
abstracts from participation problems and grounds most of the critique on the assumption that the
adversarial process itself is functional. Id. at 667, 685.
107. See JOSEPH W. LITTLE ET AL., WORKERS’ COMPENSATION: CASES AND MATERIALS 544–45
(7th ed. 2014) (describing some of the benefits of Adminization of workers’ claims); Lester
Brickman, The Asbestos Claims Management Act of 1991: A Proposal to the United States Congress,
13 CARDOZO L. REV. 1891, 1892 (1992) (arguing that the processing of asbestos claims should be
rendered by an administrative agency rather than the tort system). There are also calls now to
create administrative health courts. See Nora Freeman Engstrom, A Dose of Reality for Specialized
Courts: Lessons from the VICP, 163 U. PA. L. REV. 1631, 1633–35 (2015). In the context of tort law,
some have proposed a move to a no-fault system. See Stephen D. Sugarman, Doing Away with Tort
Law, 73 CALIF. L. REV. 555, 558–59 (1985). Finally, consumer arbitration may suggest yet another
solution, an issue addressed separately infra Section III.D.
108. See, e.g., Arthur L. Shipe, Private Litigation Before the Commodity Futures Trading
Commission, 33 ADMIN. L. REV. 153 (1981) (considering the constitutionality and desirability of
administrative adjudication of private rights in “complex cases” such as futures trading). On the
constitutional challenges, see infra Part IV.A.
109. 42 U.S.C. § 2000e-8(a) (2012); see also EEOC v. Shell Oil Co., 466 U.S. 54, 68–70 (1984)
(discussing the limits of the EEOC’s investigative powers).
Electronic copy available at: https://ssrn.com/abstract=3015569

<<PAGE_BREAK>>

Arbel_Galley(Do Not Delete) 1/2/2018 4:17 PM
2018] ADMINIZATION 145
private information. But the EEOC, through its broad investigatory
powers, including the subpoena power, is still able to acquire
considerable information. The EEOC handles close to one hundred
thousand charges every year.110 And while the EEOC audits cases on
behalf of plaintiffs and not defendants, it shares the objective of
increasing participation.111 Similarly, the IRS conducts about 1.2
million audits annually,112 the Department of Justice often takes over
private qui tam lawsuits under the False Claims Act using its own
investigatory powers,113 and the CFPB has extensive experience in
investigating consumer complaints. 114
At first blush, it may seem wasteful to have the agency collect
information that the parties naturally possess. On closer inspection,
however, such an approach is highly attractive. First and foremost, we
have already seen that consumers are not always able to use their
information effectively, nor are they always aware of what information
is most relevant to their case. An agent collecting information would be
able to direct the parties to the most pertinent evidence. Especially for
the weaker party, it is an entirely different experience to produce
evidence for trial and to answer leading questions from an experienced
investigator, who can ask the consumers questions such as “Do you
have a bank statement from November, 2005, so that we can see if you
indeed paid off your debt?” Secondly, the agency, being part of the
government, can have access to information that may not be available
to other parties, such as agency records—a treasure trove of
information on past behavior and industry practices. Moreover, through
its investigatory powers, the agency can access information that is in
the hands of third parties. Overall, putting the agency at the front of
the process, in charge of initiating actions and using its expertise to
110. See Press Release, Equal Emp’t Opportunity Comm’n, EEOC Releases Fiscal Year 2015
Enforcement and Litigation Data (Nov. 2, 2016), https://www.eeoc.gov/eeoc/newsroom/release/2-
11-16.cfm [https://perma.cc/9Y33-KMF8] (reporting 92,000 claims in 2015).
111. See Michael Selmi, The Value of the EEOC: Reexamining the Agency’s Role in Employment
Discrimination Law, 57 OHIO ST. L.J. 1, 3 (1996) (analyzing critically whether the EEOC mitigates
participation problems).
112. INTERNAL REVENUE SERV., DATA BOOK 2015, at 9 (2016), https://www.irs.gov/pub/irs-
soi/15databk.pdf [https://perma.cc/KV9F-VYLV] [hereinafter IRS DATA BOOK] (reporting about
147 million individual income tax returns and audits of 0.8 percent of those).
113. See Marc S. Raspant & David M. Laigaie, Current Practice and Procedure Under the
Whistleblower Provisions of the Federal False Claims Act, 71 TEMP. L. REV. 23, 38–40 (1998)
(describing the government’s role in qui tam actions under the False Claims Act).
114. The CFPB recently proposed a program under which it would examine the practices of
covered entities, which comprise approximately sixty percent of the market. See CONSUMER FIN.
PROT. BUREAU, EXAMINATION PROCEDURES: DEBT COLLECTION 28,
https://s3.amazonaws.com/files.consumerfinance.gov/f/documents/201210_cfpb_debt-collection-
examination-procedures.pdf (last updated Oct. 24, 2012) [https://perma.cc/A726-VFB9].
Electronic copy available at: https://ssrn.com/abstract=3015569

<<PAGE_BREAK>>

Arbel_Galley(Do Not Delete) 1/2/2018 4:17 PM
146 VANDERBILT LAW REVIEW [Vol. 71:1:121
gather and analyze information, relieves critical pressure from the
consumer.
A complementary feature of audits is the use of fines against
baseless claims. Where a case is found to involve abuse or fraud, the
agency will issue a fine. The goal is not to conduct a “mini-trial,” but
rather to inspect the case for plausibility and signs of abuse or fraud—
the use of false evidence, the processing of unverified debts, or the
claiming of nonexistent charges, to give but a few examples.115 The size
of the fine may be influenced by various considerations, and economic
theory provides a guidepost: the magnitude of fines should reflect,
among other considerations, the probability of evading detection.116 The
agency should calibrate the level of fines according to the perceived
accuracy and frequency of its audits. Like audits, the use of fines is
commonplace among agencies, which use them as a means of
sanctioning noncompliant behavior. Fines give “teeth” to the audit
process and guarantee that fraudulent claims will be met with a
sanction even in cases of underparticipation by the defendant. The fines
are then paid to the public coffer and can be used for various social
purposes (including financing the agency, although this may raise
conflicts of interests).
Taken together, the use of audits and fines that are initiated by
the agency would provide a bulwark against abuse for those cases where
underparticipation is a problem. An outstanding issue is the costliness
of such audits, as it will clearly be prohibitively costly to audit all
incoming cases. We now move to consider another feature of
Adminization that accounts for this highly relevant concern.
2. Sampling, Artificial Intelligence, and Resource Management
Both the judicial process and audits are resource-intensive
processes. Marginalist economic theory teaches that, given budgetary
constraints, it is desirable to allocate resources such that they have the
115. On the plausibility standard, see FED. R. CIV. P. 12(b)(6); Ashcroft v. Iqbal, 556 U.S. 662,
678–89 (2009) (“Only a complaint that states a plausible claim for relief survives a motion to
dismiss.”); Bell Atl. Corp. v. Twombly, 550 U.S. 544 (2007) (setting a plausibility test for the filings
of civil actions). See also Raymond H. Brescia & Edward J. Ohanianm, The Politics of Procedure:
An Empirical Analysis of Motion Practice in Civil Rights Litigation Under the New Plausibility
Standard, 47 AKRON L. REV. 329, 334–51 (2014) (reviewing the evolution of the standard and its
critique). On Rule 11, see FED. R. CIV. P. 11.
116. See Becker, supra note 15 (developing the foundations for the theory of optimal fines in
law enforcement). There is rich literature that examines the constraints on the use of fines to
supplement imperfect enforcement. The key reasons developed there—risk aversion and wealth
constraints—apply only weakly in the context of consumer credit litigation. See generally A.
Mitchell Polinsky & Steven Shavell, The Theory of Public Enforcement of Law, in 1 HANDBOOK OF
LAW AND ECONOMICS 403, 405 (A. Mitchell Polinsky & Steven Shavell eds., 2007).
Electronic copy available at: https://ssrn.com/abstract=3015569

<<PAGE_BREAK>>

Arbel_Galley(Do Not Delete) 1/2/2018 4:17 PM
2018] ADMINIZATION 147
greatest marginal productivity. This would often imply that different
cases should receive varying amounts of attention.117 However, civil
litigation handles attention allocation relatively poorly. Judges are not
free to dismiss cases simply because they want to devote more time to
hear other cases which are more deserving of judicial attention.118 A
judge is expected to give some attention to all the cases that come before
her, and lack of public interest is not a general reason for refusing to
hear cases. In contrast, agencies frequently allocate and prioritize
attention and resources based on priorities, with a clear example being
the IRS, which chooses only about one percent of all cases for in-depth
review.
Sampling is the process by which agencies choose the cases they
would like to prioritize and examine. There are a few approaches to
sampling, and the most straightforward and well-known one is random
sampling. This is the approach used, partially, by the IRS and the
TSA.119 A random sampling implies that each case has an equal chance
of being chosen for audit, thus imposing an equal risk of examination
on all participants. This approach has many upsides, with simplicity
being a main one. This approach also has a very clear drawback, in that
meritorious cases have an equal chance of being chosen for audit, thus
wasting resources. Another approach is to choose cases based on criteria
that are suggestive of risk. For example, the police may monitor known
sex offenders more closely than other citizens, and an insurance
company may only investigate claims of high value. This has the
drawback that if the criteria used to sample cases are known in
advance, then the system may be gamed.120 Moreover, prescreening the
cases that would be sampled can itself be resource-intensive, thus
reducing the benefit of using samples.
117. There are many advantages to the focusing of attention and there are even potential
economic gains from focusing enforcement efforts on arbitrary subgroups, like auditing more
closely the tax returns of people whose last name begins with A than those whose last name begins
with B. See Henrik Lando & Steven Shavell, The Advantage of Focusing Law Enforcement Effort,
24 INT’L REV. L. & ECON. 209, 209–10 (2004).
118. Adam M. Samaha, Randomization in Adjudication, 51 WM. & MARY L. REV. 1, 70–81
(2009) (exploring the role of randomization in adjudication and defending the use of case
randomization). The literature considers, to some extent, the role of managerial judges in
managing resources. See, e.g., Judith Resnik, Managerial Judges, 96 HARV. L. REV. 374, 380
(1982).
119. The samples are not purely random, and profiling (racial and other) is common. See Robin
Shepard Engel & Jennifer M. Calnon, Examining the Influence of Drivers’ Characteristics During
Traffic Stops with Police: Results from a National Survey, 21 JUST. Q. 49, 69–77 (2006) (finding
strong evidence of racial profiling in traffic police stops).
120. See Lando & Shavell, supra note 117, at 215 (arguing that a known enforcement focus
may increase crime if offenders can freely move to offend in unenforced areas).
Electronic copy available at: https://ssrn.com/abstract=3015569

<<PAGE_BREAK>>

Arbel_Galley(Do Not Delete) 1/2/2018 4:17 PM
148 VANDERBILT LAW REVIEW [Vol. 71:1:121
A promising sampling approach that can be used fruitfully in
Adminization is smart sampling—the use of Big Data and artificial
intelligence (“AI”) to profile risky cases using complex models. To be
clear at the outset, although I believe smart sampling to be highly
feasible and relatively inexpensive to develop, nothing in Adminization
depends directly on such sophisticated methods, and the system could
work on the basis of random sampling until smart sampling algorithms
prove workable. With this caveat in mind, smart sampling consists of
using machine learning algorithms to identify cases that are
statistically most likely to involve fraud based on the past resolution of
similar cases. Poring over the vast history of past cases, AI software can
identify those characteristics of a case that are most likely to correlate
with its eventual dismissal. Each of these characteristics is assigned a
risk weight. Based on a complex risk model, the software can decide the
probability with which a given case will be sampled. Smart sampling
can be done with great speed, at almost zero marginal cost, and
potentially with great accuracy. Unlike traditional criteria-based
sampling, smart sampling is not open to gaming by market
participants. The complexity of AI algorithms—which, ironically, is a
frequent criticism levied against them—presents a black box to those
who would seek to game the system.121 It is not surprising that the
private market is replete with AI-assisted fraud detection
algorithms.122 In the same spirit, agencies are starting to realize the
potential for machine learning for complaint handling. Today, the SEC
is developing an automated system that flags cases for review. The
system is based on an automated anomaly detection model that would
flag submissions for human review on the basis of statistical deviations
from the common filings.123
It may seem ambitious to develop a fraud-detecting software,
given the great diversity of cases and the complexity involved. And
while there is nothing simple about this task, it should be evaluated in
light of AI’s proven capabilities, especially bearing in mind the recent
121. See VIKTOR MAYER-SCHÖNBERGER & KENNETH CUKIER, BIG DATA: A REVOLUTION THAT
WILL TRANSFORM HOW WE LIVE, WORK, AND THINK 178 (2014) (“The basis of an algorithm’s
predictions may often be far too intricate for most people to understand.”); see also David Sussillo
& Omri Barak, Opening the Black Box: Low-Dimensional Dynamics in High-Dimensional
Recurrent Neural Networks, 25 NEURAL COMPUTATION 626, 627–29 (2013) (noting how a recurrent
neural network is viewed as a black box in terms of its implementation of its target functions).
122. See, e.g., Clifton Phua et al., A Comprehensive Survey of Data Mining-based Fraud
Detection Research, https://arxiv.org/pdf/1009.6119.pdf (last visited Dec. 19, 2017)
[https://perma.cc/E28Z-BWK2].
123. The model is called the “Automatic Quality Model” and is based, at least in part, on a
Jones Model: measuring the difference between a company’s discretionary accruals and those of
peer companies in the industry. See Douglas M. Boyle et al., Insights into the SEC’s Accounting
Quality Model, CPA J., May 2015, at 16, 18.
Electronic copy available at: https://ssrn.com/abstract=3015569

<<PAGE_BREAK>>

Arbel_Galley(Do Not Delete) 1/2/2018 4:17 PM
2018] ADMINIZATION 149
victory of AI over grandmaster Lee Sedol at the game of Go—a game so
rich in possibilities that it was considered to be impossibly stacked
against machines and in favor of human intuition.124 The closest
example of a working AI technology in fraud detection comes from the
credit card industry.125 Despite a daily volume of millions of
transactions,126 credit card companies effectively flag fraudulent
transactions, alerting human investigators of potential fraud.127 These
algorithms run in real time and evaluate each transaction against a
model of the specific consumer, placing alerts in the case of any
significant deviation from model-predicted behavior. Sifting through
the large dataset of past purchases, the consumer model is able to detect
when purchases are made in unexpected locations, times, or amounts.
Importantly, these algorithms, which run on an almost
incomprehensible volume of data with little to no human intervention,
manage to detect suspicious transactions with a relatively low level of
either false negatives or false positives. Another telling example is that
of spam filters. Until very recently, it seemed nearly impossible for a
computer to overcome the problem of spam identification, as the range
of richness of human communication is so vast. In 2002, for example,
Slate ran an article that pessimistically stated, “It’s time to give up . . .
spam has won. Spam is killing e-mail.”128 Pew predicted in 2002—based
on a large consensus—a rate of spam growth that would imply today
hundreds if not thousands of spam messages every day.129 Yet email
124. See Adrian Cho, “Huge leap forward”: Computer That Mimics Human Brain Beats
Professional at Game of Go, SCI. (Jan. 27, 2016, 1:00 PM), http://www.sciencemag.org/news/
2016/01/huge-leap-forward-computer-mimics-human-brain-beats-professional-game-go
[https://perma.cc/N3M6-K2EU] (“[F]or many years people have tried to sell the notion of Go as a
game in which computers can never beat humans.”); Cade Metz, Google’s AI Takes Historic Match
Against Go Champ with Third Straight Win, WIRED (Mar. 12, 2016, 3:21 AM),
https://www.wired.com/2016/03/third-straight-win-googles-ai-claims-victory-historic-match-go-
champ/ [https://perma.cc/9EQQ-KXKU].
125. See generally Richard J. Bolton & David J. Hand, Statistical Fraud Detection: A Review,
17 STAT. SCI. 235 (2002).
126. See VISA, ANNUAL REPORT 2013 (2013), https://s1.q4cdn.com/050606653/files/
doc_downloads/annual%20meeting/Visa%20Annual%20Report%202013%20final%20website.pdf
[https://perma.cc/SC7Q-3BXY] (reporting a daily volume of 160 million transactions).
127. Some of the methods include genetic algorithms, Bayesian classifiers, a hidden Markov
model, and, more recently, neural networks. See generally Krishna Kumar Tripathi & Mahesh A.
Pavaskar, Survey on Credit Card Fraud Detection Methods, 2 INT’L J. EMERGING TECH. &
ADVANCED ENGINEERING 721 (2012).
128. Kevin Werbach, Death by Spam, SLATE (Nov. 18, 2002, 10:35 AM),
http://www.slate.com/articles/technology/webhead/2002/11/death_by_spam.html
[https://perma.cc/D38A-54LZ].
129. Deborah Fallows, Email at Work: Few Feel Overwhelmed and Most Are Pleased with the
Way Email Helps Them Do Their Jobs, PEW RES. CTR. 5 (Dec. 8, 2002),
http://www.pewinternet.org/2002/12/08/email-at-work/ [https://perma.cc/K62R-HTGP] (citing
sources predicting a doubling of spam load every six months and a rate of growth from 2001 to
2006 of approximately six hundred percent).
Electronic copy available at: https://ssrn.com/abstract=3015569

<<PAGE_BREAK>>

Arbel_Galley(Do Not Delete) 1/2/2018 4:17 PM
150 VANDERBILT LAW REVIEW [Vol. 71:1:121
survived. Google reports that its email service, Gmail, filters ninety-
nine percent of all spam while only having a one percent rate of false
positives.130 Stated differently, Google reports that less than 0.1 percent
of email in the average inbox is spam while less than 0.05 percent of
wanted messages are in the spam folder.131
Another example illustrates the power of statistical fraud-
detection algorithms. Benford’s law is a decision rule that meets a
seemingly impossible challenge: How can one detect fraud in accounting
books without actually analyzing them? The astronomer Simon
Newcomb postulated in 1881—and later the physicist Frank Benford
proved—that one could identify potential fraud by simply looking at the
numbers reported in these ledgers, and more specifically, at the digits
themselves.132 If we count the frequency with which each digit appears
in financial accounts, a pattern emerges with surprising regularity. In
thirty percent of cases, the first digit of any number is one, but there is
only a 4.5 percent chance of it being a nine. For a variety of reasons,
naturally occurring numbers have greater likelihood of starting with
certain digits than others. Knowing this rule, we can count all the digits
that appear in a given account book. If much more than 4.5 percent of
the numbers start with nine, or much less than thirty percent of the
numbers start with one, then we have good reason to suspect that the
book was tampered with.133 Cooking the books will often leave a
footprint in the form of unnatural distribution of digits, and simply
counting the frequency of digits—without any real understanding of the
business—will indicate cases with suspected wrongdoing. Rules like
Benford’s law were developed by humans. Software would probably use
much more nuanced and sophisticated rules, taking account of every
facet of the case—from the identity of the parties through the amounts
indicated, and perhaps even seemingly irrelevant features like the font
used or the time of filing. However, the core ideas remain the same.
130. Cade Metz, Google Says Its AI Catches 99.9 Percent of Gmail Spam, WIRED (July 9, 2015,
2:00 PM), http://www.wired.com/2015/07/google-says-ai-catches-99-9-percent-gmail-spam/
[https://perma.cc/QD4U-3DU5].
131. Emil Protalinski, Google Now Uses an Artificial Neural Network to Fight Spam, Debuts
Gmail Postmaster Tools to Cut False Positives, VENTUREBEAT (July 9, 2015, 11:35 AM),
https://venturebeat.com/2015/07/09/google-launches-gmail-postmaster-tools-to-help-companies-
ensure-their-emails-arent-marked-as-spam/ [https://perma.cc/LUJ3-7UYE].
132. See Simon Newcomb, Note on the Frequency and Use of the Different Digits in Natural
Numbers, 4 AM. J. MATHEMATICS 39 (1881); Frank Benford, The Law of Anomalous Numbers, 78
PROC. AM. PHILOS. SOC’Y 551 (1938).
133. Cindy Durtschi et al., The Effective Use of Benford’s Law to Assist in Detecting Fraud in
Accounting Data, 5 J. FORENSIC ACCT. 17, 18–19 (2004).
Electronic copy available at: https://ssrn.com/abstract=3015569

<<PAGE_BREAK>>

Arbel_Galley(Do Not Delete) 1/2/2018 4:17 PM
2018] ADMINIZATION 151
To develop such sophisticated rules, we would need a large body
of training data.134 Ideally, the data will be “labeled,” i.e., each case will
be identified as either being with merit or without merit. Without such
data, machine learning cannot produce accurate predictions. Luckily,
this type of “big data” is readily available.135 As Andrew Crespo recently
noted, a by-product of the judicial process is a large body of unutilized
“systemic facts,” which are records of cases, claims, and resolutions.136
These present an almost perfect type of training data—the software can
scan the filings and all relevant facts of the case and then see how it
was decided. Of course, some of the data will have to be filtered, as many
cases are decided not on the merits. Yet, there is such a wealth of data
on all the millions of claims that are filed every year that even after
filtering, there will be a very large body of data. Moreover,
Adminization constantly produces new data. As part of the process,
cases are chosen for audit and are then subject to review—an
information producing process. Importantly, not only flagged cases will
be chosen, but also a few nonflagged cases. The results of the audit will
then be fed into the machine learning algorithm. If a flagged case is
proved to involve fraud, this will reinforce the rules used by the
software. If there was no fraud in a flagged case, this will prompt the
software to modify its decision rules—and the converse applies to
nonflagged cases. Over time, the system will self-modify based on the
results of the audit process, thus promising continuous improvement
and adaptation to changing circumstances.
3. Third-Party Communications
As previously discussed, the expectation that plaintiffs, who
stand to gain from consumer underparticipation, will effectively serve
134. A general view among computer scientists is that having a large dataset is at least as
important as good machine learning models to the development of effective algorithms. Google’s
Research Director, Peter Norvig, famously stated on Google’s success in this area: “We don’t have
better algorithms. We just have more data.” See Xavier Amatriain, Mining Large Streams of User
Data for Personalized Recommendations, ACM SIGKDD EXPLORATIONS, Dec. 2012, at 37, 43
(quoting Norvig in discussion on power of data); see also Pedro Domingos, A Few Useful Things to
Know About Machine Learning, 55 COMM. ACM, Oct. 2012, at 78 (explaining that simple
algorithms with large amounts of data are superior to sophisticated algorithms with modest
amounts of data).
135. On big data and the law, see Daniel Martin Katz, Quantitative Legal Prediction—Or—
How I Learned to Stop Worrying and Start Preparing for the Data-Driven Future of the Legal
Services Industry, 62 EMORY L.J. 909, 913–22 (2013).
136. Andrew Manuel Crespo, Systemic Facts: Toward Institutional Awareness in Criminal
Courts, 129 HARV. L. REV. 2049, 2065–66 (2016). Crespo’s argument is couched in the context of
the criminal law system; however, the spirit of his argument applies to civil litigation.
Electronic copy available at: https://ssrn.com/abstract=3015569

<<PAGE_BREAK>>

Arbel_Galley(Do Not Delete) 1/2/2018 4:17 PM
152 VANDERBILT LAW REVIEW [Vol. 71:1:121
consumers with court documents is highly unrealistic and will result in
many instances of sewer service.137
Under Adminization, the agency serves process, as well as all
other communications, thereby informing defendants of their rights.
This simple design feature will directly solve this structural problem,
which is wholly an artifact of a design that is incompatible with private
incentives. Indeed, pilot programs with third-party service by the court
were successful, which suggests even greater potential effectiveness if
done at scale by an agency.138 And while it may be possible to adapt
courts to provide services, agencies are naturally better designed to
provide such “outgoing” services, which involve reaching out to
individuals, locating them, and handling the necessary administrative
aspects. It will also allow courts to develop a more independent
approach to evaluating the quality of service if they are not implicated
in the process. In terms of finance, the service may still be funded as it
is today—by the plaintiff through fees. Moreover, taking advantage of
its disinterested role, the agency can also provide defendants with
educational materials to inform them of their rights, a function agencies
rarely perform today.139 With its communications, the agency could
provide informative, plain-language explanations of defendants’ rights
and duties, using simple illustrations, flowcharts, frequently asked
questions, and visual guides. In contrast, entrusting plaintiffs with this
task would again engender a moral hazard problem.
C. Adminization of Consumer Credit Litigation
The application of Adminization to consumer credit litigation
starts with the agency. The administrative overlay in the context of
consumer credit can be the CFPB, with its broad regulatory powers
under the Dodd-Frank Act.140 Indeed, it is possible to implement
Adminization using state or even local agencies; nothing here depends
critically on the use of federal agencies. Yet the advantages of scale, as
well as the broad existing powers of the CFPB, are very appealing, and
137. See supra Section I.A.
138. N.Y. COMP. CODES R. & REGS. tit. 22, § 208.6(h) (2017); OUT OF SERVICE, supra note 68,
at 11–12 (showing that sending court summons in addition to plaintiff summons resulted in an
increase in consumer participation, and that consumers often reported receiving only the court’s
summons).
139. See Thomas v. Law Firm of Simpson & Cybak, 354 F.3d 696, 699 (7th Cir. 2004) (“Nothing
in the FDCPA suggests that Congress intended creditors’ unilateral actions to obligate debt
collectors to inform debtors of their rights . . . .”), vacated, 358 F.3d 446 (7th Cir. 2004), and opinion
substituted, 392 F.3d 914 (7th Cir. 2004). Consumer education is at least partially a problem with
lack of incentive to learn. Since Adminization makes it easier to contest claims, learning
information becomes more attractive.
140. See infra Section IV.A.
Electronic copy available at: https://ssrn.com/abstract=3015569

<<PAGE_BREAK>>

Arbel_Galley(Do Not Delete) 1/2/2018 4:17 PM
2018] ADMINIZATION 153
so I will focus on this agency. The CFPB’s powers include the power to
investigate claims related to debt collection, the power to summon
witnesses, and the ability to issue fines.141 The existence of the CFPB’s
platform, its broad legislative powers, and its subject-matter expertise,
promise a smooth implementation at a relatively low marginal cost.
The process starts by filing a claim with the agency. A claim
could be initiated by the original creditor, or if the state permits, a debt
buyer. The claimant would be required to furnish rudimentary
information regarding the claim: the identity of the debtor and her last
known address, an estimate of the breakdown of the debt to its principal
and other fees, the origin of the claim, and the name of the original
creditor. The standard by which the quality of information is judged is
whether it provides a sufficient basis for a reasonable but
unsophisticated consumer to decide if the debt is real and accurate.142
The claimant would acknowledge, on pain of financial sanctions, that it
holds supporting evidence, although the current rules requiring an
affidavit may be relaxed.143
The agency will check the claim via an automatic machine
learning system that would screen and flag cases. The algorithms will
check, for example, whether the debt is time barred, whether the
interest rate exceeds statutorily allowed levels, and whether another
identical claim against the same debtor was filed by a different creditor.
If violations of bright line rules are identified, the claim will be
automatically rejected without prejudice and a notice will be sent to the
creditor, explaining the flaw. This will be beneficial to consumers in
that it will filter out empty claims that are currently filed against them;
specifically, this will solve the problem of “zombie debts,” which are
141. See infra Section IV.A.
142. A similar requirement exists under German law. See Sigmund A. Cohn, A Streamlined
Debt Collection Procedure in the Federal Republic of Germany, 2 B.C. INT’L & COMP. L. REV. 69,
71–79 (1978); European Consumer Ctr. Ger., The German Judicial System, EUR. CONSUMER CTR.
NETWORK 12–15 (Dec. 2010), https://www.evz.de/fileadmin/user_upload/eu-
verbraucher/PDF_Englisch/Brochures/Legal_sytem_Germany.pdf [https://perma.cc/PK3R-XFQ6];
Grozdana Šijanski & Jimmy Barber, The German Order for Payment Procedure (Mahnverfahren),
GERMAN L. ARCHIVE (2006), http://germanlawarchive.iuscomp.org/?p=343 [https://perma.cc/U7SA-
J5A9].
143. The insistence on signed affidavits in the legal system resulted in a large industry of robo-
signing. See generally Holland, supra note 60. Courts treat robo-signing with disdain. See, e.g.,
Intervale Ave Assoc v. Donlad, No. L & T 60527/12, 2013 WL 540153, at *4 (N.Y. Civ. Ct. Feb. 7,
2013) (“The courts have consistently demonstrated an intolerance for ‘robo-signing.’ ”). But the
problem of robo-signing is artificial because what should matter is the existence of evidence, not
the form of signature, and requiring personal knowledge for hundreds of thousands of debt claims
is grossly inefficient. If creditors can reliably present claims (at the pain of large financial
sanctions), this could achieve the same goals but at a lower cost.
Electronic copy available at: https://ssrn.com/abstract=3015569

<<PAGE_BREAK>>

Arbel_Galley(Do Not Delete) 1/2/2018 4:17 PM
154 VANDERBILT LAW REVIEW [Vol. 71:1:121
time barred actions that attempt to exploit consumer ignorance and
judicial passiveness.144
Besides the automatic screening of cases, the system will also
employ “smart sampling” to identify the cases which are most likely to
involve fraud. The exact algorithms will depend on implementation,
but, as a general matter, the learning system will synthesize statistical
information regarding the identity of the original creditor, the identity
and demographics of the debtor, the sums involved, the type of debt
involved, time of filings, and other case characteristics. If certain
creditors are known to engage in wrongdoing, this will increase the
likelihood that the case will be chosen for audit. If certain demographics
are targeted more frequently for abusive lawsuits—e.g., the elderly,
minorities, or the uneducated—then their cases will be flagged for audit
more frequently than other cases.
Flagged cases will be transferred to the agency’s auditors, who
will use their investigative powers to demand proof of the evidence
claimed by the creditor. The investigators will check if the evidence is
consistent, whether the case presents a cause, and, most importantly,
if there are any indications of fraud or abuse. In some cases, there will
be a need to acquire information from consumers. In these cases, the
investigators will approach consumers and ask for information. The
consumer will not be under any obligation to cooperate, but it should be
explained that an investigation can only advance the consumer’s case.
A friendly conversation could greatly advance the consumer’s interests,
as the auditor could lead with simple questions that would avoid the
need to present a legal case—“Do you have a receipt?”; “Do you have a
document showing that you were elsewhere on the date the alleged
purchase was made?”; “Did you file a complaint against identity theft?”;
etc.
If the audit reveals wrongdoing, the plaintiff will be issued a
fine. The findings of the investigation will be evaluated by the
professional staff at the agency, and where they find indications of
fraud, abuse, or other illegal practices, they can use their legal powers
to levy fines.145 The magnitude of the fine should reflect both the
severity of the offense and the likelihood of evasion. In general, large
fines would be required to deter companies from bringing abusive
lawsuits, since only a sample of cases are audited. As an administrative
action, such fines will be subject to appeal. This fine will be paid to
144. See Young Walgenkim, Killing “Zombie Debt” Through Clarity and Consistency in the
Fair Debt Collection Practices Act, 24 LOY. CONSUMER L. REV. 65, 65 (2011) (discussing the problem
of debt collectors attempting to “revive stale, paid-off, otherwise uncollectable debt”).
145. 12 U.S.C. § 5565 (2012).
Electronic copy available at: https://ssrn.com/abstract=3015569

<<PAGE_BREAK>>

Arbel_Galley(Do Not Delete) 1/2/2018 4:17 PM
2018] ADMINIZATION 155
either the agency or the government by the creditor, and these funds
may be used to finance the agency, although it will be prudent to avoid
potential conflicts of interest by not creating a direct link between fines
and agency funds.
The use of audits and fines will provide consumers with a basic
level of consumer protection. It will do so not by increasing participation
but rather by eroding the harsh consequences of underparticipation. By
using audits and fines, there will be an effective sanction against the
filing of fraudulent or unsupported claims, thus making participation
less critical and saving considerable resources. The use of audits and
fines also conforms to the prevalent but misguided expectation among
consumers today that by filing an answer the court will handle the issue
sua sponte.146
All the cases will then proceed to a “Communication” stage.
Unlike the current system, it is not the plaintiff but the agency that
would be responsible for contacting the consumer. The agency will use
its own databases, as well as information provided by the creditor, to
locate the consumer and communicate with them by email, mail, or
phone. This will address the root cause of the “sewer service”
problem.147 Here and throughout, the quality of communications should
be emphasized. Freed from the chains of legal language and procedure,
the communications should be made simple, friendly, easy to follow, and
graphic.148
All consumers will be sent a simple form. It will clearly inform
them of the fact of a claim made against them and its potential
implications. It should ask the consumer if she recalls making the
purchase from the original creditor and whether the principal and
charges seem correct.149 On this basis, the form will provide three
options: admitting the claim, contesting it, or ignoring it.150 Admitting
146. Due Process and Consumer Debt, supra note 42, at 18 (“Many defendants believe that
once they answer, the court will review their allegations and defenses sua sponte.”).
147. See supra Section I.A.
148. See D. James Greiner & Andrea J. Matthews, The Problem of Default, Part I (June 24,
2015) (unpublished), http://papers.ssrn.com/sol3/papers.cfm?abstract_id=2622140
[https://perma.cc/8BW2-VAET] (studying interventions that improve consumer participation).
149. This addresses a common problem today of the so-called “alphabet soup” of creditors,
where debtors receive debt claims from organizations with a name like ABC, which bears little
resemblance to the consumer’s experience of the origination of the debt (e.g., Best Buy). See
Roundtable on Data Integrity in Debt Collection: Life of a Debt, FED. TRADE COMMISSION &
CONSUMER FIN. PROTECTION BUREAU (2013), https://www.ftc.gov/system/files/documents/
public_events/71120/life-debt-roundtable-transcript.pdf [https://perma.cc/9XM5-L6AY]. For a
similar (although more onerous) recommendation, see FTC PROTECTING CONSUMERS REPORT,
supra note 14, at 16–17.
150. How to most clearly encourage consumer response is a question best left to
communications experts, who are frequently and regrettably missing from the design of most
governmental communications.
Electronic copy available at: https://ssrn.com/abstract=3015569

<<PAGE_BREAK>>

Arbel_Galley(Do Not Delete) 1/2/2018 4:17 PM
156 VANDERBILT LAW REVIEW [Vol. 71:1:121
will invite the consumer to make payments and, perhaps, financial
incentives (such as interest reduction) may be offered to fast-paying
consumers. If the consumer pays off the debt, the agency will provide a
confirmation letter that immunizes the consumer from any future
action based on this debt. The agency will then process the payment
and transfer it to the creditor. Alternatively, the consumer could offer a
settlement by proposing an affordable installment plan, which the
creditor may accept or reject.151 Many creditors should be willing to
accept reasonable payment plans, which offer greater recovery than
enforcement.
If the consumer contests the claim, the form will contain a few
sample checkboxes, which can be used later in litigation instead of a
more formal consumer response. Five checkboxes should be provided: “I
do not recognize the person to whom the debt is owed,” “I already paid
off this debt,” “the amount is wrong,” “another person owes this debt,”
and “other.” An open comment field should be available where the
putative debtor could write why the debt is wrong. Listing supporting
evidence should also be made easy but not mandatory. Contested cases
will be transferred to litigation, and only for those cases will the creditor
be required to provide a full body of evidence. The chief benefit of only
asking for evidence in contested cases is that it saves creditors the
immense costs of providing full evidence in all cases. This feature will
greatly increase the political appeal of this system to creditors.
Ignoring the claim will trigger a reassessment of the consumer’s
address: the agency should invest reasonable effort into searching for
the debtor using both its own resources and information procured from
the creditor. If the agency concludes that reasonable effort has been
taken, the communication should be deemed ignored and moved to
litigation, alongside all other contested cases.
Contested and ignored cases will be litigated, and the outcomes
of the process will be “fed” to the machine learning algorithms for future
improvements. These outcomes include the agency’s findings,
consumer’s response, and the court’s ruling. On this basis, the agency
will also be able to manage an internal score of creditor reputation, with
every finding of fraud lowering the creditor’s score. Low score creditors
will be chosen for audit more often—as the algorithm will take account
of their identity—whereas high score creditors will be subject to fewer
investigations.152 Creditor reputation could also be made public, thus
151. The consumer’s choice to admit the debt has important legal ramifications, and these
ramifications should be clearly explained.
152. For obvious reasons, the odds of being selected for audit, even for a creditor with the
highest level of reputation, must never be zero.
Electronic copy available at: https://ssrn.com/abstract=3015569

<<PAGE_BREAK>>

Arbel_Galley(Do Not Delete) 1/2/2018 4:17 PM
2018] ADMINIZATION 157
informing future consumers before they engage with a specific provider
of credit. This reputation system will provide greater compliance
incentives, especially since most debt collection lawsuits are brought by
a limited number of creditors.153
Adminization does not supplant litigation; rather, it
complements it. The continued use of litigation may raise some concern,
given its imperfections discussed above, yet the process will carry
significant advantages over the current system. First, and perhaps
most importantly, Adminization will significantly curtail the filing of
unmeritorious claims. Once plaintiffs internalize the risk associated
with filing frivolous claims—due to the real potential for fines—they
will be less inclined to file them. Second, and as a result, Adminization
provides important cost savings for the judicial system. The reduced
volume of filing (due to lesser incentive to file unmeritorious claims),
will lead to fewer cases on the docket. This will save considerable
resources for the courts, freeing them up to scrutinize other debt cases
more closely, thus further deterring the filing of unmeritorious
lawsuits. Third, Adminization is also highly beneficial for creditors. By
increasing the reliability and legitimacy of consumer credit contracts,
and by simplifying the process of producing judgments for uncontested
cases, there will be significant savings in the cost of providing credit—
savings that would be expected to be partially passed on to consumers.
From the consumer side, this will make the use of credit a safer option,
thus increasing the utilization of safe credit. This has important
implications, especially for people in poverty, for whom access to credit
is a persistent obstacle.154 No doubt, Adminization also involves certain
costs, but as I endeavor to show below, the costs are unlikely to be
prohibitively high and will mostly be offset by a reduction in the volume
of litigation. Perhaps more importantly, these costs pale in comparison
to any of the other alternatives currently considered, a topic to which I
now turn.155
III. THE FAILURE OF PARTICIPATION-BASED SOLUTIONS
In evaluating the desirability and effectiveness of Adminization,
it is important to be cognizant of the alternatives. The various
153. See DEBT WEIGHT, supra note 42, at 14 (finding that over fifty-eight percent of the cases
in the sample were brought by three debt buyers).
154. See, e.g., Dean Karlan & Jonathan Morduch, Access to Finance, in 5 HANDBOOK OF
DEVELOPMENT ECONOMICS 4702, 4703 (Dani Rodrik & Mark Rosenzweig eds., 2009) (“Expanding
access to financial services holds the promise to help reduce poverty and spur economic
development.”).
155. See infra Section IV.D.
Electronic copy available at: https://ssrn.com/abstract=3015569

<<PAGE_BREAK>>

Arbel_Galley(Do Not Delete) 1/2/2018 4:17 PM
158 VANDERBILT LAW REVIEW [Vol. 71:1:121
alternative solutions currently considered can be effectively grouped
under the general heading of participation-based solutions. The
common core idea, explored below, is that incentivizing and subsidizing
consumer participation would allow judges to have the information they
need to scrutinize cases.156 A thorough analysis of these proposed
solutions reveals, as I will show in this Part, that participation-based
solutions involve immense costs but marginal benefits, and that the
costs of Adminization pale in comparison to the costs and risks of
participation-based approaches.157 With this in mind, Adminization and
participation are not mutually exclusive, and a well-functioning system
should employ some degree of both approaches. My main contention is
not that participation solutions are without merit in some absolute
sense, but rather that—on the margin—there is much greater need for,
and a much higher return on, investments in administrative review as
a screening mechanism than greater and greater investments in more
traditional court-based solutions.
A. Lawyering Up
The most prominent call to solve the problem of abuse in civil
litigation has been to expand legal access through public subsidies of
legal services. Under this view, if consumers received subsidized access
to legal representation, they would more often stand up against wrongs,
assert their rights in court, and contest fraudulent claims.158 On this
view, the resulting rise in consumer participation will provide judges
with the information they need to screen out bad cases and prevent
156. On the dominant role of participation-based approaches in state legislatures, see, for
example, N.Y. ACCESS TO JUSTICE REPORT, supra note 81, at 3 (requesting $30 million in public
funding for legal assistance to “close the justice gap”); STATE BAR OF CAL., CIVIL JUSTICE
STRATEGIES TASK FORCE, REPORT & RECOMMENDATIONS 19 (2015),
http://board.calbar.ca.gov/docs/agendaItem/Public/agendaitem1000013003.pdf [https://perma.cc/
9W3Q-XF66] (recommending “that the State Bar support efforts to secure universal
representation”); Mission & Goals, TEX. ACCESS TO JUST. COMMISSION,
http://www.texasatj.org/mission-goals (last visited Oct. 23, 2017) [https://perma.cc/QQ34-WPFV]
(reporting their central goal of “reduc[ing] barriers to our judicial system”).
157. Proposals that primarily affect the debt collection industry, such as licensing
requirements, are excluded. Perhaps this type of ex ante regulation of debt collection is helpful,
but the New York experience—where licensing is employed—casts doubt. See N.Y.C., N.Y.,
ADMINISTRATIVE CODE § 20-490 (2017).
158. There are many reasons why consumers underparticipate in legal proceedings, leading to
potentially significant divergence between the social interest in the existence of lawsuits for
wrongful behavior and private incentives not to sue. See, e.g., Yonathan A. Arbel & Yotam Kaplan,
Tort Reform Through the Back Door: A Critique of Law and Apologies, 90 S. CAL. L. REV. 1199
(2017) (showing evidence that the simple tender of apology can cause consumers to avoid filing
lawsuits for meritorious claims of malpractice).
Electronic copy available at: https://ssrn.com/abstract=3015569

<<PAGE_BREAK>>

Arbel_Galley(Do Not Delete) 1/2/2018 4:17 PM
2018] ADMINIZATION 159
plaintiffs from taking advantage of consumers.159 This type of proposal,
often called a “civil Gideon” right, mirrors the right of indigent
defendants in criminal proceedings to an attorney.160 While this is
proposed as a primary solution to the problem, it is unworkable,
prohibitively costly, and of marginal effectiveness.
First, the sheer number of people who would be eligible for this
subsidy is staggering. The former president of the American Bar
Association (“ABA”) claimed that “one in five Americans now qualifies
for legal assistance,”161 and even that, he thought, was an
understatement: “[I]t’s not just the poor [who need assistance] . . . Too
many low- and moderate-income people cannot access legal
representation.”162 Yet, even his more conservative estimate implies
that sixty-four million people nationwide will be eligible for this
subsidy. And while not all of these people have legal issues, a significant
majority do, and those that do often have more than one. A recent study
found that about half of all low-income New Yorkers have experienced
legal issues in the course of a year, with about a third of them facing
three or more legal issues.163 Based on these estimates, which are
admittedly rough, we would expect there to be about thirty-two million
people who are both eligible for a subsidy and have a legal issue, ten
million of whom would have three or more such issues.
The cost of providing subsidies on such a scale is immense. The
ABA, which may have a reason to downplay the costs of legal aid,164
estimates the costs of expanding legal access at about $1.7 billion every
year.165 This is unlikely, as this amount is not much larger than the
159. See, e.g., DEBT WEIGHT, supra note 42, at 21 (calling on the state of New York to “[f]und
legal services for low-income and working poor individuals sued on alleged debts” and “[f]und the
provision of assistance, information and resources for pro se defendants”); Fox, supra note 46, at
75 (“Consumers need to be provided the legal assistance necessary to defend themselves in civil
debt litigation.”).
160. Gideon v. Wainwright, 372 U.S. 335, 339 (1963).
161. PERMANENT COMM’N ON ACCESS TO JUSTICE, REPORT TO THE CHIEF JUDGE OF THE STATE
OF NEW YORK—APPENDICES app. 7 at 41 (2015), https://www.nycourts.gov/
accesstojusticecommission/PDF/2015_Access_to_Justice-Appendices.pdf [https://perma.cc/T2GG-
ER4D].
162. Id.
163. N.Y. ACCESS TO JUSTICE REPORT, supra note 81, at 9.
164. Lawyers’ incentives exert considerable pressure on the choice of legal procedure. See, e.g.,
Yonathan A. Arbel, Contract Remedies in Action: Specific Performance, 118 W. VA. L. REV. 370,
388–89 (2015) (finding that lawyers tend to steer clients to opt for remedies that would facilitate
the collection of attorney’s fees).
165. The ABA finds an even lower amount—$1.7 billion, but this is based on the very strong
assumption that $100 worth of legal services will suffice for the common consumer. This rate is
the equivalent of less than an hour of work per case, which seems highly ambitious. The ABA also
notes that the United Kingdom spends $1.36 billion on legal services for the poor, which would
imply a U.S. cost of $8.16 billion (population weighted). TASK FORCE ON ACCESS TO CIVIL JUSTICE
ET AL., AM. BAR ASS’N, REPORT TO THE HOUSE OF DELEGATES 14 (2006),
Electronic copy available at: https://ssrn.com/abstract=3015569

<<PAGE_BREAK>>

Arbel_Galley(Do Not Delete) 1/2/2018 4:17 PM
160 VANDERBILT LAW REVIEW [Vol. 71:1:121
current cost of legal aid, estimated at $1.3 billion annually.166 More
realistically, Jessica Steinberg estimates that the costs would be three
times the ABA’s estimate: around $5.4 billion every year.167 My analysis
suggests that if we discard projections and instead look at the actual
costs of running the institutions that are currently assisting those in
need, we will find costs that are higher by at least an order of
magnitude. In New York, the Interest on Lawyer Account (“IOLA”) fund
reports that in 2013, a large group of supported organizations closed
296,621 cases with an overall budget totaling $266.6 million.168 This
implies a per-case cost of $897, which is the equivalent of 7.7 hours of
paralegal work per case at the national average rate of $116, or 2.5
attorney hours at the average rate of $361.169 Now, if indeed around
thirty-two million Americans would be eligible for assistance,170 then
the annual cost would amount to $28.7 billion—about seventeen times
more than the already expensive $1.7 billion estimate, which—to
emphasize—is the annual cost of running this system, not its overall
cost.
Admittedly, it is possible to cut some of the costs of legal aid,
primarily through domain restriction or through the use of means or
merit testing.171 Most clearly, the numbers given here include all issues
https://www.americanbar.org/content/dam/aba/administrative/legal_aid_indigent_defendants/ls_
sclaid_resolution_06a112a.authcheckdam.pdf [https://perma.cc/Q7YZ-H8Z2].
166. ALAN W. HOUSEMAN, CTR. FOR LAW & SOC. POLICY, CIVIL LEGAL AID IN THE UNITED
STATES: AN UPDATE FOR 2013, at 5 (2013), http://www.clasp.org/resources-and-
publications/publication-1/CIVIL-LEGAL-AID-IN-THE-UNITED-STATES-3.pdf
[https://perma.cc/573D-S4SB]. According to the report, the LSC is the largest provider of such
services, providing legal aid in eleven percent of the cases it handles.
167. See Jessica K. Steinberg, Demand Side Reform in the Poor People’s Court, 47 CONN. L.
REV. 741, 771 n.167 (2015). Steinberg extrapolates from an analysis made in Maryland, finding
that the national costs would be $5.4 billion. Id. However, this estimate is also conservative. It
assumes low payments to lawyers ($80 per hour), only four hours of work per case, and no overhead
and administrative costs, and also that pro bono services will not contract (a phenomenon known
as “crowding out”), that the rate of litigation will not increase, and that all those currently
represented will continue to hire a lawyer despite free legal services. See MD. ACCESS TO JUSTICE
COMM’N, Implementing a Civil Right to Counsel in Maryland, in ANNUAL REPORT 2010 app. 6 at
10 (2010), http://mdcourts.gov/mdatjc/pdfs/implementingacivilrighttocounselinmd2011.pdf
[https://perma.cc/L8HD-JWSK] [hereinafter Right to Counsel in Maryland]. Accounting for these
considerations would dramatically increase the costs involved.
168. INTEREST ON LAWYER ACCOUNT FUND OF THE STATE OF N.Y., ANNUAL REPORT 2014, at 2
(2014), https://www.iola.org/board/Grantee%20Annual%20Report%202014-
15/Annual%20Report%202014(final).pdf [https://perma.cc/F8GZ-TYUH].
169. See BURDGE, supra note 89, at 12.
170. To confirm this from another perspective, in Maryland, an average state in terms of
economy and inequality, one-sixth of the population qualifies for legal representation. See Right to
Counsel in Maryland, supra note 167, at 9 (reporting that approximately one million Marylanders
qualify for legal assistance from organizations funded by the Maryland Legal Services
Corporation). This would suggest a potential pool of at least fifty million eligible Americans
nationally.
171. Id. at 4.
Electronic copy available at: https://ssrn.com/abstract=3015569

<<PAGE_BREAK>>

Arbel_Galley(Do Not Delete) 1/2/2018 4:17 PM
2018] ADMINIZATION 161
where people might seek legal assistance, not only consumer litigation.
Restricting legal assistance to only the cases involving consumer credit
would be expected to reduce the overall costs of legal aid and make this
reform appear somewhat more realistic. While the cost reduction is
indeed likely, it is unlikely to be dramatic enough. As a preliminary
matter, someone would need to classify incoming complaints, and this
classification is costly and open to mistakes. More importantly, it is
necessary to recall the volume of consumer credit litigation—with over
eight million filings every year. Many of the people involved in such
litigation are likely to be in need of legal assistance, so that even by
itself, this category of cases is substantial.
A more promising avenue for cost reduction is means or merit
testing. Assistance could be made conditional on the financial needs of
consumers or the strength of the underlying case. By denying
assistance to people with means above a certain threshold, or to people
with weak cases, the costs of providing legal aid can be substantially
reduced. Both means and merit testing are indeed capable of cutting
costs, but they present their own issues. If the means threshold is high
(i.e., only people with low means are eligible), very few people will be
able to benefit from legal aid, which makes such reform unlikely to be
transformative enough. But if the threshold is set sufficiently low, the
whole point of means testing would be missed. Merit testing is likewise
difficult in this setting, because the consumers that are capable of
demonstrating the merits of their case to an administrator are those
who are least likely to need legal assistance in the first place, as they
could presumably also present their case to a judge. With respect to
both types of testing, it is also important to remember the
administrative infrastructure that would be required to support the
administration of testing, as well as the costs of both types of
mistakes—denying aid to deserving applicants and permitting aid to
irrelevant claims or claimants.172 From the consumer standpoint, such
testing often involves applicant-side costs and stigma,173 thus deterring
172. See Amartya Sen, The Political Economy of Targeting, in PUBLIC SPENDING AND THE POOR
11, 12–13 (Dominique van de Walle & Kimberly Nead eds., 1995); Wim van Oorschot, Targeting
Welfare: On the Functions and Dysfunctions of Means Testing in Social Policy, in WORLD POVERTY:
NEW POLICIES TO DEFEAT AN OLD ENEMY 171, 176 (Peter Townsend & David Gordon eds., 2002).
173. See Sen, supra note 172, at 13 (“Any system of subsidy that requires people to be identified
as poor and that is seen as a special benefaction for those who cannot fend for themselves would
tend to have some effects on their self-respect as well as on the respect accorded them by others.”);
Jennifer Stuber & Mark Schlesinger, Sources of Stigma for Means-Tested Government Programs,
63 SOC. SCI. & MED. 933, 944–45 (2006) (conducting empirical examination of the sources of
stigma); see also Bo Rothstein, The Universal Welfare State as a Social Dilemma, 13 RATIONALITY
& SOC’Y 213, 222–23 (2001) (explaining that in order to achieve sufficient support for such
measures, citizens must regard it as valuable and believe their fellow citizens are contributing).
Electronic copy available at: https://ssrn.com/abstract=3015569

<<PAGE_BREAK>>

Arbel_Galley(Do Not Delete) 1/2/2018 4:17 PM
162 VANDERBILT LAW REVIEW [Vol. 71:1:121
the neediest from seeking it.174 Overall, the discussed cost reduction
methods must make a difficult compromise: either set a low bar that
reduces the effectiveness of testing, or set a high bar but risk limiting
aid in a way that would mostly retain the status quo.175 While legal aid
can complement Adminization, it does not appear to be an appealing
substitute.
Not only are the costs of legal aid in this context extremely high,
the benefits are quite limited. Most cases are not genuinely disputed,176
and getting more consumers to court could drown the signal (valid
consumer defenses) in the flood of noise. Put formally, free
representation reduces Type I errors (enforcing unmeritorious claims)
but increases Type II errors (failing to enforce legitimate debts).
Whether one effect will be greater than the other is an open empirical
question, but even if the net effect is positive, the overall benefits will
be significantly limited by these costs. Moreover, the benefits will likely
be further diluted by rational creditor responses to such reforms, which
will likely consist of investing more in legal services to retain some of
their original advantage.177 This is even without taking into account
creditors’ market power and ability to influence the consumer contract
in ways that would mitigate the effects of legal access. At best, then, the
benefits will be modest but the costs will be immense. Equally worrying,
the costs are likely to expand over time, with little ability to control
them, as more and more people may claim eligibility.
174. Sen, supra note 172, at 13; van Oorschot, supra note 172, at 176; Dimitri Gugushvili &
Donald Hirsch, Means-Tested and Universal Approaches to Poverty: International Evidence and
How the UK Compares 2–3 (Ctr. for Research in Soc. Policy, Working Paper No. 640, 2014)
(empirical evidence); Thandika Mkandawire, Targeting and Universalism in Poverty Reduction
15–16 (Soc. Policy and Dev., United Nations Research Inst. for Soc. Dev., Working Paper No. 23,
2005).
175. These are not the only cost-cutting mechanisms. It is possible to offer a menu of more
limited services (such as a hotline for pro se claimants), and it is even possible to co-opt some of
the mechanisms developed in this paper, such as algorithmic screening of applicants and audit
review. Such proposals require sustained development and evaluation before they can be compared
to the alternatives considered here.
176. See infra notes 185–189.
177. Economic theory predicts that increasing one party’s investment in litigation (which is
similar to the effect of representation) can lead to an arms race that will greatly increase spending
but will not necessarily increase overall judicial accuracy. See Avery Katz, Judicial
Decisionmaking and Litigation Expenditure, 8 INT’L REV. L. & ECON. 127, 138–39 (1988). The
overall effect will be a reduction in the volume of litigation (as it is costlier to litigate) but an
increase in the intensity of litigation (because both parties “fight” harder). The net result requires
a more robust empirical analysis.
Electronic copy available at: https://ssrn.com/abstract=3015569

<<PAGE_BREAK>>

Arbel_Galley(Do Not Delete) 1/2/2018 4:17 PM
2018] ADMINIZATION 163
B. Throwing Judges into the Fray
Another common proposal is to have judges play a more active
role in litigation to level the playing field between the parties.178 Under
this view, judges should be more forgiving of consumers’ procedural
mistakes, allow more flexible deadlines, and furnish opportunities to
amend or correct what may be either mistakes or suboptimal litigation
tactics. According to more expansive versions, the judge would even
conduct examinations and seek settlements where possible.
This proposal is equally problematic. First, we do not know
whether inquisitorial systems produce systematically better results,
with a lingering concern that judges who produce their own evidence
are more prone to confirmation bias.179 Second, from an institutional
perspective, training judges to conduct inquisitorial functions requires
fundamental changes to the way legal education and training is
provided. But perhaps most troubling are the costs of these proposals.180
The more we ask judges to perform the activities of lawyers, the closer
we are to the first type of proposals, with public subsidies for private
lawyers. Discounting overhead and judicial staff, the median annual
salary of a judge is $132,500,181 compared with the median salary of a
178. See Steinberg, supra note 167, at 800 (“[J]udges should be active, frame legal issues, and
question parties and witnesses in order to develop legal claims.”); see also Amalia D. Kessler, Our
Inquisitorial Tradition: Equity Procedure, Due Process, and the Search for an Alternative to the
Adversarial, 90 CORNELL L. REV. 1181, 1274 (2005).
179. See Lon L. Fuller, The Adversary System, in TALKS ON AMERICAN LAW 30, 40 (Harold J.
Berman ed., 1961) (“An adversary presentation seems the only effective means for combating this
natural human tendency to judge too swiftly in terms of the familiar that which is not yet fully
known.”); Kathryn E. Spier, Litigation, in 1 HANDBOOK OF LAW AND ECONOMICS, supra note 116,
at 313–16 (presenting mixed theoretical accounts of the implications of an inquisitorial system);
John Thibaut et al., Comment, Adversary Presentation and Bias in Legal Decisionmaking, 86
HARV. L. REV. 386, 389–90 (1972) (noting that interested parties may vet evidence more thoroughly
than a judge). But see E. Allan Lind et al., Comment, Discovery and Presentation of Evidence in
Adversary and Nonadversary Proceedings, 71 MICH. L. REV. 1129, 1143 (1973) (arguing that bias
in evidence production will bias outcomes). On the empirical side, see Michael K. Block et al., An
Experimental Comparison of Adversarial Versus Inquisitorial Procedural Regimes, 2 AM. L. ECON.
REV. 170, 177–78 (2000) (finding that inquisitorial investigations fared better than adversarial
ones, but only if parties have no access or knowledge of the other party’s information and evidence).
180. See Resnik, supra note 118, at 380 (doubting that managerial judging reduces litigation
costs).
181. Survey of Judicial Salaries, NAT’L CTR. FOR ST. CTS. (2012),
http://www.ncsc.org/~/media/Files/PDF/Information%20and%20Resources/Judicial%20Salary/jud
icialsalaries.ashx [https://perma.cc/9AHV-WZMV]. The median salary for federal district court
judges is even higher, at $174,000 (both values are current to 2012). Judicial Compensation, U.S.
CTS., http://www.uscourts.gov/judges-judgeships/judicial-compensation (last visited Oct. 23, 2017)
[https://perma.cc/GZ5Z-A5ME].
Electronic copy available at: https://ssrn.com/abstract=3015569

<<PAGE_BREAK>>

Arbel_Galley(Do Not Delete) 1/2/2018 4:17 PM
164 VANDERBILT LAW REVIEW [Vol. 71:1:121
public interest attorney of $45,000–$75,000.182 The natural question is:
Would it not be cheaper to simply subsidize lawyers outright?
C. Modifying the Legal Process
The third type of reforms involve changes to legal procedure. For
example, to mitigate evidentiary problems, many propose that plaintiffs
should assert detailed knowledge of the claim, its origin, and of all other
evidence.183 Consequently, some states have imposed heavier
evidentiary burdens on creditors.184 Setting high evidentiary burdens
for the sake of controlling litigation may seem appealing, but it is a poor
solution to the problem at hand. Perhaps the most obvious point is that
in the absence of meaningful scrutiny, the mere production of evidence
cannot improve outcomes—similar to the problem of sewer service, how
can judges authenticate and verify the veracity of evidence? Moreover,
this proposal is extremely wasteful. Evidence production involves some
complex operations, as even discerning the amount of charges,
principal, and interest is not straightforward.185 Admittedly, the costs
per case are not high, but given the large volume of cases, these costs
quickly become a significant burden. Additionally, evidentiary bars are
182. Press Release, Nat’l Ass’n for Law Placement, New Public Interest and Public Sector
Salary Figures from NALP Show Little Growth Since 2004 (Oct. 18, 2012),
http://www.nalp.org/uploads/PressReleases/2012PISALPressRelease_Rev.pdf
[https://perma.cc/LEN7-N7BN]. For comparison, a lawyer’s median salary in 2012 was $113,530,
which is eighty-six percent of the salary of a state judge and sixty-five percent of the salary of a
federal district court judge. Bureau of Labor Statistics, May 2014 National Occupational
Employment and Wage Estimates: United States, U.S. DEP’T LAB.,
https://www.bls.gov/oes/2012/may/oes_nat.htm#23-0000 (last modified Mar. 25, 2015)
[https://perma.cc/B56N-S7X7]; see also sources cited supra note 181.
183. See Eric Y. Wu, Note, Vigilante Justice: Ensuring that Consumer Credit Plaintiffs Are Not
Above the Law in Collins Financial Services v. Vigilante, 60 AM. U. L. REV. 1561, 1563 (2011)
(advocating increased documentation requirements for default judgment); see also Fox, supra note
46, at 40 (documenting regulatory action aimed at increasing evidentiary standards); Glover,
supra note 46, at 1133 (“[A]t a bare minimum, courts should require the plaintiff to produce a valid
contract between the original creditor and the debtor.”); Goldberg, supra note 46, at 748 (proposing
that lawyers in small claims court be required to plead specific information about the debtor and
debt agreement); Debt Deception, supra note 92, at 2 (arguing in favor of “[p]rohibit[ing] debt
buyers from filing lawsuits without evidence”).
184. N.C. GEN. STAT. § 58-70-150 (2017) (requiring evidence of the original contract); see also;
MD. R. CIV. P. 3-306(d) (establishing additional requirements for affidavits filed by a plaintiff who
is not the original creditor); MASS. UNIF. SMALL CLAIMS R. 7(d) (outlining the circumstances that
impact whether further inquiry is needed in the event that a defendant does not appear for trial);
MINN. STAT. § 548.101 (2017) (proscribing requirements for assigned consumer debt default
judgments); Administrative Directive of the Chief Judge of the Court of Common Pleas for the
State of Delaware, No. 2012-2 (Aug. 22, 2012),
http://courts.delaware.gov/CommonPleas/docs/AD2012-2.pdf [https://perma.cc/TJ8Y-X5N7]
(establishing pleading requirements in consumer debt collection actions).
185. Duffy, supra note 42, at 1195 (“The amount due, however, is typically the result of
complicated, and often dynamic, contract terms . . . .”).
Electronic copy available at: https://ssrn.com/abstract=3015569

<<PAGE_BREAK>>

Arbel_Galley(Do Not Delete) 1/2/2018 4:17 PM
2018] ADMINIZATION 165
a “blunt calibration device[ ] . . . [that] risks screening out meritorious
and unmeritorious claims alike.”186 The concern that evidentiary bars
will deter the filing of meritorious lawsuits is heightened by the fact
that most cases are not even disputed. Evidence shows that in only 3.2
percent of debt collection cases by debt buyers did debtors informally
bother to dispute the debt.187 A qualitative in-depth (but small sample)
study found that only twenty percent of the cases were contested,
although perhaps half of them had some good faith defense of which
they were unaware.188 Some debtors, presumably those with the best
cases, do decide to go to court, but even those debtors fail about fifty
percent of the time.189 Even if we suppose that the rate of disputes
stands at the inflated rate of thirty percent, these reforms would require
the redundant production of evidence in all remaining cases (seventy
percent).190
Clearly, having robust evidence is also beneficial. Allowing court
judgments in the absence of evidence is a recipe for disaster. However,
the benefit of evidence only accrues if a sufficient number of cases are
scrutinized, which is hardly the case today.191 Additionally, there is also
an evidence requirement today, so one should consider whether the
marginal benefits that could result justify the requirement of high
evidentiary bars in all cases. Recall that Adminization is not meant as
a substitute, and setting evidentiary bars is recognized to be important.
The main contention here is that on the margin it would be more
productive to invest in administrative audits than to categorically
186. Engstrom, supra note 31, at 643.
187. FTC DEBT INDUSTRY REPORT, supra note 10, at 38. Admittedly, there are certain
recording issues involved, especially regarding verbal disputes. However, of the cases recorded,
only about fifty percent could be later verified, making the scope of genuine disputes much smaller.
Id. at 40. The FTC acknowledges that verbal disputes may not be properly recorded. Id. at 38; see
also Todd J. Zywicki, The Law and Economics of Consumer Debt Collection and Its Regulation 14–
15 (George Mason Univ. Law & Econ. Research Paper Series, Paper No. 15-33, 2015),
https://www.law.gmu.edu/assets/files/publications/working_papers/LS1517.pdf [https://perma.cc/
6M8L-4HN2].
188. See Sterling & Schrag, supra note 71, at 366 (studying claims against fifteen debtors).
Note, however, that the authors believe, based on interviews, that eight of the fifteen interviewees
had good-faith defenses of which they were personally unaware due to legal ignorance. Id. at 384.
189. See Holland, supra note 46, at 210 (finding that pro se debtors had at least some success
in fifty-three percent of the cases, although they only won trials in about one percent of the cases.
The represented debtors had favorable outcomes in about eighty-five percent of cases, but this only
applied to eight cases out of a sample of 4,400 cases). Id. Of course, trial outcomes are only
suggestive.
190. Means and merit testing would increase the benefit of evidence requirements, but would
introduce other types of errors and problems (e.g., debtors would “attorney-shop” for lenient
attorneys) and involve administrative costs. Most importantly, however, letting private attorneys
screen cases amounts to a de facto privatization of the process and, as such, should be evaluated
independently of the current system.
191. See Healy, supra note 1.
Electronic copy available at: https://ssrn.com/abstract=3015569

<<PAGE_BREAK>>

Arbel_Galley(Do Not Delete) 1/2/2018 4:17 PM
166 VANDERBILT LAW REVIEW [Vol. 71:1:121
require a higher bar of evidence in all eight million consumer credit
cases.
Other types of proposals offer conflicting recommendations on
the choice of venue. While in the past small claims courts have been
proposed as a solution, today some call for the transfer of cases to the
general civil courts, where a higher standard of proof might deter
creditors from filing.192 But this is similar to requiring more evidence,
and, as just argued, more evidence is unlikely to be the solution to the
problem. Others suggest that federal courts will provide a better
solution, due to their fee-shifting rules.193 Yet others suggest simply
narrowing creditors’ access to any court. Because litigation tends to be
lopsided, they reason, it will be best to allow litigation only after
creditors have exhausted informal collection efforts.194 However, since
informal collection is tainted with widespread abuse, it is hard to see
how such a proposal could improve the consumer’s situation.195
The last type of procedural reform tries to directly regulate
plaintiff behavior. For example, these proposals would require plaintiffs
to sign affidavits that they have taken due effort to locate the debtor,196
prove the timeliness of the claim,197 document service by means of GPS
technology, or educate the debtor of her rights.198 The problem with
these proposals, even setting aside their cost, is that they critically
depend on creditors with misaligned incentives. Financial incentives
exert a strong power, and as long as creditors stand to gain from
192. See, e.g., Goldberg, supra note 46, at 747–48.
193. See, e.g., Improving Relief, supra note 53, at 1464 (proposing a doctrine of “equitable
remand,” allowing federal courts to issue a vacatur of a state court judgment). This involves
reforming the Rooker-Feldman doctrine that limits federal courts’ power to intervene in state
courts’ judgments. See D.C. Court of Appeals v. Feldman, 460 U.S. 462 (1983); Rooker v. Fid. Tr.
Co., 263 U.S. 413 (1923).
194. See Goldberg, supra note 46, at 748 (“[T]o ensure that small-claims courts are truly a last
resort . . . lawyers should be required to inform the court of all prior communications with the
debtor and any extrajudicial collection efforts.”). In September of 2013, Minnesota passed a law
requiring creditors to provide advance notice of at least fourteen days to debtors of their intention
to file for a default judgment. MINN. STAT. § 548.101(a)(7) (2017); see also Glover, supra note 46,
at 1132 (advocating filing fees).
195. The authors of such proposals also seem aware of this inherent difficulty: “One possible
weakness . . . is that it may result in more aggressive extrajudicial collection pursuits and
consequently more violations of FDCPA.” Goldberg, supra note 46, at 749.
196. In Massachusetts, creditors in small claims courts are required to file a “Verification of
Defendant’s Address form, certifying that he or she has verified the defendant’s mailing address
in the manner set forth therein.” MASS. UNIF. SMALL CLAIMS R. 2(b).
197. See, e.g., Haneman, supra note 86, at 735–37.
198. See, e.g., FTC PROTECTING CONSUMERS REPORT, supra note 14, at 10 (“[J]urisdictions
should also consider amending service of process rules to require greater verification.”); OUT OF
SERVICE, supra note 68, at 3.
Electronic copy available at: https://ssrn.com/abstract=3015569

<<PAGE_BREAK>>

Arbel_Galley(Do Not Delete) 1/2/2018 4:17 PM
2018] ADMINIZATION 167
debtors’ failure to appear, they are bound to find loopholes and
shortcuts.199
D. Arbitration and Class-Defense
Two very different types of solutions include arbitration and
class litigation. Consumer arbitration is a growing trend.200 In theory,
it has various appealing characteristics that are relevant to some of the
problems Adminization addresses, most notably, arbitration’s ability to
overcome byzantine procedures and cut costs.201 Despite these benefits
(which many find empirically contestable202), arbitration does not solve
the structural issues that Adminization does. This is especially clear in
the case of consumer credit litigation where the FTC itself concluded
that arbitration fails to adequately protect consumers.203 The primary
reason for this failure is that arbitration is ultimately a contractual
instrument. As such, it tends to replicate the same market dynamics
that often lead to abuse in litigation. For example, creditors draft most
consumer agreements and affect the choice of arbitrators; as a result,
those cherry-picked arbitrators are often structurally impeded from
199. “[L]ife finds a way.” MICHAEL CRICHTON, JURASSIC PARK 160 (1990).
200. See AT&T Mobility, LLC v. Concepcion, 563 U.S. 333 (2011) (finding that the Federal
Arbitration Act preempted a California unconscionability rule for arbitration clauses, thereby
expanding the scope of such clauses in contracts related to class actions); David Horton & Andrea
Cann Chandrasekher, After the Revolution: An Empirical Study of Consumer Arbitration, 104 GEO.
L.J. 57, 70–76 (2015) (detailing the rise of consumer arbitration).
201. Arbitration allows consumers to avoid litigation costs, as emphasized by the industry. See
Letter from Am. Bankers Assoc. et al., to the Honorable Richard Cordray, Chairman, Bureau of
Consumer Fin. Prot. (July 13, 2015), http://www.aba.com/Advocacy/commentletters/Documents/cl-
jointArbitration2015.pdf [https://perma.cc/A5FB-LGMC]. Reducing costs for creditors could also
reduce the costs of consumer goods. See Stephen J. Ware, Paying the Price of Process: Judicial
Regulation of Consumer Arbitration Agreements, 2001 J. DISP. RESOL. 89, 91–93 (noting that the
passing of cost savings is an overlooked advantage for consumers of arbitration).
202. See JOHN O’DONNELL, PUB. CITIZEN, THE ARBITRATION TRAP: HOW CREDIT CARD
COMPANIES ENSNARE CONSUMERS 43 (2007), https://www.citizen.org/sites/default/files/
arbitrationtrap.pdf [https://perma.cc/W5A5-74T6] (highlighting the costs of arbitration to
consumers as a barrier). But see PETER B. RUTLEDGE, U.S. CHAMBER INST. FOR LEGAL REFORM,
ARBITRATION–A GOOD DEAL FOR CONSUMERS: A RESPONSE TO PUBLIC CITIZEN 10–12 (2008),
http://stmedia.startribune.com/documents/docload.pdf [https://perma.cc/3UEC-ZEKE] (critiquing
O’Donnell’s analysis); SEARLE CIVIL JUSTICE INST., NORTHWESTERN UNIV. SCH. OF LAW,
CONSUMER ARBITRATION BEFORE THE AMERICAN ARBITRATION ASSOCIATION 67–68 (2009),
https://www.adr.org/sites/default/files/document_repository/Searle%20Civil%20Justice%20Instit
ute%20Report%20on%20Consumer%20Arbitration.pdf [https://perma.cc/C9AF-GTDW]
(reviewing the empirical literature and finding mostly positive effects of arbitration for
consumers). Additionally, there is empirical doubt as to what extent consumers understand and
consent to arbitration clauses. See Jeff Sovern et al., “Whimsy Little Contracts” with Unexpected
Consequences: An Empirical Analysis of Consumer Understanding of Arbitration Agreements, 75
MD. L. REV. 1, 62–63 (2015) (finding broad consumer misunderstanding of arbitration clauses in
contracts).
203. See FTC PROTECTING CONSUMERS REPORT, supra note 14, at i.
Electronic copy available at: https://ssrn.com/abstract=3015569

<<PAGE_BREAK>>

Arbel_Galley(Do Not Delete) 1/2/2018 4:17 PM
168 VANDERBILT LAW REVIEW [Vol. 71:1:121
deterring fraud.204 Moreover, even well-intentioned arbitrators cannot
meaningfully investigate and audit cases where consumers do not
appear, and access to arbitration is still considered “prohibitively
expensive for consumers with relatively small claims.”205 A large study
of thirty-four thousand arbitration cases revealed statistics that are
similar to those of litigation, with ninety-four percent of arbitrations
being resolved in favor of creditors.206 The study also details evidence of
arbitrator shopping where pro-plaintiff arbitrators are sought more
often than prodefendant arbitrators.207 As a result, many are
disillusioned today with arbitration as a means of improving consumer
protection and remedying market flaws.208
Another alternative is the idea of class defense.209 Developed by
Assaf Hamdani and Alon Klement, the class defense mechanism is a
mirror image of the class action, only that it consolidates dispersed
defendants (rather than plaintiffs). When multiple defendants are sued
by a single plaintiff, the class defense mechanism would allow them to
be sued as a class, binding them all to the outcomes of litigation. The
aggregation of claims makes it more worthwhile to defend them, as the
joint stakes are large enough to pay a lawyer.210 Class defense has much
greater potential than the other proposals surveyed, primarily because
of its cost-effectiveness. Nonetheless, class defense is unlikely to fully
resolve the problems identified here. By their nature, class actions
apply only to cases meeting narrow criteria, and many consumer credit
204. See Richard M. Alderman, Pre-dispute Mandatory Arbitration in Consumer Contracts: A
Call for Reform, 38 HOUS. L. REV. 1237, 1256 (2001) (discussing the significant bias that favors
repeat players in the arbitration process); David S. Schwartz, Enforcing Small Print to Protect Big
Business: Employee and Consumer Rights Claims in an Age of Compelled Arbitration, 1997 WIS.
L. REV. 33, 60–61 (noting that corporate defendants may prefer arbitration over litigation due to
a belief that they will receive either sympathy or outright favorable bias from the arbitrator);
Nancy A. Welsh, Mandatory Predispute Consumer Arbitration, Structural Bias, and Incentivizing
Procedural Safeguards, 42 SW. L. REV. 187, 197 (2013) (noting that predispute arbitration is a
“system that is beset by structural bias”).
205. Sarah Rudolph Cole, On Babies and Bathwater: The Arbitration Fairness Act and the
Supreme Court’s Recent Arbitration Jurisprudence, 48 HOUS. L. REV. 457, 466 (2011).
206. See O’DONNELL, supra note 202, at 2 (examining approximately nineteen thousand cases
in which the arbitrator was appointed by the National Arbitration Forum).
207. Id. at 16–17 (exploring the incentives that exist for arbitrators to overwhelmingly side
against consumers). On the other hand, the Searle Civil Justice Institute found only weak evidence
of repeat-player effects in its review of the literature. See SEARLE CIVIL JUSTICE INST., supra note
202, at xiii.
208. See Cole, supra note 205, at 458–59 (detailing consumer concerns and attempted policy
responses to the growth in consumer arbitration agreements). But see SEARLE CIVIL JUSTICE INST.,
supra note 202, at 109–11 (reviewing the empirical evidence and discussing costs, due process,
speed, outcomes, and fairness considerations, and finding mostly positive effects).
209. See Hamdani & Klement, supra note 97, at 709–10 (proposing the mechanism of class
defense).
210. Class defense depends on fee shifting, so that if the class prevails, the representing
attorney can recover her fees from the plaintiff. Id. at 715–17.
Electronic copy available at: https://ssrn.com/abstract=3015569

<<PAGE_BREAK>>

Arbel_Galley(Do Not Delete) 1/2/2018 4:17 PM
2018] ADMINIZATION 169
cases would not meet those criteria. In this context, the most notable
issue is the requirement of commonality among the class members. The
Supreme Court’s recent decision in Wal-Mart Stores, Inc. v. Dukes
means that class members must share a very high degree of
commonality, and such degree of commonality is rare in civil litigation
generally, and especially in consumer credit contracts. 211 Having said
that, if implemented, a class defense mechanism could complement the
institution of Adminization.
E. A Pyrrhic Victory
Suppose, contrary to all of the foregoing, that these reforms
could work, and that they would bring a large portion of all consumers
to court. These consumers would plead and argue their cases and fight
against unfair charges, lack of evidence, fraud and abuse, or even more
technical issues, such as proper venue or setoffs and fees. Emboldened
and empowered, consumers would also appeal wrong decisions, and all
would have their day(s) in court. Consequently, reformers hope, the
accuracy of legal determination will rise and the scope of fraud and
consumer abuse will fall.
This optimistic view requires that the legal system will be able
to support this significant increase in litigation. The volume of civil
litigation is about fifteen million cases annually, and, as noted, it is
estimated that about eight million are consumer credit related.212
Today, in the vast majority of cases, consumers either do not appear or
do not respond. For example, the civil courts of the City of New York
saw 9,295 defendants out of 122,166 cases filed by nine large creditors
in 2008—this is about seven percent.213 Getting even one-third of all
New York consumers to appear means that the number of cases that
would be heard will rise from 9,295 to thirty-one thousand cases, and
an additional 4,340 appeals would be filed.214 Hence, any moderately
successful reform would then encumber the courts with a few million
new cases each year. This would increase the caseload of the same
courts that are currently criticized for being clogged and “overwhelmed”
211. See Wal-Mart Stores, Inc. v. Dukes, 564 U.S. 338, 349–360 (2011) (declining to certify a
class action due to lack of commonality among plaintiffs).
212. See supra note 42.
213. See Justice Disserved, supra note 71, at 4 (accounting for the volume of debt claims filed
by nine large creditors).
214. See Court Statistics Project, Caseload Highlights, NAT’L CTR. FOR ST. CTS. (Mar. 2007),
http://www.courtstatistics.org/~/media/Microsites/Files/CSP/DATA%20PDF/Vol14Num1CivilTria
lsonAppeal1.ashx [https://perma.cc/S6L9-KNA6] (finding a fourteen percent rate of appeal in all
civil matters).
Electronic copy available at: https://ssrn.com/abstract=3015569

<<PAGE_BREAK>>

Arbel_Galley(Do Not Delete) 1/2/2018 4:17 PM
170 VANDERBILT LAW REVIEW [Vol. 71:1:121
by consumer credit cases.215 To accommodate these cases, the system
would have to quadruple its capacity or else introduce impossibly long
queues to resolve disputes.216 Sending more cases to arbitration, it was
noted, is unlikely to be effective. Can we sustainably double, triple, or
even quadruple or more the national expense of the civil legal
system?217
This cost is “that which is seen,” but what about the cost “which
is not seen”?218 The less salient and more removed costs would be those
created by the response of creditors and debtors to such a change.
Debtors would be much more inclined to defend cases which have less
merit, hoping to win them through luck or through the attrition of the
creditor. Creditors will have to spend more resources on litigation to
win cases. Therefore, some creditors will not find it worthwhile to
pursue small claims, either because the case lacks merit or because the
costs exceed the value of the expected judgment. This will lead many to
215. See OUT OF SERVICE, supra note 68, at 11.
216. Not all of civil litigation is debt claims, so doubling the number of cases would lead to less
than double the resources. Nonetheless, debt claims are the majority of civil litigation, so the
necessary increase in resources in response to doubling the debt claims will be large. See supra
note 42. Also, some of the costs of litigation are fixed, so that more cases would not entail
necessarily more courtrooms. However, as we consider here, a very large increase in the volume of
cases would create a need for new infrastructure. The alternative to infrastructure, queueing, has
important costs well beyond the direct costs of waiting longer for cases to resolve; if the filing of a
lawsuit delays enforcement by a few years, this will provide a much stronger incentive to borrow
irresponsibly in the first place.
217. We do not know what the full cost of the legal system is, mainly because funding is
fragmented between local, state, and federal governments, as well as between user fees, fines,
charges, etc. Telephone Interview with William Raftery, Senior Knowledge & Info. Servs. Analyst,
Nat’l Ctr. for State Courts (Sept. 14, 2015). On the structure of funding, see RON MALEGA &
THOMAS H. COHEN, DEP’T OF JUSTICE, STATE COURT ORGANIZATION, 2011, at 8 (2013),
https://www.bjs.gov/content/pub/pdf/sco11.pdf [https://perma.cc/JNV8-HFF7]. For comparison, the
cost of the New York court system is $2 billion a year, and the cost of the Pennsylvania system is
$0.5 billion. Budget: Fiscal Year 2015-2016, N.Y. ST. UNIFIED CT. SYS., at v (2014),
https://www.nycourts.gov/admin/financialops/BGT15-16/2015-16-UCS-BUDGET.pdf
[https://perma.cc/PR29-DSMW]; Proposed Budget of the Unified Judicial System, Fiscal Year
2015–2016, SUP. CT. PA. (2015), http://www.pacourts.us/assets/files/setting-4778/file-
4372.pdf?cb=7127c2 [https://perma.cc/P6PC-QQZM] (noting that overall state contributions
amount to $11 billion a year); see also NAT’L GOVERNORS ASS’N & NAT’L ASS’N OF STATE BUDGET
OFFICERS, THE FISCAL SURVEY OF STATES: SPRING 2012 (2012),
https://www.nga.org/files/live/sites/NGA/files/pdf/FSS1206.PDF [https://perma.cc/KT83-3QKL];
Preparation and Submission of the Judicial Branch Budget, NAT’L CTR. ST. CTS.,
http://data.ncsc.org/QvAJAXZfc/opendoc.htm?document=Public%20App/SCO.qvw&host=QVS@qli
kviewisa&anonymous=true&bookmark=Document\BM09 (last visited Oct. 23, 2017)
[https://perma.cc/8PSQ-ZFXW] (outlining the various budget proposal processes across multiple
states).
218. See 1 CLAUDE FRÉDÉRIC BASTIAT, That Which is Seen, and That Which is Not Seen, in
THE BASTIAT COLLECTION 1, 1 (Ludwig von Mises Inst. ed., 2d ed. 2007) (1850). (“In the economy,
an act, a habit, an institution, a law, gives birth not only to an effect, but to a series of effects. Of
these effects, the first only is immediate; it manifests itself simultaneously with its cause—it is
seen. The others unfold in succession—they are not seen.” (emphasis added)).
Electronic copy available at: https://ssrn.com/abstract=3015569

<<PAGE_BREAK>>

Arbel_Galley(Do Not Delete) 1/2/2018 4:17 PM
2018] ADMINIZATION 171
invest more in informal debt collection219—an area that is hard to police
and is rife with abuse220—and others will altogether abandon small
consumer loans, an outcome undesirable for both creditors and debtors.
Indeed, there may be some important benefits to all of these
reform proposals: more legal accuracy, less fraud, and greater due
process and consumer participation. Adminization does not mean that
these routes should be abandoned; rather, we should diversify our
approach by using multiple institutions to address a multicausal
problem, thus improving outcomes and reducing costs. Adminization,
recall, is a complement, not a substitute, to litigation. Working in
tandem, litigation and Adminization pack a punch.
IV. CHALLENGES
A. Legal Authority
Adminization requires an agency infrastructure, and the use of
agencies to review consumer cases in state courts may introduce some
legal and constitutional issues. But such concerns are surmountable,
since Adminization relies on preexisting and legally proven
infrastructure such as the FTC, the CFPB, and state attorney general
offices.
At the federal level, both the FTC and the CFPB are already
legally empowered to oversee Adminization, although with certain
limits. For the CFPB, the primary source of authority is the Consumer
Financial Protection Act,221 enacted as Title X of the Dodd-Frank Act,
which established the CFPB and tasked it with implementing and
enforcing federal consumer protection law to ensure that “markets for
consumer financial products and services are fair, transparent, and
competitive.”222 A central objective is to protect consumers “from unfair,
deceptive, or abusive acts and practices.”223 To achieve these goals, the
law provides the CFPB with broad powers to conduct investigations,
request information from covered entities, issue subpoenas and civil
219. See Oren Gazal-Ayal & Limor Riza, Plea-Bargaining and Prosecution, in CRIMINAL LAW
AND ECONOMICS 145, 149 (Nuno Garoupa ed., 2009) (explaining that trial complexities lead to
greater frequency of plea bargains); Sergio G. Lazzarini et al., Order with Some Law:
Complementarity Versus Substitution of Formal and Informal Arrangements, 20 J.L. ECON. & ORG.
261, 262 (2004) (exploring substitution and complementarity between formal and informal norms).
220. See supra Section I.A; see also supra note 195 (explaining that advocates preferring
informal debt collection practices over litigation recognize inherent widespread abuse of such
practices).
221. Dodd-Frank Wall Street Reform and Consumer Protection (Dodd-Frank) Act § 1011(a),
12 U.S.C. § 5491 (2012).
222. 12 U.S.C. § 5511(a).
223. 12 U.S.C. § 5511(b)(2).
Electronic copy available at: https://ssrn.com/abstract=3015569

<<PAGE_BREAK>>

Arbel_Galley(Do Not Delete) 1/2/2018 4:17 PM
172 VANDERBILT LAW REVIEW [Vol. 71:1:121
investigative demands, hold hearings, bring lawsuits, and, importantly,
levy fines.224 The second relevant legislative authority is the Fair Debt
Collection Practices Act (“FDCPA”), which provides enforcement
powers to both the FTC and the CFPB.225 These powers are intended to
curb abusive debt collection practices and encourage fair debt collection
practices.226 The jurisdiction of both the FTC and the CFPB is
sufficiently broad, and their enforcement powers encompass any
provider of consumer financial services or its affiliates engaging in
“unfair, deceptive, or abusive acts or practices.”227 Moreover, the CFPB
has supervisory powers over large banks and certain “non-banks,” for
example, providers of credit such as payday lenders, auto lenders,
mortgage originators, and more recently, debt collectors with annual
earnings over $10 million, which is not a very high bar.228 In addition,
the FDCPA also empowers the FTC and the CFPB to investigate and
pursue actions against debt collectors.229 Using these broad powers,
these agencies regularly engage in enforcement activity that covers a
broad array of regulated entities, including banks, law firms that file
debt collection lawsuits with insufficient evidence, debt collectors, and
even individuals.230 As a consequence of these powers, both the CFPB
and the FTC have the necessary authority to support Adminization of
consumer debt litigation, allowing them to investigate and take
enforcement actions against those engaged in unfair, deceptive, or
abusive acts. Beyond the federal level, state attorney general offices are
generally equally empowered to investigate and prosecute consumer
abuse, although they are naturally limited to the jurisdiction of their
own states.231
A second related issue concerns the power of the federal agencies
to regulate consumer activity at the state level. This concern is directly
addressed by the FDCPA, which explicitly states that “[e]ven where
abusive debt collection practices are purely intrastate in character, they
224. 12 U.S.C. §§ 5562–65.
225. 15 U.S.C. § 1692l(a) (2012).
226. 15 U.S.C. § 1692(e).
227. 12 U.S.C. § 5531. For the definition of covered persons, see 12 U.S.C. § 1002(6).
228. 12 U.S.C. § 5514(a). Large debt collectors are considered “larger participants” under 12
U.S.C. § 5514(a)(1)(B), according to 12 C.F.R. § 1090.105(b) (2017).
229. 15 U.S.C. § 1692a(6).
230. See, e.g., In re Pressler & Pressler, LLP, CFPB No. 2016-CFPB-0009 (2016) (issuing
consent order regarding debt collection practices of a law firm); David Eghbali, CFPB No. 2016-
CFPB-0011 (2016) (issuing consent order regarding illegal mortgage-loan transaction
manipulations by a bank employee).
231. For example, the Consumer Interest Division at the Office of the Attorney General of the
State of Alabama is described as one of the Attorney General’s “most important responsibilities.”
Consumer Interest Division, ST. ALA. OFF. ATT’Y GEN., http://www.ago.state.al.us/Page-Consumer-
Protection (last visited Oct. 23, 2017) [https://perma.cc/AYZ3-7U8J].
Electronic copy available at: https://ssrn.com/abstract=3015569

<<PAGE_BREAK>>

Arbel_Galley(Do Not Delete) 1/2/2018 4:17 PM
2018] ADMINIZATION 173
nevertheless directly affect interstate commerce.”232 The Supreme
Court shared Congress’s view, holding that “commercial lending . . .
[has broad impact] on the national economy.”233 A large body of case law
affirmed this view.234 It is also worth mentioning that the CFPB has
recently emerged largely intact from a constitutional challenge that
sought to dismantle it.235 Whether the CFPB will continue to exist in
the current political climate is an open question, but such an issue does
not arise with respect to the other potential institutional arrangements.
B. Feasibility of Adminization & Political Economy
The success of regulatory reform does not depend solely on its
merits, but also on its political appeal. Would Adminization receive
sufficient political support? While predicting any sort of political
trajectory is difficult, I will note a few reasons why Adminization may
appeal to a variety of diverse interests that wield political power. First,
on the consumer side, this system of Adminization provides a robust
and meaningful form of protection that addresses some of the key
concerns of consumer associations today. Implementing Adminization
on a broad scale can improve the lives of millions of consumers over a
relatively short period. Consumer advocates and politicians seeking to
enhance the welfare of the middle and lower classes can mark a quick
victory with relatively little investment. It is equally important that
Adminization would also be appealing to creditors. As noted, they stand
to gain from a streamlined process, greater consumer confidence in the
credit market, and greater legitimacy of the debt collection process.
After all, there is reason to believe that greater legitimacy will translate
to greater consumer propensity to repay debts.236 Indeed, some
232. 15 U.S.C. § 1692(d).
233. Citizens Bank v. Alafabco, Inc., 539 U.S. 52, 58 (2003); see also Lewis v. BT Inv.
Managers, Inc., 447 U.S. 27, 38 (1980) (“[B]anking and related financial activities are of profound
local concern. . . . Nonetheless, it does not follow that these same activities lack important
interstate attributes.”); Perez v. United States, 402 U.S. 146, 154 (1971) (“Extortionate credit
transactions, though purely intrastate, may in the judgment of Congress affect interstate
commerce.”).
234. See supra note 16.
235. See PHH Corp. v. Consumer Fin. Prot. Bureau, 839 F.3d 1, 33 (D.C. Cir. 2016), reh’g en
banc granted, order vacated (Feb. 16, 2017). Note that while the D.C. Circuit panel decision holding
the CFPB unconstitutional was vacated and rehearing en banc granted, the court has not yet
issued its en banc opinion at the time of this writing. Thus there is still some uncertainty regarding
the CFPB’s future.
236. See, e.g., Jonathan Jackson et al., Why Do People Comply with the Law?, 52 BRIT. J.
CRIMINOLOGY 1051, 1059 (2012) (finding higher compliance from those who believe in the
legitimacy of the law); Tom R. Tyler, Psychological Perspectives on Legitimacy and Legitimation,
57 ANN. REV. PSYCHOL. 375, 377 (2006) (explaining legitimacy as the belief that the law should be
obeyed).
Electronic copy available at: https://ssrn.com/abstract=3015569

<<PAGE_BREAK>>

Arbel_Galley(Do Not Delete) 1/2/2018 4:17 PM
174 VANDERBILT LAW REVIEW [Vol. 71:1:121
creditors would object to Adminization, precisely because of its
effectiveness in deterring creditor fraud. But the opposition by creditors
will likely be much stronger to any of the other alternatives discussed
above, which tend to impose costs on all creditors, independently of the
nature of their claims. If not in absolute terms, then at least in relative
terms, Adminization should garner greater creditor support.
These mutual advantages to debtors and creditors promise a real
political possibility of implementation. As a case study, in Israel, where
a reform that streamlined the collection of small judgments was
proposed, an unlikely coalition emerged.237 Both creditors and
consumers joined hands in support of the reform; the creditors were
drawn to the streamlined process and the debtors to the greater
transparency and simplicity of the process as well as the concomitant
reduction in interest and fees.238 The only opponent was the Israel Bar
Association, which expressed concerns that the reform would make
parties less likely to retain the services of lawyers.239 Ultimately, the
Bar lost.240 It would seem that overall, Adminization offers a great
promise to both plaintiffs and defendants, and should be highly feasible
from a political-economy standpoint.
C. Regulatory Capture
In administrative law, there is a general concern with regulatory
capture.241 Here, one might worry that creditors will be able to lobby
the relevant agency, causing the agency to capitulate to their interests.
Without denying the potential dangers of regulatory capture in some
237. The initiative was not identical to Adminization; Israel already relies heavily on
administrative agencies to enforce small claims, and the reform proposal sought to create an
administrative process where lawyers would not be needed. In contrast, Adminization is meant to
supplement litigation.
238. See Protocol No. 661, LAW & JUST. COMMITTEE (July 24, 2012),
http://www.knesset.gov.il/protocols/data/rtf/huka/2012-07-24-02.rtf [https://perma.cc/EF32-
V5VY]; see also Protocol No. 7, LAW & JUST. COMMITTEE (June 16, 2015),
http://www.nevo.co.il/law_html/law103/20_ptv_309355.htm [https://perma.cc/H9X8-H3TM]
(endorsement of the process by a consumer NGO).
239. These concerns were expressed (and criticized by the court) in HCJ 6804/12 Israel Bar v.
Minister of Justice, unpublished (2013) (Isr.), http://elyon1.court.gov.il/files/12/040/068/
o10/12068040.o10.pdf [https://perma.cc/XK37-ZL9Y].
240. In the interest of disclosure, the author was a paid advisor for one of the commercial
companies supporting the reform.
241. See, e.g., STEVEN P. CROLEY, REGULATION AND PUBLIC INTERESTS: THE POSSIBILITY OF
GOOD REGULATORY GOVERNMENT 26–52 (2008) (noting that public choice theory is “an
abbreviation for analysis of how or why narrow regulatory interests routinely prevail over
others . . . [and] accounts for much academic skepticism toward public-law regulation”); Posner,
supra note 105, at 19 (“Agencies are subject to far more intense interest-group pressures than
courts.”).
Electronic copy available at: https://ssrn.com/abstract=3015569

<<PAGE_BREAK>>

Arbel_Galley(Do Not Delete) 1/2/2018 4:17 PM
2018] ADMINIZATION 175
cases,242 the concern in the abstract is unconvincing.243 Many
government agencies already operate in the world, and they are not all
hopelessly captured, despite a great variety of lobbyist groups.244 This
seems especially true of the CFPB, which has taken a hard line against
creditors during its years of operation. Additionally, consumers also
mobilize politically, as evidenced by the support garnered by politicians
such as Senators Elizabeth Warren and Bernie Sanders and political
movements such as Occupy Wall Street.245 Also, consumers are already
at a disadvantage in the courts today, as creditors are repeat players,
with more resources and greater ability to forum shop. Hence, neither
forum is immune to special interests.246 Ultimately, this challenge does
not appear especially worrying. The agency does not replace court
proceedings; it only adds an additional layer. Hence, the benefit to a
plaintiff of “capturing” the regulator is much diminished. Given the
great benefits that Adminization could provide and the low concrete
threat of regulatory capture, it would be misguided to let abstract
regulatory concerns inhibit meaningful reform.
D. Costs and Incidence
A final challenge relates to the cost of running the agency. This
concern may relate to the costs themselves or their “incidence,” i.e., the
idea that the public should bear the cost of Adminization. On reflection,
however, this challenge does not prove critical. Using the existing
platform of the CFPB means that set-up costs will be low. The most
242. See Daniel Carpenter & David A. Moss, Introduction to PREVENTING REGULATORY
CAPTURE: SPECIAL INTEREST INFLUENCE AND HOW TO LIMIT IT 3 (Daniel Carpenter & David A.
Moss eds., 2014) (“[O]bservers are quick to see capture as the explanation for almost any
regulatory problem . . . . At the same time, there appears to be a great deal of fatalism . . . about
the impossibility of ameliorating or preventing capture.”).
243. For general critique, see Engstrom, supra note 31, at 674–78. Engstrom argues, however,
that there is greater concern with capture when agencies conduct case-by-case adjudication. Id. at
678. His reasoning in this context seems to rely on a different model, where the agency substitutes
legal supervision rather than complements it—as Adminization does.
244. For a list of the most concentrated lobbyist groups, see Top Interest Groups Giving to
Members of Congress, 2018 Cycle, OPENSECRETS.ORG, http://www.opensecrets.org/industries/
mems.php (last visited Oct. 23, 2017) [https://perma.cc/P7YQ-BKKA] (select “2016” from the drop-
down list).
245. See Stephen Collinson, Does Elizabeth Warren Regret Not Running for President?, CNN
(Aug. 26, 2015), http://www.cnn.com/2015/08/25/politics/elizabeth-warren-joe-biden-elections-
2016/ [https://perma.cc/5DXH-PX4G] (predicting high potential for both Elizabeth Warren and
Bernie Sanders); 2016 Democratic Popular Vote, REALCLEARPOLITICS,
https://www.realclearpolitics.com/epolls/2016/president/democratic_vote_count.html (last visited
Oct. 23, 2017) [https://perma.cc/7Y6A-3XZ7] (noting twelve million votes in favor of Bernie
Sanders).
246. Cf. Posner, supra note 105, at 20 (“Courts are relatively immune to interest-group
pressures.”).
Electronic copy available at: https://ssrn.com/abstract=3015569

<<PAGE_BREAK>>

Arbel_Galley(Do Not Delete) 1/2/2018 4:17 PM
176 VANDERBILT LAW REVIEW [Vol. 71:1:121
significant cost is that of the audits, but the agency (and Congress) has
control over the frequency of audits, thus guaranteeing budgetary
control. For comparison, the IRS handles about 1.2 million audits every
year, which amounts to an audit rate of 0.8 percent of all its cases.247 To
achieve similar rates, Adminization would only require the auditing of
sixty-four thousand cases.248
Estimating the cost of audits is difficult; luckily, in situations
like these, Fermi Estimate often provides useful approximations
(within an order of magnitude).249 Collecting evidence in a case,
analyzing it, and contacting all the relevant parties should probably
take no more than ten hours on average for a skilled auditor. The
median annual salary of an IRS auditor is about $70,000,250 which,
using the standard divisor of 2,087 working hours per year, implies a
per-hour-cost of $33.50. To this we should add overhead, inefficiencies,
and some margin, so it is probably within a reasonable range to assume
that for every hour of work, an hour of similar cost should be added.
This means that the per-hour cost of audit is (again, using a very rough
estimate) about $70, giving us $700 per audited case, or a cost of $44.8
million. To verify, this estimate is consistent with the IRS estimate that
a case audit costs about $600.251 Even doubling this estimate, we are
still two orders of magnitude less than the cost of the leading
alternative. In fact, this cost is so low that there is reason to believe that
if Adminization reduces filings, it will be cheaper than the status quo,
where courts have to handle many cases that should not have been filed.
Another source of cost comes from the development of
algorithms. However, this cost would be largely a one-off expenditure
on development. Perhaps even more importantly from a policy
247. IRS DATA BOOK, supra note 112, at 21.
248. This is done under the assumption of eight million filings every year, of which 0.8 percent
would be audited. See supra note 42.
249. See Fermi Problem, WIKIPEDIA, https://en.wikipedia.org/wiki/Fermi_problem (last
updated June 8, 2017) [https://perma.cc/U7EH-WD2R] (“Fermi estimates generally work because
the estimations of the individual terms are often close to correct, and overestimates and
underestimates help cancel each other out.”).
250. See Average Salary for Tax Examiner, Collector, or Revenue Agent at U.S. Internal
Revenue Service (IRS), PAYSCALE, http://www.payscale.com/research/US/Employer=U.S.
_Internal_Revenue_Service_(IRS)/Salary/Job/Tax-Examiner%2c-Collector%2c-or-Revenue-Agent
(last visited Oct. 23, 2017) [https://perma.cc/3K5P-9BLR].
251. To verify, the IRS estimates that a $55 million budget increase will allow it to deal with
five hundred thousand additional cases (including individual audits, employment tax exams, and
collection matters). This implies a per-case cost of $574, which—despite the differences between
audited cases and the costs of handling the other types of cases—is still suggestive that the
analysis here is in the right order of magnitude. See IRS OVERSIGHT BD., FY2015 IRS BUDGET
RECOMMENDATION SPECIAL REPORT 1, 6 (2014), https://www.treasury.gov/IRSOB/reports/
Documents/IRSOB%20FY2015%20Budget%20Report-FINAL.pdf [https://perma.cc/J4FM-QV55].
Electronic copy available at: https://ssrn.com/abstract=3015569

<<PAGE_BREAK>>

Arbel_Galley(Do Not Delete) 1/2/2018 4:17 PM
2018] ADMINIZATION 177
perspective, Adminization can begin without these algorithms and
simply choose cases at random, similar to the IRS’s process.
The incidence objection holds that it should not be the public
purse that pays the costs of setting up an agency that delivers services
relating to purely private financial matters. While such objections may
have some merit in certain contexts, it is also of little relevance to the
case made here. This is because there are already large government
subsidies in place, namely the costs of running the courts, paying
judges’ and staff salaries, administrative processes, provision of legal
aid, etc. Court fees account for only twenty to thirty percent of the
overall cost of running the court itself, with the remainder being a
subsidy.252 Moreover, all the current reform proposals will involve a
much greater degree of subsidies. The question at this point is how to
best allocate those existing subsidies.
Overall, whatever costs Adminization entails and whatever
their incidence is, it is important to measure them in relation to both
the (impossibly) high costs of the alternatives and the benefits of
improving the system.
CONCLUSION
An old joke tells of a customer who dines in a restaurant and,
after finishing his meal, asks for the check, which the waiter promptly
brings him. The customer then decides to review the check in detail,
and discovers that, among the various items on the list, there is an
unrecognized item called “success.” Having no recollection of ordering
such a dish, the customer asks the waiter about the meaning of this
charge. “It is actually quite simple,” responds the waiter, “if the
customer pays, then it is a success.”
The success method is the calculated, strategic filing of
unmeritorious claims in the presence of lax screening mechanisms. This
Article demonstrates that civil litigation is systematically lacking in its
ability to screen unmeritorious claims in consumer credit litigation. The
review of the evidence shows problems of predatory debt collection
practices, sewer service, consumer underparticipation, lack of legal
representation, faulty and sometimes fraudulent evidence, and a lack
of supervision by judges. This results in a large system that invites the
use of the “success method.”
252. See GEOFFREY MCGOVERN & MICHAEL D. GREENBERG, WHO PAYS FOR JUSTICE?:
PERSPECTIVES ON STATE COURT SYSTEM FINANCING AND GOVERNANCE 17–18 (2014) (reporting
findings from Massachusetts and Utah, while noting, however, that in Florida the court system
seems to be profitable on net).
Electronic copy available at: https://ssrn.com/abstract=3015569

<<PAGE_BREAK>>

Arbel_Galley(Do Not Delete) 1/2/2018 4:17 PM
178 VANDERBILT LAW REVIEW [Vol. 71:1:121
The proposed solution to this problem is the use of a new mode
of regulation, in between courts and agencies, called Adminization: the
use of a gatekeeper agency to provide oversight when participation is
systematically lacking. It also offers a robust protection of due process
rights as a matter of both procedure and substance. This results in a
lean, cost-effective institution that could garner broad political support,
much more so than most of the other reform proposals currently
advocated. Consumers would enjoy greater access to justice at lower
costs and much broader protection of their rights. Creditors would
benefit from having greater consumer confidence in the credit market.
Future work will explore other applications of Adminization;
some prominent examples include housing, insurance and social
benefits fraud, employment law (suits against employees), civil rights,
and civil forfeitures. Each unique context brings its own nuance and
sensibilities, and the framework presented here can be usefully adapted
to meet these considerations. With the advance of algorithmic
decisionmaking, the growing budgetary pressures on courts, and the
pressure to improve outcomes for consumers of the legal system,
Adminization offers a glimpse into the future of our systems of
regulation.
Electronic copy available at: https://ssrn.com/abstract=3015569

---

## ssrn-3239995: W03_ARBEL_GRAPHICS_REVISED.DOCX (DO NOT DELETE) 1/30/20 11:10 AM
Year: 2020
Authors: Yonathan Arbel
Source: papers/ssrn-3239995/paper.txt

W03_ARBEL_GRAPHICS_REVISED.DOCX (DO NOT DELETE) 1/30/20 11:10 AM
REPUTATION FAILURE: THE LIMITS OF MARKET
DISCIPLINE IN CONSUMER MARKETS
Yonathan A. Arbel*
Many believe that consumer-sourced reputational
information about products should increasingly replace top-
down regulation. Instead of protecting consumers through
coercive laws, reputational information gleaned from the
wisdom of the crowd would guide consumer decision-making.
There is now a growing pressure to deregulate in diverse
fields such as contracts, products liability, consumer
protection, and occupational licensing.
This Article presents a common failure mode of systems
of reputation: “Reputation Failure.” By spotlighting the
public-good nature of reviews, rankings, and even gossip, this
Article shows the mismatch between the private incentives
consumers have to create reputational information and its
social value. As a result of this divergence, reputational
information is beset by participation, selection, and social
desirability biases that systematically distort it. This Article
argues that these distortions are inherent to most systems of
reputation and that they make reputation far less reliable
than traditionally understood.
The limits of reputation highlight the centrality of the
law to the future of the marketplace. Proper legal institutions
can deal not only with the symptoms of reputation failure—
consumer mistakes—but improve the flow and quality of
reputational information, thus correcting reputation failures
before they arise. This Article offers a general framework and
*. Assistant Professor of Law, University of Alabama School of Law. For
useful comments and conversations, I thank Oren Bar-Gill, Lisa Bernstein,
Alfred Brophy, Shahar Dillbary, Janet Freilich, Brian Galle, John Goldberg,
Michael Heller, Richard Hynes, Louis Kaplow, Daniel Klarmen, Ronald
Krotoszynski, Irina Manta, Murat Mungan, Nicholas Marquiss, Michael Pardo,
Gregg Polsky, Barak Richman, Ken Rosen, Roy Shapira, Steve Shavell, Henry
Smith, Andrew Tuch, Fred Vars, and Rory Van Loo. I am also thankful to
participants at the American, Midwestern, and European Law & Economics
Conferences, Contracts Conference XIII, and workshop participants at the
Universities of Alabama, Bar-Ilan, and Chicago. The editors of the Wake Forest
Law Review provided many thoughtful suggestions. For excellent research
assistance, I thank Hamilton Millwee, Victoria Moffa, Kenton McGilliard, and
Brenton Smith.
1239
Electronic copy available at: https://ssrn.com/abstract=3239995

<<PAGE_BREAK>>

W03_ARBEL_GRAPHICS_REVISED.DOCX (DO NOT DELETE) 1/30/20 11:10 AM
1240 WAKE FOREST LAW REVIEW [Vol. 54
explores a number of strategies. A more robust system of
reputation can preserve consumer autonomy without
sacrificing consumer welfare.
TABLE OF CONTENTS
I. INTRODUCTION ...................................................................... 1240
II. LAW VS. MARKETS AND ASYMMETRIC INFORMATION ............ 1246
A. Law vs. Markets ............................................................. 1246
B. The Supposed Reliability of Reputation in Legal
Thought .......................................................................... 1251
III. REPUTATION FAILURE: MICROFOUNDATIONS, DISTORTIONS,
AND SOCIAL WELFARE ........................................................... 1254
A. The Microfoundations of Reputation ............................ 1256
1. The Costs of Gossip .................................................. 1256
2. Internal Drives: On Spite and Gratitude ................ 1256
3. Social Pressures and Herd Behavior ....................... 1258
4. Material Incentives: Shilling and Cherry-Picking . 1261
B. Reputational Distortions ............................................... 1262
1. Reputational Sluggishness ...................................... 1263
2. Regression to the Extreme ........................................ 1265
3. Reputation Integrity ................................................. 1269
C. Flawed Information, Flawed Decisions ........................ 1270
1. Informational Distortions ........................................ 1271
2. Overcoming Bias ...................................................... 1275
IV. LEGAL IMPLICATIONS OF REPUTATION FAILURE .................. 1286
A. Reputation Failure and Contemporary Debates in
Contracts and Torts ....................................................... 1286
B. Reputation-by-Regulation ............................................. 1287
1. Leveraging Market Players: The Role of
Reputational Platforms ............................................ 1288
a. Regulating Platforms ........................................ 1292
b. Policing Platforms ............................................. 1293
c. Platform Accreditation ...................................... 1293
2. Professional Publications ........................................ 1294
3. Fighting Fake Reviews ............................................. 1295
4. Fostering Positive Incentives ................................... 1297
5. Controlling Costs: First Amendment and
Reputation ................................................................. 1299
V. CONCLUSION ......................................................................... 1303
I. INTRODUCTION
How much trust should we place in consumer-sourced
reputational information? This Article develops the argument that
systems of reputational information are subject to a number of
distortions that limit the reliability of reputational information. As a
result, trusting these systems to replace the law should be done with
Electronic copy available at: https://ssrn.com/abstract=3239995

<<PAGE_BREAK>>

W03_ARBEL_GRAPHICS_REVISED.DOCX (DO NOT DELETE) 1/30/20 11:10 AM
2019] LIMITS OF MARKET DISCIPLINE 1241
great caution. The source of these distortions and the role of the law
in addressing them are the key themes developed here.
Some of the most important debates in contract law involve a
basic dilemma: to what extent can markets be trusted to regulate
themselves?1 One reason why regulation may be needed is
asymmetric information—if sellers know more, they can exploit
buyers and promise high but deliver low. A mitigating factor, which
counsels against less regulation, is reputation. Reputation
information, once the province of small-knit communities, allows
parties to develop trust based on self-interest.2 If the seller cheats,
her reputation will suffer, costing her opportunities to deal with other
buyers. In the last two decades, reputational information has
permeated almost all aspects of consumer markets, online and offline.
Through the use of rankings, reviews, and stars, reputation facilitates
transactions between complete strangers.
The explosion of reputational information has instilled a sense of
optimism among many that the end of asymmetric information is
nigh.3 Why regulate markets, the argument goes, if consumers can
easily know in advance which seller is honest, which product is best,
and which service provider is most reliable? The increased trust in
1. The debate on law versus markets assisted by reputation is long-
standing. For example, Milton Friedman argued that “consumers do not have to
be hemmed in by rules and regulation . . . because they are protected by the
market itself.” Milton Friedman’s Free to Choose: Who Protects the Consumers?
(PBS television broadcast Jan. 11, 1980), https://www.freetochoosenetwork.org
/programs/free_to_choose/index_80.php?id=the_power_of_the_market; see also
ADAM SMITH, LECTURES ON JURISPRUDENCE 327 (R.L. Meek et al. eds., 1978)
(“When a person makes perhaps 20 contracts in a day, he cannot gain so much
by endeavoring to impose on his neighbors, as the very appearance of a cheat
would make him lose.”); Lior Jacob Strahilevitz, Less Regulation, More
Reputation, in THE REPUTATION SOCIETY 71 (Hassan Massum & Mark Tovey eds.,
2012) (arguing that a world with strong reputational information has
“diminished need for regulatory oversight and legal remedies”); Rory Van Loo,
Helping Buyers Beware: The Need for Supervision of Big Retail, 163 U. PA. L. REV.
1311, 1347 (2015) (“One common argument in consumer protection is that
reputational concerns will stamp out many bad practices, thus making some
regulations unnecessary.”). On these notions, see infra Subpart II.A.
2. See e.g., Lisa Bernstein, Contract Governance in Small-World Networks:
The Case of the Maghribi Traders, 113 NW. L. REV. 1009, 1009 (2019) (tracing
reputational flows in complex trade networks); Lisa Bernstein, Opting Out of the
Legal System: Extralegal Contractual Relations in the Diamond Industry, 21 J.
LEGAL STUD. 115, 152 (1992) [hereinafter Bernstein, Opting Out] (analyzing the
behavior of Jewish Orthodox diamond traders in New York); Barak D. Richman,
An Autopsy of Cooperation: Diamond Dealers and the Limits of Trust-Based
Exchange, 9 J. LEGAL ANALYSIS 247, 247–50 (2017) (exploring how market
perturbations lead to the decline of trust-based institutions). Recent trends also
include the scoring of consumers themselves, see Yonathan A. Arbel & Roy
Shapira, Theory of the Nudnik: The Future of Consumer Activism and What We
Can Do to Stop It, VAND. L. REV. (forthcoming 2020).
3. Alex Tabarrok & Tyler Cowen, The End of Asymmetric Information,
CATO UNBOUND (Apr. 6, 2015), https://www.cato-unbound.org/2015/04/06/alex-
tabarrok-tyler-cowen/end-asymmetric-information.
Electronic copy available at: https://ssrn.com/abstract=3239995

<<PAGE_BREAK>>

W03_ARBEL_GRAPHICS_REVISED.DOCX (DO NOT DELETE) 1/30/20 11:10 AM
1242 WAKE FOREST LAW REVIEW [Vol. 54
reputation has galvanized support for deregulatory policies from
conservatives and liberals alike.4 Various scholars have made calls
to abolish consumer protections in contracts, torts, and occupational
licensing.5 The Trump Administration has effectively defanged the
Consumer Financial Protection Bureau and otherwise stalled many
regulatory interventions in markets.6
This trust in reputation-based market ordering overlooks a key
feature of reputation: it is a public good.7 Through gossip, word-of-
4. See ARUN SUNDARARAJAN, THE SHARING ECONOMY: THE END OF
EMPLOYMENT AND THE RISE OF CROWD-BASED CAPITALISM 138 (2016) (“Eventually,
peer-to-peer platforms may provide a basis upon which society can develop more
rational, ethical, and participatory models of regulation.”); Benjamin G. Edelman
& Damien Geradin, Efficiencies and Regulatory Shortcuts: How Should We
Regulate Companies Like Airbnb and Uber?, 19 STAN. TECH. L. REV. 293, 300
(2016) (“By all indications, reputation systems are serving the intended
purpose.”); Christopher Koopman et al., The Sharing Economy and Consumer
Protection Regulation: The Case for Policy Change, 8 J. BUS. ENTREPRENEURSHIP
& L. 529, 530 (2015); Adam Thierer et al., How the Internet, the Sharing Economy,
and Reputational Feedback Mechanisms Solve the “Lemons Problem,” 70 U.
MIAMI L. REV. 830, 830–31 (2016). But see Sofia Ranchordás, Does Sharing Mean
Caring? Regulating Innovation in the Sharing Economy, 16 MINN. J.L. SCI. &
TECH. 413, 414 (2015) (critiquing aspects of the sharing economy); Abbey Stemler,
Feedback Loop Failure: Implications for the Self-Regulation of the Sharing
Economy, 18 MINN. J.L. SCI. & TECH. 673, 673 (2017) (highlighting the issues
posed to the sharing economy by flawed reputational mechanisms and offering
regulatory solutions); Chris Nosko & Steven Tadelis, The Limits of Reputation in
Platform Markets: An Empirical Analysis and Field Experiment 1 (Nat’l Bureau
of Econ. Research, Working Paper No. 20830, 2015) (considering dynamic biases
resulting from buyers who leave the marketplace without producing reviews).
5. See e.g., Oren Bar-Gill, The Behavioral Economics of Consumer
Contracts, 92 MINN. L. REV. 749, 756 (2008); Albert H. Choi & Kathryn E. Spier,
Should Consumers be Permitted to Waive Products Liability? Product Safety,
Private Contracts, and Adverse Selection, 30 J.L. ECON. ORG. 734, 755 (2014);
Richard A. Epstein, Behavioral Economics: Human Errors and Market
Corrections, 73 U. CHI. L. REV. 111, 120 (2006); A. Mitchell Polinsky & Steven
Shavell, The Uneasy Case for Product Liability, 123 HARV. L. REV. 1437, 1449
(2010); Alan Schwartz & Robert E. Scott, Contract Theory and the Limits of
Contract Law, 113 YALE L.J. 541, 557 (2003) (“[s]tate enforcement
of . . . agreements is unnecessary when the agreements . . . can be enforced with
reputational sanctions.”); Stephen D. Sugarman, Doing Away with Tort Law, 73
CALIF. L. REV. 555, 564 (1985); see also THOMAS SZASZ, OUR RIGHT TO DRUGS: THE
CASE FOR A FREE MARKET (1992) (arguing for deregulation of access to drugs);
Walter Gellhorn, The Abuse of Occupational Licensing, 44 U. CHI. L. REV. 6, 6
(1976).
6. See, e.g., Renae Merle & Tracy Jan, Trump is Systematically Backing Off
Consumer Protections, to the Delight of Corporations, WASH. POST (Mar. 6, 2018),
https://www.washingtonpost.com/business/economy/a-year-of-rolling-back-
consumer-protections/2018/03/05/e11713ca-0d05-11e8-95a5-c396801049ef
_story.html?noredirect=on; Tracking Deregulation in the Trump Era, BROOKINGS
(Sept. 23, 2019), https://www.brookings.edu/interactives/tracking-deregulation-
in-the-trump-era/ (tracking ninety-six areas where there are deregulatory
attempts).
7. Technically, reputation is a public good because it is neither excludable
nor is its consumption rivalrous. See Tyler Cowen, Public Goods, in CONCISE
Electronic copy available at: https://ssrn.com/abstract=3239995

<<PAGE_BREAK>>

W03_ARBEL_GRAPHICS_REVISED.DOCX (DO NOT DELETE) 1/30/20 11:10 AM
2019] LIMITS OF MARKET DISCIPLINE 1243
mouth, online reviews, and product ranking, consumers create a body
of reputational information covering innumerable products and
services—from restaurants and keychains to doctors and car
mechanics.8 This information is then used by future consumers to
guide their own decision-making, but the original creators of this
information are rarely, if ever, compensated for their efforts.9 That
is, while the costs of creating reputational information are private,
the benefits are public. Observing the divergence of private and
public costs presents a deep puzzle for all systems of reputation: Who
chooses to participate in the creation and dissemination of
reputational information, why, and to what effect?
In spotlighting this puzzle and exploring its consequences, this
Article identifies a common failure mode of reputational information,
called “reputation failure.” Prospective consumers use reputational
information to learn about the experiences of a representative sample
of similarly situated consumers. This kind of “poll” could inform the
consumer about the expected quality of service, the frequency of
errors, and the honesty of the seller. However, this poll is subject to
three confounding factors: sluggishness, regression to the extreme, and
an integrity bias. Reputational information is sluggish, i.e., slow to
develop, because sharing consumers are not sufficiently incented to
share their experiences. The motivations to share are not only weak,
but they are also asymmetric; psychologically, individuals are more
inclined to share information when they had a very positive or
negative experience. Thus, reputational information tends to “regress
to the extremes,” or develop over time in a way that overly emphasizes
extreme experiences at the expense of middling ones. And even those
experiences that are shared are not always authentic: social and
financial motivations to share lead some individuals to misstate their
experiences in ways that put themselves in a better light or otherwise
favor them. This leads to an integrity bias.
In the presence of reputation failure, dishonest sellers can thrive,
not just in the short term but also over longer spans of time.
Reputation failure thus suggests the limits of market discipline
through reputational information.10
ENCYCLOPEDIA OF ECONOMICS (Lauren F. Landsburg et al. eds., 2008); Agnar
Sandmo, Public Goods and Pigouvian Taxes, in PALGRAVE ENCYCLOPEDIA OF
ECONOMICS 10,975 (2018).
8. Daniel B. Klein, Knowledge, Reputation, and Trust, by Voluntary Means,
in REPUTATION: STUDIES IN THE VOLUNTARY ELICITATION OF GOOD CONDUCT 1, 3
(Daniel B. Klein ed., 1997) (“[T]he ‘invisible eye’ often functions by virtue of very
audible tongues.”).
9. Id. at 1; see also Eric Goldman, The Regulation of Reputational
Information, in THE NEXT DIGITAL DECADE: ESSAYS ON THE FUTURE OF THE
INTERNET 293, 301 (Berin Szoka & Adam Marcus eds., 2010) (noting the
“inadequate production incentives” of reputational information).
10. See Yannis Bakos et al., Does Anyone Read the Fine Print? Consumer
Attention to Standard-Form Contracts, 43 J. LEGAL STUD. 1, 2 (2014) (“Defenders
Electronic copy available at: https://ssrn.com/abstract=3239995

<<PAGE_BREAK>>

W03_ARBEL_GRAPHICS_REVISED.DOCX (DO NOT DELETE) 1/30/20 11:10 AM
1244 WAKE FOREST LAW REVIEW [Vol. 54
These concerns with reputation failure are consistent with some
important trends in the empirical data.11 Amazon is a case in point;
despite the cornucopia of products listed there, reviews follow an
unusual distribution.12 One might expect that among so many
products, some reviews would be exciting and others disappointing,
but that the majority would be middling. Evidence from millions of
products contradicts this expectation; reviews concentrate in the
extremes and are scarce in the middle.13 Additional evidence
suggests that the properties of the products themselves do not drive
this unusual distribution. For example, there is little agreement—
quite often, disagreement—between the rating of the same products
by professionals and consumers.14 There is also little agreement
among consumers on different platforms regarding the same
products.15 And when consumers are asked to rate products in lab
settings, their reviews show a remarkably different distribution.16
Despite reputation failures, consumers reportedly rely on
reputational information. In a recent survey, 82 percent of American
adults said they sometimes or always read reviews before making
new purchases, and more than two-thirds of those who routinely use
reviews described them as “generally accurate.”17 Similarly, a survey
of online users found that, on average, users rated the credibility of
the last review they read as a 4.2 out of five, or roughly 84 percent,
on average.18
Not all reputation failures are severe but ignoring the risk of
failure is a serious omission. In some cases, sophisticated consumers
might be able to mitigate part of the distortionary effect of reputation
failure by interpreting reputational information using a combination
of freedom of contract have generally rejected intervention by relying on
reputational constraints.”).
11. See infra Subpart III.B for a more general discussion of the evidence.
12. See infra note 171.
13. At least, one would expect a unimodal distribution, but this is
contradicted in the data. See infra Subpart III.B.
14. Bart de Langhe et al., Navigating by the Stars: Investigating the Actual
and Perceived Validity of Online User Ratings, 42 J. CONSUMER RES. 817, 821
(2016) (studying correlations between online reviews and scores provided by the
magazine Consumer Reports and finding that “[t]he average correlation is 0.18,
and 34% of correlations are negative”).
15. See Georgios Zervas et al., A First Look at Online Reputation on Airbnb,
Where Every Stay is Above Average 10 (Jan. 28, 2015) (unpublished manuscript),
https://papers.ssrn.com/sol3/papers2.cfm?abstract_id=2554500 (finding that the
ranking on Airbnb only explains 17 percent of the correlation (R2) between cross-
listed properties on TripAdvisor).
16. See infra Subpart II.B.2.
17. Aaron Smith, Online Reviews, PEW RESEARCH CTR. (Dec. 19, 2016),
http://www.pewinternet.org/2016/12/19/online-reviews/ (explaining that even
among the general population, 51 percent of US adults described reviews as
generally giving an accurate picture).
18. Cindy Man-Yee Cheung et al., Is This Review Believable?, 13 J. ASS’N.
INFO. SYS. 618, 624 (2012).
Electronic copy available at: https://ssrn.com/abstract=3239995

<<PAGE_BREAK>>

W03_ARBEL_GRAPHICS_REVISED.DOCX (DO NOT DELETE) 1/30/20 11:10 AM
2019] LIMITS OF MARKET DISCIPLINE 1245
of heuristics, statistical analysis, multisource analysis, and
experience.19 However, it is important to recognize that the power of
these methods is limited; there is only so much signal that can be
extracted from a biased and noisy sample.20 To illustrate this claim,
I employ a method known as a Monte-Carlo simulation, which
illustrates the limits of such heuristics.21
Like other forms of market failure, the existence of reputation
failure has various legal implications. Most directly, reputation
failures call for greater scrutiny of consumer transactions and stricter
regulation of product safety and quality. Such regulation can come in
the form of mandatory warranties, broader disclosure obligations,
good-faith requirements, product liability duties, etc.22
Legal interventions, however, need not be limited to the
consequences of reputation failure. The law can also improve the
quality of reputation itself, thus avoiding the failure of reputation in
the first place. To this end, I propose here a new framework of
synthesizing legal institutions and markets, called Reputation-by-
Regulation. Policymakers can significantly improve consumer
welfare while preserving consumer autonomy by focusing on
designing rules that improve and increase the flow of reliable
reputational information to the market. Building channels through
which reputational information can effectively flow to the market can
solve reputation failure and allow consumers to choose freely and
effectively for themselves. To guide future policymaking, this Article
illustrates Reputation-by-Regulation through five concrete types of
effective legal interventions.
The analysis in this Article should also inform economic analysis
more generally. It is very common, even in leading economic models,
to assume that reputation is an inherent feature of the market.23
Sellers sell, buyers buy, and reliable reputational information
miraculously emerges.24 These studies could benefit from explicit
19. See, e.g., id. at 627-28.
20. The problem combines low-response rate, self-selection bias, middle-
censoring, and middle-truncation. For a statistical analysis of some of these
issues, see S. Rao Jammalamadaka & Srikanth K. Iyer, Approximate Self
Consistency for Middle-Censored Data, 124 J. STAT. PLAN. & INFERENCE 75, 76-85
(2004).
21. For examples in law, see Dan M. Kahan et al., Whose Eyes Are You Going
to Believe? Scott v. Harris and the Perils of Cognitive Illiberalism, 122 HARV. L.
REV. 837, 870-76 (2009).
22. See Ranchordás, supra note 4, at 459–61 (discussing regulations imposed
and suggested within the sharing economy); see also Stemler, supra note 4, at
703–11 (offering additional regulatory solutions).
23. See Simon Board & Moritz Meyer-Ter-Vehn, Reputation for Quality, 81
ECONOMETRICA 2381, 2384–86 (2013) (discussing the treatment of reputation in
various economic models).
24. See, e.g., David S. Ardia, Reputation in a Networked World: Revisiting
the Social Foundations of Defamation Law, 45 HARV. C.R.-C.L. L. REV. 261,
267―68 (2010) (“Reputation is an emergent property of social interactions.”). In
Electronic copy available at: https://ssrn.com/abstract=3239995

<<PAGE_BREAK>>

W03_ARBEL_GRAPHICS_REVISED.DOCX (DO NOT DELETE) 1/30/20 11:10 AM
1246 WAKE FOREST LAW REVIEW [Vol. 54
recognition of the “microfoundations” of reputation—the incentives
that lead individuals to share their experiences with others, and their
consequences for the reliability of reputational information.25
This Article unfolds in five parts. Part II explores the role of
reputation in our thinking about the proper scope of intervention in
consumer markets. It highlights how central is the idea that
reputation is reliable. Part III develops the “microfoundations” of
reputation. It surveys the motivations to produce reputational
information and explains how these lead to systemic bias. Finally,
Part IV explores the legal-market interface and the use of the law to
improve reputational information flows.
II. LAW VS. MARKETS AND ASYMMETRIC INFORMATION
This Part surveys debates on regulation, deregulation, and the
role of reputation. It shows how critical reputation is to these debates
and yet how very little attention is given to the reliability of
reputational information. As this Article will show, imperfections
and failures in reputational information undermine the validity and
persuasiveness of many market self-ordering arguments.
A. Law vs. Markets
Most commercial transactions involve asymmetric information
between sellers and buyers. Buying a refrigerator or a car, hiring a
contractor, and seeking a financial advisor are all quotidian
transactions that involve what economists call “experience” goods—
i.e., goods where the consumer can only observe quality after
consumption or usage.26 The concern with such transactions is that
the recent edition of the Palgrave Dictionary of Economics, there are early signs
of recognition of these problems: “[T]he literature on this area [of reputation in
large groups] is in its infancy; very little can be said with much certainty now.”
Martin W. Cripps, Reputation, in THE NEW PALGRAVE DICTIONARY OF ECONOMICS
11,569 (2018); see also infra Subpart II.B.
25. See, e.g., Roy Shapira, Reputation Through Litigation: How the Legal
System Shapes Behavior by Producing Information, 91 WASH. L. REV. 1193, 1203
(2016) (describing the perception of reputation in the scholarship as the product
of a simple process). This reductive view uncritically assumes, with only a few
exceptions, that reputation information is reliable. For prominent examples in
economics, see, e.g., Heski Bar-Isaac & Steven Tadelis, Seller Reputation, 4
FOUND. & TRENDS IN MICROECONOMICS 273, 282 (2008) (reviewing the literature);
Board & Meyer-Ter-Vehn, supra note 23, at 2386–87. A leading paper in
evolutionary psychology argues that reputation is an evolutionary solution to the
tragedy of the commons with respect to public goods, not acknowledging that the
creation of reputation itself suffers from the same problem. See Manfred
Milinsky et al., Reputation Helps Solve the ‘Tragedy of the Commons’, 415 NATURE
424, 424 (2002); see also Martin A. Nowack & Karl Sigmund, Evolution of Indirect
Reciprocity, 437 NATURE 1291, 1291 (2005) (noting the evolutionary roots of
reputation).
26. See Gary T. Ford et al., An Empirical Test of the Search, Experience and
Credence Attributes Framework, in 15 ADVANCES IN CONSUMER RESEARCH 239,
Electronic copy available at: https://ssrn.com/abstract=3239995

<<PAGE_BREAK>>

W03_ARBEL_GRAPHICS_REVISED.DOCX (DO NOT DELETE) 1/30/20 11:10 AM
2019] LIMITS OF MARKET DISCIPLINE 1247
they invite opportunistic behavior, as sellers might take advantage of
the information asymmetry by promising high but delivering low.27
This possibility, left unchecked, would lead to misallocation of
resources, abuse of buyers, and increased buyer trepidation, stalling
economic activity overall.28
The conventional response to such problems is direct regulation.
To give but a few examples, the law sets ex ante minimum quality
regulations;29 mandates price controls;30 imposes good-faith duties;31
compels mandatory disclosure;32 creates implied warranties of
merchantability and fitness;33 requires licensing, training, and
testing;34 enforces truth-in-advertising requirements;35 and imposes
tort and criminal liability for violations of any of these standards.36
All of these measures are meant to curb abuse of asymmetric
information and to facilitate trust in the market. With regulation,
241 (Micheal J. Houston ed., 1988). A subtle issue is that while individual
preferences are idiosyncratic, they are still predictive. A consumer contemplating
the purchase of a microwave may be different in any number of ways from past
consumers, yet, learning that other consumers disliked the microwave would still
inform the consumer’s private decision.
27. Timothy J. Muris, Opportunistic Behavior and the Law of Contracts, 65
MINN. L. REV. 521, 522–26 (1981) (discussing the role of opportunistic behavior in
contract law). Muris seems to consider reputation as a better solution but
suggests that it is unhelpful when sellers can conceal their past misbehavior. Id.
at 526–27; see KATALIN JUDIT CSERES, COMPETITION LAW AND CONSUMER
PROTECTION 155–56 (2005) (explaining the need for consumer protection and the
various private law tools meant to achieve it); Henry Smith, Equity as Second-
Order Law: The Problem of Opportunism (Harvard Pub. L. Working Paper No.
15-13, 2015) (arguing that equity’s primary goal in private law is to control the
problem of opportunism).
28. George A. Akerlof, The Market for “Lemons”: Quality Uncertainty and the
Market Mechanism, 84 Q.J. ECON. 488, 488 (1970).
29. See, e.g., 7 C.F.R. § 996.13 (2018) (requiring that peanuts considered
“Segregation 1” shall not have more than 2.49 percent damaged kernels).
30. See, e.g., ALA. CODE § 8-8-1 (1975) (setting a cap of 8 percent on the price
of credit).
31. U.C.C. § 1-201(b)(20) (AM. LAW INST. & UNIF. LAW COMM’N, amended
2011); RESTATEMENT (SECOND) OF CONTRACTS § 205 (AM. LAW INST. 1981).
32. See, e.g., Moehling v. W. E. O’Neil Constr. Co., 170 N.E.2d 100, 107 (Ill.
1960) (finding a fiduciary duty of disclosure of material facts in a real estate
transaction between an agent and its principal). See generally Anthony T.
Kronman, Mistake, Disclosure, Information, and the Law of Contracts, 7 J. LEGAL
STUD. 1 (1978) (exploring optimal disclosure rules).
33. See, e.g., Choi & Spier, supra note 5, at 735 (explaining that courts are
“generally hostile toward[s]” attempts to opt-out of product liability).
34. See, e.g., MISS. CODE ANN. § 73-9-29 (1972) (requiring practicing dentists
to attend a board-certified educational program and pass an exam before
receiving a license to practice in the state).
35. See, e.g., U.S. FOOD & DRUG ADMIN., INGREDIENTS DECLARED AS
EVAPORATED CANE JUICE: GUIDANCE FOR INDUSTRY (2016) (providing that a
sweetener cannot be described as “evaporated cane juice” because it may mislead
consumers to believe that it is juice rather than sugar).
36. See, e.g., 815 ILL. COMP. STAT. ANN. 505/2, 7 (West 2016) (imposing
criminal and civil liability for consumer fraud).
Electronic copy available at: https://ssrn.com/abstract=3239995

<<PAGE_BREAK>>

W03_ARBEL_GRAPHICS_REVISED.DOCX (DO NOT DELETE) 1/30/20 11:10 AM
1248 WAKE FOREST LAW REVIEW [Vol. 54
consumers can trust—to an extent—that a car seat, for example, will
be sufficiently safe even if the producer is unknown or that an
unfamiliar merchant will not engage in unfair business practices.
Free-market advocates contest the need for such laws, which
necessarily limit freedom of contract, and instead argue that law is
“only one of many social institutions and practices amid which
markets function.”37 One such institution, arguably the most central
one, is reputation.38 Part of Adam Smith’s genius was the insight that
reputation facilitates trust in markets, even if actors are self-
interested; as Smith explained, the baker will soon realize that selling
low-quality bread will diminish his reputation and thus future profits,
making dishonesty an unprofitable business strategy.39 Drawing on
this insight, influential scholars such as Milton Friedman, Richard
Posner, and Richard Epstein have called to deregulate markets and
rely instead on internal market discipline.40
These debates are longstanding and tend to track traditional
political stances on the government, top-down regulation, and the free
market.41 Recently, however, a sea change has swept many
progressives and left-leaning thinkers towards the deregulatory
camp.42 The rise of the sharing economy and information technology
has inspired widespread belief in the impending death of asymmetric
information.43 In the past, private ordering through reputation was
understood to be the domain of small-knit communities, such as
Orthodox Jewish diamond traders or cattle ranchers in small
counties, as these small communities could effectively exchange
37. Lewis A. Kornhauser, Reliance, Reputation, and Breach of Contract, 26
J.L. & ECON. 691, 702 (1983); see also OLIVER E. WILLIAMSON, THE ECONOMIC
INSTITUTIONS OF CAPITALISM: FIRMS, MARKETS, RELATIONAL CONTRACTING 163–68
(1985).
38. See FRIEDRICH A. HAYEK, LAW, LEGISLATION AND LIBERTY, VOLUME 1:
RULES AND ORDER 46–48 (1973); Barak D. Richman, Firms, Courts, and
Reputation Mechanisms: Towards a Positive Theory of Private Ordering, 104
COLUM. L. REV. 2328, 2333–34 (2004) (dating the literature on private ordering
to the early 1990s).
39. See SMITH, supra note 1; see also ALBERT HIRSCHMAN, RIVAL VIEWS OF
MARKET SOCIETY 106–07 (1992).
40. See Lucian A. Bebchuk & Richard A. Posner, One-Sided Contracts in
Competitive Consumer Markets, 104 MICH. L. REV. 827, 827–28 (2006); Epstein,
supra note 5, at 131; Milton Friedman’s Free to Choose: Who Protects the
Consumers?, supra note 1.
41. Venerable traditions in political theory—Godwinian utopia and
Smithian natural liberty—believe reputation can effectively constrain self-
interested behavior. Klein, supra note 8, at 2–3. As economist Benjamin Klein
observed, “[i]f one puts small confidence in the efficacy and integrity of external
authority—in particular, governmental institutions—then the hope for self-
policing gains in relevance.” Id. at 2.
42. See, e.g., Christian Britschgi, Progressives and Libertarians Team Up to
Deregulate Airports, REASON (July 19, 2019), https://reason.com/2019/07/19
/progressives-and-libertarians-team-up-to-deregulate-airports/printer/.
43. See Tabarrok & Cowen, supra note 3.
Electronic copy available at: https://ssrn.com/abstract=3239995

<<PAGE_BREAK>>

W03_ARBEL_GRAPHICS_REVISED.DOCX (DO NOT DELETE) 1/30/20 11:10 AM
2019] LIMITS OF MARKET DISCIPLINE 1249
gossip and other word-of-mouth reputational information.44 The rise
of information technology now promises gossip at scale. Drug users,
involuntary regulatory entrepreneurs as they are, utilize message
boards to spread reputational information on which cocaine dealer
uses cheap fillers.45 Less daring consumers use popular reputation
platforms such as Amazon and Uber to guide their decisions on
everyday purchases.46 The meteoric rise of these platforms enthused
many about a future where regulatory interventions are moot, as
consumers do the work organically for their peers47 without coercive
44. See ROBERT C. ELLICKSON, ORDER WITHOUT LAW: HOW NEIGHBORS SETTLE
DISPUTES vii (1991); Bernstein, Opting Out, supra note 2, at115, 130, 139–40
(analyzing the behavior of Jewish Orthodox diamond traders in New York); see
also Stewart Macaulay, Non-Contractual Relations in Business: A Preliminary
Study, 28 AM. SOC. REV. 55, 55, 63 (1963) (studying the behavior of managers in
Wisconsin).
45. Drug dealers trade under carefully maintained brand names, although
they suffer from a short half-life. See Nick Janetos & Jan Tilly, Reputation
Dynamics in a Market for Illicit Drugs 1 (U. Pa., Working Paper No.
arXiv:1703.01937v1, 2017), https://arxiv.org/pdf/1703.01937.pdf.
46. See Cheung et al., supra note 18, at 619; Smith, supra note 17.
47. A sample of contemporary examples of pro-reputation attitudes includes
The Disrupter Series: How the Sharing Economy Creates Jobs, Benefits
Consumers, and Raises Policy Questions: Hearing Before the Subcomm. on
Commerce, Mfg., & Trade of the H. Comm. on Energy & Commerce, 114th Cong.
2 (2016) (statement of Hon. Michael C. Burgess, Chairman, Subcomm. on
Commerce, Mfg., & Trade) (“Sharing platforms are inherently good, providing
reputation feedback loops.”); Barriers to Opportunity: Do Occupational Licensing
Laws Unfairly Limit Entrepreneurship and Jobs: Hearing Before the Subcomm.
on Contracting and Workforce of the H. Comm. on Small Business, 113th Cong.
11 (2014) (statement of Hon. Richard Hanna, Chairman, Subcomm. on
Contracting and Workforce) (“Bad actors get in, people find out about their
reputations, good or bad, they grow or leave the market.”); FTC, THE “SHARING”
ECONOMY: ISSUES FACING PLATFORMS, PARTICIPANTS & REGULATORS 32 (2016),
https://www.ftc.gov/system/files/documents/reports/sharing-economy-issues-
facing-platforms-participants-regulators-federal-trade-commission-staff
/p151200_ftc_staff_report_on_the_sharing_economy.pdf (“[A] seller’s favorable
reputation can provide important leverage for regulators seeking to ensure
consumers are protected when shopping online.”); Jürgen Backhaus, Company
Board Representation, in THE ELGAR COMPANION TO LAW AND ECONOMICS 155, 155
(Jurgen Backhaus ed., 1999); RICHARD A. POSNER, THE ECONOMICS OF JUSTICE 288
(1981); Strahilevitz, supra note 1, at 71; Omri Ben-Shahar, Consumer Protection
Without Law, REGULATION 26, 26 (Summer 2010); David Charny, Illusions of a
Spontaneous Order: “Norms” in Contractual Relationships, 144 U. PA. L. REV.
1841, 1841–42 (1996); Alex Geisinger, Are Norms Efficient? Pluralistic Ignorance,
Heuristics, and the Use of Norms as Private Regulation, 57 ALA. L. REV. 1, 1–2,
29–30 (2005); Robert E. Scott, A Theory of Self-Enforcing Indefinite Agreements,
103 COLUM. L. REV. 1641, 1644, 1692 (2003). In economics, see, e.g., Benjamin
Klein & Keith B. Leffler, The Role of Market Forces in Assuring Contractual
Performance, 89 J. POL. ECON. 615, 616 (1981). On complementarity between law
and reputation, see Kishanthi Parella, Reputational Regulation, 67 DUKE L.J.
907, 910–18 (2018); Shapira, supra note 25, at 1203. But see Eric A. Posner,
Recent Books On International Law, 101 AM. J. INTL. L. 509, 510 (2007) (reviewing
ROBERT E. SCOTT & PAUL B. STEPH, THE LIMITS OF LEVIATHAN: CONTRACT THEORY
AND THE ENFORCEMENT OF INTERNATIONAL LAW (2006)).
Electronic copy available at: https://ssrn.com/abstract=3239995

<<PAGE_BREAK>>

W03_ARBEL_GRAPHICS_REVISED.DOCX (DO NOT DELETE) 1/30/20 11:10 AM
1250 WAKE FOREST LAW REVIEW [Vol. 54
and often misguided government intervention.48 Given this new
zeitgeist, there is little in the way of effective opposition to the recent
policy trends that have dramatically scaled down consumer
protection.49
To give a sense of where the contemporary battle lines are
drawn, consider the influential debate between Professors Richard
Epstein and Oren Bar-Gill (who also serves as a reporter for the new
Restatement of Consumer Contracts).50 Both scholars debate the old
question of asking how severely contract law should limit the freedom
of contract in the name of other interests.51 Epstein concedes the
existence and importance of cognitive constraints on consumer
decision-making, which he agrees can lead to “serious mistakes.”52
Still, in his view, “second-order rationality” in the form of reputation,
among other sources, can overcome these shortcomings.53
Remarkably, Epstein sees reputation as a valid response to the new
problems posed to the traditional model by behavioral economics.54
In contrast, Bar-Gill argues that because goods are sometimes
unique, or consumers use them in unique ways, there is too little
information that is transferable among consumers.55 Under such
conditions, Bar-Gill contends, there is still a need for regulatory
interventions in private contracts, such as safety standards or
immutable warranties.56
The most surprising feature of this debate is not the
disagreement but the broad agreement that underlies it. For
standardized goods (or standard uses), reputation, in addition to
48. See Rory Van Loo, The Corporation as Courthouse, 33 YALE J. REG. 547,
569 (2016) (noting the trend where “[t]he consumer legal system is evolving
toward a similar reliance on reputation-based governance mechanisms”). On the
problem of authority, see MICHAEL HUEMER, THE PROBLEM OF POLITICAL
AUTHORITY 100 (2013) (arguing that courts have a limited role and “may not go
on to coercively impose paternalistic or moralistic laws”); see also Charny, supra
note 47, at 1845–47 (highlighting the centralization inherent to informal systems
of ordering); Duncan Kennedy, The Role of Law in Economic Thought: Essays on
the Fetishism of Commodities, 34 AM. U. L. REV. 939, 944–49 (1985) (critiquing
the tendency to see the market as natural and state interventions as artifice).
49. See sources cited supra note 5.
50. See Bar-Gill, supra note 5, at 749–54; Richard A. Epstein, The
Neoclassical Economics of Consumer Contracts, 52 MINN. L. REV. 803, 803–10
(2003).
51. See Bar-Gill, supra note 5, at 749–54; Epstein, supra note 50, at 808–10.
52. Epstein, supra note 5, at 111.
53. Id.
54. Epstein, supra note 50, at 811.
55. Bar-Gill, supra note 5, at 756 (“[Epstein] forcefully argues that mistakes
with respect to the value of a standardized product are unlikely to persist in the
marketplace. But not all products are standardized . . . . With a non-
standardized good, the information obtained by one consumer might not be
relevant to another consumer who purchased a different version of the
nonstandard good.”).
56. Id. at 793–94.
Electronic copy available at: https://ssrn.com/abstract=3239995

<<PAGE_BREAK>>

W03_ARBEL_GRAPHICS_REVISED.DOCX (DO NOT DELETE) 1/30/20 11:10 AM
2019] LIMITS OF MARKET DISCIPLINE 1251
other background pressures, can be sufficiently potent to curb
opportunistic behavior. Hence, contract and consumer law need not
worry about intervening in areas where product reputation is
abundant.57 Similar attitudes were expressed by other leading
figures in the field and in the context of torts, occupational licensing,
and even drug regulation.58 As shall become clear, the existence of
reputation failures undermines this view.
B. The Supposed Reliability of Reputation in Legal Thought
These debates highlight the centrality of the belief that
reputation is an effective, dependable, credible, and reliable
regulator.59 Advocates argue that the loss of reputation is immediate,
independent of lengthy and uncertain trials, and stems from the
interactions of the parties themselves.60 Additionally, reputation
allows parties to tap into assets that the legal system cannot reach.61
For these reasons, advocates believe that what the law does slowly
and inaccurately, reputation can do quickly and precisely.62
57. See Schwartz & Scott, supra note 5, at 557; see also Robert A. Hillman &
Jeffrey J. Rachlinski, Standard-Form Contracting in the Electronic Age, 77
N.Y.U. L. REV. 429, 441 (2002) (arguing that reputational pressures restrain
firms from enforcing some exploitative terms in standard-forms contracts).
58. See supra sources cited note 5.
59. See Klein, supra note 8, at 2 (noting that reputation enforcement does
not involve coercion); Barak D. Richman, Norms and Law: Putting the Horse
Before the Cart, 62 DUKE L.J. 739, 740 (2012) (“Among the most salient features
of modern courts are that they are expensive, slow, and inaccurate.”); see also
Scott Baker & Albert H. Choi, Reputation and Litigation: Why Costly Legal
Sanctions Can Work Better Than Reputational Sanctions, (Va. Law & Econ.,
Research Paper No. 2013-02, 2013).
60. See Richman, supra note 38, at 2335.
61. Id. at 2332 (explaining that efficient enforcement is more important than
efficient administration in explaining why merchant communities prefer private
ordering to contractual enforcement).
62. See, e.g., John Barton, The Economic Basis of Damages for Breach of
Contract, 1 J. LEGAL STUD. 277, 277 (1972); Lisa Bernstein, Private Commercial
Law in the Cotton Industry: Creating Cooperation Through Rules, Norms, and
Institutions, 99 MICH. L. REV. 1724, 1725 (2001) (arguing that the informal order
at the cotton industry “work[s] extraordinarily well,” that this system resolves
disputes “expeditiously and inexpensively,” and that arbitration awards “are
widely respected and complied with promptly”); Juan Jose Ganuza, Fernando
Gomez & Marta Robles, Product Liability versus Reputation, 32 J.L. ECON. &
ORG. 213, 213 (2016); Lawrence Lessig, The New Chicago School, 27 J. LEGAL
STUD. 661, 665 (1998). For earlier examples of reputation advocates, see, e.g.,
Avner Greif, Informal Contract Enforcement: Lessons from Medieval Trade, in 2
THE NEW PALGRAVE DICTIONARY OF ECONOMICS AND THE LAW 287, 287–88 (Peter
Newman ed., 1998); Janet T. Landa, A Theory of the Ethnically Homogeneous
Middleman Group: An Institutional Alternative to Contract Law, 10 J. LEGAL
STUD. 349, 349 (1981).
Electronic copy available at: https://ssrn.com/abstract=3239995

<<PAGE_BREAK>>

W03_ARBEL_GRAPHICS_REVISED.DOCX (DO NOT DELETE) 1/30/20 11:10 AM
1252 WAKE FOREST LAW REVIEW [Vol. 54
As central as reputation is to these debates, it is perplexing to see
how little attention is given to reputation’s nature.63 Instead, the
literature mostly relies on a simplistic “emergentist” view of
reputation that ignores all questions of how reputation comes to be.64
The reputation of goods and services is described as simply emerging
from complex market interactions.65 A seller sells a widget and once
enough consumers purchase and use it, the widget “automatically”
gains a reputation for quality.66 Somehow, reputation emerges. From
where? How? By whom? These issues are hardly ever addressed.
Instead, reputation is taken to be, as Shapira pointedly notes, “[a]
frictionless, uncomplicated process in which individuals somehow get
access to information.”67
It is hard to overstate just how common it is for people to perceive
that reputation is reliable and how much this perception influences
policy. Take, for example, economic models of market transactions;
there, it is common to assume that “[t]he moment that a person
cheats, it becomes common knowledge that the person lacks integrity,
and hence there is no cooperation for the rest of the game.”68 In the
foundational Klein-Leffler model of reputation, consumers are
explicitly assumed to “costlessly communicate [quality information]
among one another.”69 Such spontaneous reputational information is
then thought to propagate “throughout the community without
63. LAWRENCE MCNAMARA, REPUTATION AND DEFAMATION 19 (2007) (“[O]nly
a few works are concerned with the nature of reputation.”); Laura A. Heymann,
The Law of Reputation and the Interest of the Audience, 52 B.C. L. REV. 1341,
1345 (2011); Robert C. Post, The Social Foundations of Defamation Law:
Reputation and the Constitution, 74 CALIF. L. REV. 691, 692 (1986) (describing
reputation as a “mysterious thing”).
64. A view is emergentist if it identifies a phenomenon only at the complex
level. For example, the quality of “saltiness” does not describe the taste of
chlorine or sodium, yet their combination creates a salty ionic compound; a grain
of sand has no “pileness” to it, but once enough grains are collected, a pile
emerges; or, more contentiously, no neuron has self-awareness, yet their
collection seems to cause conscience. This omission is hardly unique to law; for a
recent example in other fields, see Wenqi Shen et al., Competing for Attention:
An Empirical Study of Online Reviewers’ Strategic Behavior, 39 MGMT. INFO. SYS.
Q. 683, 684 (2015) (“[M]ost of the existing literature has overlooked the question
of how online reviewers are incentivized to write reviews.”).
65. For a review of legal conceptions of reputation, see Post, supra note 63,
at 691.
66. See Richman, supra note 59, at 750.
67. Shapira, supra note 25, at 1203.
68. W. Bentley MacLeod, Reputations, Relationships and the Enforcement of
Incomplete Contracts 31 (Ctr. for Econ. Studies & Ifo Inst. for Econ. Research,
Working Paper No. 1730, 2006); see also Lewis A. Kornhauser, Reliance,
Reputation, and Breach of Contract, 26 J.L. & ECON. 691, 697 (1983) (depicting
an ideal model of reputation where “buyers have perfect knowledge of the seller’s
performance rate”).
69. Klein & Leffler, supra note 47, at 617. They do admit the possibility of
imperfect recall of reputational information. Id.
Electronic copy available at: https://ssrn.com/abstract=3239995

<<PAGE_BREAK>>

W03_ARBEL_GRAPHICS_REVISED.DOCX (DO NOT DELETE) 1/30/20 11:10 AM
2019] LIMITS OF MARKET DISCIPLINE 1253
institutional help.”70 In legal scholarship, this conception arises most
clearly in defamation law jurisprudence where reputation is thought
of as a right—natural, static, or inherent, like property or dignity—
that comes into being by immaculate conception and must be
“protected” against those who seek to besmirch it.71
Some scholars have started to recognize cracks in the traditional
paradigm.72 As they note, reputational information may be costly to
obtain, noisy,73 distorted by the incentives of intermediaries,74 or
ineffectual (if, for example, a sellers’ presence in the market is short-
lived).75 Economists Paul Milgrom and John Roberts focus on the
difficulty of creating reputation when opportunistic behavior is hard
to detect.76 Similarly, Professor Alan Schwartz notes the potential
costs of reputation, explaining that “the innocent party [to a failed
transaction] will incur costs in informing others that it was not at
fault, and third parties will incur costs learning about which of the
contract parties is unreliable.”77 Finally, Professor Bar-Gill
emphasizes the possibility that in some markets there will be an
insufficient volume of reputational information.78 Still, even
admitting reputation’s potential noise does not amount to a claim that
recognizes the inherent systematic distortion of reputational
information.79 Rather, the noise is thought to disappear, as new
information accumulates and “increases the diagnosticity” and
persuasiveness of reputation.80 Moreover, these are exceptions. The
dominant view in the policy and scholarship is still very much
emergentist, expressing great trust in the reliability of reputation.
The emergentist view is problematic for several reasons, not the
least of which is its lack of any theoretical underpinnings that explain
when—and when not—reputation will come to be. Why is
70. See Richman, supra note 59, at 750.
71. See Post, supra note 63, at 692; Yonathan Arbel & Murat Mungan, The
Uneasy Case for Expanding Defamation Law, 71 ALA. L. REV. (forthcoming 2019)
(arguing that audiences are actively involved in assigning meaning to statements
and that defamation law might exacerbate the harmful effect of lies).
72. Some notable examples include Goldman, supra note 9; Stemler, supra
note 4; Van Loo, supra note 48, at 583 (noting the existence of potential
informational market failures due to manipulations of consumer reviews).
73. See Alan Schwartz, The Enforcement of Contracts and the Role of the
State, in LEGAL ORDERINGS AND ECONOMIC INSTITUTIONS 105, 105 (Fabrizio
Cafaggi et al. eds., 2007) (“Reputation is a noisy signal.”).
74. See Shapira, supra note 25, at 1219.
75. See Douglas W. Diamond, Reputation Acquisition in Debt Markets, 97 J.
POL. ECON. 828, 829 (1989).
76. PAUL MILGROM & JOHN ROBERTS, ECONOMICS, ORGANIZATION, AND
MANAGEMENT 265 (1992).
77. See Schwartz, supra note 73, at 105.
78. See Bar-Gill, supra note 5, at 756.
79. See, e.g., MILGROM & ROBERTS, supra note 76, at 259–67.
80. Adwait Khare et al., The Assimilative and Contrastive Effects of Word-
of-Mouth Volume: An Experimental Examination of Online Consumer Ratings, 87
J. RETAILING 111, 112 (2011).
Electronic copy available at: https://ssrn.com/abstract=3239995

<<PAGE_BREAK>>

W03_ARBEL_GRAPHICS_REVISED.DOCX (DO NOT DELETE) 1/30/20 11:10 AM
1254 WAKE FOREST LAW REVIEW [Vol. 54
information about some products abundant whereas information for
other products is sparse? Another problem is that many jurists have
come to think of reputation as a right that belongs to individuals,81
rather than the byproducts of dynamic social processes.82 As a result,
much of the discussion about reputation neglects its social value.83
But most disconcerting is the implication that reputation is generally
reliable—that it fairly describes the quality of the underlying good
without systematic bias. After all, if reputation simply emerges,
there is no process by which it will be “tainted.” Thus, the proposition
that reputation can be unreliable cuts at heart, nerve, and sinew of
these influential works.
III. REPUTATION FAILURE: MICROFOUNDATIONS, DISTORTIONS, AND
SOCIAL WELFARE
When my neighbor complained that his newly purchased lawn
mower was shoddy, he created reputational information.84 When user
“daniel” wrote on Amazon that a play tent has “the stability of a house
of cards,” he or she created reputational information.85 When
musician Dave Caroll uploaded his song “United Breaks Guitars” to
YouTube, he created reputational information, and powerful
information at that: United’s stock price fell ten cents, representing a
market cap loss of $180 million.86
Reputation is information. It is a kind of statistical information
which helps consumers predict their own experiences based on the
81. See, e.g., Joseph Blocher, Reputation as Property in Virtual Economies,
118 YALE L.J. POCKET PART 120, 120 (2009), https://www.yalelawjournal.org
/forum/reputation-as-property-in-virtual-economies (“[R]eputation is not merely
valuable; it is the new New Property.”). Moreover, many disagreed with the
Supreme Court’s decision in Paul v. Davis, 424 U.S. 693, 694 (1976) (holding that
harm to reputation, by itself, is not deprivation of liberty or property for
Fourteenth Amendment purposes). See Eric J. Mitnick, Procedural Due Process
and Reputation Harm: Liberty as Self-Invention, 43 U.C. DAVIS L. REV. 79, 89–97
(2009); see also Marrero v. City of Hialeah, 625 F.2d 499, 514 (5th Cir. 1980)
(concerning a Florida law that considers business reputation a property interest).
82. See POSNER, supra note 47, at 252–53 (1981) (“It makes no sense to treat
reputation as a ‘right.’ Reputation is what others think of us.”).
83. See Heymann, supra note 63, at 1342.
84. See Nick Emler, Gossip, Reputation, and Social Adaptation, in GOOD
GOSSIP 135 (R. F. Goodman & A. Ben-Ze’ev eds., 1994) (“Reputations do not exist
except in the conversations that people have about one another.”).
85. daniel, Customer Review of “AMASKY tm Large Space Children Game
Play Tent,” AMAZON (Apr. 20, 2016), https://www.amazon.com/gp/customer-
reviews/R373NHZZ854AU4/ref=cm_cr_arp_d_rvw_ttl?ie=UTF8&ASIN=B00YB
TFY52.
86. See Chris Ayres, Revenge is Best Served Cold – on YouTube, TIMES
(London) (July 22, 2009, 1:00 AM), https://www.thetimes.co.uk/article/revenge-
is-best-served-cold-on-youtube-2dhbsh6jtp5; Gulliver, Did Dave Carroll Lose
United Airlines $180m?, ECONOMIST (July 24, 2009), https://www.economist.com
/gulliver/2009/07/24/did-dave-carroll-lose-united-airlines-180m.
Electronic copy available at: https://ssrn.com/abstract=3239995

<<PAGE_BREAK>>

W03_ARBEL_GRAPHICS_REVISED.DOCX (DO NOT DELETE) 1/30/20 11:10 AM
2019] LIMITS OF MARKET DISCIPLINE 1255
distribution and valence of experiences of past consumers.87 As such,
reputational information is like a poll. But as the examples highlight,
this kind of information does not simply emerge; rather, it is the fruit
of deliberate action by disparate individuals who decide to take time
and effort to share reviews, opinions, gossip, and other word-of-mouth
information.
The most basic observation to make is that such peer-to-peer
reputational information is a public good.88 While everyone benefits
from having this public resource, producers of reputational
information are not directly compensated for their contributions.
Private costs and public benefits are a recipe for the well-known
free-rider problem—like national defense, clean air, and a vaccinated
society—where there is a constant concern with overconsumption and
undersupply.89
Once reputation is seen as public good, a deep puzzle is exposed:
What motivates individuals to share reputational information? Who
does so? And, critically, to what effect?90
This Part explores these “microfoundations” of reputation and
their consequences. It shows how people share experiences for
reasons that are mostly private and self-serving.91 As a result, future
consumers are often exposed to a highly unrepresentative and biased
sample of limited credibility. Inferences drawn from such samples
can be highly misleading, even for those consumers who are aware of
them and try to account for them. As data scientists would say: Bias
in, bias out.92
87. See Goldman, supra note 9, at 294; Shapira, supra note 25, at 1201.
88. See Cowen, supra note 7. Once reputational information exists, it is hard
to prevent people from using it (i.e., it is non-excludability); nor does use of this
resource diminish it (i.e., it is non-rivalry). See Larry Downes, The Economics of
Information: From Dismal Science to Strange Tales, in THE NEXT DIGITAL DECADE
273, 277–78 (Berin Szoka & Adam Marcus eds., 2010). Professional publications
solve these problems by commoditizing the information they produce, which is
subject to copyright and other protections. See, e.g., N.Y. GEN. BUS. LAW § 397
(McKinney 1961) (prohibiting the unconsented use of nonprofits’ test results by
nonprofits).
89. Today, reputational platforms reap most of the benefit of reputation
aggregation, but reputation’s direct producers receive very little reward. These
issues are sometimes conceptualized as a tragedy of the commons. See Garrett
Hardin, The Tragedy of the Commons, 162 SCI. MAG. 1243, 1243–48 (1968).
90. By and large, legal scholars have glossed over this question. One notable
exception is Robert D. Cooter, Decentralized Law for A Complex Economy: The
Structural Approach to Adjudicating the New Law Merchant, 144 U. PA. L. REV.
1643, 1669 (1996) (arguing that individuals disseminate reputational
information due to an internalized social norm).
91. For an exploration of consumer activism in the marketplace, see
Yonathan A. Arbel & Roy Shapira, Consumer Activism: From the Informed
Minority to the Crusading Minority, DEPAUL L. REV. (forthcoming 2019) and
Arbel & Shapira, supra note 2.
92. Sandra G. Mayson, Bias In, Bias Out, 128 YALE L.J. 2218, 2224 (2019).
Electronic copy available at: https://ssrn.com/abstract=3239995

<<PAGE_BREAK>>

W03_ARBEL_GRAPHICS_REVISED.DOCX (DO NOT DELETE) 1/30/20 11:10 AM
1256 WAKE FOREST LAW REVIEW [Vol. 54
A. The Microfoundations of Reputation
1. The Costs of Gossip
Creating and sharing reputational information involves effort,
time, and, in some cases, the risk of legal liability. “Bianca S.” must
have spent the better part of her lunch break writing a 143-word
review of a cleaning service attached alongside six photos of her
home.93 One anonymous Amazon user probably spent at least a few
minutes writing a 291-word review of his experiences with Kevlar
gloves,94 and “The Amazing Lucas” in all likelihood spent a few hours
creating and editing a seven-minute review of the movie It.95 Not only
is creating reviews time consuming, it is also sometimes emotionally
difficult to say negative things about others.96 Beyond these costs, as
will be elaborated below, there is a growing tendency among some
service providers to sue consumers for negative reviews, using factual
inaccuracies and misstatements to ground their lawsuits.97 Such
lawsuits can involve months of litigation, a serious disruption, and—
in some rare cases—large judgments.98
These broadly-defined costs suggest that there must be
countervailing motivations to produce reputational information, or
else people—as distinct from sellers, advertisers, and affiliates—will
not generate reputational information. Citing the utility of
reputation to the operation and efficiency of the market, as well as
the welfare of future consumers, is insufficient as these are public
benefits.99 What needs to be determined, then, are the specific private
benefits—what the sharing individual gets from incurring these
costs.
2. Internal Drives: On Spite and Gratitude
Starting in the 1960s, psychologists began investigating the
psychological drives impelling individuals to participate in
93. Bianca S., Customer Review of “Joanna Cleaning Service,” YELP (July 15,
2016), https://www.yelp.com/biz/joanna-cleaning-service-brooklyn-
2?hrid=XjR0XP21gLXqvOoHH99vEA.
94. PsychSchematics, Customer Review of “SINNAYEO- Kevlar Cat Bird
Dog Reptile Barbecue, Grill, hearth Leather Gloves Animal Handling Gloves,”
AMAZON (Mar. 4, 2017), https://www.amazon.com/gp/review
/R2ZUV15SLM6H0M.
95. The Amazing Lucas, it movie 2017 review WHY THIS MOVIE IS BAD,
YOUTUBE (Sept. 12, 2017), https://www.youtube.com/watch?v=PEKLB9j6-nY.
96. Many religions prohibit calumny and detraction. See, e.g., Joseph
Delany, Detraction, in 4 THE CATHOLIC ENCYCLOPEDIA 757, 757–58 (Charles G.
Herbermann et al. eds., 1908); YISRAEL MEIR KAGAN, SEFER CHAFETZ CHAYIM
(Yedidya Levy trans., 2008).
97. See infra Subpart IV.B.5.
98. See Steven Tadelis, Reputation and Feedback Systems in Online
Platform Markets, 8 ANN. REV. ECON. 321 (2016).
99. See Jeffrey L. Harrison, A Positive Externalities Approach to Copyright
Law, 13 J. INTELL. PROP. L. 1, 8–10 (2012).
Electronic copy available at: https://ssrn.com/abstract=3239995

<<PAGE_BREAK>>

W03_ARBEL_GRAPHICS_REVISED.DOCX (DO NOT DELETE) 1/30/20 11:10 AM
2019] LIMITS OF MARKET DISCIPLINE 1257
word-of-mouth activity.100 In an influential paper, psychologist
Ernest Dichter highlighted four internal motivations: self-centered
perceptions, quality of experience, altruistic motivations, and
message involvement.101 In the presence of these factors, individuals
would be motivated to create and share reputational information.102
Over time, however, this theory encountered difficulties. Most
problematic were the empirical findings that consumers are more
likely to share reputational information when they had a favorable
experience.103 Yet other evidence showed the exact opposite:
dissatisfaction yields greater propensity to share.104 In 1998,
business professor Eugene Anderson reconciled these findings by
explaining that the underlying issue is the extremity of experience
rather than its valence.105 Further, current work in psychology
explains the creation of favorable and negative reviews as a distinct
activity motivated by different internal impetus. For example, D.S.
Sundaram et al. argued that positive word-of-mouth results from
altruism,106 product involvement, self-enhancement, and a desire to
help the company, whereas negative word-of-mouth is due to anxiety
reduction, vengeance, altruism, and advice-seeking purposes.107
Critically, these internal drivers are related to the quality of the
experience. The standard Expectation Disconfirmation Theory holds
that the gap between expectation and reality creates a sense of
100. The propensity to help others, as well as the idea that one must
“retaliate” against wrongs and “reward” generosity, has strong roots in
evolutionary psychology and social norms. See ELINOR OSTROM, TRUST AND
RECIPROCITY: INTERDISCIPLINARY LESSONS FOR EXPERIMENTAL RESEARCH 41–44
(2003); Yonathan A. Arbel & Yotam Kaplan, Tort Reform Through the Back Door:
A Critique of Law and Apologies, 90 S. CAL. L. REV. 1199, 1212 n.60 (2017); see
also Jeffrey L. Harrison, Spite: Legal and Social Implications, 22 LEWIS & CLARK
L. REV. 991, 993 (2018) (“[P]erhaps actions that appear spiteful are actually not
self-regarding but have deontological significance in that the detractor acts out
of sense of duty.”).
101. Ernest Dichter, How Word-of-Mouth Advertising Works, 44 HARV. BUS.
REV. 147, 148 (1966); see also Kyung Hyan Yoo & Ulrike Gretzel, What Motivates
Consumers to Write Online Travel Reviews?, 10 INFO. TECH. & TOURISM 283, 286
(2008) (discussing motivations).
102. See Yoo & Gretzel, supra note 101, at 286–88.
103. See John H. Holmes & John D. Lett, Jr., Product Sampling and Word of
Mouth, 17 J. ADVERT. RES. 35, 36 (1977).
104. See Marsha L. Richins, Negative Word-of-Mouth by Dissatisfied
Consumers: A Pilot Study, 47 J. MARKETING 68, 76 (1983).
105. See Eugene W. Anderson, Customer Satisfaction and Word of Mouth, 1
J. SERV. RES. 5, 11 (1998).
106. One oddity with altruistic motivations is that consumers tend to review
products that were already extensively reviewed despite the low information
value of such reviews. See Jonathan Lafky, Why Do People Rate? Theory and
Evidence on Online Ratings, 87 GAMES & ECON. BEHAV. 554, 567 (2014); Fang Wu
& Bernardo A. Huberman, Opinion Formation Under Costly Expression, 1 ACM
TRANSACTIONS ON INTELLIGENT SYS. & TECH. 1, 3 (2010).
107. See D.S. Sundaram et al., Word-Of-Mouth Communications: A
Motivational Analysis, 25 ADVANCES IN CONSUMER RES. 527, 527–28 (1998).
Electronic copy available at: https://ssrn.com/abstract=3239995

<<PAGE_BREAK>>

W03_ARBEL_GRAPHICS_REVISED.DOCX (DO NOT DELETE) 1/30/20 11:10 AM
1258 WAKE FOREST LAW REVIEW [Vol. 54
disequilibrium in the consumer that manifests as feelings of spite or
gratitude that motivate action.108 A recently developed, empirically
successful variant of this theory is the tractable “brag and moan”
model. This model stipulates that independent of expectations,
extreme experiences would motivate individuals to share their
opinions with others.109 The problem is, however, that many if not
most products and services are not extreme in the experiences they
generate.110 The theory holds that these tepid experiences will tend
to be suppressed because they are “boring” and do not evoke any sense
of spite or gratitude.111 Empirical research strongly supports this
prediction.112
3. Social Pressures and Herd Behavior
Aristotle was not wrong: man is a social animal. As such, we are
in some sense “programmed” to cooperate, reciprocate, and engage in
social behavior.113 It is no coincidence that reputation-creating
activities stand at the center of so many social activities.114 In social
gatherings, individuals gossip, share experiences, and impart
opinions with other members of the social community.115 Such
activities have a clear social function. When transgressors violate
community norms, gossip and related activities allow members of the
community to learn of the violation and take concerted social action
against the transgressor, such as avoidance, disrespect, and in
extreme cases, shunning and excommunication.116 Fearing this,
108. See William O. Bearden & Jesse E. Teel, Selected Determinants of
Consumer Satisfaction and Complaint Reports, 20 J. MARKETING RES. 21, 21–27
(1983).
109. Nan Hu et al., Can Online Reviews Reveal a Product’s True Quality?
Empirical Findings and Analytical Modeling of Online Word-of-Mouth
Communication, EC ‘06 PROC. 7TH ACM CONF. ELECTRONIC COM. 324, 327 (2006)
(attempting to discern whether consumer spite (or gratitude) is premised on a
desire to punish the seller or to warn future buyers failed to reach any clear
conclusions); Lafky, supra note 106, at 563.
110. Lafky, supra note 106, at 556–57.
111. Id.
112. See infra Subpart II.A.
113. See, e.g., OSTROM, supra note 100, at 28 (summarizing experimental
studies showing human tendency to reciprocate at the expense of self-interest).
114. See, e.g., Nicholas Emler, Gossip, Reputation, and Social Adaptation, in
GOOD GOSSIP 117, 117 (Robert. F. Goodman & A. Ben-Ze’ev eds., 1994) (exploring
the role of gossip).
115. See Jonah Berger, Word of Mouth and Interpersonal Communication: A
Review and Directions for Future Research, 24 J. CONSUMER PSYCHOL. 586, 588–
90 (2014) (arguing that word-of-mouth activities are means to a variety of social
ends, such as self-enhancing one’s image, signaling a positive identity, and filling
conversational space).
116. See, e.g., ROBERT C. ELLICKSON, ORDER WITHOUT LAW: HOW NEIGHBORS
SETTLE DISPUTES 130 (1991).
Electronic copy available at: https://ssrn.com/abstract=3239995

<<PAGE_BREAK>>

W03_ARBEL_GRAPHICS_REVISED.DOCX (DO NOT DELETE) 1/30/20 11:10 AM
2019] LIMITS OF MARKET DISCIPLINE 1259
community members feel a strong pressure to conform, thus
maintaining social norms.117
The standard view of social pressures fails to consider the many
ways that social forces can also undermine cooperation.118 If a seller
misbehaves in a market, it is important that buyers share this
information. But proper socialization often consists of masking one’s
true feelings, forgiving slights, and avoiding offending others even at
the cost of distorting reality (i.e., “white lies”). Forgiveness and
charity can play a negative role by leading consumers to avoid
pursuing action.119 Even reciprocity can be problematic, as
discovered inadvertently by eBay’s engineers.120 In one iteration,
buyers and sellers could rate each other after every transaction.121
This led reviewers to post (artificially) favorable reviews in the hope
that their counterparts will positively review them.122 Consumers
explained their behavior as being motivated by fear of retaliation: “[I]f
I left a bad review, I might be afraid of being retaliated against.”123 A
similar issue arises with Uber and Lyft, where both drivers and
passengers rate each other.124 In addition, individuals often mask
their opinions due to the Social Desirability Bias,125 the pressure to
strategically project socially acceptable opinions.126 A hijab-wearing
interviewer would hear more women reporting themselves as
religious than an unveiled one.127 Similarly, this bias often leads
people to misreport tax compliance, porn consumption, homosexual
117. Id. at 57.
118. This conversion—of how social tendencies undermine cooperation—is
similar to Adam Smith’s conversion—the idea that selfish behavior can promote
cooperation. SMITH, supra note 1, at 326–27.
119. See Arbel & Shapira, supra note 2 (discussing findings showing that most
consumers avoid reacting to seller failure).
120. See Chrysanthos Dellarocas et al., Self-Interest, Reciprocity, and
Participation in Online Reputation Systems 3 (MIT Sloan, Working Paper No.
4500-04, 2004).
121. Id.
122. Id. at 1.
123. See FTC, supra note 47, at 42; Edelman & Geradin, supra note 4, at 316
(“Some users seem to fear retaliation through a review platform.”); see also
Bryant Cannon & Hanna Chung, A Framework for Designing Co-Regulation
Models Well-Adapted to Technology-Facilitated Sharing Economies, 31 SANTA
CLARA HIGH TECH. L.J. 23, 38 (2015).
124. See, e.g., SAUL KASSIN ET AL., SOCIAL PSYCHOLOGY 285 (10th ed. 2017)
(discussing the role of reciprocity with respect to reviews); Stemler, supra note 4,
at 692 (discussing the effects of reciprocity in the sharing economy).
125. See Maryon F. King & Gordon C. Bruner, Social Desirability Bias: A
Neglected Aspect of Validity Testing, 17 PSYCHOL. & MARKETING 79, 82 (2000)
(“Today, [Social Desirability Bias] is considered to be one of the most common and
pervasive sources of bias affecting the validity of experimental and survey re-
search findings in psychology.”).
126. See Lisa Blaydes & Rachel M. Gillum, Religiosity-of-Interviewer Effects:
Assessing the Impact of Veiled Enumerators on Survey Response in Egypt, 6 POL.
& RELIGION 459, 462 (2013).
127. Id. at 476.
Electronic copy available at: https://ssrn.com/abstract=3239995

<<PAGE_BREAK>>

W03_ARBEL_GRAPHICS_REVISED.DOCX (DO NOT DELETE) 1/30/20 11:10 AM
1260 WAKE FOREST LAW REVIEW [Vol. 54
activities, recycling, and charity.128 It is hard to overstate the
tendency of individuals to misstate opinions given this bias.129
Social pressures often result in individuals herding around
popular opinions.130 Herding is the convergence of opinions, a
phenomenon very familiar in public debates, whereby participants
“often shift their public statements in accordance with reputational
incentives.”131 Herding is also well documented in the context of
reviews.132 Experiments by University of Washington Professor Ann
Schlosser found that exposing subjects to past negative reviews
increases the likelihood that the subject will also voice a negative
review.133 Similarly, reviews for popular movies tend to lump around
leading opinions.134 Interestingly, some individuals exhibit an
antiherding behavior whereby they strategically express
nonconforming opinions, possibly in an attempt to lead the herd.135
While it is hard to assess the overall effect of social motivations in the
abstract, the effect seems large. As marketing professors Wendy Moe
and David Schwiedel concluded: “[A] vocal subset of the customer
base may dominate the ratings environment, consequently steering
the subsequently posted evaluations and deterring some customers
from contributing to the environments.”136
128. See Samuel Himmelfarb & Carl Lickteig, Social Desirability and the
Randomized Response Technique, 43 J. PERSONALITY & SOC. PSYCHOL. 710, 710–
17 (1982) (reviewing empirical findings).
129. See King & Bruner, supra note 125, at 82.
130. See Timur Kuran & Cass R. Sunstein, Availability Cascades and Risk
Regulation, 51 STAN. L. REV. 683, 727–30 (1999); Maria del Mar Rueda et al., Use
of Randomized Response Techniques When Data Are Obtained from Two Frames,
9 APPLIED MATHEMATICS & INFO. SCI. 389, 389 (2015). Social motivations are
complex and their effects can go in many different directions, including
antiherding, as in Radu Jurca et al., Reporting Incentives and Biases in Online
Review Forums, 4 ACM TRANSACTIONS ON WEB 1, 1–3, 14, 20, 21, 22, 25 (2010).
131. Cass R. Sunstein, Deliberative Trouble? Why Groups Go to Extremes, 110
YALE L.J. 71, 78 (2000).
132. See Stemler, supra note 4, at 693–94 (discussing evidence of herding in
online reviews).
133. See Ann E. Schlosser, Posting Versus Lurking: Communicating in a
Multiple Audience Context, 32 J. CONSUMER RES. 260, 264 (2005) (“[R]eading a
negative review triggers posters’ concerns with the social outcomes of their public
evaluations, thereby causing them to lower their public ratings strategically.”).
134. See Young-Jin Lee et al., Do I Follow My Friends or the Crowd?
Information Cascades in Online Movie Ratings, 61 MGMT. SCI. 2241, 2256 (2015).
135. Wendy W. Moe & David A. Schweidel, Online Product Opinions:
Incidence, Evaluation, and Evolution, 31 MARKETING SCI. 372, 383 (2012); Shen
et al., supra note 64, at 689–90 (finding that raters choose to review less reviewed
books in order to stand out and gain more attention where there are reviewer
rankings systems).
136. Moe & Schweidel, supra note 135, at 385. Similarly, others find that
attention seeking is another important social motivator (where there are
reviewer ranking systems). See Shen et al., supra note 64, at 685. Additionally,
maintaining an online social identity (rather than anonymity) was found to lead
to more quality content. Zhongmin Wang, Anonymity, Social Image, and the
Electronic copy available at: https://ssrn.com/abstract=3239995

<<PAGE_BREAK>>

W03_ARBEL_GRAPHICS_REVISED.DOCX (DO NOT DELETE) 1/30/20 11:10 AM
2019] LIMITS OF MARKET DISCIPLINE 1261
4. Material Incentives: Shilling and Cherry-Picking
Material rewards are the most direct form of incentivizing
individuals to share reputational information. The familiar version
of that is “shilling,” also known as “fake reviews” or “astroturfing,”
which involves the provision of payments in exchange for (unfounded)
positive reviews.137 Shilling is reported to be quite common, with
some estimating that as much as 30 percent of online reviews are
fake.138 In 2013, for example, Samsung was fined $340,000 because
it paid for fake reviews—both positive reviews for their own products
and negative reviews for their competitors.139 Various websites offer
full reimbursement of the purchase of certain products in exchange
for positive reviews, which are then reported by the unwitting
platforms as being made by “verified users.”140 Firms also use
negative rewards, i.e., sanctions, to deter consumers from sharing
negative reviews.141 Until the recent passing of the Consumer Review
Fairness Act, and perhaps continuing despite the law, firms would
include nondisparagement clauses in contracts with consumers.142 In
addition, firms sometimes threaten consumers with legal action for
defamation or use copyright law to argue that a review infringes on
Competition for Volunteers: A Case Study of the Online Market for Reviews, 10
B.E. J. ECON. ANALYSIS & POL’Y 1, 1–31 (2010).
137. See generally FTC, supra note 47, at 41–42 (reviewing evidence on
shilling and reporting some attempts by reputation platforms to curb shilling);
Kaitlin A. Dohse, Fabricating Feedback: Blurring the Line Between Brand
Management and Bogus Reviews, 2013 U. ILL. J.L. TECH. & POL’Y 363, 370–71
(reviewing some of the services that offer bogus reviews).
138. Nan Hu et al., Manipulation of Online Reviews: An Analysis of Ratings,
Readability, and Sentiments, 52 DECISION SUPPORT SYS. 674, 681 (2012)
(estimating fake reviews at 10 percent); Karen Weise, A Lie Detector Test for
Online Reviewers, BLOOMBERG BUSINESSWEEK (Sept. 29, 2011, 6:09 PM),
https://www.bloomberg.com/news/articles/2011-09-29/a-lie-detector-test-for-
online-reviewers.
139. See Andreas Munzel, Malicious Practice of Fake Reviews: Experimental
Insight into the Potential of Contextual Indicators in Assisting Consumers to
Detect Deceptive Opinion Spam, 30 RECHERCHE & APPLICATIONS MARKETING 24,
41 (2015).
140. See, e.g., AMZDISCOVER, https://www.amzdiscover.com/blog/best-100-
amazon-review-groups-to-help-you-test-products/ (last visited Dec. 3, 2019);
AMZRC, https://amzrc.com/ (last visited Dec.3, 2019). A more extensive list of
websites like these is on record with the author.
141. Brad Tuttle, Guess Who’s Getting Some Pretty Awful Reviews: User
Review Sites, TIME (Sept. 21, 2013), http://business.time.com/2013/09/21/guess-
whos-getting-some-pretty-awful-reviews-user-review-sites/.
142. Consumer Review Fairness Act of 2016, 15 U.S.C. § 45b(b)(1) (2012)
(voiding standard form contracts that include anti-disparagement clauses). See
Lucille M. Ponte, Protecting Brand Image or Gaming the System? Consumer
“Gag” Contracts in an Age of Crowndsourced Ratings and Reviews, 7 WM. & MARY
BUS. L. REV. 59, 59 (2016) (surveying the use of anti-disparagement clauses before
the law).
Electronic copy available at: https://ssrn.com/abstract=3239995

<<PAGE_BREAK>>

W03_ARBEL_GRAPHICS_REVISED.DOCX (DO NOT DELETE) 1/30/20 11:10 AM
1262 WAKE FOREST LAW REVIEW [Vol. 54
their copyright and should be taken down.143 Shilling strategies are
highly diverse, sophisticated, and reportedly quite potent.144
A related but less understood problem is that of “cherry-picking.”
Companies often selectively choose consumers who are most likely to
disseminate either favorable or unfavorable information and reward
them.145 As is very familiar, businesses offer thinly veiled bribes to
unhappy consumers in the form of reimbursements, free meals, or
“heartfelt” apologies.146 Celebrities and other influencers are also
more likely to receive special treatment in the hope that they will
share their (unrepresentative) experiences with their many
followers.147
Both shilling and cherry-picking result from strategic behavior
on behalf of firms. Both result in and emphasize more extreme
opinions, at the extreme of middling ones.148 This is because it would
not pay to invest in promoting middling reviews.149
B. Reputational Distortions
Placing reputation within a framework of individual rationality
allows us to draw meaningful conclusions about the integrity,
evolution, and credibility of reputational information.150 Based on the
143. See infra Subpart IV.B.
144. See Dohse, supra note 137, at 370–71 (reviewing online shilling
techniques and the services). For an updated list of shilling services and news,
see Opinion Spam Detection: Detecting Fake Reviews and Reviewers,
https://www.cs.uic.edu/~liub/FBS/fake-reviews.html (last visited Dec. 3, 2019).
145. See generally Shmuel L. Becher & Tal Z. Zarsky, Minding the Gap, 51
CONN. L. REV. 69, 90 (2018) (demonstrating how firms treat consumers based on
the threat the consumers pose to the firms’ revenue).
146. See generally Arbel & Kaplan, supra note 100, at 1216 (exploring the
corrosive effects of apologies on deterrence).
147. See Becher & Zarsky, supra note 145, at 90–91 (finding that firms often
consider consumers’ “online influence over peers” when deciding how to handle
complaints).
148. See, e.g., Miguel Helft, Charges Settled over Fake Reviews on iTunes, N.Y.
TIMES (Aug. 26, 2010), http://www.nytimes.com/2010/08/27/technology/27ftc.html
(discussing false reviews that “typically gave the games four or five stars”).
149. Astroturfing is a form of advertising, although a highly misleading one.
For some economic dynamics of reputation and advertising, see Kyle Bagwell,
The Economic Analysis of Advertising, in 3 HANDBOOK OF INDUSTRIAL
ORGANIZATION 1701, 1703 (Mark Armstrong ed., 2007); Phillip Nelson,
Advertising as Information, 82 J. POL. ECON. 729, 730 (1974); see also Lingfang
(Ivy) Li et al., Buying Reputation as a Signal of Quality: Evidence from an Online
Marketplace 2 (Nat’l Bureau of Econ. Research, Working Paper No. 22584, 2016)
(finding that quality sellers tended to participate more often in a program where
they offer rebates for (all) reviews of their products).
150. Professor Abbey Stemler recently provided an insightful account of such
biases in the context of the sharing economy where intimate interactions between
peers occur often (such as sharing a stranger’s house or car). Stemler, supra note
4, at 674. Unlike her account, I focus on developing the microfoundations of
reputation of consumer goods generally and explore how sophisticated, rational
consumers would process flawed reputational information.
Electronic copy available at: https://ssrn.com/abstract=3239995

<<PAGE_BREAK>>

W03_ARBEL_GRAPHICS_REVISED.DOCX (DO NOT DELETE) 1/30/20 11:10 AM
2019] LIMITS OF MARKET DISCIPLINE 1263
framework developed in the last Subpart, three systemic distortions
will be expounded here, relating to participation, selection, and
content biases. The implications for consumer action are explored in
the following Part, but the overall arc of the argument is that in the
presence of these distortions, a reputation failure emerges, which
undermines the reliability of reputational information.
1. Reputational Sluggishness
Reputational sluggishness is the consequence of feeble, yet
existing, motivations to contribute to the public good of reputation.
On the one hand, reputation creators do not benefit financially from
creating reputational information.151 It is hard to commoditize
opinions and the transaction costs of doing so are prohibitive.152 On
the other hand, there are drivers that incentivize individuals to create
reputational information even in the absence of monetary
compensation. Altruism, desire for social recognition, gratitude, and
anger all provide reasons for people to create reputational
information that benefits others.153 Sluggishness emphasizes the
concern that for many individuals, or in many circumstances, these
benefits are insufficient. As a result, participation rates in reputation
creation are going to be low, leading reputational information to be
more slowly developed than is generally recognized.154
Empirical data, while wanting, suggests the broad scope of this
issue. One study found a sharing rate of fifteen out of a thousand
consumers.155 More optimistic estimates suggest a rate of one in
ten.156 In my analysis of product review data from Amazon, I found
that among electronics products with at least one review, the median
product only had two reviews.157 Moreover, few elect to write long
151. Today, reputational platforms reap most of the benefit of reputation
aggregation, but reputation’s direct producers receive very little reward. See also
Goldman, supra note 9, at 301.
152. Blockchain and cryptocurrencies may be promising solutions to such
transactions as they offer—in theory—trivial transaction costs. In the future, it
may be possible to commoditize opinions and employ a pay-per-use model.
153. See Lafky, supra note 106, at 555.
154. See generally Thomas R. Palfrey & Jeffrey E. Prisbrey, Altruism,
Reputation and Noise in Linear Public Goods Experiments, 61 J. PUB. ECON. 409,
410 (1996) (explaining that “altruistic behavior is illusionary or, at best, of minor
importance”).
155. Eric T. Anderson & Duncan I. Simester, Reviews Without a Purchase:
Low Ratings, Loyal Customers, and Deception, 51 J. MARKETING RES. 249, 251
(2014).
156. See, e.g., Andrew Thomas, The Secret Ratio That Proves Why Customer
Reviews Are So Important, INC., https://www.inc.com/andrew-thomas/the-hidden-
ratio-that-could-make-or-break-your-company.html (last visited Dec. 3, 2019)
(explaining that only one in ten satisfied customers will leave a review).
157. The mean was considerably higher at sixteen; the result of a few products
amassing many reviews. The analysis was based on data collected by Ruining
He & Julian McAuley, Ups and Downs: Modeling the Visual Evolution of Fashion
Electronic copy available at: https://ssrn.com/abstract=3239995

<<PAGE_BREAK>>

W03_ARBEL_GRAPHICS_REVISED.DOCX (DO NOT DELETE) 1/30/20 11:10 AM
1264 WAKE FOREST LAW REVIEW [Vol. 54
verbal reviews.158 Another indication comes from eBay. There, for
every negative review there are three times as many complaints to
customer service, which strongly indicates that many negative
reviews are either not generated or are deleted.159 In fact, this three
to one ratio seems like a lower bound on the scope of suppression of
opinions by users because it is reasonable that there would be many
more negative reviews than there would be active complaints. A more
speculative source of data, but interesting nonetheless, comes from
the sanitation reputation of restaurants in Los Angeles. In a series
of studies, researchers attempted to establish the effect of a law that
required restaurants to disclose their sanitation ratings.160 In a naïve
model of reputation the impact of such a law on food-borne illnesses
should be relatively small.161 If a person contracts such an illness,
then conditions are ripe for the word to travel fast: a food-borne illness
is highly salient, it is moderately easy to establish its cause, and it is
of great interest to prospective diners.162 Then, mandatory disclosure
of sanitation levels would then not be expected to have a significant
effect on food-borne illness because the information would already
exist throughout the market. Despite that, the study found that the
law had a powerful effect, with a sharp decline in hospitalizations due
to foodborne illnesses.163 The law’s effectiveness is amenable to a few
explanations, but one is that the reputation system was too congested
to work properly before the law—despite the ideal background
conditions.
Trends with One-Class Collaborative Filtering, U.C. SAN DIEGO JACOBS SCH.
ENGINEERING, http://cseweb.ucsd.edu/~jmcauley/pdfs/www16a.pdf.
158. Most reviews on Amazon for electronics are in the range of one hundred-
150 characters, or about half a paragraph. See Max Woolf, A Statistical Analysis
of 1.2 Million Amazon Reviews, MAX WOOLF’S BLOG (June 17, 2014),
http://minimaxir.com/2014/06/reviewing-reviews/.
159. See Nosko & Tadelis, supra note 4, at 9 (concluding “there are a
substantial number of transactions that went badly for which negative feedback
was not left”).
160. Ginger Zhe Jin & Phillip Leslie, The Effect of Information on Product
Quality: Evidence from Restaurant Hygiene Grade Cards, 118 Q.J. ECON. 409, 410
(2003) [hereinafter Jin & Leslie, Effect of Information]; see also Ginger Zhe Jin &
Phillip Leslie, Reputational Incentives for Restaurant Hygiene, 1 AM. ECON. J.:
MICROECONOMICS 237, 238 (2009) [hereinafter Jin & Leslie, Reputational
Incentives]; Paul A. Simon et al., Impact of Restaurant Hygiene Grade Cards on
Foodborne-Disease Hospitalizations in Los Angeles County, 67 J. ENVTL. HEALTH
32, 32 (2005). The local health department collected these ratings long before
restaurants were required to disclose them. Jin & Leslie, Effect of Information,
supra, at 410; Jin & Leslie, Reputational Incentives, supra, at 238.
161. See Simon et al., supra note 160, at 32 (explaining that some studies have
not found a connection between low department of health inspection scores and
foodborne-disease outbreaks at restaurants).
162. See Jin & Leslie, Reputational Incentives, supra note 160, at 238 (“Local
customers can learn about a restaurant’s hygiene quality by repeatedly
patronizing the restaurant, by talking to friends who have patronized the
restaurant, or through exposure to local news reports about the restaurant.”).
163. Jin & Leslie, Effect of Information, supra note 160, at 439–40.
Electronic copy available at: https://ssrn.com/abstract=3239995

<<PAGE_BREAK>>

W03_ARBEL_GRAPHICS_REVISED.DOCX (DO NOT DELETE) 1/30/20 11:10 AM
2019] LIMITS OF MARKET DISCIPLINE 1265
2. Regression to the Extreme
So far, we saw that only some consumers would choose to produce
reputational information, but this leaves the question of who those
consumers are. If the sample of consumers who produce reputation
is randomly selected, then we would expect the outliers to experience
what statisticians call “regression to the mean,” i.e., the eventual
balancing of outliers towards the mean of the group.164 Indeed, the
regression to the mean will be impeded by sluggishness, but there is
the possibility of self-correction over time with a randomly selected
sample. Unfortunately, the selection of consumers is all but random.
Regression to the extreme is the propensity of reputational data
to emphasize, rather than eliminate, outlier experiences over time.
Internal motivations select against middling reviews because those
reviews are based on experiences that are too “boring” to generate the
requisite sense of spite or gratitude that will overcome the costs of
producing reputational information.165 Additionally, reciprocity
norms would lead consumers to overly represent positive experience,
in hopes of receiving reciprocal reviews from sellers,166 and herding
would tend to silence nonpopular reviews that might betray the
consumer’s lack of sophistication.167 If a bottle of French wine
receives paeans, an individual consumer may be embarrassed to
reveal that she did not like it, noted no accents of “forest floor,” and
was not seduced by its “interplay of plump grapes and jazzy oak.”168
Lastly, financial incentives select against middling reviews because
shilling and cherry-picking foster creation of extreme opinions. All
these tendencies lead to “regression to the extreme”: the propensity of
reputational data to emphasize, rather than eliminate, outlier
experiences over time.169
Product reviews consistently provide strong evidence of
regression to the extreme. One might expect that most products sold
on the market would follow some generalized, bell-shaped (Gaussian)
distribution—after all, very few products are really outstanding or
truly atrocious. Instead, most reviews on a large variety of online
platforms form a so-called “J-shaped distribution,” with most reviews
164. Stephen M. Stigler, Regression Towards the Mean, Historically
Considered, 6 STAT. METHODS MED. RES. 103, 103–05 (1997).
165. Nan Hu et al., Overcoming the J-shaped Distribution of Product Reviews,
52 COMM. ACM 144, 145 (2009).
166. See Stemler, supra note 4, at 692.
167. Id. at 693.
168. Wine Description of Lewis, Cabernet Sauvignon Napa Valley 2014,
WINE SPECTATOR TOP 100, http://top100.winespectator.com/wine/wine-no-1/;
Wine Description of Orin Swift, Machete California 2014, WINE SPECTATOR TOP
100, http://top100.winespectator.com/wine/6-orin-swift/.
169. See Hillel J. Bavli, The Logic of Comparable-Case Guidance in the
Determination of Awards for Pain and Suffering and Punitive Damages, 85 U.
CIN. L. REV. 1, 17 (2017).
Electronic copy available at: https://ssrn.com/abstract=3239995

<<PAGE_BREAK>>

W03_ARBEL_GRAPHICS_REVISED.DOCX (DO NOT DELETE) 1/30/20 11:10 AM
1266 WAKE FOREST LAW REVIEW [Vol. 54
amassed in the extremes.170 On Amazon, more than 72 percent of the
products have an average rating of at least four stars.171 In Airbnb
listings, the average rating is 4.7 stars.172 Studies repeatedly find
that middling reviews are rare and that even products with an
average rating of two or three stars have only a few middling
reviews.173 Further evidence suggests this pattern is not unique to
online settings but carries over to offline settings.174 Figure 1 shows
the distribution of 1.2 million electronic products listed on Amazon,175
while Figure 2 shows a comparison of three specific products.176
170. See, e.g., Chrysanthos Dellarocas & Ritu Narayan, A Statistical Measure
of a Population’s Propensity to Engage in Post-Purchase Online Word-of-Mouth,
21 STAT. SCI. 277, 279–80 (2006); Yi-Chun Ho et al., Disconfirmation Effect on
Online Rating Behavior: A Structural Analysis, 28 INFO. SYS. RES. 626, 630
(2017); Hu et al., supra note 165, at 144–45 (detailing evidence from Amazon and
arguing that the J shaped distribution “contradicts the law of ‘large numbers’
that would imply a normal distribution”); Hu et al., supra note 109, at 328
(finding that 54 percent of all products on Amazon have a review distribution
that is neither normal or bimodal, and 35 percent have a unimodal, nonnormal
distribution); Woolf, supra note 158.
171. See Wu & Huberman, supra note 106, at 3; Woolf, supra note 158.
172. See Zervas et al., supra note 15, at 3.
173. See Lafky, supra note 106, at 556.
174. See Eugene W. Anderson, Customer Satisfaction and Word of Mouth, 1
J. SERV. RES. 5, 6–7 (1998).
175. See Woolf, supra note 158.
176. Amazon.com Customer Reviews: Culture War? The Myth of a Polarized
America, AMAZON, www.bit.do/RBProd1 (last visited Dec. 3, 2019); Amazon.com
Customer Reviews: $20 PlayStation Store Gift Card [Digital Code]: Video Games,
AMAZON, www.bit.do/RBProd2 (last visited Dec. 3, 2019); Amazon.com Customer
Reviews: BIC Cristal For Her Ball Pen, 1.0, Black, 16ct, AMAZON,
www.bit.do/RBProd3 (last visited Aug. 28, 2019).
Electronic copy available at: https://ssrn.com/abstract=3239995

<<PAGE_BREAK>>

W03_ARBEL_GRAPHICS_REVISED.DOCX (DO NOT DELETE) 1/30/20 11:10 AM
2019] LIMITS OF MARKET DISCIPLINE 1267
FIGURE 1. DISTRIBUTION OF RATINGS OF 1.2 MILLION ELECTRONIC
PRODUCTS LISTED ON AMAZON
FIGURE 2. REVIEWS OF THREE SAMPLE PRODUCTS
Electronic copy available at: https://ssrn.com/abstract=3239995

<<PAGE_BREAK>>

W03_ARBEL_GRAPHICS_REVISED.DOCX (DO NOT DELETE) 1/30/20 11:10 AM
1268 WAKE FOREST LAW REVIEW [Vol. 54
Although the J-shaped distribution strongly supports the idea of
regression to the extreme, alternative explanations should also be
considered. One alternative is that market dynamics push low-
quality products out of the market.177 Because such pressures leave
only high-quality products on the market, reviews would be
(accurately) amassed in the right tail. While worthy of further
investigation, this explanation appears unlikely for a number of
reasons. Even if the products on the market are of high quality, there
should still be some middling reviews,178 and, in particular, there
should be more middling reviews than negative reviews.179 This
explanation suggests that high ranking is indicative of quality, but in
fact, rankings of identical products listed on different platforms are
often negatively correlated, such that a high ranking of the same
product in one place does not predict a high ranking elsewhere.180
A more general issue, and one that clouds other alternative
explanations, is that voluntary consumer reviews systematically
diverge from other types of evaluations. Across a variety of products,
professional testing of the same products listed on consumer websites
shows low correlation with consumer reviews.181 Not only does the
average quality differ, but a systematic difference in the distribution
of opinions also exists. While consumers’ reviews follow the noted J-
distribution, professional reviews of the same products follow a bell-
shaped distribution.182 One can almost hear the exasperation in the
voice of the researchers who concluded that “critics are more normal
than normal users.”183 If professional reviewers are competent, one
would expect a strong correlation between their judgments and
consumer reviews; the lack of such correlations suggests that at least
one of these sources of information is amiss. To test whether the
professional reviewers are actually inaccurate, consider the following
experiment. 218 participants, none of them a professional critic, were
177. A related theory is that consumers select products that they will probably
like and so it is expected that there will be a concentration of satisfied consumers.
See Nilesh Dalvi et al., Para ‘normal’ Activity: On the Distribution of Average
Ratings, 7 PROC. 7TH INT’L AAAI CONF. WEBLOGS & SOC. MEDIA 110, 111, 115
(2013). This theory, however, needs to explain why, in the absence of regression
to the extreme, there are so few middling reviews, which are to be expected in
light of possible consumer mistakes among similarly highly rated products.
178. See Hu et al., supra note 165, at 145–46.
179. See Stigler, supra note 164, at 104–05.
180. See de Langhe et al., supra note 14, at 826.
181. See generally Roberto Centeno et al., On the Inaccuracy of Numerical
Ratings: Dealing with Biased Opinions in Social Networks, 17 INFO. SYS.
FRONTIERS 809, 809 (2015) (discussing how reputation rankings within current
social networks are likely skewed due to subjectivity issues); Dalvi et al., supra
note 177 (discussing a theory that consumers select products that they will
probably like, thus leading to concentrations of satisfied customers); de Langhe
et al., supra note 14, at 818 (comparing online reviews to reviews of the same
products in Consumer Reports).
182. See Centeno et al., supra note 181, at 811.
183. See Dalvi et al., supra note 177, at 114.
Electronic copy available at: https://ssrn.com/abstract=3239995

<<PAGE_BREAK>>

W03_ARBEL_GRAPHICS_REVISED.DOCX (DO NOT DELETE) 1/30/20 11:10 AM
2019] LIMITS OF MARKET DISCIPLINE 1269
asked to review a product that—unbeknownst to them—was also
listed on Amazon.184 The experimental reviews followed the bell
curve, unlike their Amazon counterparts, as illustrated in reproduced
Figure 3 below:185
FIGURE 3. AMAZON REVIEWS VS. REVIEWS BY TEST PARTICIPANTS
60%
50%
40%
30%
20%
10%
0%
0 1 2 3 4 5 6
Amazon Experiment
3. Reputation Integrity
The last issue is the concern that even when consumers have an
incentive to report experiences, they may face adverse incentives
about the content of their reviews. For multiple reasons, individuals
may misstate the quality of their own experience. Consider, for
example, social pressures to conform, financial incentives, a desire to
avoid confrontation, an endowment effect, personal style, and other
similar considerations.186 All of these may lead individuals to report
their experiences more or less favorably than they actually were.
Threats to the integrity of reputational information are hard to
measure through data itself, but there is evidence that exposure to
the opinions of others will make others report more or less favorably
about their own experiences. Sociologist Ronald Burt noted, in the
184. Hu et al., supra note 165, at 145–46.
185. The graph reproduces the data presented in Id. at 146.
186. Ronald Burt, Gossip and Reputation, 9–13 (2008)
https://faculty.chicagobooth.edu/ronald.burt/research/files/GR.pdf. This source
was taken from Ronald Burt’s faculty website; it was a preprint of a chapter to
appear in Management et réseaux sociaux: ressource pour l'action ou outil
degestion?, edited by Marc Lecoutre and Lievre Pascal, Editions Hermes -
Lavoisier, and published in 2008.
Electronic copy available at: https://ssrn.com/abstract=3239995

<<PAGE_BREAK>>

W03_ARBEL_GRAPHICS_REVISED.DOCX (DO NOT DELETE) 1/30/20 11:10 AM
1270 WAKE FOREST LAW REVIEW [Vol. 54
context of gossip and stories told about others, that “[a]ccuracy is a
nicety more than a requirement for the stories.”187 Thus, he finds
significant echo chamber effects, where people shape the valance of
reputational information on the basis of context and audience rather
than merit.188 One such experimental finding is made by Tory
Higgins, who gave research subjects a description of a person called
Donald.189 The key was that the descriptions were very ambiguous
about whether Donald had positive or negative characteristics.190
Then, a confederate entered the room and said that he “kinda likes”
or “kinda dislikes” Donald, and asked the subjects for their opinion.191
The subjects then offered a distorted view of Donald that accorded
with the confederate’s disposition.192
* * *
In sum, the theory of the microfoundations of reputation suggests
that (1) there will be a trend in reputational data towards more
extreme reviews, (2) that the integrity of information will be
compromised, and (3) that the volume of reputational data will be
constrained by reputational sluggishness. The predictions of this
theory are consistent with available data, which show that significant
divergence exists between voluntary consumer reviews and other
measures of quality.193 While there is much to be desired in the way
of additional evidence, the existing data come from millions of
different products and across various platforms. All in all, the case
for distortions seems robust, given current knowledge.
C. Flawed Information, Flawed Decisions
When consumers make purchase decisions, one key type of
information they seek is data on the experiences of past consumers.
From the perspective of a prospective consumer, it is useful to know
how frequently the product or service resulted in a favorable
experience along some dimension (e.g., quality of food, promptness of
service, durability).194 Consumers seek to extrapolate from these data
to predict their own individual experience despite the obvious
187. Id. at 1.
188. Id. at 9–10.
189. E. Tory Higgins & William S. Rholes, “Saying is Believing”: Effects of
Message Modification on Memory and Liking the Person Described, 14 J.
EXPERIMENTAL SOC. PSYCHOL. 363, 366 (1978).
190. Id. at 366–67.
191. Id. at 367.
192. Id. at 368–70, 374–77. For more examples of social pressures, see
discussion and notes supra Subpart III.A.3.
193. See supra notes 172–87 and accompanying text.
194. Xinxin Li & Lorin M. Hitt, Self-Selection and Information Role of Online
Product Reviews, 19 INFO. SYS. RES. 456, 459–60 (2008).
Electronic copy available at: https://ssrn.com/abstract=3239995

<<PAGE_BREAK>>

W03_ARBEL_GRAPHICS_REVISED.DOCX (DO NOT DELETE) 1/30/20 11:10 AM
2019] LIMITS OF MARKET DISCIPLINE 1271
differences in taste among individuals.195 Moreover, consumers care
about more than the average expected experience—whether it is good
or bad on average—but also about its variance, e.g., a phone that
generally functions perfectly but will on rare occasions explode could
have the same average rating as a phone that is consistently
mediocre.196 To the risk-averse consumer, the high-variance phone
would be inferior.197 To optimize decisions, then, consumers would
like to have access to the distribution of past consumer experiences,
rather than just their average.
Understood this way, the deleterious effect of sluggishness,
integrity, and regression to the extreme become apparent as they
make estimation less accurate. This loss of accuracy is because both
the quantity and quality of reputational information themselves are
jeopardized. The goal of this Part is to study these effects, using both
theory and a Monte Carlo simulation. One key insight from the
simulation, which is worth emphasizing here and throughout, is that
not all reputation failures are born equal. Some may lead to small
distortions that are largely inconsequential. Understanding the
circumstances under which reputation failures are most severe is key
to policymaking but, unfortunately, is largely outside the ambit of
this paper.
1. Informational Distortions
Sluggishness makes quality estimation difficult because it limits
the quantity of available data. Because consumers lack incentives to
share reputational information data exist for only a fraction of all
consumers. This limited quantity of information has two related
adverse effects. First, sluggishness leads outlier, unrepresentative
experiences to appear more common than they actually are—there is
not enough “regular use” data to contradict them.198 If, by chance
alone, one of these consumers had an extreme but unrepresentative
experience, an outlier, this will taint the perception of the product.
Sluggishness prolongs the time it takes for more reviews to
accumulate and correct the noise.199 Second, less information also
195. Id. at 459.
196. Hayley Tsukayama, How Samsung Moved Beyond Its Exploding Phones,
WASH. POST (Feb. 23, 2018), https://www.washingtonpost.com/business/how-
samsung-moved-beyond-its-exploding-phones/2018/02/23/5675632c-182f-11e8-
b681-2d4d462a1921_story.html.
197. See Eyal Zamir, Loss Aversion and the Law, 65 VAND. L. REV. 829, 872
(2012) (articulating that individuals who perceive losses as more painful than
potential gains are less inclined to pursue the potential gains).
198. Consider an example of a product that has, on average, a three-star
quality. If the first consumer, by chance, ranks it at one star, then it would take
two higher-than-average consumers rankings of four stars to correct this
impression.
199. For an analysis of the dynamic evolution of reputation, including the
possibility that early adopters may be systematically different in their
Electronic copy available at: https://ssrn.com/abstract=3239995

<<PAGE_BREAK>>

W03_ARBEL_GRAPHICS_REVISED.DOCX (DO NOT DELETE) 1/30/20 11:10 AM
1272 WAKE FOREST LAW REVIEW [Vol. 54
means less information regarding the distribution of experiences.
Even if the average is accurate, consumers also care about the
distribution, but sluggishness limits the volume of available
information.200
The problem of sluggishness is the same familiar problem of
surveys with small sample sizes. Figure 4 illustrates, using randomly
generated values, how much sluggishness can distort one’s
impression of products. Both graphs track the distribution of reviews
that were given by a sample of all consumers who chose to share their
reviews of the same product. In the top graph, only ten consumers
chose to do so, whereas in the bottom graph, one hundred consumers
shared their reviews. The dashed line indicates the full distribution
of all consumer experiences while the full line denotes the estimated
distribution based on the limited number of consumer reviews. As
can be seen, a smaller sample distorts one’s view of both the mean
and the distribution.
preferences and views from standard consumers, see generally Li & Hitt, supra
note 194.
200. See Li & Hitt, supra note 194, at 457–58, 463 and accompanying text.
Electronic copy available at: https://ssrn.com/abstract=3239995

<<PAGE_BREAK>>

W03_ARBEL_GRAPHICS_REVISED.DOCX (DO NOT DELETE) 1/30/20 11:10 AM
2019] LIMITS OF MARKET DISCIPLINE 1273
FIGURE 4. ESTIMATED AVERAGE VS. REAL AVERAGE AS THE NUMBER
OF OPINIONS INCREASE
The next distortion concerns the quality of information and is
caused by regression to the extreme. Because incentives to report
experiences are weakest when the experiences are rote or bland, very
few reviews fall in the middle range, leaving only extreme reviews
reported.201 Trying to infer quality based on such a sample involves
a thorny statistical problem known as “middle censoring.” From a
statistical perspective, most methods of estimation assume that the
201. See Hu et al., supra note 165, at 145.
Electronic copy available at: https://ssrn.com/abstract=3239995

<<PAGE_BREAK>>

W03_ARBEL_GRAPHICS_REVISED.DOCX (DO NOT DELETE) 1/30/20 11:10 AM
1274 WAKE FOREST LAW REVIEW [Vol. 54
sample is taken from a random sample.202 If, instead, subjects self-
select—as is the case here—then this bias could undermine the
validity of statistical inferences. Figure 5 demonstrates the potential
implications of regression to the extreme. Similarly, the figure
collects, using randomly generated data, different consumer
reviews—with a sample of one hundred participating consumers—
but it omits the reviews of people with middling reviews who
presumably lacked an incentive to share. A prospective consumer,
seeking to decide whether to buy the product, only observes the filled
bars (the empty bars are not visible and illustrate the distribution of
unreported experiences). The full lines again mark the consumer’s
best guess about the mean and distribution based on this limited
information.203 The difference between the estimated mean and the
mean of all experiences (dashed) is highlighted by the arrow. As can
be seen, naïve estimation methods would yield widely inaccurate
outcomes.
FIGURE 5. ESTIMATED AVERAGE VS. REAL AVERAGE AS THE NUMBER
OF OPINIONS INCREASE
Dashed = Estimated Average; Full = Average of all consumers.
The shorter the gap between the curves and the means, the more
accurate the estimate
Notedly, Figure 5 illustrates that the extremes do not “even
out.”204 It may seem that in a large sample, extreme results on one
202. See DAVID S. MOORE & GEORGE P. MCCABE, INTRODUCTION TO THE
PRACTICE OF STATISTICS (5th ed., 2006).
203. See infra Subpart III.C.2.
204. See Bavli, supra note 169, at 17.
Electronic copy available at: https://ssrn.com/abstract=3239995

<<PAGE_BREAK>>

W03_ARBEL_GRAPHICS_REVISED.DOCX (DO NOT DELETE) 1/30/20 11:10 AM
2019] LIMITS OF MARKET DISCIPLINE 1275
end will be balanced by extreme results on the other end. This logic,
however, only applies to symmetric distributions—not the positively-
biased J distribution here.205
Finally, there are problems with the integrity of information.
Herding (or antiherding) is a highly path-dependent phenomenon.
Some products will appear to draw more and more favorable reviews,
but this can be the result of chance that led the group of first
consumers to have a favorable experience.206 Or, a product may
appear overly negative simply because a random group of first
consumers experienced some rare issues.
In sum, for a prospective consumer to accurately estimate the
quality of the underlying good, both the quantity and quality of
reputational information are essential. Sluggishness and regression
to the extreme make reputational information scarce and biased.
Consequently, the estimated mean and distribution of reported
reviews systematically diverge from the actual mean and
distribution, thus making them unreliable as sole guides for
consumer decision-making. The question still remains, however,
whether consumers can adjust for these distortions.
2. Overcoming Bias
Distorted information is likely to have a strong effect on
consumers. Survey after survey, consumers express strong
confidence in reputational information, describing it as a reliable
source of information.207 While it is unclear whether consumers take
reputation at face value, the level of their confidence is at least
suggestive of the former. Moreover, evidence shows a strong
monotonic relationship between ratings and sales—a half-star
increase in a restaurant rating resulting in a 19 percent higher
likelihood that the restaurant would sell out and another half-star
increase resulted in a 5 percent–9 percent increase in revenues.208
Consumers can also be affected by distorted information through a
205. See Hu et al, supra note 165, at 144 (“[T]he average is statistically
meaningful only when it is based on a unimodal distribution, or when it is based
on a symmetric bimodal distribution. However, since product systems have an
asymmetric bimodal (J-shaped) distribution, the average is a poor proxy of
product quality.”).
206. See Stemler, supra note 4, at 693 (discussing evidence of herding in
online reviews).
207. See generally Rosie Murphey, Local Consumer Review Survey: Online
Reviews Statistics & Trends, BRIGHTLOCAL (Dec. 7, 2018),
https://www.brightlocal.com/learn/local-consumer-review-survey/ (finding that
89 percent of consumers read online reviews for local businesses and that 91
percent of eighteen-to thirty-four-year-old consumers trust online reviews as
much as they trust personal recommendations).
208. See Michael Anderson & Jeremy Magruder, Learning from the Crowd:
Regression Discontinuity Estimates of the Effects of an Online Review Database,
122 ECON. J. 957, 966 (2012); Michael Luca, Reviews, Reputation, and Revenue:
The Case of Yelp.com 2 (Harv. Bus. Sch., Working Paper No. 12-2016, 2016).
Electronic copy available at: https://ssrn.com/abstract=3239995

<<PAGE_BREAK>>

W03_ARBEL_GRAPHICS_REVISED.DOCX (DO NOT DELETE) 1/30/20 11:10 AM
1276 WAKE FOREST LAW REVIEW [Vol. 54
variety of behavioral, cognitive limitations,209 most notably
anchoring. Anchoring is the well-replicated psychological
phenomenon that describes how the introduction of arbitrary and
irrelevant numbers affects the outcomes of negotiations, evaluations,
and work performance ratings.210 If the consumer is exposed to
inflated reviews, then this can anchor an inflated sense of value.211
In addition, even if consumers learn that the data is biased, it is
unclear that they can effectively discount it.212 In a set of studies,
researchers investigated how individuals reacted when they learn
that they receive biased advice.213 Participants were asked to
estimate the cost of a house in Pittsburgh.214 To aid them, they were
given an estimate by a local realtor who knew the local market.215
However, the realtor also had an incentive to exaggerate her
estimate, because her commission was based on the final sale price.216
Surprisingly, the control group that was unaware of the realtor’s bias
had more accurate estimates than the treatment group which was
informed that the realtor had a conflict of interest.217 Finally, even if
consumers were capable of mentally detaching from these effects, it
is unclear that most have the statistical literacy to effectively
discount online data.218 The median American will likely not
understand what it means to be median.219 In a famous experiment,
respondents insisted that a person described to them is less likely to
209. See Bar-Gill, supra note 5, at 749.
210. See, e.g., Adrian Furnham & Hua Chu Boo, A Literature Review of the
Anchoring Effect, 40 J. SOCIO-ECON. 35, 35 (2011).
211. See id.
212. See Daylian M. Cain et al., When Sunlight Fails to Disinfect:
Understanding the Perverse Effects of Disclosing Conflicts of Interest, 37 J.
CONSUMER RES. 836, 845, 847 (2011) (finding an absence of the ability to
effectively discount the biased information when disclosed).
213. George Loewenstein et al., The Limits of Transparency: Pitfalls and
Potential of Disclosing Conflict of Interest, 101 AM. ECON. REV.: PAPERS & PROC.
423, 425 (2011).
214. See id.
215. See id.
216. See Cain et al., supra note 212, at 840–41 (finding that groups that were
aware of the bias had a higher variation in results).
217. See id. at 845, 847.
218. See, e.g., Laurent E. Calvet et al., Measuring the Financial Sophistication
of Households, 99 AM. ECON. REV. 393, 393 (2009) (“Many households invest in
ways that are hard to reconcile with standard financial theory and that have been
labelled as investment mistakes.”); Mark Grinblatt, et al., IQ, Trading Behavior,
and Performance, 104 J. FIN. ECON. 339, 360 (2012) (finding that measured levels
of IQ affect stock market sophistication).
219. See Pranjal Gupta & Judy Harris, How E-WOM Recommendations
Influence Product Consideration and Quality of Choice, 63 J. BUS. RES. 1041, 1042
(2010) (explaining how research finds that consumers sometimes lack motivation
to process information, sometimes trusting even a single data point).
Electronic copy available at: https://ssrn.com/abstract=3239995

<<PAGE_BREAK>>

W03_ARBEL_GRAPHICS_REVISED.DOCX (DO NOT DELETE) 1/30/20 11:10 AM
2019] LIMITS OF MARKET DISCIPLINE 1277
be a bank teller than be both a bank teller and a feminist.220 But this,
of course, cannot be. Obviously there are more bank tellers than there
are bank tellers who are also feminists, but still, people find it difficult
to intuit statistical judgments.221
Consequently, the law is generally skeptical of consumers’
abilities to correct biased data, even in situations where consumers
may be aware of the existence of distortions and where third-party
services may be used to correct them.222 Such are, for example, the
limits on contractual misrepresentation, investor fraud through
pump-and-dump strategies, false advertising, defamation, and false
lights. The pump-and-dump scheme is especially telling because it
involves the dissemination of wrong reputational information about
firms.223 Even though investors may be thought to be, on average,
somewhat more sophisticated than consumers and even though it
may be clear to those investors that pump-and-dump schemes take
place, the law still chooses to proscribe such activities, fearing that
consumers will not be able to compensate for such misleading
strategies adequately.224
While it is clear that reputation failure could have a strong effect
on most consumers, in the rest of this Part, I focus on a harder
question. Can consumers—at least those that are rational,
sophisticated, and informed—overcome these distortions? After all,
it is fair to assume that many consumers at least suspect that
reputational information should not be taken at face value. This Part
investigates these issues, using both examples and computer
simulations to evaluate three central consumer strategies: cardinal
evaluations—i.e., choosing a product based on its score or mean;
ordinal ranking—i.e., choosing the relatively better-rated product;
and evaluating qualitative information—i.e., choosing on the basis of
the content of reviews.
Cardinal Evaluations. Suppose that a consumer is trying to
estimate the quality of a hypothetical product based on the valence of
reviews. She knows that reviews in the middle, rated two or three
220. Amos Tversky & Daniel Kahneman, Extensional Versus Intuitive
Reasoning: The Conjunction Fallacy in Probability Judgment, 90 PSYCHOL. REV.
293, 297 (1983).
221. But see Berit Brogaard, Linda the Bank Teller Case Revisited, PSYCHOL.
TODAY (Nov. 22, 2016), https://www.psychologytoday.com/us/blog/the-
superhuman-mind/201611/linda-the-bank-teller-case-revisited.
222. See Truth In Advertising, FTC, https://www.ftc.gov/news-events/media-
resources/truth-advertising (last visited Dec. 3, 2019) (showing the Federal Trade
Commission aims to protect consumers by enforcing federal law which says
information given to consumers must be truthful and not misleading).
223. See Pump and Dump, INVESTOPEDIA, https://www.investopedia.com/
terms/p/pumpanddump.asp (last updated Apr. 26, 2019).
224. In the unregulated space of Bitcoin, a recent research paper found that
the market price of bitcoin rose up in 2013 tenfold due to manipulative trading
tactics by a single trader. Neil Gandal et al., Price Manipulation in the Bitcoin
Ecosystem, 95 J. MONETARY ECON. 86, 87 (2018).
Electronic copy available at: https://ssrn.com/abstract=3239995

<<PAGE_BREAK>>

W03_ARBEL_GRAPHICS_REVISED.DOCX (DO NOT DELETE) 1/30/20 11:10 AM
1278 WAKE FOREST LAW REVIEW [Vol. 54
stars, are suppressed, so she only sees extreme reviews. Figure 6 lists
the information that is available to her. Armed with the knowledge
that middling reviews are censored, what can she say about the
quality of the underlying product? What would she believe the mean
to be? How confident should she be?225
FIGURE 6. FREQUENCY OF REVIEWS UNDER REGRESSION TO THE
EXTREME
Bars show the number of reviews in each ranking category
Next, based on this analysis, which of Figures 7 and 8 best
represents the quality of the underlying product?
225. As I shall argue, consumers care about more than the mean, but average
star rating is often the first filter consumers use in their searches.
Electronic copy available at: https://ssrn.com/abstract=3239995

<<PAGE_BREAK>>

W03_ARBEL_GRAPHICS_REVISED.DOCX (DO NOT DELETE) 1/30/20 11:10 AM
2019] LIMITS OF MARKET DISCIPLINE 1279
FIGURES 7 & 8. FREQUENCY OF POTENTIAL REVIEWS UNDER
REGRESSION TO THE EXTREME
Bars, full and empty, show the number of reviews in each
ranking category
Of course, these questions are not answerable. In fact, these
figures are only two of many possible distributions. There is just not
enough information to make accurate so-called cardinal evaluations,
i.e., determinations of the quality of the product on the basis of review
valence.226 In particular, estimating the mean on the basis of a
226. If one has enough data about the relationship between full reviews (as in
reviews solicited from all consumers) and voluntary reviews, it may be possible
to make some educated guesses to fill in the missing data. Whether this will be
Electronic copy available at: https://ssrn.com/abstract=3239995

<<PAGE_BREAK>>

W03_ARBEL_GRAPHICS_REVISED.DOCX (DO NOT DELETE) 1/30/20 11:10 AM
1280 WAKE FOREST LAW REVIEW [Vol. 54
truncated sample is a risky proposition, doubly so when the sample is
small due to sluggishness, and triply so when the data is misstated
due to integrity bias. Still, consumers often try to estimate quality on
the basis of review valence, especially by limiting their searches to
products above a certain mean.
Ordinal Comparisons. Suppose that the consumer reluctantly
accepts that means are problematic, and instead seeks to compare
among products, reasoning that if all are subject to biases, at least
the comparison of the means would reveal which one is superior.227
The following Table describes two products that the consumer is
trying to compare; the shaded area is middling information that is not
available to her. On the basis of available information, she takes the
mean of product A to be 2.8 and that of product B to be also 2.8. She
also notes that they both have the same distribution of reviews. She
concludes that the two products are of equal value. Based on your
knowledge of the shaded information, is this a correct conclusion?
TABLE 1. ORDINAL COMPARISON WITH TRUNCATED DATA
To give a sense of the scope of mistakes based on interproduct
comparisons, I conducted various Monte Carlo simulations, reported
in Figures 9, 10, and 11.228 Monte-Carlo simulations are a computer-
assisted technique used in finance, physics, and computer science to
track complex interactions in domains where the parameter space is
possible, the accuracy of such process and its transferability across domains
remains to be seen.
227. It is worth recalling that statistical tests of significance of mean
difference (Student’s T-Test) are unhelpful when the sample is not randomly
chosen. See MOORE & MCCABE, supra note 202, at 463. Nonparametric tests also
depend on various assumptions that may not hold in these contexts. Id.
228. The computer simulation is on file and can be replicated by the reader.
Given the use of randomness, actual results may vary slightly among runs, but
given the large volume of trials, this deviation will not affect any of the
conclusions here.
Electronic copy available at: https://ssrn.com/abstract=3239995

<<PAGE_BREAK>>

W03_ARBEL_GRAPHICS_REVISED.DOCX (DO NOT DELETE) 1/30/20 11:10 AM
2019] LIMITS OF MARKET DISCIPLINE 1281
large and uncertain.229 By running thousands of simulated
experiments, each with random deviations, the experimenter can
learn of trends in the data.230 Methodologically, the Monte Carlo
simulation is akin to a quasi experiment; it is useful in demonstrating
the existence of certain phenomena and indicating their potential
magnitude, although it is not at the epistemic level of natural
experiments as it only studies possibilities rather than actual
quantities.231
The first simulation generated two products of arbitrarily chosen
mean quality (although they shared all other statistical features).
Each product was “tried” by one hundred different “consumers,”
which means that each consumer has a random experience based on
the quality of the product. The higher mean product was more likely
to generate a favorable experience. After trying the product, each
consumer could report the experience by rating it from one to five
stars in half-star increments. Because of regression to the extreme,
the consumers are coded not to share experiences in the range of two
to three stars. Once all the information accumulates, a new consumer
comes and tries to decide which product to purchase on the basis of
interproduct comparisons. She chooses the one with the higher
reported mean, based on the reasoning noted above. The code then
counts every instance where the consumer was misled into choosing
the inferior product. This process, for the same products, was
repeated ten thousand times. This gives an account of the frequency
of mistakes, given products of different means. To see how a higher
difference would affect the frequency of mistakes, the simulation then
ran the same process but increased the mean of product B by a slight
amount. The following figures report this simulation, and two others,
explained below.
229. See Ankita Bihani, A New Approach to Monte Carlo Simulation of
Operations, 8 INT’L J. ENGINEERING TRENDS & TECH. 218, 218 (2014). A recent
example is the use of a Monte-Carlo Simulation to evaluate the rarity of
intelligent life in the universe. See Anders Sandberg, Eric Drexler & Toby Ord,
Dissolving the Fermi Paradox, CORNELL U. (June 8, 2018), https://arxiv.org/pdf
/1806.02404.pdf.
230. See Bihani, supra note 229, at 218–19.
231. See Robert L. Harrison, Introduction To Monte Carlo Simulation 2 (Jan.
1, 2011) (unpublished manuscript) (on file with the National Institutes of
Health), https://www.ncbi.nlm.nih.gov/pmc/articles/PMC2924739/pdf
/nihms219206.pdf.
Electronic copy available at: https://ssrn.com/abstract=3239995

<<PAGE_BREAK>>

W03_ARBEL_GRAPHICS_REVISED.DOCX (DO NOT DELETE) 1/30/20 11:10 AM
1282 WAKE FOREST LAW REVIEW [Vol. 54
FIGURE 9. DIFFERENCE IN MEAN
FIGURE 10. DIFFERENCE IN SALES VOLUME
Electronic copy available at: https://ssrn.com/abstract=3239995

<<PAGE_BREAK>>

W03_ARBEL_GRAPHICS_REVISED.DOCX (DO NOT DELETE) 1/30/20 11:10 AM
2019] LIMITS OF MARKET DISCIPLINE 1283
FIGURE 11. DIFFERENCE IN STANDARD DEVIATION
Figure 9 shows how the mean quality of the underlying goods
affects consumer mistakes.232 For products that are not clearly
distinguishable, i.e., they have a somewhat similar mean, consumer
mistakes are widespread. For example, if the difference in mean is
0.1 stars, then under the parameters of the simulation consumers
would choose the wrong products in 25 percent of the cases. For
products that are even harder to distinguish, with only a 0.05 star-
difference, the ratio of mistakes rises to 35 percent. On the flip side,
the more different the products are, the fewer mistakes consumers
commit, despite regression to the extreme. When the difference is
0.25 stars, the ratio of mistakes falls below 10 percent, and when it is
0.5 stars, it mostly disappears.
Figure 10 reports the same simulation, but this time it holds the
mean difference constant at 0.3 stars and only varies the sale volume.
One product is reviewed throughout by one hundred consumers,
whereas the other is reviewed by a variable number of consumers.
When the second product is reviewed by only fifteen consumers, the
ratio of mistakes raises to about 20 percent. This is important, in part
because the difference in means is relatively significant (0.3 stars),
and in part because most products have very few reviews, making this
scenario likely.233
232. Part of the distortion of reputational information is also due to the use of
integers or half integers (i.e., a consumer reports a 2.5-star review, whereas the
actual experience is 2.34). Despite its flaws, the integer ranking system is almost
universal.
233. As noted, the median product only has two reviews. See supra note 157
and accompanying text.
Electronic copy available at: https://ssrn.com/abstract=3239995

<<PAGE_BREAK>>

W03_ARBEL_GRAPHICS_REVISED.DOCX (DO NOT DELETE) 1/30/20 11:10 AM
1284 WAKE FOREST LAW REVIEW [Vol. 54
Finally, Figure 11 reports the same simulation but this time
holding the mean and sale volume equal, and only changing the
variability of experiences. From a consumer perspective, in choosing
between two products with equal means, the one with the lower
variability would be preferred due to risk aversion. Here we find the
most considerable degree of mistakes. When one product yields
consistent experiences and the other variable ones, the ratio of
mistake is very high—when the variance of one product is 0.1 stars,
but the variance of the other is 0.5 stars, consumers mistakenly prefer
the inferior product in over 80 percent of the cases. Only when both
products are highly variable does the ratio of mistakes start to fall.
Taken together, and under some important caveats, these
simulations demonstrate the potential scope of consumer errors given
reputation failure. At the same time, the simulations also
demonstrated a broad range of cases where reputation failure is
unlikely—specifically, environments where there is a great difference
in product quality, when the sale volume is large, and when quality
variability is large or constant across products. This conclusion is
important in evaluating the social harm and the contexts in which it
is likely to arise from reputational distortions. An important caveat,
however, is that these simulations are based on stylized examples and
use arbitrarily chosen parametric values. This limits the
interpretation of the results reported here. On the other hand, real-
life considerations tend to increase the problematic nature of reviews
relative to the simulations. For example, satisfied consumers may be
more or less likely to report their experiences than disgruntled
consumers.234 After all, the tendency to complain is different from the
tendency to praise, and spite is not simply gratitude multiplied by
negative one. Other practical complications involve consumers
ascribing different meaning to star reviews (for some, a four-star
review means high-valence, while for others, it will indicate a
negative experience); the possibility that some products will have
bimodal or other nonstandard distributions; the dynamic effect
caused by buyers experimenting less with low-reviewed products; and
firms investing different amounts of efforts in shilling and cherry-
picking. These considerations would tend to make not only the
simulations less reliable but also any quantitative approach to the
data.
Qualitative Analysis. Suppose now that the consumer seeks to
only read reviews and focus only on qualitative content. In particular,
she is trying to decide between two brands of toilet paper sold on one
234. See Interview with anonymous medium-sized seller on Amazon of
organic products for babies (Jan. 19, 2018) (claiming that disgruntled consumers
are more prone to writing reviews than very happy ones); cf. Chrysanthos
Dellarocas & Charles A. Wood, The Sound of Silence in Online Feedback:
Estimating Trading Risks in the Presence of Reporting Bias, 54 MGMT. SCI. 460,
460 (2008) (finding that satisfied consumers are more prone to write reviews).
Electronic copy available at: https://ssrn.com/abstract=3239995

<<PAGE_BREAK>>

W03_ARBEL_GRAPHICS_REVISED.DOCX (DO NOT DELETE) 1/30/20 11:10 AM
2019] LIMITS OF MARKET DISCIPLINE 1285
platform. It turns out that there are almost 8000 different reviews
for the two brands.235 How long would it take her to read them all?
How confident should she be in her ability to spot fake reviews?
Suppose that she finds some regularity in reviews that she deems
suspect, so she dismisses them; how long would it take for financially
motivated sellers to produce reviews that avoid the pattern?
Stated more generally, qualitative analysis does not scale, and
trying to peruse all the reviews of more than a few products can often
be unmanageable. Yet, limiting attention to a few potential products
is also unworkable—what would be the selection criteria? If it is
reputation (e.g., only products with 4.5 stars), this runs into exactly
the same issues discussed above. Moreover, the ability to spot fake
reviews—consumer overconfidence notwithstanding—is in fact quite
limited.236 Finally, even if a consumer can find a useful guiding
heuristic, it will be exploitable. If consumers only trust the reviews
of serial reviewers, for example, a seller may derive a sizeable
financial benefit from bribing this serial reviewer.237 If consumers
mostly care about negative reviews, for another example, then a seller
will pay to invest heavily in shilling against competitors’ products.238
If consumers mostly care about the volume of sales, the seller may
artificially inflate sales by giving away products.239 Stated more
generally, heuristics beget loopholes which beget exploitation by
opportunistic sellers.
* * *
To summarize, this Part demonstrated how the microfoundations
of reputation result in informational distortions. Because the reasons
to share information are often private and self-serving, three types of
information distortions emerge—sluggishness, regression to the
235. ANGEL SOFT Toilet Paper Bath Tissue, 48 Double Rolls, 260+ 2-Ply
Sheets Per Roll, AMAZON, https://www.amazon.com/Angel-Soft-Toilet-Double-
Tissue/dp/B00FFJ2LXU/ (last visited Dec. 3, 2019); Cottonelle Ultra ComfortCare
Big Roll Toilet Paper, Bath Tissue, 12 Toilet Paper Rolls, AMAZON,
https://www.amazon.com/Cottonelle-Ultra-ComfortCare-Toilet-Tissue/dp
/B01AFRSQGW/ (last visited Dec. 3, 2019).
236. See, e.g., Ponte, supra note 142, at 64–65 (“[I]t is becoming challenging
to decipher more sophisticated forms of fake online reviews.”); Bing Liu, Opinion
Spam Detection: Detecting Fake Reviews and Reviewers, U. ILL. CHI.
https://www.cs.uic.edu/~liub/FBS/fake-reviews.html#reviews (last visited Dec. 3,
2019) (providing an example to test one’s ability in detecting fraud reviews).
237. See, e.g., Jason Murdock, Amazon Sellers Are Bribing Users with Cash
and Gift Vouchers for Five-Star Reviews, Investigation Reveals, NEWSWEEK (July
5, 2019, 12:01 AM), https://www.newsweek.com/amazon-fake-reviews-which-
investigation-bribes-cash-vouchers-five-star-reviews-1447606.
238. See, e.g., Jacob Shamsian, Beauty Brands Are Reportedly Paying $85,000
to Influencers Who Trash Their Competitors on YouTube, INSIDER (Aug. 30, 2018,
1:11 PM), https://www.insider.com/brands-reportedly-paying-influencers-to-
criticize-makeup-competitors-2018-8.
239. See Ponte, supra note 142, at 134.
Electronic copy available at: https://ssrn.com/abstract=3239995

<<PAGE_BREAK>>

W03_ARBEL_GRAPHICS_REVISED.DOCX (DO NOT DELETE) 1/30/20 11:10 AM
1286 WAKE FOREST LAW REVIEW [Vol. 54
extreme, and integrity bias. As a result, peer-to-peer reputational
information tends to provide a false sense of the true quality of the
underlying product. While consumers can try to account for these
distortions, many will lack the requisite sophistication, and even
consumers who do account for the distortions might not be able to do
so given the potentially corrupting effect of the distortions. This is
not to say that distortions are always strong or that consumer
heuristics are not helpful. Still, reputation failures have important
normative implications which I now move to discuss.
IV. LEGAL IMPLICATIONS OF REPUTATION FAILURE
What does the law have to say or do about reputation failures? I
start with the most direct legal interventions that are needed when
the symptoms of reputation failure are present and acute (which is
not always the case). I then move to outline a more ambitious
program: Reputation-by-Regulation. The key idea is to shift attention
from symptoms—such as consumer mistakes—to causes. Legal
institutions can be improved to facilitate the creation of quality
reputational information, thus mitigating some of the root causes of
reputation failure.
A. Reputation Failure and Contemporary Debates in Contracts
and Torts
There are many who call for deregulation on the basis of the rise
of reputational information.240 There has also recently been growing
support among sharing-market enthusiasts, liberals and
conservatives alike, who believe that online platforms open avenues
for effective self-regulation “outside the law.”241
Recognizing reputation failures highlights the dangers of relying
on existing market mechanisms. Naïve reliance on reputation-based
market mechanisms often leads to perverse outcomes in the presence
of acute reputation failures. When consumers select products on the
basis of biased or distorted reputational information, they are likely
to make persistent mistakes242—a social deadweight loss.243 These
mistakes have negative dynamic effects because they make the
production of quality products less rewarding and the production of
unsafe products more rewarding.244 Such a dynamic can devolve into
240. See supra notes 4–6 and accompanying text.
241. See supra note 47 and accompanying text (providing deregulatory
examples among lawmakers and scholars).
242. See supra Subpart III.C.1.
243. See Cannon & Chung, supra note 123, at 39.
244. See Michael Spence, Consumer Misperceptions, Product Failure and
Producer Liability, 44 REV. ECON. STUD. 561, 561 (1977) (“The effect of consumer
misperceptions is that demand votes are miscast, and the supply-side produces
the wrong products.”); see also Oren Bar-Gill, Seduction by Plastic, 98 NW. L. REV.
1373, 1399 (2004) (studying the market effects of consumer mistakes).
Electronic copy available at: https://ssrn.com/abstract=3239995

<<PAGE_BREAK>>

W03_ARBEL_GRAPHICS_REVISED.DOCX (DO NOT DELETE) 1/30/20 11:10 AM
2019] LIMITS OF MARKET DISCIPLINE 1287
what economists call a “lemon market,” where sellers decide to stop
selling quality goods even though consumers would want to buy them
because consumers cannot distinguish between high and low-quality
goods.245
In the presence of persistent and systematic consumer errors,
recent scholarship has shown that some type of regulation can be
welfare-enhancing even when accounting for the limitations of a top-
down regulator.246 If sellers cannot be trusted to meet consumer
expectations, then setting boundaries for permissible dealings may
improve matters.247 Thus, laws and regulations such as lemon laws,
implied warranties, safety audits and recalls, restaurant safety
grading, and many other measures may be needed more than critics
would admit. It also helps draw the boundaries of the sharing
economy and the continued need for traditional reputational sources,
such as professional critics or professional review media (Consumer
Reports, for example).
In sum, reputation failure fits in the family of market failures. It
is a market friction that can justify intervention in consumer markets
in order to improve consumer and social welfare. Of course,
reputation failures do not give a carte blanche for regulation. These
failures vary in scope and severity and in some cases, the costs of
product regulation by an outside regulator may outweigh the
benefits.248 Still, modern debates on deregulation—especially those
involving the sharing economy—fail to recognize that reputation is
subject to systematic failures.249 Bringing this insight into modern
debates should temper some deregulatory trends.
B. Reputation-by-Regulation
Today, the regulatory schema is one of competition between legal
ordering and market ordering “outside the law.”250 Policymakers are
told to choose between heavy-handed regulation and unbridled trust
245. See Akerlof, supra note 28, at 489.
246. See e.g., Oren Bar-Gill, Algorithmic Price Discrimination: When Demand
Is a Function of Both Preferences and (Mis)Perceptions, 86 U. CHI. L. REV. 217,
235–36 (2019); Oren Bar-Gill & Kevin E. Davis, (Mis)perceptions of Law in
Consumer Markets, 19 AM. L. & ECON. REV. 245, 280–81 (2017).
247. About CPSC, U.S. CONSUMER PROD. SAFETY COMM’N,
https://www.cpsc.gov/About-CPSC/ (last visited Dec. 3, 2019) (“CPSC is charged
with protecting the public from unreasonable risks of injury or death associated
with the use of the thousands of types of consumer products under the agency’s
jurisdiction.”).
248. Harold Demsetz, Information and Efficiency: Another Viewpoint, 12 J.L.
ECON. 1, 19 (1969) (describing the “!,” the fallacious assumption that against
market failures there is a perfect regulator).
249. See Stemler, supra note 4, at 687–88.
250. Ronald J. Gilson et al., Braiding: The Interaction of Formal and Informal
Contracting in Theory, Practice, and Doctrine, 110 COLUM. L. REV. 1377, 1379
(2010).
Electronic copy available at: https://ssrn.com/abstract=3239995

<<PAGE_BREAK>>

W03_ARBEL_GRAPHICS_REVISED.DOCX (DO NOT DELETE) 1/30/20 11:10 AM
1288 WAKE FOREST LAW REVIEW [Vol. 54
in the market.251 The analysis presented here suggests a novel third
way, a complementarity model between these two options. The key
insight is that the law has an active role to play ex ante in designing
the rules of the game, such that the information that flows to the
market is more reliable and abundant. I name this family of
strategies Reputation-by-Regulation to indicate how closely related
reputation is to regulation. Rather than an organic and “natural”
outgrowth of market relations, reputation is deeply influenced by
background legal institutions. Drawing awareness to Reputation-by-
Regulation helps expose the role legal institutions play in the
development of reputational information and highlights alternative
institutional strategies. The rest of this Part suggests a menu of five
options that illustrate how the law can take various degrees of
involvement in removing reputational bottlenecks.
To provide some initial motivation to Reputation-by-Regulation,
it is worth noting that when reputation works it has an important
advantage over standard disclosures rules in that it communicates
with consumers in their own terms, thus avoiding some of the
critiques brought against mandatory disclosure over the last few
years.252 As a peer-to-peer mechanism, consumers directly transmit
the information that they find pertinent using their language and
emphasizing their use patterns. For example, consumer comments
on fuel economy can track normal use patterns more accurately than
the abstract categories of pure city or highway miles required by
law.253 Similarly, annual percentage interest rates that credit issuers
must disclose may be less intelligible to consumers than actual
examples of costs per use.254 As these examples highlight, there is
great potential in Reputation-By-Regulation.
1. Leveraging Market Players: The Role of Reputational
Platforms
It goes without saying that market players will often have an
incentive and ability to deal with market problems themselves. In
the last two decades, for example, reputational platforms specializing
in the aggregation of peer-to-peer reputational information have
blossomed.255 Such platforms have realized the value of “reputation
for reputation,” i.e., the value of garnering consumer trust which can
251. Id. at 1398.
252. See Omri Ben-Shahar & Carl E. Schneider, The Failure of Mandated
Disclosure, 159 U. PA. L. REV. 647, 651 (2011). See generally OMRI BEN-SHAHAR
& CARL E. SCHNIEDER, MORE THAN YOU WANTED TO KNOW: THE FAILURE OF
MANDATED DISCLOSURE 6 (2014) (providing general background on the use and
limitations of mandatory disclosure systems).
253. 16 C.F.R. § 259.4 (2019).
254. 12 C.F.R. § 226.5 (2019).
255. Spencer E. Ante, How Amazon is Turning Consumer Opinions into Gold,
BUS. WEEK, Oct. 26, 2009, at 47, 47.
Electronic copy available at: https://ssrn.com/abstract=3239995

<<PAGE_BREAK>>

W03_ARBEL_GRAPHICS_REVISED.DOCX (DO NOT DELETE) 1/30/20 11:10 AM
2019] LIMITS OF MARKET DISCIPLINE 1289
then be monetized using various business models.256 Although it may
seem natural now, in the early days of the internet it was far from
evident that a shopping website would want to display information
that could portray some of its traded products in a negative light.257
The sentiment at the time was that “[l]etting consumers rant about
products in public was a recipe for retail suicide.”258 It was also
incredible that consumers could trust the advertised opinions of
complete strangers.259 Still, a small online bookseller by the name of
Amazon took a bold step and adopted a system of consumer
feedback.260 The rest, is, well, history.261
Reputational platforms are metaregulators and, within their
limits, should be enlisted to address some of the problems of
reputation failure. Given that consumer trust is a source of the “new
oil”—internet traffic—platforms have an incentive to develop
metareputation for being honest curators of reputational
information.262 Indeed, some platforms have already taken
voluntarily action to stamp out fake reviews.263 Amazon uses a
variety of algorithms to detect suspect reviews, prohibits the
provision of incentives-for-reviews, and sues violators.264 Moreover,
Amazon also lists some reviews as those done by “Verified
Purchasers” to further limit manipulation, although this has led to a
cottage industry of payments for purchases coupled with fake
reviews.265
256. Id.
257. Id. at 47.
258. Id.
259. See Tadelis, supra note 98.
260. Ante, supra note 255, at 47. For a review of eBay’s history and success,
see Tadelis, supra note 98, at 321.
261. For historical examples of reputation systems, see supra note 5.
262. See Eric Goldman, The Regulation of Reputational Information, in THE
NEXT DIGITAL DECADE: ESSAYS ON THE FUTURE OF THE INTERNET 293, 294–95
(Berin Szoka & Adam Marcus eds., 2010) (reviewing examples of online
reputational platforms).
263. See Communications Decency Act of 1996, 47 U.S.C. § 230 (2012)
(immunizing websites from liability for restricting material that the website
considers to be obscene or otherwise objectionable, “whether or not such material
is constitutionally protected”).
264. See Community Guidelines, AMAZON, https://www.amazon.com/gp/help
/customer/display.html?nodeId=14279631 (last visited Dec. 3, 2019) (limiting
reviews made with a financial motive). Amazon is not the only platform that
protects its reviews. For other examples from other providers see Content
Guidelines, YELP, https://www.yelp.com/guidelines (last visited Dec. 3, 2019)
(prohibiting biased contributions); What Constitutes a First-Hand Traveler
Review? TRIPADVISOR, https://www.tripadvisorsupport.com/hc/en-us/articles
/200614837-What-constitutes-a-first-hand-traveler-review- (last visited Dec. 3,
2019) (limiting reviews in various ways, including “second-hand information”).
265. Various websites offer refunds, sometimes with commission, for reviews.
See list of websites cited supra note 140. A further list of sites is on record with
the author.
Electronic copy available at: https://ssrn.com/abstract=3239995

<<PAGE_BREAK>>

W03_ARBEL_GRAPHICS_REVISED.DOCX (DO NOT DELETE) 1/30/20 11:10 AM
1290 WAKE FOREST LAW REVIEW [Vol. 54
To the extent that such systems work, they are desirable and
helpful. But reputational platforms are also limited in their policing
powers. For the most part, platforms only rely on contractual
agreements between themselves, sellers, and buyers.266 Thus, their
ability to investigate and sanction fake reviews is very limited.
Platforms also risk harmful public relations implications if they take
actions that consumers deem too aggressive.267 Moreover, platforms’
ability to correct consumer misstatements, investigate cherry-
picking, or validate information is also limited. There is not much
TripAdvisor can do to enforce its ban of reviews by family members of
an owner’s hotel.268
A deeper problem is that platforms do not always have the
incentive to act in the public interest. Platforms face a conflict of
interest because profits and sales can be in tension with consumer
trust. The existence and type of a conflict depends on the specific
business model, but any platform that profits from the transactions it
facilitates may be tempted to promote higher margin items.269 As a
result, the platform may list these products first, suppress negative
reviews of its own products, or otherwise manipulate the market for
its own advantage.270 Even if gross violations of consumer trust can
be detected, small violations of consumer trust—“‘fudging’ on the
margin”—will be all but impossible to detect by consumers.271 When
Amazon, for example, lists its own products prominently on the first
page and before higher-rated products, it trades off some of the trust
consumers place in it, the trust that it will feature best products first,
against its own profits.272 Uber, facing pressures from drivers,
266. See, e.g., Amazon Services Business Solutions Agreement, AMAZON,
https://sellercentral.amazon.com/gp/help/external/1791?language=en_US&ref=e
fph_1791_cont_G521 (last visited Dec. 3, 2019) (defining sellers’ agreement);
Conditions of Use, AMAZON, https://www.amazon.com/gp/help/customer
/display.html/?nodeId=508088&tag=zxcv123-20 (last visited Dec. 3, 2019)
(defining buyers’ agreement).
267. See David Streitfeld, Giving Mom’s Book Five Stars? Amazon May Cull
Your Review, N.Y. TIMES (Dec. 23, 2012) https://www.nytimes.com/2012/12/23
/technology/amazon-book-reviews-deleted-in-a-purge-aimed-at-
manipulation.html.
268. See How Does TripAdvisor Catch Fake Reviews?, TRIPADVISOR,
https://www.tripadvisor.com/TripAdvisorInsights/w3688 (last updated July 13,
2018).
269. See David Adam Friedman, Do We Need Help Using Yelp? Regulating
Advertising on Mediated Reputation Systems, 51 U. MICH. J.L. REFORM 97, 111,
161 (2017) (exploring the conflict of interest).
270. See id. at 122; Julia Angwin & Surya Mattu, Amazon Says It Puts
Customers First. But Its Pricing Algorithm Doesn’t, PROPUBLICA (Sept. 20, 2016,
8:00 AM), https://www.propublica.org/article/amazon-says-it-puts-customers-
first-but-its-pricing-algorithm-doesnt; Julie Creswell, How Amazon Steers
Shoppers to Its Own Products¸ N.Y. TIMES (June 23, 2018),
https://www.nytimes.com/2018/06/23/business/amazon-the-brand-buster.html.
271. See Friedman, supra note 269, at 111.
272. See id. at 130; Angwin & Mattu, supra note 270.
Electronic copy available at: https://ssrn.com/abstract=3239995

<<PAGE_BREAK>>

W03_ARBEL_GRAPHICS_REVISED.DOCX (DO NOT DELETE) 1/30/20 11:10 AM
2019] LIMITS OF MARKET DISCIPLINE 1291
systematically censors reviews from passengers who give four-star or
less reviews more than a few times.273 A large class action was
brought and settled against Angie’s List in which the primary
allegation was that Angie’s List reviewer ratings were influenced by
payments from providers.274 Yelp has been the subject of extensive
litigation for allegedly manipulating reviews against businesses that
were not willing to pay advertising fees.275 According to an
investigation by the Wall Street Journal, the Federal Trade
Commission (“FTC”) received hundreds of complaints against Yelp
alleging that businesses received unfair reviews after refusing to
advertise on the website.276 Another platform, Consumer Affairs, has
similarly been subject to litigation for allegedly presenting reviews of
certain paying members in a more favorable light.277 A ProPublica
report also suggests that Amazon may be unfairly manipulating
listings in order to promote its own goods.278
Exacerbating the conflict of interest is the right courts granted to
platforms to almost arbitrarily curate reviews. The Ninth Circuit
recently considered whether a platform could arbitrarily choose the
reviews it presents to consumers.279 The court held that the reviewee
has no right to have any review posted at all and as such, cannot
compel the platform to publish reviews it does not want to publish.280
This decision licenses platforms to present reviews according to their
own discretion—with a minimal check on their behavior.281
Additionally, the fight against fake reviews exacerbates the problem
273. David Lumb, Uber Refines Its Rating System to Appease Both Drivers
and Riders, ENGADGET (Nov. 21, 2017), https://www.engadget.com/2017/11/21
/uber-refines-its-rating-system-to-appease-both-drivers-and-rider/.
274. Conditional Amended Class Action Complaint, at 2, 4, 10, Moore v.
Angie’s List, Inc., No. 2:15-cv-01243 (E.D. Pa. July 11, 2016).
275. See Curry v. Yelp Inc., No. 14–cv–03547–JST, 2015 WL 1849037, at *1,
*2 (N.D. Cal. Apr. 21, 2015); Reit v. Yelp!, Inc., 907 N.Y.S.2d 411, 412–13 (N.Y.
Sup. Ct. 2010); Rolfe Winkler, Yelp Says FTC Won’t Act on Complaints About Its
Reviews, WALL ST. J.: DIGITS (Jan. 6, 2015, 4:27 PM), https://blogs.wsj.com/digits
/2015/01/06/yelp-says-ftc-wont-act-on-complaints-about-its-reviews/ (reporting
on a closed investigation by the FTC against Yelp). Note that these cases were
ultimately dismissed; see also Eric Goldman, Court Says Yelp Doesn’t Extort
Businesses, FORBES (Sept. 3, 2014, 12:20 PM), https://www.forbes.com/sites
/ericgoldman/2014/09/03/court-says-yelp-doesnt-extort-businesses
/#c62f7d76e4ab (“For years, Yelp has been dogged by allegations that it
manipulates user reviews.”).
276. See Angus Loten, Yelp Reviews Brew a Fight over Free Speech vs.
Fairness, WALL ST. J. (Apr. 2, 2014, 7:31 PM), https://www.wsj.com/articles/no-
headline-available-1396479922.
277. See Consumer Cellular, Inc. v. ConsumerAffairs.com, No. 3:15-CV-1908-
PK, 2016 WL 3176602, at *1 (D. Or. Feb. 29, 2016).
278. See Angwin & Mattu, supra note 270 (“About three-quarters of the time,
Amazon placed its own products and those of companies that pay for its services
in [a prominently placed] position.”).
279. Levitt v. Yelp! Inc., 765 F.3d 1123, 1126 (9th Cir. 2014).
280. Id. at 1133.
281. Id. at 1133–34.
Electronic copy available at: https://ssrn.com/abstract=3239995

<<PAGE_BREAK>>

W03_ARBEL_GRAPHICS_REVISED.DOCX (DO NOT DELETE) 1/30/20 11:10 AM
1292 WAKE FOREST LAW REVIEW [Vol. 54
because screening of reviews, often done algorithmically, relies on
necessarily opaque standards since disclosing the algorithm would
invite abuse by sellers.282 At the same time, these opaque algorithms
give the platform more power to abuse consumer trust.283
To the extent regulators are worried about these issues, a few
options to leverage market players present themselves: regulation,
investigation, and accreditation.
a. Regulating Platforms
On the regulatory side, consumer agencies and legislators can
create a unified set of rules that governs what constitutes fair and
reasonable treatment of consumer peer-to-peer reputational
information.284 A platform should not promote its own products, or
higher-margin products, when it presents consumer-sourced
reputational information. A clear first step in this direction is to
revise the holding that platforms are free to arbitrarily curate
reviews.285 Additionally, platforms should be considered as forum
providers for speech, limiting their ability to arbitrarily censor
reviews. Platforms should also be required to publish their review
curation, aggregation, and display standards. Another possibility is
to require platforms to release certain key statistical information
such as the volume of sales. Additionally, platforms might be
required to display the ratio of consumers who did not rate the
product to those who did in order to aid consumers (or assistive
technology) in drawing better statistical inferences. Alternatively,
they might simply be required to create and follow their own choice
of standards of regulation—thus creating metaregulation of sorts,
relying on the platforms to find the right balance of substantive rules.
A useful source of inspiration (although with some caution) is the
evolving international standards of platform regulation developed by
the International Consumer Protection Enforcement Network
(“ICPEN”), a network of consumer protection authorities from nearly
sixty countries.286 The ICPEN standards include disclosure
282. See David Adam Friedman, Addressing the Commercialization of
Business Reputation, 80 LAW & CONTEMP. PROBS. 73, 83 (2017).
283. See id. at 79 (relating the conflict of interest to the business model of the
platform).
284. See Strahilevitz, supra note 1, at 64, 69, 71 (arguing that the government
should subsidize and encourage transparency among reputational platforms);
Van Loo, supra note 48, at 585–99 (developing an account of the regulation of
platforms by agencies, highlighting the need for regulation in certain key areas).
285. See Levitt, 765 F.3d at 1126, 1134.
286. INT’L CONSUMER PROT. & ENF’T NETWORK, ONLINE REVIEWS &
ENDORSEMENTS: ICPEN GUIDELINES FOR REVIEW ADMINISTRATORS 7 (2016)
https://icpen.org/sites/default/files/2017-06/ICPEN-ORE-
Guidelines%20for%20Review%20Administrators-JUN2016.pdf (guiding
reputational platforms to be “equal and fair in the collection of reviews,” be “alert
and proactive in the moderation of reviews,” and “transparent in publication of
reviews”).
Electronic copy available at: https://ssrn.com/abstract=3239995

<<PAGE_BREAK>>

W03_ARBEL_GRAPHICS_REVISED.DOCX (DO NOT DELETE) 1/30/20 11:10 AM
2019] LIMITS OF MARKET DISCIPLINE 1293
standards governing platforms’ methods for curating and aggregating
reviews, requirements for platform functionality of review sorting
according to consumer criteria, and obligations to present negative
reviews of a platforms’ own products.287 It should be noted, however,
that some of these regulations can run into potential First
Amendment constraints.288 At the same time, their usefulness and
importance merits serious consideration.
b. Policing Platforms
To ensure the integrity of reputational information, it may be
necessary for an external agency to regularly inspect and police the
inner workings of reputational platforms.289 This is already done, to
some extent, by the FTC.290 However, there are still some important
informational gaps.291 The agency should first have access to all
reviews posted to the platform, including their timestamps, IP
addresses, and external information relating to the product price and
type. Then, it should access the (anonymized) reviewer data itself—
past transactions and past review history—in order to identify shell
accounts. Then, the agency should trace typical consumer searches
and the corresponding results: what products are featured, in which
order, and by which criteria. Finally, the agency should review the
platform’s algorithms for identifying faux reviews and test their
operation. Such investigations are crucial given that many of the
processes for collecting and curating reputational information are
opaque and that opaqueness may be necessary to avoid manipulation
by other market players. In addition to audits, the agency should also
investigate claims of unfair treatment by market players.
c. Platform Accreditation
Accreditation is perhaps the least intensive form of regulatory
intervention. Accreditation will involve using a badge to indicate that
the platform is monitored by the agency and that it complies with its
own standards. Receiving accreditation may be entirely voluntary,
287. Id. at 7–11.
288. See Zauderer v. Office of Disciplinary Counsel of Supreme Court of Ohio,
471 U.S. 626, 650–51 (1985) (permitting disclosure requirements for attorneys);
Milavetz, Gallop & Milavetz, P.A. v. United States, 559 U.S. 229, 252–53 (2010)
(same). But cf. In re R.M.J., 455 U.S. 191, 203 (1982) (holding that misleading
commercial speech is not protected); Cent. Hudson Gas & Elec. Corp. v. Pub. Serv.
Comm’n of N.Y., 447 U.S. 557, 563–64 (1980) (applying intermediate scrutiny).
289. See Van Loo, supra note 48, at 585–98 (suggesting the need for external
policing).
290. See Brogaard, supra note 221.
291. On existing agency powers to conduct audits, see Yonathan A. Arbel,
Adminization: Gatekeeping Consumer Contracts, 71 VAND. L. REV. 121, 144–46
(2018) (exploring the use of agencies to audit market players for consumer abuse).
Electronic copy available at: https://ssrn.com/abstract=3239995

<<PAGE_BREAK>>

W03_ARBEL_GRAPHICS_REVISED.DOCX (DO NOT DELETE) 1/30/20 11:10 AM
1294 WAKE FOREST LAW REVIEW [Vol. 54
thus sidestepping any potential First Amendment concerns.292 Of
course, if the agency finds at any time that the platform is not in
compliance, it may strip its badge.
Receiving a badge would garner consumer trust. Such a system
can thus be valuable even if it is entirely voluntary because it will be
in the platform’s interest to receive accreditation. Remember that
consumers may be suspicious even when platforms act honestly
because the platform has superior information regarding its own
internal practices. The badge would allow platforms to credibly
communicate their honesty to the public.
2. Professional Publications
An alternative or supplement to a system of accreditation
involves using professional rating agencies and publications. Some
successful examples include Consumer Reports, US News, PC
Magazine, Michelin Restaurant Review, and the New York Times
Book Review section.293 Like reputation platforms, these services are
also premised on the idea of a reputation for reputation, i.e.,
monetizing consumer trust in their reputation production services.294
Moreover, they have some advantages over amateur consumer
reviews in that they have both the facilities and knowledge to
extensively test products.295 Such publications are demonstrably
valuable, as consumers continue to use them despite their cost and
the rise of free online consumer-generated information.296 Indeed,
292. The use of a government agency, rather than a market player, is
motivated by the infinite regress problem noted by Brian Galle, whereby
consumers might worry that the contracted auditor is itself compromised. See
Brian D. Galle, Self-Regulation of Social Enterprise, in RESEARCH HANDBOOK ON
SOCIAL ENTERPRISE LAW 7–8 (forthcoming); see also Oren Perez et al., The
Dynamic of Corporate Self-Regulation: ISO 14001, Environmental Commitment,
and Organizational Citizenship Behavior, 43 LAW & SOC’Y REV. 593, 593–94
(2009) (studying self-regulation under voluntary accreditation).
293. See, e.g., Book Review, N.Y. TIMES, http://www.nytimes.com/section
/books/review (last visited Dec. 3, 2019); Electronics: Ratings & Buying Guides,
CONSUMER REP., http://www.consumerreports.org/cro/index.htm (last visited
Aug. 27, 2019); The MICHELIN Star Restaurant Rating System, MICHELIN,
http://guide.michelin.com/th/en/to-the-stars-and-beyond-th (last visited Aug. 27,
2019).
294. Paul Resnick et al., Reputation Systems, 43 COMM. ACM 45, 47–48
(2000).
295. See, e.g., Jeff S. Bartlett & Gabe Shenhar, How Consumer Reports Tests
Cars, CONSUMER REP., https://www.consumerreports.org/cars-how-consumer-
reports-tests-cars/ (last visited Dec. 3, 2019) (noting that Consumer Reports has
a 327-acre test center where it test drives cars for hundreds of thousands of
miles).
296. Consumer Reports, for example, charges thirty-nine dollars per year for
a digital membership. See Buying Smart is Just the Start, CONSUMER REP.,
http://www.consumerreports.com/join?INTKEY=1810GH0MB (last visited Dec.
3, 2019). In recent years, various professional and semiprofessional critics
started using platforms such as YouTube to broadcast reviews. See, e.g., 10
YouTube Film Critics You Need to Be Watching, WHATCULTURE,
Electronic copy available at: https://ssrn.com/abstract=3239995

<<PAGE_BREAK>>

W03_ARBEL_GRAPHICS_REVISED.DOCX (DO NOT DELETE) 1/30/20 11:10 AM
2019] LIMITS OF MARKET DISCIPLINE 1295
their continued existence is a possible testament to the existence of
reputation failure in peer-to-peer reputational information.297
Still, reliance on such publications is not without its limitations.
Professional critics do not always care about the same things as less-
sophisticated consumers.298 Professional publications can only cover
a sliver of the product-space, and it is unlikely that they can ever
approach the comprehensiveness of consumer-sourced reviews.299
But, most acutely, as consumers place more confidence in such
publications, it becomes more profitable for sellers to bribe those
reviewers to publish favorable reviews.300
The government may increase the use of such services by either
subsidizing them or otherwise requiring testing in some areas.
Notably, the state already supports these publications by protecting
their copyright and intellectual property. Such protections can be
extended through broader, more aggressive copyright protections,
subject—of course—to a full cost-benefit analysis.
3. Fighting Fake Reviews
As noted earlier, fake reviews are the scourge of the reputation
system. The more consumers use and trust reviews, the more it pays
to invest in creating fake reviews.301 And while reputation platforms
have some incentive to fight fake reviews, their efforts tend to fall
short.302
A useful market-based solution here is the leveraging of a
competitor’s interest. Importantly, I propose that fake reviews will
http://whatculture.com/film/10-youtube-film-critics-you-need-to-be-watching
(last visited Dec. 3, 2019). These critics monetize user engagement through ads
or, one worries, side payments from sellers. See Jeff Rose, How Much Do
YouTubers Really Make?, FORBES (Mar. 21, 2019), https://www.forbes.com/sites
/jrose/2019/03/21/how-much-do-youtubers-really-make/#8b3cec37d2b2.
297. While professional reviews continue to exist, consumers rely more often
on peer-to-peer reputational information. See Mehdi Ghazisaeedi et al.,
Trustworthiness of Product Review Blogs: A Source Trustworthiness Scale
Validation, 6 AFR. J. BUS. MGMT. 7498, 7498 (2012).
298. See WEBER SHANDWICK & KRC RES., BUY IT, TRY IT, RATE IT: STUDY OF
CONSUMER ELECTRONICS PURCHASE DECISIONS IN THE ENGAGEMENT ERA 6, 8
https://www.webershandwick.com/uploads/news/files/ReviewsSurveyReportFIN
AL.pdf.
299. Compare Woolf, supra note 158 (examining over 1.2 million consumer
product reviews on Amazon), with All Products A-Z, CONSUMER REP.
https://www.consumerreports.org/cro/index.htm (last visited Dec. 3, 2019)
(noting that the service has only reviewed just over 9,000 products).
300. See Roomy Khan, From Fake Reviews to Unvetted Sellers: Here’s Why
Amazon Marketplace Needs More Oversight, FORBES (Apr. 1, 2019),
https://www.forbes.com/sites/roomykhan/2019/04/01/amazon-marketplace-a-
chaotic-bazaar-unvetted-sellers-to-fake-reviews-where-is-the-oversight/.
301. See supra notes 145–47.
302. See David Adam Friedman, supra note 269, at 142 (questioning the
“effectiveness of these internal initiatives to discourage and eliminate false
reviews”); Stemler, supra note 4, at 707–10.
Electronic copy available at: https://ssrn.com/abstract=3239995

<<PAGE_BREAK>>

W03_ARBEL_GRAPHICS_REVISED.DOCX (DO NOT DELETE) 1/30/20 11:10 AM
1296 WAKE FOREST LAW REVIEW [Vol. 54
be considered a form of false advertising and subject to the Lanham
Act of 1940 or state-level antitrust laws, which permit competitors to
bring private suits against sellers for posting fake reviews.303 Some
courts have authorized the use of this provision to impose liability for
fake reviews.304 This tool is helpful—competitors may lose market
share when a firm fakes its own reviews or use reviews to attack
another—but it is also quite limited. Only competitors may employ
this tool, and they themselves have limited resources to investigate
claims. More fundamentally, the cost of fighting false advertising by
a competitor is private, but the benefit accrues to all the firms that
compete in the space.
In contrast to private market players, the FTC, the Consumer
Financial Protection Bureau, and some state agencies have broad
investigative powers.305 These agencies can investigate fraud and
have both the authority and resources to do so effectively.306 They
can also use their powers to fine market players for unlawful
behavior, creating the strong deterrence needed to effectively combat
the generation of fake reviews.307 Importantly, fake reviews can be
considered a form of false advertising and subject to the Lanham Act
or state-level antitrust laws,308 although the exact mechanisms are
beyond the scope of this Article.309 Reputation failure provides strong
reasons for further investment in resources in these measures.
One issue in combating fake reviews is the First Amendment
protection of speech. Historically, the First Amendment was not
thought to cover fraudulent speech.310 In In re R.M.J.,311 the Supreme
Court held that states are free to regulate advertising that is
inherently misleading.312 And while the recent decision in United
States v. Alvarez313 allowed some protection of fraudulent speech in
the context of the Stolen Valor Act, such protection is very limited.314
303. 15 U.S.C. § 1125(a) (2012); see, e.g., CAL. BUS. & PROF. CODE § 17200
(West 2019).
304. Romeo & Juliette Laser Hair Removal, Inc. v. Assara I LLC, No.
08cv0442(DLC), 2016 WL 815205, at *21–23 (S.D.N.Y. Feb. 29, 2016).
305. Dodd-Frank Wall Street Reform and Consumer Protection Act § 1052, 12
U.S.C. § 5562 (2012); 15 U.S.C. § 46 (2012).
306. 12 U.S.C. § 5562; 15 U.S.C. § 46.
307. See also Arbel, supra note 291, at 171–72.
308. See 15 U.S.C. § 1125(a); CAL. BUS. & PROF. CODE § 17200; Assara I LLC,
2016 WL 815205, at *21–23.
309. On the regulation of platforms, see, e.g., Max N. Helveston, Regulating
Digital Markets, 13 N.Y.U. J.L. & BUS. 33, 83–84 (2016).
310. See Va. Bd. of Pharmacy v. Va. Citizens Consumer Council, Inc., 425 U.S.
748, 771 (1976).
311. 455 U.S. 191 (1982).
312. Id. at 207.
313. 567 U.S. 709 (2012).
314. Id. at 719, 730 (allowing regulation of fraudulent speech); see also
Donaldson v. Read Magazine, Inc., 333 U.S. 178, 190 (1948) (holding that the
government’s power “to protect people against fraud” has “always been
recognized in this country and is firmly established”).
Electronic copy available at: https://ssrn.com/abstract=3239995

<<PAGE_BREAK>>

W03_ARBEL_GRAPHICS_REVISED.DOCX (DO NOT DELETE) 1/30/20 11:10 AM
2019] LIMITS OF MARKET DISCIPLINE 1297
Fake reviews are by their nature misleading, thus it seems that well-
tailored regulations meant to apply this standard would be justified.
In addition, the law should limit businesses’ ability to offer incentives
for favorable reviews, i.e., cherry-picking consumers. Such an
approach could sidestep many of the thorny constitutional tensions
while advancing the goal of combating reputation failure.
To be clear, it is not expected that regulatory action alone will be
capable of eliminating fake reviews. Still, decisive regulatory action
can significantly curtail the profitability of this practice. It should
also be noted that investing in some of the other measures proposed
here would also be helpful in fighting fake reviews. It is much easier
and cheaper to cultivate a favorable view of one’s restaurant when
competing with a handful of reviews; it is much more complex to do
so when there are dozens of reviews.
4. Fostering Positive Incentives
As argued earlier, because reputation is a public good, consumers
often lack sufficient incentive to create it—a problem most acute with
respect to middling experiences and unpopular opinions. The nascent
law regulating consumer benefits exhibits considerable confusion
about this basic point and takes an overly strong stance against
incentivizing reviews.315 Here, again, the microfoundations
framework helps delineate the proper limits of providing incentives
and behavioral nudges to consumers.
To promote transparency in the market and curb false
advertising, the FTC announced new guidelines in 2015 that regulate
incentivized reviews.316 The context of these guidelines is facially
reasonable: the ascendency of social media has created a new form of
endorsement—reviews by “influencers,” or individuals who amass
many followers. Companies are estimated to be spending billions of
dollars paying influencers to endorse products on their social media
accounts.317 In response, the FTC sought to require influencers to
disclose their financial interests.318
The result, however, is the proverbial throwing out the baby with
the bathwater. Consumers need incentives and nudges to produce
accurate reputational information, which are outcomes of consumers
not internalizing the benefits of reputational information.319 Direct
incentives consist of free products, discounts, payments, and
commissions. Nudges, such as prompts to rate the previous
315. 16 C.F.R. § 255 (2019).
316. Id.
317. See Suzanne Kapner and Sharon Terlep, Online Influencers Tell You
What to Buy, Advertisers Wonder Who’s Listening, WALL ST. J. (Oct. 20, 2019, 8:59
PM) https://www.wsj.com/articles/online-influencers-tell-you-what-to-buy-
advertisers-wonder-whos-listening-11571594003.
318. 16 C.F.R. § 255.5 (2019).
319. See supra Subpart III.B.
Electronic copy available at: https://ssrn.com/abstract=3239995

<<PAGE_BREAK>>

W03_ARBEL_GRAPHICS_REVISED.DOCX (DO NOT DELETE) 1/30/20 11:10 AM
1298 WAKE FOREST LAW REVIEW [Vol. 54
experience before engaging in a new transaction or reminders to rate
and review, also increase the creation of consumer reputational
information.320
Despite the importance of such incentives and nudges, the FTC
guidelines impose onerous disclosure requirements that are triggered
almost indiscriminately without attention to context. For example, if
a restaurant chooses to offer free meals on its opening night so as to
incentivize traffic, every person dining there has to disclose her
financial stakes when discussing her experience—even if the
restaurant never asked for any review, much less a favorable one.321
The same goes for a “dollar-off” coupon, sweepstakes promotions, or
even charity donations.322 The imposition of such broad duties is not
only onerous but it also has unwanted secondary effects. Like the
harried student highlighting the entire textbook, there is danger in
indiscriminate disclosure. Using the same disclosure standards for
content-neutral and content-biased reviews can be misleading. Even
worse, mandating such disclosures may exacerbate the problem of
regression to the extreme. Research finds that disclosing financial
incentives may create a “moral license” to exaggeratedly extol the
virtues of the product.323
There is a readily available alternative. The developing
international standard permits the use of content-neutral
incentives.324 Under this standard, businesses may legitimately offer
incentives to reputation creators if it ensures that the resulting
opinion arises independently of the incentive.325 A content-neutral
incentive may include offering free products under an agreement that
clearly states that the user has full discretion over the content of the
review and that future promotions will not be made contingent on her
response.326 Or businesses can provide discounts to consumers who
review a product, so long as the review is anonymized by a trusted
third-party.327 Research on the effect of such incentives is scant, but
it suggests that content-neutral reviews are effective. A recent study
compared incentivized reviews to organic ones, both qualitatively and
320. Stemler, supra note 4, at 684–85 (discussing creation of reputational
information by encouraging or requiring users to leave feedback after a
transaction is complete).
321. FTC, THE FTC’S ENDORSEMENT GUIDES: WHAT PEOPLE ARE ASKING 5
(2017).
322. Id. at 4.
323. See Loewenstein et al., supra note 213, at 424–25.
324. See Int’l Consumer Prot. & Enf’t Network, Online Reviews &
Endorsements: ICPEN Guidelines for Review Administrators, 8 (June 2016).
325. See id.
326. See id. (stating that financial or material benefits should be given by
review administrators to all types of reviews); see, e.g., FTC, supra note 321.
327. See Int’l Consumer Prot. & Enf’t Network, supra note 324, at 8; see, e.g.,
Maria Petrescu et al., Incentivized Reviews: Promising the Moon for a Few Stars,
41 J. RETAILING AND CONSUMER SERVS. 288, 292 (2018) (stating reviewers are
given incentives such as discounted products from third party companies).
Electronic copy available at: https://ssrn.com/abstract=3239995

<<PAGE_BREAK>>

W03_ARBEL_GRAPHICS_REVISED.DOCX (DO NOT DELETE) 1/30/20 11:10 AM
2019] LIMITS OF MARKET DISCIPLINE 1299
quantitatively.328 Not surprisingly, incentivized reviews put less
emphasis on price; but importantly, there was no difference in rating
between the content-neutral-incentivized and organic reviews.329
Thus, incentives can have desirable effects for creating reliable
reputational information.
5. Controlling Costs: First Amendment and Reputation
The last set of solutions builds on the key insight that the costs
of reputation generation are wholly private, but the benefits are
partly public. This Subpart advocates the expansion of free speech
safeguards provided by the First Amendment to consumer reviews.
Today, with increasing frequency, lawsuits are brought against
consumers for providing reviews.330 Businesses latch onto factual
inaccuracies (some small or innocent) and sue using a variety of
doctrines including defamation, tortious interference, injurious
falsehoods (commercial disparagement),331 and false light.332 One
report finds that “negative reviews have become the subject of dozens
of lawsuits across Texas in recent years,” and there is a growing sense
that this happens across the nation.333 The consequences of such
lawsuits can be dire: a woman complaining online about the services
of her divorce attorney was charged with $350,000 in damages.334
Admittedly, such judgments are relatively exceptional. However, the
threat is not just liability but also litigation. Indeed, according to
Professor Lyrissa Lydsky, a primary reason such lawsuits are
brought is not to collect damages but to silence.335 And this menacing
effect is amplified by consistent media coverage of such lawsuits.336
328. Petrescu et al., supra note 327, at 291, 293.
329. See id. at 294 (finding that providing incentives does not affect the
“satisfaction ratings assigned to the product in the form of ‘stars’ from one to five”
although they do find some evidence of “potential linguistic and sentiment
differences found in the qualitative analysis”).
330. See, e.g., Brittany Glas, Think Twice Before You Post a Negative Review
Online, KXAN (Feb. 14, 2018), https://kxan.com/news/local/austin/think-twice-
before-you-post-a-negative-review-online/.
331. See LOUIS ALTMAN & MALLA POLLACK, 3 CALLMANN ON UNFAIR
COMPETITION, TRADEMARKS. & MONOPOLIES, §11:13 (4th ed., 2019). States differ
considerably; see also Gillon v. Bernstein, 218 F. Supp. 3d 285, 301 (D.N.J. 2016)
(considering whether an unfavorable review amounts to product disparagement).
332. RESTATEMENT (SECOND) OF TORTS § 623A, § 623A cmt. g, § 652E, § 652E
cmt. b (AM. LAW INST. 1977).
333. Glas, supra note 330.
334. Blake v. Giustibelli, 182 So. 3d 881, 884 (Fla. Dist. Ct. App. 2016); see
also Samson Habte, Court Affirms $350k Verdict for Lawyer Smeared on Avvo,
BLOOMBERG L. (Jan. 27, 2016), https://www.bloomberglaw.com.
335. See Lyrissa Barnett Lidsky, Silencing John Doe: Defamation & Discourse
in Cyberspace, 49 DUKE L.J. 855, 858–60 (2000) [hereinafter Lidsky, Silencing
John Doe]; see also Lyrissa Barnett Lidsky, Anonymity in Cyberspace: What Can
We Learn from John Doe?, 564 B.C. L. REV. 1373, 1374 (2009).
336. See, e.g., Beth Landman & Julia Marsh, I Wrote a Negative Yelp Review
– and It Made My Life a Nightmare, N.Y. POST (May 28, 2018),
Electronic copy available at: https://ssrn.com/abstract=3239995

<<PAGE_BREAK>>

W03_ARBEL_GRAPHICS_REVISED.DOCX (DO NOT DELETE) 1/30/20 11:10 AM
1300 WAKE FOREST LAW REVIEW [Vol. 54
To compound the matter further, in handling these lawsuits,
consumers face the common risk of de-anonymization.337 Nor is state
legislation very helpful. Anti-Strategic Lawsuits Against Public
Participation (“Anti-SLAPP”) legislation meant to combat abusive
lawsuits is not broadly adopted or consistently applied.338 Finally,
even slight increases in cost can dissuade reviewers (reduce the
number of reviews). One experiment, for example, tested how small
costs affect behavior and found that “[r]emoving a cost of only
$0.25 . . . leads to a more than 50 percentage point increase in the
frequency of rating.”339
Some examples might be helpful in appreciating the chilling
effect of litigation risk. One New Jersey consumer, Jane Perez,
complained online about her contractor, stating, “My home was
damaged: the ‘work’ had to be re-accomplished . . . he invoiced me for
work not even performed.”340 The contractor sued Perez for $750,000
in damages for defamation.341 The contractor finally lost the suit, but
along the way, Ms. Perez deleted her review and had to defend herself
through an expensive five-day jury trial.342 Or, take the case of Las
Vegas consumer Pamela Boling.343 She sought the assistance of a tax
professional to help demonstrate her economic hardships to tax
authorities. However, the service she received was below her
expectations, so she turned to Yelp and wrote a review concluding
“this is MALPRACTICE!”344 Soon after, the business filed a
defamation lawsuit against her. To ward off the lawsuit, she spent
$40,852 in litigation costs.345 Although she ultimately won the case
https://nypost.com/2018/05/28/i-wrote-a-negative-yelp-review-and-it-made-my-
life-a-nightmare/.
337. See, e.g., Yelp, Inc. v. Hadeed Carpet Cleaning, Inc., 770 S.E.2d 440, 441
(Va. 2015) (ruling, by the Supreme Court of Virginia, that authority exists for
disclosing the identity of the consumers); see also Lori A. Roberts, Brawling with
the Consumer Review Site Bully, 84 U. CIN. L. REV. 633, 653–56 (2016) (reviewing
the procedures involved in de-anonymizing consumers). Every month, Yelp
receives about six subpoenas to reveal the identity of consumers and many more
requests are filed with the courts. See Loten, supra note 276.
338. For a review of state legislation, see State Anti-SLAPP Laws, PUB.
PARTICIPATION PROJECT, https://anti-slapp.org/your-states-free-speech-protection
(last visited Dec. 3, 2019); see also Aaron Smith, Note, SLAPP Fight, 68 ALA. L.
REV. 303, 305 (2016) (surveying anti-SLAPP legislation and exploring the
uncertainty surrounding their applicability in federal courts).
339. Lafky, supra note 106, at 561.
340. Complaint at 3–4, Dietz Dev., LLC v. Perez, 2012 Va. Cir. LEXIS 139
(Va. Cir. Ct. Dec. 7, 2012) (No.2012-16249).
341. Id. at 9–10.
342. See Paul A. Levy, Ruminations About Dietz v. Perez, PUB. CITIZEN (Mar.
28, 2014, 6:22 PM), http://pubcit.typepad.com/clpblog/2014/03/ruminations-
about-dietz-v-perez.html.
343. Defendant Pamela Boling’s Motion for Costs and Attorneys’ Fees Under
NRS 41.670 at 1, IQTAXX, LLC v. Pamela Boling, 2016 WL 4924268 (Nev. D. Ct.
May 12, 2016) (No. 15-A-728426-C).
344. Id. at 4.
345. Id. at 15.
Electronic copy available at: https://ssrn.com/abstract=3239995

<<PAGE_BREAK>>

W03_ARBEL_GRAPHICS_REVISED.DOCX (DO NOT DELETE) 1/30/20 11:10 AM
2019] LIMITS OF MARKET DISCIPLINE 1301
and recovered some costs, the process was long, risky, and caused her
to redact her original opinion—suppressing a view that the court
deemed legitimate.346 Finally, consider the case of Stephen Glover,
who posted a negative review about his lawyer, claiming that he was
the “[w]orst ever” because he yelled at him to “GOOGLE IT!” in
response to a question and otherwise acted unprofessionally.347 This
review led to a two-year defamation lawsuit and appeal where Glover,
finally, prevailed.
The chilling effect of lawsuits is related to the lack of legal
safeguards to protect consumer speech.348 Under prevailing
standards, businesses can bring a defamation lawsuit against
consumers if the review contains some factual inaccuracies.349 From
a First Amendment perspective, some courts have been willing to
accept that reviews are a matter of public interest and therefore
should be protected under the First Amendment, but the scope of
protection is slim. In a recent case, the Oregon Supreme Court
explained that reviews are protected only if “a reasonable factfinder
could not conclude that [the consumer’s] review implies an assertion
of fact.”350 In effect, the decision underscores the costs borne by
consumers who pen reviews. Beyond the possibility of an
anticonsumer mistake by judges or juries,351 it is simply difficult for
most consumers—especially those who are emotional—to write
reviews that clearly communicate an opinion or avoid any factual
inaccuracies given inevitable gaps in recollection, errors in phrasing,
or strong emotions.352
If we recognize the social importance of consumer reviews, the
weak positive incentives to produce them, and the risk of liability or
even just litigation, a few solutions present themselves. One
moderate solution is greater adoption and broader implementation of
anti-SLAPP legislation.353 This legislation is useful because it
imposes costs on strategic lawsuits by businesses. But it is also
limited. To win such a suit, the consumer has to prove that the
346. See id.
347. Spencer v. Glover, 397 P.3d 780, 783 (Utah Ct. App. 2017).
348. See DAN B. DOBBS ET AL., THE LAW OF TORTS, 159–61 (2d ed. 2011 & Supp.
2016); W. PAGE KEETON ET AL., PROSSER AND KEETON ON THE LAW OF TORTS 771–
72, 839–40 (5th ed. 1984).
349. DOBBS ET AL., supra note 348, at 167–71; MCNAMARA, supra note 63, at
2; see Sim v. Stretch [1936] 52 Times L. Rep. 669, 669–71 (UK).
350. Neumann v. Liles, 369 P.3d 1117, 1126 (Ore. 2016) (interpreting
Milkovich v. Lorain Journal Co., 497 U.S. 1 (1990)).
351. Nuno Garoupa, Dishonesty and Libel Law: The Economics of the
“Chilling” Effect, 155 J. INSTITUTIONAL THEORETICAL ECON. 284, 285, 289 (1999).
352. Lidsky, Silencing John Doe supra note 335, at 865 (noting the current
protections are “inadequate”).
353. See Smith, supra note 338, at 305. The “SLAPP” in anti-SLAPP stands
for “strategic lawsuit against public participation.” Dan Frosch, Venting Online,
Consumers Can Find Themselves in Court, N.Y. TIMES (May 31, 2010)
https://www.nytimes.com/2010/06/01/us/01slapp.html?module=inline.
Electronic copy available at: https://ssrn.com/abstract=3239995

<<PAGE_BREAK>>

W03_ARBEL_GRAPHICS_REVISED.DOCX (DO NOT DELETE) 1/30/20 11:10 AM
1302 WAKE FOREST LAW REVIEW [Vol. 54
business does not stand a good chance of prevailing, which—given the
current legal standards and the limited resources consumers have—
is tough.354 Other options also include the use of legal aid subsidies
or crowdfunding to defend consumers, arbitration, and other forms of
alternative dispute resolution, and agency audits.355
The most powerful solution would be a First Amendment
protection in the form of a consumer review privilege.356 Today,
political speech enjoys broad protections under the New York Times
v. Sullivan357 standard.358 Despite the recognition that protecting
political speech could foster false allegations, the Supreme Court
expressed a strong preference for the promotion of speech on matters
involving public figures.359 As a result, the Court ruled that unless
plaintiffs can show malice on the defendant’s side, a lawsuit cannot
be brought.360 As a result, such lawsuits are relatively rare. Future
cases, most notably Dun & Bradstreet, Inc. v. Greenmoss Builders,361
emphasized that issues of public interest are also deserving of greater
protection.362 This is explained on the basis of the positive externality
of speech, a feature that consumer reviews also share.363
A consumer review privilege would still permit businesses to
bring lawsuits against false reviews, but they will have to be able to
show malice on the consumer side. Such a privilege will greatly
reduce the business ability to strategically drag consumers to court.364
The privilege would also protect consumers in the lawsuit itself,
although given the high win rate consumers enjoy today, this effect is
admittedly small. Additionally, this privilege will considerably limit
354. See id. at 305, 316–18, 325.
355. See Arbel, supra note 291, at 158; Ronen Perry, Crowdfunding Civil
Justice, 59 B.C. L. REV. 1357, 1359–60 (2018) (describing the use of crowdfunding
to subsidize litigation).
356. See Lyrissa Barnett Lidsky & RonNell Andersen Jones, Of Reasonable
Readers and Unreasonable Speakers: Libel Law in a Networked World, 23 VA. J.
SOC. POL’Y & L. 155, 157–59 (2016) (exploring how policymakers can amend the
rules on expression of opinion and the malice requirements to control speech).
357. 376 U.S. 254 (1964).
358. See Gertz v. Robert Welch, Inc., 418 U.S. 323, 334–37, 340 (1974);
Sullivan, 376 U.S. at 269–70; see also Anthony Lewis, New York Times v.
Sullivan Reconsidered: Time to Return to “The Central Meaning of the First
Amendment”, 83 COLUM. L. REV. 603, 604 (1983) (noting that the Supreme Court
had gone “for 170 years without finding in the first amendment any limits on libel
judgments”). But cf. Milkovich v. Lorain Journal Co., 497 U.S. 1, 18–19 (1990)
(holding that there is no “wholesale defamation exemption for anything that
might be labeled ‘opinion’”).
359. See Sullivan, 376 U.S. at 269–70.
360. See id. at 279–80.
361. 472 U.S. 749 (1985).
362. See id. at 758–59 (1985); see also Snyder v. Phelps, 562 U.S. 443, 453–54
(2011) (testing what counts as public interest).
363. See POSNER, supra note 47, at 297–98.
364. For an early expression of this sentiment, see THOMAS STARKIE, A
TREATISE ON THE LAW OF SLANDER, LIBEL, SCANDALUM MAGNATUM, AND FALSE
RUMOURS xx–xxi (New York, J. & J. Harper 1826).
Electronic copy available at: https://ssrn.com/abstract=3239995

<<PAGE_BREAK>>

W03_ARBEL_GRAPHICS_REVISED.DOCX (DO NOT DELETE) 1/30/20 11:10 AM
2019] LIMITS OF MARKET DISCIPLINE 1303
the ability of businesses to de-anonymize consumers. As a result, this
privilege would significantly reduce the cost of legal liability making
speech more attractive on the margin. Indeed, existing privileges are
also justified by the positive externalities of speech, so this privilege
would be a natural extension.
Some have objected to protecting consumers’ reviews on the
ground that it encourages reckless or deliberate lies by consumers
against businesses.365 However, objections of this sort have not
sufficiently accounted for the public value of reputation or its
microfoundations.366 They assume that consumers share a desire to
besmirch the reputation of firms but say little about why (or when)
consumers care to tell the truth in the first place. Moreover, they
have not analyzed the dynamic equilibrium that emerges from a lax
defamation regime. In short, people tend to place less trust in
assertions that are made in the absence of defamation law and so the
negative impact of lies would be much abated.367 Thus, the opposition
to consumer review privileges should be revisited. At the very least,
scholars and policymakers should adopt a more skeptical approach to
the social utility of defamation laws, and courts should better
understand the chilling effect of their rulings, even when the case is
finally disposed of in favor the consumer.
V. CONCLUSION
Reputation is fundamental to the operation of many markets.
When reputation works, it works extremely well; it disciplines sellers
at a low cost, saving the need for courts and lawyers. But reputation
can also fail. Today, many are too excited by the rise of the sharing
economy to see that the microfoundations on which it rests are
faltering.
Earlier scholarship—in law, economics, sociology, and biology—
has trusted reputation to work well, at least in certain domains. This
Article explained why careful analysis of the microfoundations of
reputation—the microincentives that lead individuals to create and
share reputational information—suggests the potential of reputation
failures. Such failures have a significant bearing on future
policymaking and contracts scholarship in particular. Most directly,
it invites greater skepticism towards current trends to deregulate
consumer transactions on the basis of faith in the internal regulatory
power of market forces.
365. See Dohse, supra note 137, at 390–91.
366. See Heymann, supra note 63, at 1417–23 (arguing that the public
interest dimension of reputation has been neglected).
367. See Yonathan A. Arbel & Murat Mungan, The Case Against Strong
Defamation Laws 6–7 (Univ. of Ala. Legal Studies Research Paper No. 3311527),
https://papers.ssrn.com/sol3/papers.cfm?abstract_id=3311527.
Electronic copy available at: https://ssrn.com/abstract=3239995

<<PAGE_BREAK>>

W03_ARBEL_GRAPHICS_REVISED.DOCX (DO NOT DELETE) 1/30/20 11:10 AM
1304 WAKE FOREST LAW REVIEW [Vol. 54
The most ambitious goal of this Article is to carve a path for
future regulation of consumer markets—Reputation-by-Regulation,
i.e., the use of laws and institutions to improve the flow of
reputational information to the market. This approach holds
considerable promise. Like mandatory disclosures, the law of
reputation seeks to improve markets indirectly by providing
consumers with reliable information that would allow them to make
informed purchasing decisions.368 By identifying and removing
reputational failures, the law can increase consumer welfare without
mandating any specific set of terms, thus preserving autonomy and
freedom of contract.369 Addressing reputation failure should be the
cornerstone of future consumer policy.
368. See, e.g., John C. Coffee, Jr., Market Failure and the Economic Case for
a Mandatory Disclosure System, 70 VA. L. REV. 717, 728–29 (1984); Amy J.
Schmitz, Remedy Realities in Business-to-Consumer Contracting, 58 ARIZ. L. REV.
213, 217, 219 (2016) (“Classical contract doctrine prefers formulistic disclosure
rules . . . . [D]isclosure bolsters freedom of contract by giving consumers an
opportunity to review contract terms before consenting.”).
369. See Andrew T. Bond, Essay, An App for That: Local Governments and the
Rise of the Sharing Economy, 90 NOTRE DAME L. REV. ONLINE 77, 95–96 (2015)
(arguing that reputational incentives allow deregulation).
Electronic copy available at: https://ssrn.com/abstract=3239995

---

## ssrn-3272595: Book Review: Civil Justice
Year: 2018
Authors: Yonathan Arbel
Source: papers/ssrn-3272595/paper.txt

Book Review: Civil Justice
Reconsidered: Toward a Less Costly,
More Accessible Litigation System
Yonathan Arbel 37 C.J.Q. 09 (2018)
This paper can be downloaded without
charge from the Social Science Research
Network Electronic Paper Collection:
https://ssrn.com/abstract=3272595
Electronic copy available at: https://ssrn.com/abstract=3272595

<<PAGE_BREAK>>

2018] Review: Civil Justice Reconsidered 509
Book Review: Civil Justice
Reconsidered: Toward a Less Costly,
More Accessible Litigation System,
by Steven P. Croley, (New York: NYU Press, 2017), 304 pp.,
hardback, US $55, ISBN: 9781479855001.
Yonathan A. Arbel,
Assistant Professor of Law, University of Alabama School of
Law
A camel, they say, is a horse designed by a committee. By that
token, civil litigation is justice designed by the common law. But even
though the appearance of both the camel and the system of civil
litigation does not betray the existence of any design, much less an
intelligent one, careful investigation reveals how both camels and
common law courts are awe-inspiringly robust evolutionary
adaptations to the complex environments where they evolved. This
insight—regarding law, not camels—is but one of the many payoffs of
reconsidering civil justice.
In this accessible book, Professor Croley brings to bear his
synoptic view of the civil justice literature and his expertise as a
practicing attorney. This book addresses a much broader audience
than its title might imply, going beyond the cadre of civil procedure
and private law aficionados and hoping to inspire and instruct
policymakers, involved citizens, and scholars at large. To that end,
Croley’s exposition is clear and comprehensive, devoid of jargon, and
assumes little background knowledge.
Electronic copy available at: https://ssrn.com/abstract=3272595

<<PAGE_BREAK>>

510 Civil Justice Quarterly [Vol. 37]
The book advances two arguments that partition it into two
fairly distinct halves. The first half seeks to dispel the widespread
perception that the American system of civil litigation is corrupted by
rapacious plaintiffs who leverage the sympathy of gullible juries to
extract payments they do not deserve. Croley’s careful evaluation of
the evidence suggests that the camel is much stronger than that.
Upon closer examination of the empirical literature on trial outcomes,
he finds little evidence of pro-plaintiff bias, and he notes that across
many domains of civil justice, defendants are almost just as likely to
prevail as plaintiffs. Croley is also skeptical of the allegation of
excessive money judgments: Once one accounts for the severity of the
injury involved, the money damages seem to be fairly proportional.
While Croley freely admits that there are many who misuse the legal
system, he finds that the idea of widespread abuse is largely
overstated. The balance of evidence, Croley concludes, does not
support those reformers who seek to limit the access of plaintiffs to the
courts.
Rejecting the case for limiting plaintiff’s access does not mean
that the system is optimal. Far from it. Rather than over-participation
by unmeritorious plaintiffs, Croley’s second proposition is that the real
problem is under-participation by meritorious plaintiffs. He argues
that many are deterred by the cost, length, and complexity of the
process and so fail to file claims even when they have a real cause of
action. To overcome that, Croley proposes an interesting paradigm
which can be dubbed more cases, less litigation. If the legal procedure
were less complicated, less tolerant of those who file vexatious and
frivolous motions, and more streamlined, a larger number of
meritorious plaintiffs would be able to access justice at a lower cost.
Electronic copy available at: https://ssrn.com/abstract=3272595

<<PAGE_BREAK>>

2018] Review: Civil Justice Reconsidered 511
Moreover, if our society were to extend more resources to legal aid, it
would remove another critical roadblock on the way to justice.
From the more cases, less litigation viewpoint follow localized
and practical reforms of three types: sanctioning attempts to over-
litigate cases; providing venues with truncated procedures for
resolving small and medium-sized claims; and, expanding legal aid
subsidies. In all of that, Croley rejects radical alternatives and favors
changes on the margin. Such changes are argued to be better in part
because they stand a chance of actual implementation, but also
because they are more amenable to empirical evaluation. This
resonates well with another theme in this book, the belief that civil
procedure should be experimented at the local level, channeling the
idea of states as laboratories of democracies that can breed camels
more adaptive to the 21st century.
Croley’s approach in this book is careful and fair; he takes
counter-evidence seriously and acknowledges the limits of supporting
evidence. This even-handed analysis of the evidence marks the book’s
primary contribution: A trusted guide for the perplexed reader who
seeks to learn more about the realities of civil litigation in America in
a highly politicized area. His reform proposals are equally careful and
measured and provide a useful roadmap for a host of non-boat-rocking
reforms that still carry the promise of bolstering civil justice in
America and potentially also elsewhere.
Besides its many strengths, there are some caveats. The book’s
dual goals—to show that over-litigation is not a severe problem but
under-litigation is—are not always consonant with each other. While
the evidence for the existence of a pro-plaintiff bias is carefully
dissected, citing dozens of studies, the point that meritorious plaintiffs
under-participate is not directly proven empirically. Instead, Croley
Electronic copy available at: https://ssrn.com/abstract=3272595

<<PAGE_BREAK>>

512 Civil Justice Quarterly [Vol. 37]
explains that litigation is expensive and litigation finance is limited,
and on this basis “one would expect some legal harms to go un-
remedied” (p.124). Similarly, he notes that legal aid is limited and
that there are several roadblocks that prevent access to civil justice.
Still, he never fully proves the existence of a real, widespread shortfall
of cases of social importance. Admittedly, a problem of under-
participation likely exists, but the rigor applied to reject the over-
participation thesis is markedly different from what is used to
establish the under-participation hypothesis. This tension runs even
deeper. Croley’s dismissal of the pro-plaintiff bias is built, in part, on
the observation that in a broad range of civil categories, plaintiffs lose
almost as often as they win. This evidence, he admits, is not
conclusive, but he considers it highly “suggestive” of a neutral,
unbiased system. But if, as Croley argues in the second half of the
book, many meritorious plaintiffs are chilled from participating, then
that means the current pool of plaintiffs has too few meritorious
plaintiffs. This presents the following dilemma. If current win rates
suggest a neutral system, there is no need to reform. And if reform
were to take place, it would lead to plaintiffs winning more than 50%
of the cases (as even more meritorious cases would join the pool of
cases), which—by this metric—would indicate bias.
Importantly, it is disputed whether win-rates are indicative of
anything. As shown by Priest and Klein1 and Shavell,2 among others,
the distribution of win rates can wear many shapes that are largely
independent of the whether the legal standard favors one party or the
other. Recently, Klerman and Lee have questioned this prevailing
1 G.L. Priest and B. Klein, “The Selection of Disputes for Litigation”, (1984) 13
Journal of Legal Studies 1.
2 S. Shavell, “Any Frequency of Plaintiff Victory at Trial is Possible” (1996) 25 Journal
of Legal Studies 493.
Electronic copy available at: https://ssrn.com/abstract=3272595

<<PAGE_BREAK>>

2018] Review: Civil Justice Reconsidered 513
wisdom,3 but the debate is still ongoing.4 A lively illustration of the
difficuility of drawing inferences from win rates comes from the Israeli
criminal justice system, where over 99% of criminal charges result in
guilty verdicts.5 This fact seems to suggest an almost overwhelming
anti-defendant bias, but a closer look at the data reveals a very
different picture. The police and attorney general are either very risk-
averse or highly lenient, and they winnow out the vast majority of
cases, so that the ones that proceed to trial are uncharacteristically
strong.66 As a result, the prosecution almost always wins, but despite
that, it is hard to speak of a pro-plaintiff bias.
Another issue, and one that is common to the broader civil
justice scholarship, is the faint attention that is paid to the largest
source of civil cases: debt collection lawsuits. Every year, about 8
million cases are filed in as suits by creditors and debt buyers against
consumers for allegedly unpaid debts. These cases amount to over 50%
of all civil cases, leading far ahead of any other category of cases.
Indeed, the average American is far more likely to encounter such a
3 D. Klerman and Y.A. Lee, “Inferences from Litigated Cases” (2014) 43 Journal of
Legal Studies 209.
4 J.B. Gelbach, “The Reduced Form of Litigation Models and the Plaintiff’s Win Rate”
(2016), work in progress, available online at
https://pdfs.semanticscholar.org/f18d/fece631c5c9d0feb21edf516562a0b5aaf87.pdf
[Accessed 31 July 2018].
5 O. Gazal-Eyal, I. Galon and K. Weinshall, “Outcomes Ratios in Legal Proceedings”
(Hebrew) (Israeli Courts Research Division, 2012), Center for the Study of Crime, Law
& Society Research Paper,
http://elyon1.court.gov.il/heb/Research%20Division/doc/Research1.pdf[Accessed 31
July 2018]. (Only 7 out of 1187 cases that were litigated to a verdict in the lower
courts resulted in the exoneration of the defendant, amounting to roughly 0.5%).
6 Israeli Police, “Year in Review” (Hebrew) (2015),
https://www.police.gov.il/Doc/TfasimDoc/shnaton2015.pdf
[Accessed 31 July 2018] (roughly 16% of the police cases result in criminal charges).
State Attorney, “Year Summary 2015” (Hebrew),
http://www.justice.gov.il/Units/StateAttorney/Publications/OnTheAgenda/Pages/1
1-07-16.aspx
[Accessed 31 July 2018] (reporting that 78% of the cases were closed by an
administrative decision).
Electronic copy available at: https://ssrn.com/abstract=3272595

<<PAGE_BREAK>>

514 Civil Justice Quarterly [Vol. 37]
lawsuit than to be involved in a contractual dispute or a medical
malpractice lawsuit. In this context there is alarming evidence of a
systematic failure of the civil litigation system in a way that favors
plaintiffs. In many of these cases, service is shoddy, evidence is scant,
the consumer appears pro se—if she is participating at all—and the
plaintiff’s representative has all but the most rudimentary familiarity
with the case. As one judge put it, these cases tend to “lack a nano of a
modicum of a scintilla of a prima facie case”.7 Yet, plaintiffs routinely
win a default judgment in their favor, with very little judicial
oversight or screening.8 This is not to say that debt lawsuits are by
their nature frivolous, but the lack of any judicial oversight is a recipe
for disaster, leading the regulator itself to exasperatedly decry debt
litigation as a “broken system.”9
In light of these severe issues with the handling of debt
collection lawsuits, Croley’s marginalist approach may be palliative at
best. Civil litigation is not designed to process cases where
participation is systematically lacking, and it certainly uncapable to
do so at the scale necessary to manage 8 million additional lawsuits
every year. Indeed, if Croley’s proposals will have their desired effect,
the result will be a deluge of routine, small cases that the system—
already rebuked for being lethargic and overburdened—will have to
resolve. There is simply not enough capacity for that. Fortunately,
there are viable alternatives, ranging from qui tam type lawsuits to
7 Am Express Bank, FSB v Dalbis, No.300082/10, 2011 WL 873512, at 12 (NY Civ Ct
14 March 2011) (internal quotation marks omitted).
8 Y. A. Arbel, “Adminization: Gatekeeping Consumer Contracts” (2018) 71 Vanderbilt
Law Review 121.
9 Federal Trade Commission, Repairing a Broken System: Protecting Consumers in
Debt Collection Litigation and Arbitration (Federal Trade Commission, 2010).
Electronic copy available at: https://ssrn.com/abstract=3272595

<<PAGE_BREAK>>

2018] Review: Civil Justice Reconsidered 515
ideas like the class defense mechanism.10 A recent proposal in this
area is the so-called Adminization of certain legal processes, whereby
a governmental agency (such as the Federal Trade Commission)
randomly samples cases that were filed in state courts and audits
them, levying fines where wrongdoing is detected.11 This approach
adds a cost-effective layer of consumer protection, that works well
independent of consumers’ participation gap. Even the cases that are
not audited would benefit from Adminization, because plaintiffs would
be overall more hesitant to engage in abuse if there is a risk of audit
and fines. But what is most important is that these solutions scale
well and are thus much more effective than standard solutions that
try to cram millions of additional cases into the already clogged
arteries of the civil justice system.
Croley’s most secure footing is in the tort context and his
analysis is best read as a careful analysis of the state of the art in the
tort-reform debate. Indeed, most of the examples and data in the book
are drawn from this domain. Still, it is worth remembering that a
significant portion of tort reform has shapeshifted in recent years.
Tort reformers today are not only lobbying for explicit anti-plaintiff
measures (such as damages caps) but instead, they pursue alternative
strategies that avoid the branding of tort reform and thus sometimes
garner the unwitting support of traditional opponents. In the last
decade, a systemic effort to lobby for apology laws—laws that make
apologies inadmissible at trial—led to legislative changes in most US
states, Republican and Democratic alike. In reality, it was recently
argued, these apology laws are covert tort reform, as they allow
10 A. Hamdani and A. Klement, “The Class Defense” (2005) 93 California Law Review
685.
11 Arbel, “Adminization: Gatekeeping Consumer Contracts” (2018) 71 Vanderbilt Law
Review 121.
Electronic copy available at: https://ssrn.com/abstract=3272595

<<PAGE_BREAK>>

516 Civil Justice Quarterly [Vol. 37]
tortfeasors to escape substantial liability with bespoke, strategic
apologies.12 Croley’s proposals are centered on traditional tort reform
efforts and so would do relatively little to address these new frontiers.
Despite these issues, I should emphasize, Croley’s proposals
are sensible and helpful. The only recommendation that may prove
counter-productive is his support of a civil “Gideon” right; i.e., the
provision of subsidized lawyering to indigent plaintiffs. Croley finds it
essential to expand legal aid budgets and subsidies and, in particular,
to impose more requirements of pro bono work on lawyers. Putting
aside my critique of the cost-effectiveness of poverty alleviation
through legal aid,13 it is interesting to reflect on the idea of mandatory
pro bono requirements from the perspective of the Effective Altruism
movement.14 Practicing lawyers in the US have a notoriously bimodal
distribution of wages and salaries, with a mass of lawyers who make
almost four times the wages of the other mass.15 If a top-earning
lawyer is providing pro bono representation to an indigent plaintiff,
12 Y. A. Arbel and Y. Kaplan, “Tort Reform through the Backdoor: A Critique of Law &
Apologies” (2017) 90 Southern California Law Review 1199; B. McMichael, R. Van
Horn and W. K. Viscusi, “Sorry is Never Enough: How State Apology Laws Fail to
Reduce Medical Malpractice Liability Risk” (2019, forthcoming) Stanford Law Review.
13 Y. A. Arbel, “Adminization: Gatekeeping Consumer Contracts” (2018) 71 Vanderbilt
Law Review 121.
14 P. Singer, The Most Good You Can Do: How Effective Altruism Is Changing Ideas
About Living Ethically (New Haven, Connecticut: Yale University Press, 2015).
15 See https://www.nalp.org/salarydistrib [Accessed 31 July 2018]
Electronic copy available at: https://ssrn.com/abstract=3272595

---

## ssrn-3311527: 4 ARBELMUNGAN 453-497 (DO NOT DELETE) 12/4/2019 7:18 PM
Year: 2019
Authors: Yonathan Arbel
Source: papers/ssrn-3311527/paper.txt

4 ARBELMUNGAN 453-497 (DO NOT DELETE) 12/4/2019 7:18 PM
THE CASE AGAINST EXPANDING
DEFAMATION LAW
Yonathan A. Arbel & Murat Mungan
INTRODUCTION ..................................................................................................... 454
I. DEFAMATION LAW & REPUTATION ......................................................... 461
A. Goals & Functions of Defamation Law .................................................. 461
B. Defamation Law: Doctrine, Nature of Reputation, and the Audience ....... 465
C. Where Defamation Law Ends ................................................................ 469
II. DEFAMATION & AUDIENCES .................................................................... 471
A. Basic Example ....................................................................................... 472
B. Analysis ................................................................................................. 475
C. Audience Effects: Evaluation & Generalization ...................................... 481
D. Qualifications & Richer Considerations .................................................. 483
1. Ignorant Audiences .......................................................................... 484
2. Audience Rationality & Sticky Falsehoods ...................................... 485
3. Imperfect and Costly Enforcement, Litigation, and Execution ........... 486
4. Social and Moral Norms ................................................................. 487
E. Would Expanding Defamation Law Advance Its Goals? ........................ 488
1. Protecting Reputation Through Deterrence ........................................ 488
2. Protecting Reputation Through Redress ............................................. 488
3. Protecting Reputation Through Vindication ...................................... 490
III. DEFAMATION LAW & AUDIENCE EFFECTS ............................................ 491
A. The Desirable Scope of Defamation Law ................................................. 491
1. Defamation Law in Employment ..................................................... 492
2. Defamation Law in Consumer Markets ........................................... 493
3. Political Speech ................................................................................ 494
B. Some Constitutional Ramifications .......................................................... 495
CONCLUSION ......................................................................................................... 496
453
Electronic copy available at: https://ssrn.com/abstract=3311527

<<PAGE_BREAK>>

4 ARBELMUNGAN 453-497 (DO NOT DELETE) 12/4/2019 7:18 PM
THE CASE AGAINST EXPANDING
DEFAMATION LAW
Yonathan A. Arbel & Murat Mungan*
It is considered axiomatic that defamation law protects reputation. This proposition—commonsensical,
pervasive, and influential—is faulty. Underlying this fallacy is the failure to appreciate audience effects:
the interaction between defamation law and members of the audience.
Defamation law seeks to affect the behavior of speakers by making them bear a cost for spreading un-
truthful information. Invariably, however, the law will also affect members of the audience, as statements
made in a highly regulated environment tend to appear more reliable than statements made without
accountability. Strict defamation law would tend to increase the perceived reliability of statements, which
in some cases can have harmful effects on the reputation of the targets of the speech.
This unrecognized complexity of defamation law has the potential to tip the scales in First Amendment
jurisprudence towards greater protection of free speech and free press. Audience effects should also be
considered within the newly announced Restatement project on defamation law. Most urgently, the conse-
quences of audience effects should give pause to the recent calls to expand libel laws to fight fake news by
showing that such laws may well backfire and exaggerate the consequences of falsehoods.
INTRODUCTION
In New York Times Co. v. Sullivan, the Supreme Court famously circum-
scribed the tort of defamation to protect freedom of speech and press.1 Now,
winds blowing from Washington augur that the Times they are a-changin’.2 Re-
cently, Justice Thomas called on the Supreme Court to reconsider its holding
in New York Times, seeing the scope of defamation law as a state issue, rather
than one having a “constitutional status.”3 In the name of fighting “fake news,”
many others are now calling to erode the safeguards set out by this case and its
progeny. President Donald Trump has made defamation law a repeated theme
* Assistant Professor of Law, the University of Alabama School of Law, and Professor of Law, George
Mason University, Antonin Scalia Law School. We are grateful for the insightful comments of Jack Balkin,
Oren Bar-Gill, Omri Ben-Shahar, Mark Brandon, William Brewbaker, Zachary Clopton, Shahar Dillbary,
Heather Elliott, Janet Freilich, John Goldberg, Christine Jolls, Ronald Krotoszynski, Yair Listokin, Irina
Manta, Benjamin McMichael, Michael Pardo, Kish Parella, Steve Shavell, and Rebecca Tushnet. We are also
grateful for comments received in the Yale/Harvard/Stanford Junior Faculty Forum and Midwestern Law &
Economics Conference. The editors of the Alabama Law Review gave many helpful and thoughtful sugges-
tions. Katherine Johnson, Hamilton Millwee, Victoria Moffa, and Brenton Smith provided invaluable re-
search assistance.
1. 376 U.S. 254, 277–83 (1964).
2. BOB DYLAN, THE TIMES THEY ARE A-CHANGIN’ (Columbia Records 1964).
3. McKee v. Cosby, 139 S. Ct. 675, 682 (2019) (Thomas, J., concurring in the denial of certiorari).
454
Electronic copy available at: https://ssrn.com/abstract=3311527

<<PAGE_BREAK>>

4 ARBELMUNGAN 453-497 (DO NOT DELETE) 12/4/2019 7:18 PM
2019] The Case Against Expanding Defamation Law 455
of his public communications, and he promised decisive action: “We are going
to take a strong look at our country’s libel laws, so that when somebody says
something that is false and defamatory about someone, that person will have
meaningful recourse in our courts . . . .”4 At the same time, in January of 2019,
the American Law Institute (ALI) announced the start of a new Restatement
project for defamation law.5 The confluence of political will, support on the
Supreme Court, and the ALI project suggests that, indeed, writers and critics
who prophesize with their pens should keep their eyes wide open, for the Times
they are a-changin’.6
The calls to expand defamation law—by removing safeguards and increas-
ing money damages7—are grounded in the widely held theory that defamation law
protects reputation.8 And because defamation law is believed to protect reputation,
4. Michael M. Grynbaum, Trump Renews Pledge to ‘Take a Strong Look’ at Libel Laws, N.Y. TIMES (Jan.
10, 2018), https://www.nytimes.com/2018/01/10/business/media/trump-libel-laws.html; see also David
Jackson, Donald Trump Maintains Attacks on Bob Woodward, Calls for Changes in Libel Laws, USA TODAY (Sept.
5, 2018, 3:55 PM), https://www.usatoday.com/story/news/politics/2018/09/05/donald-trump-maintains-
attacks-bob-woodward-calls-changes-libel-laws/1199794002/; Donald J. Trump (@realDonaldTrump),
TWITTER (Sept. 5, 2018, 6:33 AM), https://twitter.com/realdonaldtrump/status/1037302649199177728?
lang=en (“Isn’t it a shame that someone can write an article or book, totally make up stories and form a
picture of a person that is literally the exact opposite of the fact, and get away with it without retribution or
cost. Don’t know why Washington politicians don’t change libel laws?”). Other figures have insinuated that
the “fake news” media is so untrustworthy that it must be circumvented. See Sophia Tesfaye, Trump’s Daughter-
in-Law Pushes His Propaganda: Lara Trump Launches “Real News” Show to Praise the President, SALON (Aug. 2, 2017,
5:03 PM), https://www.salon.com/2017/08/02/trumps-daughter-in-law-pushes-his-propaganda-lara-
trump-launches-real-news-show-to-praise-the-president/. Despite Trump’s calls for stronger defamation
laws, he himself has been a defendant in defamation suits. Jessica Levinson, Stormy Daniels and Summer Zervos
Are Using Defamation Laws to Try and Reveal the Truth About Trump, NBC NEWS (Mar. 28, 2018, 2:18 PM),
https://www.nbcnews.com/think/opinion/stormy-daniels-summer-zervos-are-using-defamation-laws-try-
reveal-ncna860851.
5. Restatement of the Law Third, Torts: Defamation and Privacy, ALI, https://www.ali.org/projects/show/
torts-defamation-and-privacy/ (last visited Oct. 8, 2019).
6. DYLAN, supra note 2.
7. See, e.g., Hadas Gold, Donald Trump: We’re Going to ‘Open Up’ Libel Laws, POLITCO (Feb. 26, 2016,
2:31 PM), https://www.politico.com/blogs/on-media/2016/02/donald-trump-libel-laws-219866 (quoting
Trump’s assertion that he is “going to open up our libel laws so when [newspapers] write purposely negative
and horrible and false articles, we can sue them and win lots of money”).
8. Milkovich v. Lorain Journal Co., 497 U.S. 1, 12 (1990) (“Defamation law developed not only as a
means of allowing an individual to vindicate his good name, but also for the purpose of obtaining redress for
harm caused by such statements.”); see also, e.g., PETER N. AMPONSAH, LIBEL LAW, POLITICAL CRITICISM,
AND DEFAMATION OF PUBLIC FIGURES 2 (2004) (“To protect people from injury to their reputation, socie-
ties create laws of defamation to settle issues of truth or falsehood and reputational harm that result from
defamatory statements.”); DAN B. DOBBS ET AL., HORNBOOK ON TORTS § 37.1, at 936 (2d ed. 2015) (“Def-
amation law . . . aims at protecting reputation and good name against false and derogatory communica-
tions.”); RICHARD A. EPSTEIN & CATHERINE M. SHARKEY, CASES AND MATERIALS ON TORTS 1017 (10th
ed. 2012) (describing the common law “premise that an individual’s reputation should be protected against
false words”); WILLIAM K. JONES, INSULT TO INJURY: LIBEL, SLANDER, AND INVASIONS OF PRIVACY 1, 9
(2003) (“Briefly stated, the law of defamation protects a person against falsehoods that expose him to hatred,
contempt, or ridicule or cause him to be shunned by his fellows or that tend to injure him in his trade or
occupation. . . . The objective of the law of defamation is to protect reputations against derogatory false-
hoods.”); W. PAGE KEETON ET AL., PROSSER AND KEETON ON THE LAW OF TORTS § 111, at 771 (5th ed.
1984) [hereinafter PROSSER AND KEETON] (“[D]efamation is an invasion of the interest in reputation and
Electronic copy available at: https://ssrn.com/abstract=3311527

<<PAGE_BREAK>>

4 ARBELMUNGAN 453-497 (DO NOT DELETE) 12/4/2019 7:18 PM
456 ALABAMA LAW REVIEW [Vol. 71:2:453
many think that stricter defamation law means stricter protection of reputa-
tional interests. It is remarkable just how common the reputation-protection
theory is. Whereas lawyers often decry the incoherency and vagaries of the com-
mon law tort of defamation,9 they share what has been described as a “virtually
axiomatic” belief that defamation law shields reputation from harm.10 Courts,
commentators, policy makers, and lay people all seem to share this common
theory.11 Despite decades of jurisprudence and debate, few have contested it,
perhaps because of how enticing it is in its simplicity—this theory that offen-
sive, pejorative, and vituperative comments cause harm to the victim’s standing
in society. To prevent wrongdoers from causing this harm and to compensate
victims, tort law must impose a fine on those who make statements that are
found to be false. On the basis of this theory, courts will let a tort overcome a
constitutional right that is right at the heart of the American ethos.12
This Article exposes the shortcomings of the reputation-protection theory
by demonstrating how it fails to consider audience effects.13 Unlike the harms from
good name.”); LAWRENCE MCNAMARA, REPUTATION AND DEFAMATION 1 (2007) (noting that “[t]he clarity
of the rationale and the extent of agreement surrounding it is quite remarkable”). For further discussion, see
infra Part I.A.
9. EPSTEIN & SHARKEY, supra note 8, at 1017 (“Of all the areas of tort law, defamation is perhaps the
most difficult to organize and to understand.”); PROSSER AND KEETON, supra note 8, § 111, at 771 (“[T]here
is a great deal of the law of defamation which makes no sense. It contains anomalies and absurdities for which
no legal writer ever has had a kind word . . . .”); Randall P. Bezanson, The Libel Tort Today, 45 WASH. & LEE
L. REV. 535, 543 (1988) (“[R]ecovery by any plaintiff is more likely to be the product of chance than of any
systematic pattern reflecting reputational interests.”); Sheldon W. Halpern, Values and Value: An Essay on Libel
Reform, 47 WASH. & LEE L. REV. 227, 230 (1990). For an early discussion of defamation, see Van Vechten
Veeder, The History and Theory of the Law of Defamation, 3 COLUM. L. REV. 546, 546 (1903) (“English law of
defamation . . . is a mass which has grown by aggregation . . . . [P]erhaps no other branch of the law is as
open to criticism for its doubts and difficulties, its meaningless and grotesque anomalies. It is, as a whole,
absurd in theory, and very often mischievous in its practical operation.”).
10. MCNAMARA, supra note 8, at 1. The concept of reputation in legal scholarship is quite thin. See
generally Yonathan A. Arbel, Reputation Failure: The Limits of Market Discipline in Consumer Markets, WAKE
FOREST L. REV. (forthcoming 2019) [hereinafter Arbel, Reputation Failure] (exploring the concept of reputa-
tion and arguing that systems of reputation are highly susceptible to significant bias, given the divergence
between private incentives people have to share reputational information and its status as a public good).
11. See infra Part I.A.
12. See, e.g., Ventura v. Kyle, 63 F. Supp. 3d 1001, 1011 (D. Minn. 2014), rev’d in part, vacated in part, 825
F.3d 876, 885–86 (8th Cir. 2016) (vacating the jury verdict due to a prejudicial error during trial); Blake v.
Ann-Marie Giustibelli, P.A., 182 So. 3d 881, 883–84 (Fla. Dist. Ct. App. 2016) (affirming $350,000 in damages
for online defamatory reviews of attorney services); Anagnost v. Mortg. Specialists, Inc., No. 216-2016-cv-
277, 2017 WL 7693149 (N.H. Super. Ct. Sept. 1, 2017), aff’d, No. 2017-0311, 2018 WL 4940850 (N.H. Sept.
25, 2018) (upholding a $275 million judgment, see Jury Verdict Form, Anagnost, No. 216-2016-cv-277, 2017
WL 7690898, for false accusations of running a drug ring and conspiracy to murder). However, other torts
often yield to constitutional protections. See, e.g., Snyder v. Phelps, 562 U.S. 443, 460–61 (2011) (holding that
the First Amendment bars the father of a deceased soldier from recovering for intentional infliction of emo-
tional distress due to picketing by members of the Westboro Baptist Church); United States v. Eichman, 496
U.S. 310, 319 (1990) (holding that a federal law prohibiting flag burning was unconstitutional and that “[p]un-
ishing desecration of the flag dilutes the very freedom that makes this emblem so revered, and worth rever-
ing”).
13. This statement is less bold when one considers Professor Laura Heymann’s argument that, until
recently, the existence of the audience and its interests were all but neglected in both scholarship and case
Electronic copy available at: https://ssrn.com/abstract=3311527

<<PAGE_BREAK>>

4 ARBELMUNGAN 453-497 (DO NOT DELETE) 12/4/2019 7:18 PM
2019] The Case Against Expanding Defamation Law 457
traditional torts, such as assault and battery, reputational harms are not imme-
diate. Rather, they are mediated by third parties, namely, the audience.14 Repu-
tational harm is the result of the audience believing, at least to some extent, in
a negative statement. As a result, any legal analysis of defamation is incomplete
without considering audience effect. As communication theorists agree, audi-
ence effects can be complex: “The modern view, informed by decades of em-
pirical research, supports an understanding antithetical to the assumption of
direct and uniform effects [of defamatory statements].”15 Yet the standard
model of defamation law only accounts for speakers and victims, relegating the
audience to a secondary and often invisible role.16
This Article offers a framework for defamation law that accounts for audi-
ence effects. Audiences form judgments on the basis of a multitude of factors.
We focus here on one important, but neglected, factor—the legal environment
itself. Borrowing from the rich and well-established signaling theory,17 we con-
sider how defamation law affects audience beliefs. A key finding in this litera-
ture is that expensive signals appear more reliable than cheap signals, “cheap
talk.”18 This makes intuitive sense: puffery and gossip appear less reliable than
a statement by a person testifying under the threat of perjury. Because stricter
defamation law makes inaccurate statements more expensive (by increasing the
likelihood of an adverse judgment), they make the signals appear to be more
reliable. Indeed, this is why the regulation of false advertising is believed to
increase consumer confidence in the marketplace.19 The increased perception
of the reliability of statements is salutary when the statements are indeed truth-
law. See Laura A. Heymann, The Law of Reputation and the Interest of the Audience, 52 B.C. L. REV. 1341, 1341
(2011).
14. Other dignitary torts, such as intentional infliction of emotional harm or infringement of privacy,
are contingent on the reaction of the victim, rather than the audience, and thus can be tortious even when
they involve true statements.
15. Jeremy Cohen & Albert C. Gunther, Libel as Communication Phenomena, 9 COMM. & L. 9, 21 (1987).
16. See, e.g., Heymann, supra note 13, at 1341; Lyrissa Barnett Lidsky, Nobody’s Fools: The Rational Audience
as First Amendment Ideal, 2010 U. ILL. L. REV. 799, 801 (2010) [hereinafter Lidsky, Rational Audience] (“The
Court rarely articulates its assumptions about the presumed audience of core speech, but its assumptions
shape the outcomes of First Amendment cases.”).
17. See generally Rebecca Bliege Bird & Eric Alden Smith, Signaling Theory, Strategic Interaction, and Symbolic
Capital, 46 CURRENT ANTHROPOLOGY 221 (2005); Brian L. Connelly et al., Signaling Theory: A Review and
Assessment, 37 J. MGMT. 39 (2011); Michael Spence, Job Market Signaling, 87 Q.J. ECON. 355 (1973).
18. See, e.g., William Boulding & Amna Kirmani, A Consumer-Side Experimental Examination of Signaling
Theory: Do Consumers Perceive Warranties as Signals of Quality?, 20 J. CONSUMER RES. 111 (1993).
19. Everette MacIntyre, Member, Fed. Trade Comm’n, Address Before the Better Business Division
Miami-Dade County Chamber of Commerce: FTC Promotes Confidence in Advertising (July 18, 1963),
https://www.ftc.gov/system/files/documents/public_statements/683591/19630718_macintyre_ftc_pro-
motes_confidence_in_adertising.pdf. We also find a similar idea in securities law: close regulation of infor-
mation streams would increase investor confidence. See, e.g., Mary Schapiro, Chairman, U.S. Sec. & Exch.
Comm’n, Speech at the SIFMA Annual Conference: The Road to Investor Confidence (Oct. 27, 2009),
https://www.sec.gov/news/speech/2009/spch102709mls.htm (noting that the way to restore investor con-
fidence, post crisis, is through high standards and stricter enforcement of securities laws).
Electronic copy available at: https://ssrn.com/abstract=3311527

<<PAGE_BREAK>>

4 ARBELMUNGAN 453-497 (DO NOT DELETE) 12/4/2019 7:18 PM
458 ALABAMA LAW REVIEW [Vol. 71:2:453
ful. But it can have negative and deleterious effects when the occasional state-
ment proves to be false, as audiences are more likely to believe it to be true than
they would absent strict defamation law.20 Hence, we conclude that strict defama-
tion law may damage reputational interests.
The framework presented here offers another dimension to standard anal-
yses of defamation law.21 In the standard bilateral-tort model, courts and com-
mentators see expansions to defamation law as involving a simple balance be-
tween better protection of the victim’s reputation and the chilling effect of such
laws on speakers.22 The framework here adds another player—the audience.
The chilling effect in the bilateral model assumes that would-be speakers will
change their behavior in response to stricter defamation laws. In the trilateral
model, stricter defamation laws also affect the audience. In particular, we argue
that considering the impact of defamatory statements on audiences produces a
“seesaw dynamic,” where strict defamation laws chill false statements but in-
crease the reliability and thus the harm of surviving false statements.23 Using
the trilateral model, courts should engage in richer balancing of the effects of
defamation law, which can sometimes lead to very different conclusions than
the standard analysis.
20. A poetic illustration of some of the audience effects is encapsulated in writer Bertolt Brecht’s
satirical poem, The Burning of the Books:
When the Regime commanded that books with harmful knowledge
Should be publicly burned and on all sides
Oxen were forced to drag cartloads of books
To the bonfires, a banished
Writer, one of the best, scanning the list of the
Burned, was shocked to find that his
Books had been passed over. He rushed to his desk
On wings of wrath, and wrote a letter to those in power
Burn me! he wrote with flying pen, burn me! Haven’t my books
Always reported the truth? And here you are
Treating me like a liar! I command you:
Burn me!
BERTOLT BRECHT, POEMS 1913-1956, at 294 (1998).
21. Our paper was developed contemporaneously and independently of a similar project pursued by
Professors Ariel Porat and Daniel Hemel. Both projects conclude that audience effects undermine the stand-
ard narrative of defamation law, although we differ in focus and in some of our conclusions. See Daniel Jacob
Hemel & Ariel Porat, Free Speech and Cheap Talk, 11 J. LEGAL ANALYSIS 46 (2019).
22. See, e.g., Petro-Lubricant Testing Labs., Inc. v. Adelman, 184 A.3d 457, 461 (N.J. 2018) (“Defama-
tion law balances two competing interests—an individual’s right to protect his reputation from unjustified
and false aspersions and our citizens’ right to free expression and robust debate in our democratic society.”).
23. See infra Part II.C.
Electronic copy available at: https://ssrn.com/abstract=3311527

<<PAGE_BREAK>>

4 ARBELMUNGAN 453-497 (DO NOT DELETE) 12/4/2019 7:18 PM
2019] The Case Against Expanding Defamation Law 459
Audience effects, of the kind we identify here, do not depend on audiences
being rational, sophisticated, or well versed in defamation law. Just like the well-
accepted chilling effect, the key dynamics we identify here accommodate dif-
ferent views regarding these issues. In fact, under some conditions, greater au-
dience ignorance and gullibility will bolster the harmful effect of expanding def-
amation law.24 What we find implausible is the idea inherent in the standard
model that defamation law affects speakers and their subjects but that somehow
audiences are completely insulated from these effects.25 As noted, it is well rec-
ognized in other domains that close regulation of the information environment
would lead to increased trust by members of the audience.26 Our analysis here
frames the key dynamics and invites judges, policy makers, and scholars to ex-
plicitly consider these effects.
Our policy prescriptions call for a more nuanced and careful approach to
the evolution of defamation law. There will be contexts wherein expansions of
defamation law can be shown to be helpful, but the law’s efficacy is neither self-
evident nor easily supported. Lawmakers, courts, and commentators contem-
plating a reform or a new application of defamation law—such as President
Trump’s proposal—should consider the trade-off between defamation law’s
potential benefits and its countervailing effects. When considering the expan-
sion of defamation law, policy makers should ask: what is the harm prevented
by having fewer falsehoods, and how does it compare to the harm caused by
falsehoods becoming more believable? These regulators should only expand
liability if they judge that the harm prevented by the expansion is greater than
the harm it creates. Indeed, this question is not always easy to answer, and there
will often be some factual uncertainty about this trade-off. In such cases, we
proffer a default position with a venerable history in the courts: err on the side
of free speech. If one cannot prove that a new application of defamation law
would result in a net benefit to reputation, then defamation’s ambit should not
be expanded.
24. Audiences may easily underestimate or overestimate the strictness of defamation law. The effects
of expanding defamation law depend on the audience members’ starting positions and how likely and quick
they are to learn about changes to the law, among other considerations. See generally Christine Jolls, Debiasing
Through Law and the First Amendment, 67 STAN. L. REV 1411 (2015) (listing empirical evidence of how the law
might correct consumer misperceptions). But see Karen Russo France & Paula Fitzgerald Bone, Policy Makers’
Paradigms and Evidence from Consumer Interpretations of Dietary Supplement Labels, 39 J. CONSUMER AFF. 27 (2005)
(finding that it is difficult to correct the misperception that the safety of certain supplements is regulated).
Psychological biases and heuristics add another dimension of complexity, as audiences may react strongly to
salience and repetition (even of suspected lies) or may be overly cynical as a defense mechanism. These
considerations, alongside many other practical, legal, and political considerations and the findings of this
paper, are relevant for the determination of the scope of defamation law. This is why it is important to
abandon the simplistic bilateral model of reputation protection.
25. Perhaps in some contexts, speakers are better informed about the law than audiences. While rele-
vant, what matters most for the analysis here is that audiences have some very general (even if mistaken) idea
about the severity of the law, which is plausible given the common media coverage of libel lawsuits.
26. See supra note 19 and accompanying text.
Electronic copy available at: https://ssrn.com/abstract=3311527

<<PAGE_BREAK>>

4 ARBELMUNGAN 453-497 (DO NOT DELETE) 12/4/2019 7:18 PM
460 ALABAMA LAW REVIEW [Vol. 71:2:453
We show in three Parts that the case for expanding defamation law is an
uneasy one. In Part I, we provide general background on defamation law, First
Amendment jurisprudence, and the protection of reputation. A central obser-
vation here is that the making of defamatory statements is already permissible
in many important areas of social life, and commentators generally accept such
carve outs without much alarm, presumably because audiences take assertions
in these spheres more skeptically. This observation grounds our discussion and
demonstrates the practicality and sensibility of limiting defamation law. In Part
II, we develop our main argument using concrete examples. While we base our
general analysis on a formal model,27 here we use a simple, stylistic, and easy-
to-follow example. We then consider a variety of limitations, qualifications, and
considerations. We pay particular attention to issues such as audience sophisti-
cation, behavioral biases, reliability and accessibility of courts, and the stakes of
the allegations. With a few exceptions, the dynamics we identify in Part II turn
out to be general, although their strength is context-specific.
In Part III, we start to explore some of the legal implications of our analysis.
We examine the proper ambit of defamation law in diverse contexts, such as
employment, consumer goods, and political speech. We conclude that, first,
courts should reexamine traditional balances in First Amendment jurisprudence
and tilt the balance further in favor of free speech. Historically, when courts
decided defamation cases, they labored under the assumption that defamation
law definitively protects reputation. The upshot of our analysis is that defama-
tion law is less protective than traditionally believed, and so the weight given by
defamation law to the goal of protecting reputation should be considerably
lighter. The recent announcement of a new Restatement project presents a rare
opportunity to engage in such reflection.28
The second and perhaps the most urgent consequence of our analysis is
that the war on fake news should not result in an expansion of libel laws. This
consequence is significant, because our analysis takes the concerns of fake news
seriously. Based on this premise, the analysis shows that expanding defamation
law can easily backfire, resulting in the unintended consequence of aggravating
the harm of fake publications by lulling the populace into a sense of assurance
that if it’s in the news, it must be true.
27. See Yonathan A. Arbel & Murat Mungan, Regulating Speech with Bayesian Audiences (U. of Ala. Sch. of
Law Legal Studies, Research Paper No. 3452662, 2019), https://papers.ssrn.com/sol3/abstract=3452662.
28. See Restatement of Law Third, Torts: Defamation and Privacy, supra note 5.
Electronic copy available at: https://ssrn.com/abstract=3311527

<<PAGE_BREAK>>

4 ARBELMUNGAN 453-497 (DO NOT DELETE) 12/4/2019 7:18 PM
2019] The Case Against Expanding Defamation Law 461
I. DEFAMATION LAW & REPUTATION
This Part explores modern defamation law, as it formed after the turbu-
lence of the 1960s with New York Times Co. v. Sullivan.29 This Part demonstrates
how the belief in defamation law’s reputation-protecting powers has shaped its
doctrine, highlights how courts have relegated the role of audiences to second-
ary consideration, and explores some of the exceptions to defamation law.
These exceptions, it is argued, are domains where audiences tend to be more
critical of information.
A. Goals & Functions of Defamation Law
Under defamation law, a plaintiff can recover pecuniary damages from any
person who makes a public, false defamatory statement against her, unless spe-
cial conditions or privileges exist.30 We defer discussion of doctrine until after
we have examined a pressing preliminary question of why the law is needed to
regulate such statements in the first place. In the United States, free speech is a
core value, ethos, and right; the commitment to protecting and promoting free
speech runs deep. Indeed, most forms of speech go unregulated, even if the
content is inflammatory, inane, provocative, flippant, or frivolous.31 Why, then,
regulate defamatory speech?
Defamation law exists to protect reputation. This, at least, is the common
view, one that is so broadly held and so commonsensical that it is in the small
province of statements to which lawyers do not attach a footnote. Leading com-
mentators call this idea axiomatic and universal.32 Courts frequently recite the
idea that “[i]n American law, defamation is . . . about protecting a good reputa-
tion honestly earned.”33 Several casebooks matter-of-factly state that “[d]efa-
mation protects an individual’s interest in reputation,” omitting—for reasons
of blatant obviousness—any support or authority.34 Note that this justification
is distinct from the related, but often confused, goal of protecting emotions or
29. 376 U.S. 254 (1964).
30. See PROSSER AND KEETON, supra note 8, § 111, at 771.
31. See, e.g., Snyder v. Phelps, 562 U.S. 443, 458 (2011) (allowing Westboro Baptist Church’s picketing
of a soldier’s funeral); Reno v. ACLU, 521 U.S. 844 (1997) (discussing “indecent” content on the Internet);
United States v. Eichman, 496 U.S. 310, 319 (1990) (regarding flag burning).
32. See supra note 10 and accompanying text; see also Spencer v. Kemna, 523 U.S. 1, 24 n.5 (1998)
(Stevens, J., dissenting) (“[V]indicating one’s reputation is the main interest at stake in a defamation
case . . . .”); Albright v. Oliver, 510 U.S. 266, 283 (1994) (Kennedy, J., concurring) (“[T]he interests granted
historical protection by the common law of torts [include] freedom from defamation . . . .”); David J. Ache-
son & Ansgar Wohlschlegel, The Economics of Weaponized Defamation Lawsuits, 47 SW. L. REV. 335, 335 (2018)
(“The law of defamation is the principal legal mechanism in both the United States and England for protect-
ing the interest in reputation.”).
33. Bustos v. A&E Television Networks, 646 F.3d 762, 764 (10th Cir. 2011).
34. RUSSEL L. WEAVER ET AL., TORTS: CASES, PROBLEMS, AND EXERCISES 803 (2d ed. 2005).
Electronic copy available at: https://ssrn.com/abstract=3311527

<<PAGE_BREAK>>

4 ARBELMUNGAN 453-497 (DO NOT DELETE) 12/4/2019 7:18 PM
462 ALABAMA LAW REVIEW [Vol. 71:2:453
privacy. These goals are served by other tort doctrines, such as intentional in-
fliction of harm and privacy infringement, that are not conditioned on the men-
dacity of the allegation.35 The Supreme Court has emphasized that emotional
harm alone cannot support a defamation lawsuit but that a defamation lawsuit
must rest on harm to reputation, which is, after all, its raison d’etre.36
As to why reputation should be protected, there is an unsurprising differ-
ence of opinion. Rights-based accounts tend to view reputation as being part
of a person’s property, dignity, or honor.37 In such views, reputation is some-
thing one has, a view which is quite dominant in the scholarship.38 For such
accounts, the wrongfulness of defamation consists in the taking and the viola-
tion of a right.39 A more social view sees defamation as a replacement of the
old customs of honor duels and blood feuds.40 By channeling certain behaviors
to the court system, defamation law is believed to serve a civilizing function—
so much so that some think that “a civilized society cannot refuse to protect
reputation.”41
Economic theories of reputation shift the point of view from the subject
to the public. Reputation consists of an ununified mass of opinions others have
of us.42 Such opinions have predictive values. They help members of the com-
munity—or market participants—judge the “affinity” of a particular partner, be
35. PROSSER AND KEETON, supra note 8, § 111, at 771 (“Defamation is not concerned with the plain-
tiff’s own humiliation, wrath or sorrow . . . .”). In Gertz v. Robert Welch, Inc., the Court took a more inclusive
approach. 418 U.S. 323, 349–50 (1974) (“We need not define ‘actual injury,’ . . . . Suffice it to say that actual
injury is not limited to out-of-pocket loss. Indeed, the more customary types of actual harm inflicted by
defamatory falsehood include impairment of reputation and standing in the community, personal humiliation,
and mental anguish and suffering.”).
36. See Hustler Magazine, Inc. v. Falwell, 485 U.S. 46, 52–57 (1988).
37. See Robert C. Post, The Social Foundations of Defamation Law: Reputation and the Constitution, 74 CALIF.
L. REV. 691, 693–719 (1986); see also Richard A. Epstein, Was New York Times v. Sullivan Wrong?, 53 U. CHI.
L. REV. 782, 800–01 (1986).
38. See, e.g., David S. Ardia, Reputation in a Networked World: Revisiting the Social Foundations of Defamation
Law, 45 HARV. CIV. RTS.-CIV. LIBERTIES L. REV. 261, 290 (2010) (“The . . . most dominant[] conception of
reputation embodied in American defamation law is that of reputation as property.”); Post, supra note 37, at
730 (discussing defamation “within the framework of reputation as property”).
39. See generally Dun & Bradstreet, Inc. v. Greenmoss Builders, Inc., 472 U.S. 749 (1985) (Powell, J.,
plurality opinion). In common law, punitive damages are conditional on malice but in the sense of a wrongful
attitude rather than in the Sullivan sense of a disregard for the truth. See Sheldon W. Halpern, Of Libel, Language,
and Law: New York Times v. Sullivan at Twenty-Five, 68 N.C. L. REV. 273, 278 (1990).
40. See PROSSER AND KEETON, supra note 8, § 111, at 772. It is puzzling what social function duels
had; after all, the ability to win a duel is not correlated with the veracity of the offending statement. See generally
Ben Merriman, Duels in the European Novel: Honor, Reputation, and the Limits of a Bourgeois Form, 9 CULTURAL
SOC. 203 (2015) (rooting duels in a system of honor, dispute resolution, and diffusion of conflict).
41. David A. Anderson, Is Libel Law Worth Reforming?, 140 U. PA. L. REV. 487, 490 (1991).
42. RICHARD A. POSNER, THE ECONOMICS OF JUSTICE 272 (1981) (“A person’s reputation is other
people’s valuation of him as a trading, social, marital, or other kind of partner. It is an asset of potentially
great value which can be damaged both by false and by true defamation.”); Christian Hahn et al., Social Repu-
tation: A Mechanism for Flexible Self-Regulation of Multiagent Systems, 10 J. ARTIFICIAL SOCIETIES & SOC.
SIMULATION ¶ 3.1 (Jan. 31, 2007), http://jasss.soc.surrey.ac.uk/10/1/2/2.pdf (treating reputation as a form
Electronic copy available at: https://ssrn.com/abstract=3311527

<<PAGE_BREAK>>

4 ARBELMUNGAN 453-497 (DO NOT DELETE) 12/4/2019 7:18 PM
2019] The Case Against Expanding Defamation Law 463
it in a social, romantic, or transactional setting.43 How trustworthy is a potential
business partner? How good is a specific product? How loyal is a potential date?
In economic parlance, reputation is a signal about past behavior that is predic-
tive of future behavior;44 it is a “shadow of the future”45 that helps economize
search costs.46
Defamation law is thought to promote the protection of reputation in three
ways. One idea, perhaps the most prominent, is deterrence. By imposing a sanc-
tion on false allegations, defamation law disincentivizes such wrongful behavior
ex ante.47 Prospective liars would worry that lying exposes them to civil liability
and so would likely refrain from falsely defaming others.48 A second way is
through redress; by offering compensation to victims of defamation, defama-
tion law protects their reputation against wrongful attacks.49 The Supreme
Court has declared both of these goals to be important.50 A third way, although
less commonly articulated, is vindication.51 The idea of vindication focuses on
the legal process. By being able to bring a lawsuit, a victim gains access to a
procedure that allows for a public determination of truth—either through the
outcome of the case or through information revealed in the litigation process.52
Thus, victims can clear their names against nefarious allegations and have court
judgments as records of their innocence.
of “symbolic capital”); Roy Shapira, Reputation Through Litigation: How the Legal System Shapes Behavior by Producing
Information, 91 WASH. L. REV. 1193, 1203–04 (2016).
43. POSNER, supra note 42, at 272.
44. Ardia, supra note 38, at 264 (describing reputation as “a heuristic for predicting the behavior of
others”).
45. Id. (quoting ROBERT AXELROD, THE EVOLUTION OF COOPERATION 126 (1984)).
46. POSNER, supra note 42, at 287.
47. AMPONSAH, supra note 8, at 2; Stanley Ingber, Defamation: A Conflict Between Reason and Decency, 65
VA. L. REV. 785, 792 (1979) (“[A] successful defamation suit can act as a public rebuke and as an economic
penalty for the publishers of defamatory statements. Anticipation of such suits presumably will deter individ-
uals from making false statements that cause ridicule and loss of reputation.”). See LAURENCE H. ELDREDGE,
THE LAW OF DEFAMATION § 3, at 6 (1978); see also RODNEY A. SMOLLA, LAW OF DEFAMATION § 1:26 (2d
ed. 2019) (“The law of defamation serves an important social interest as a deterrent on the publication of
false and injurious speech.”).
48. Gertz v. Robert Welch, Inc., 418 U.S. 323, 350 (1974) (describing punitive damages in defamation
suits as “private fines levied by civil juries to punish reprehensible conduct and to deter its future occur-
rence”).
49. AMPONSAH, supra note 8, at 2.
50. Milkovich v. Lorain Journal Co., 497 U.S. 1, 12 (1990).
51. Id. at 23 (“[A]n action for damages is the only hope for vindication or redress the law gives to a
man whose reputation has been falsely dishonored.” (quoting Rosenblatt v. Baer, 383 U.S. 75, 93 (1966)
(Stewart, J., concurring))).
52. Shapira, supra note 42, at 1211–23.
Electronic copy available at: https://ssrn.com/abstract=3311527

<<PAGE_BREAK>>

4 ARBELMUNGAN 453-497 (DO NOT DELETE) 12/4/2019 7:18 PM
464 ALABAMA LAW REVIEW [Vol. 71:2:453
By design, defamation law falls short of protecting these goals—it does not
deter all falsehoods, compensate all victims, or vindicate all claims. There are
both institutional and substantive reasons for these limitations. On the institu-
tional side, it is widely understood that courts cannot always identify falsehoods,
the judicial process is expensive and affords limited access, offenders are some-
times judgment-proof, and courts have limited jurisdiction.53 On the substan-
tive side, First Amendment considerations,54 concerns about chilling speech,55
and aversion to the idea that state courts should declare what is true and what
is false56 have led courts to approach defamation lawsuits with a willingness to
err on the side of unfettered speech.57 This is summed up by the idea that def-
amation law must give “breathing space” to free speech58 and that some degree
of abuse is to be tolerated in a free society.59 As such, courts have shown reluc-
tance to award injunctions.60 They have also required heightened standards of
proof,61 and in some cases, they have even struck down prohibitions on false
speech motivated by ill-intent.62
In closing, it should be noted that the idea that defamation protects repu-
tation is not some impractical abstraction; it has significant constitutional and
legal ramifications. Starting in the 1960s—surprisingly late—courts started to
53. See generally Lyrissa Barnett Lidsky, Silencing John Doe: Defamation & Discourse in Cyberspace, 49 DUKE
L.J. 855 (2000).
54. St. Amant v. Thompson, 390 U.S. 727, 732 (1968) (“[T]o insure the ascertainment and publication
of the truth about public affairs, it is essential that the First Amendment protect some erroneous publications
as well as true ones.”).
55. See generally Gary L. Lee, Comment, Strict Liability Versus Negligence: An Economic Analysis of the Law
of Libel, 1981 BYU L. REV. 398, 400 (“[F]alse defamatory statements are properly viewed as an unavoidable
cost of publishing true defamatory statements.”).
56. Gertz v. Robert Welch, Inc., 418 U.S. 323, 349 (1974) (warning that “juries [might] punish unpop-
ular opinion[s]”).
57. Id. at 341 (“The First Amendment requires that we protect some falsehood in order to protect
speech that matters.”).
58. Hustler Magazine, Inc. v. Falwell, 485 U.S. 46, 56 (1988).
59. See Gertz, 418 U.S. at 341; see also Snyder v. Phelps, 562 U.S. 443, 458 (2011) (“If there is a bedrock
principle underlying the First Amendment, it is that the government may not prohibit the expression of an
idea simply because society finds the idea itself offensive or disagreeable.” (quoting Texas v. Johnson, 491
U.S. 397, 414 (1989))); James Madison, Report on the Virginia Resolutions, reprinted in 4 DEBATES IN THE
SEVERAL STATE CONVENTIONS ON THE ADOPTION OF THE FEDERAL CONSTITUTION 546, 571 (Jonathan
Elliot ed., Philadelphia, J.B. Lippincott Co. 2d ed. 1891) (1800) (“Some degree of abuse is inseparable from
the proper use of every thing; and in no instance is this more true than in that of the press.”).
60. See, e.g., Kramer v. Thompson, 947 F.2d 666, 677 (3d Cir. 1991) (“[T]he maxim that equity will not
enjoin a libel has enjoyed nearly two centuries of widespread acceptance at common law.”); Konigsberg v.
Time, Inc., 288 F. Supp. 989, 989 (S.D.N.Y. 1968) (“A court of equity will not, except in special circum-
stances, issue an injunctive order restraining libel or slander or otherwise restricting free speech. To enjoin
any publication, no matter how libelous, would be repugnant to the First Amendment to the Constitution,
and to historic principles of equity.” (citations omitted)).
61. Milkovich v. Lorain Journal Co., 497 U.S. 1, 15 (1990) (“The Court has also determined that both
for public officials and public figures, a showing of New York Times malice is subject to a clear and convincing
standard of proof.”).
62. Illinois ex rel. Madigan v. Telemarketing Assocs., Inc., 538 U.S. 600, 612–16 (2003).
Electronic copy available at: https://ssrn.com/abstract=3311527

<<PAGE_BREAK>>

4 ARBELMUNGAN 453-497 (DO NOT DELETE) 12/4/2019 7:18 PM
2019] The Case Against Expanding Defamation Law 465
recognize the tension between defamation law and freedom of expression.63 In
the seminal case New York Times Co. v. Sullivan, the Supreme Court held that
protection of reputation should sometimes cede to First Amendment consid-
erations and that a defamation lawsuit by public officials cannot proceed with-
out a showing of actual malice.64 This holding cemented the idea that protecting
reputation and freedom of expression requires balancing antagonistic consider-
ations.65 First Amendment considerations could be overcome, even if narrowly,
when limitations on speech are required to protect reputation. Epstein summa-
rized this idea: “Everyone agrees that the central task of the modern law of
defamation is to reconcile the interest in reputation with that in freedom of
speech.”66
B. Defamation Law: Doctrine, Nature of Reputation, and the Audience
Defamation has been on the books for a little longer than there have been
books. First came the moral exhortations. Ancient Sumerian cuneiform tablets
admonish him who would associate with a slanderer.67 The Bible reproves
“speaking guile”68 and “spread[ing] a false report.”69 At some unknown point
in history, defamation transitioned from the improper to the illegal. One early
example comes from the Frankish Lex Salica (dated to around 500 C.E.) which
imposes a three-shilling penalty on him who calls another a “wolf” or a “hare,”
63. See generally Lillian R. BeVier, The First Amendment and Political Speech: An Inquiry into the Substance and
Limits of Principle, 30 STAN. L. REV. 299, 348 (1978); Cynthia L. Estlund, Speech on Matters of Public Concern: The
Perils of an Emerging First Amendment Category, 59 GEO. WASH. L. REV. 1, 10 (1990); id. at 12 (“The First Amend-
ment was a late entrant into the fields of public employee speech and defamation law and has never held full
sway within the two areas.”). On this tension, see AMPONSAH, supra note 8, at 2; Epstein, supra note 37, at
783.
64. New York Times Co. v. Sullivan, 376 U.S. 254, 283 (1964). Confusingly, malice refers not to
attitude towards the subject but rather to the making of a statement while knowing its falsity or with reckless
disregard for its veracity. See Halpern, supra note 39, at 278.
65. See ROBERT D. SACK, SACK ON DEFAMATION: LIBEL, SLANDER, AND RELATED PROBLEMS § 1:1
(3d ed. 2009) (“Even though reputation may be seriously injured by defamation . . . courts concluded that on
balance the damage [to free speech due to chilling effects was] too great to permit the defamed person to
recover.”); J. M. Balkin, Some Realism About Pluralism: Legal Realist Approaches to the First Amendment, 1990 DUKE
L.J. 375, 403–04; Ingber, supra note 47, at 789 (“The tort interest of protecting the individual—the interest of
decency—may circumscribe the ambit of free debate. How should this conflict be resolved?” (footnote omit-
ted)); Gerald R. Smith, Of Malice and Men: The Law of Defamation, 27 VAL. U. L. REV. 39, 40 (1992) (“The Court
has struggled to find a reasonable balance between protecting reputation and protecting free speech by fash-
ioning rules of general applicability in order to provide certainty and predictability and to avoid chilling free
speech.”).
66. EPSTEIN & SHARKEY, supra note 8, at 1022.
67. The Instructions of Shuruppag: Translation, ELEC. TEXT CORPUS OF SUMERIAN LITERATURE §§ 65–
66, http://etcsl.orinst.ox.ac.uk/section5/tr561.htm (last visited Oct. 10, 2019) (“The eyes of the slanderer
always move around as shiftily as a spindle. You should never remain in his presence . . . .”).
68. Psalms 34:13.
69. Exodus 23:1.
Electronic copy available at: https://ssrn.com/abstract=3311527

<<PAGE_BREAK>>

4 ARBELMUNGAN 453-497 (DO NOT DELETE) 12/4/2019 7:18 PM
466 ALABAMA LAW REVIEW [Vol. 71:2:453
or a forty-five shilling penalty if one calls a woman a “harlot.”70 In common
law, defamation made its debut in the latter half of the sixteenth century.71 In
England, two different doctrines coevolved: slander (spoken defamation) and
libel (written defamation).72 Each of these doctrines evolved within its own ven-
ues—ecclesiastical or common courts—and consequently developed different
rules, remedies, and procedures.73 For a period of time, defamation coupled
with sedition to form the much-maligned offense of “seditious libel” (speech
meant to criticize the government).74 Only in modernity did the common law
fuse the disparate torts of libel and slander into what is now known as defama-
tion, although remnants of this distinction still persist.75
The modern doctrine of defamation has a misleadingly simple structure. To
prevail, the plaintiff must show that the defendant has made (i) a public state-
ment76 that is (ii) false and (iii) may diminish the plaintiff’s reputation.77 In prac-
tice, applying these tests proves Herculean, with little in the way of an organiz-
ing theory.78 Here, we explicate some aspects of these doctrinal requirements,
as their application is based on some fundamental assumptions about the nature
of defamation, reputation, and audiences.
For a statement to be defamatory, it must be “published” in the very ex-
pansive sense of being communicated to any other person besides the subject.79
This distinction separates defamation law from emotional or dignitary harms
because those can arise even in private communications, as is the case with
racist or vituperative comments. By imposing a publicity requirement, courts
have taken the position that defamation is not about protecting victims from
emotional harm resulting from offensive speech per se, but rather defamation
70. PACTUS LEGIS SALICAE, tit. XXX, reprinted in KATHERINE FISCHER DREW, THE LAWS OF THE
SALIAN FRANKS 59, 94 (1991). For the history of the Lex Salica, see generally DREW, supra.
71. ELDREDGE, supra note 47, § 3, at 5.
72. EPSTEIN & SHARKEY, supra note 8, at 1051–53.
73. On the origins of defamation in English law, see generally PAUL MITCHELL, THE MAKING OF
THE MODERN LAW OF DEFAMATION (2005); Veeder, supra note 9.
74. WEAVER ET AL., supra note 34, at 803.
75. The law once distinguished between oral defamation (slander) and written defamation (libel) and
afforded stronger protection from the latter. This led to absurd outcomes, with a public address to 3,000
people considered to be less harmful than a private written letter. See ELDREDGE, supra note 47, § 12, at 77.
This distinction still reverberates in modern law, and California, for example, still has different rules for libel
and slander. Compare CAL. CIV. CODE § 45 (West 2018) (defining libel), with CAL. CIV. CODE § 46 (defining
slander).
76. JONES, supra note 8, at 19 (“[I]f the denunciation is not communicated to third persons, it is not
an actionable defamation.”).
77. See RESTATEMENT (SECOND) OF TORTS §§ 558–59 (AM. LAW INST. 1977).
78. See Nat Stern, The Certainty Principle ss Justification for the Group Defamation Rule, 40 ARIZ. ST. L.J. 951,
970 n.114 (2008) (collecting commentary condemning defamation law as “confusing and even incoherent”).
79. See RESTATEMENT (SECOND) OF TORTS §§ 558–59; see also Lambert v. Whiting Turner Contractor,
No. 1:15-cv-958-GBL-MSN, 2016 WL 2946176, at *6 (E.D. Va. May 19, 2016) (“[A] defamatory statement
must be ‘communicated to a third party “so as to be heard and understood by such person.”’” (quoting Katz
v. Odin, Feldman & Pittleman, P.C., 332 F. Supp. 2d 909, 915 (E.D. Va. 2004))).
Electronic copy available at: https://ssrn.com/abstract=3311527

<<PAGE_BREAK>>

4 ARBELMUNGAN 453-497 (DO NOT DELETE) 12/4/2019 7:18 PM
2019] The Case Against Expanding Defamation Law 467
is something that is inextricably tethered to the existence of an audience, i.e.,
harm to reputation. But this observation should not be overstated; courts do
not place any quantitative requirements on what counts as “public.”80 A state-
ment made to even one other person could be considered defamatory, although
the damages will be conditioned in part on the scope of audience exposure to
the defamatory statement.81
The statement, or at least its “gist,” must be false.82 Historically, the veracity
of statements was a defense in common law.83 It was generally presumed that
statements were false unless the defendant could prove otherwise.84
In 1964, the Court decided the landmark case of New York Times & Co. v.
Sullivan.85 This case famously involved an advertisement of allegations made
against the police department of Montgomery, Alabama, for abusing their pow-
ers to suppress the Civil Rights movement.86 The Court held that in defamation
lawsuits by public officials, the plaintiff must show actual malice in order to
prevail.87 This led to the “constitutionalization” of defamation law and to the
broader protection of speech, even when the subject is not strictly a public of-
ficial.88 For example, the assertion that a restaurant fails to meet sanitation
standards may involve a broader interest in public health, and as such, the
speech may be protected.89 Another large effect is that today, in contrast to the
past, truth is treated by most courts as an absolute bar to liability.90
An important qualification on the meaning of truth and falsity is in order.
Recall Justice Jackson’s famous insight that “[courts] are not final because [they]
are infallible, but [they] are infallible only because [they] are final.”91 In a like
80. Huegerich v. IBP, Inc., 547 N.W.2d 216, 221 (Iowa 1996) (“Publication . . . simply means a com-
munication of statements to one or more third persons.”); RESTATEMENT (SECOND) OF TORTS § 577 cmt.
b.
81. See RESTATEMENT (SECOND) OF TORTS § 621 (limiting damages to compensation for “the proved,
actual harm”).
82. Id. §§ 558–59.
83. Truth is mostly an “absolute” defense, but a sizable minority of states still allow recovery even for
truthful defamatory statements if they were made with bad intentions. See, e.g., FLA. CONST. art. 1, § 4. (“If
the matter charged as defamatory is true and was published with good motives, the party shall be acquit-
ted . . . .”); DEL. CODE ANN. tit. 10, § 3919 (2017) (noting that truth could be a defense in libel only if the
information was “published properly for public information, and with no malicious . . . motives”).
84. PROSSER AND KEETON, supra note 8, § 116, at 84 (noting that it is “[o]ut of a tender regard for
reputations [that] the law presumes in the first instance that all defamation is false”).
85. 376 U.S. 254 (1964).
86. Id. at 257–58.
87. Id. at 283.
88. See, e.g., Gertz v. Robert Welch, Inc., 418 U.S. 323, 345–50 (1974).
89. See, e.g., Journal-Gazette Co. v. Bandido’s, Inc., 712 N.E.2d 446 (Ind. 1999).
90. See SACK, supra note 65, § 3.3.2, at 3–7. But see Noonan v. Staples, Inc., 707 F. Supp. 2d 85, 90–92
(D. Mass. 2010) (holding that a Massachusetts firm that sent its employees a truthful but embarrassing recount
of the reasons why the plaintiff was fired may be held liable under Massachusetts law and thus allowing
recovery for malicious truthful defamatory speech).
91. Brown v. Allen, 344 U.S. 443, 540 (1953) (Jackson, J., concurring).
Electronic copy available at: https://ssrn.com/abstract=3311527

<<PAGE_BREAK>>

4 ARBELMUNGAN 453-497 (DO NOT DELETE) 12/4/2019 7:18 PM
468 ALABAMA LAW REVIEW [Vol. 71:2:453
manner, most courts treat their finding of falsity with humility, recognizing that
their findings constitute a “legal” truth rather than an ontological one.92 The
determinations in defamation lawsuits are not the result of exhaustive investi-
gative work by the judge but rather the determination of whether the evidence
presented supports the allegation.
The third and last requirement is for the speech to be defamatory—i.e.,
capable of harming one’s reputation, esteem, good name, or standing in soci-
ety.93 Here, courts do not normally articulate a clear understanding of reputa-
tion. Still, it seems like one reducible part of reputation is that it consists of
beliefs: A person held in high esteem, good standing, or well repute is believed to
be of high prestige, high trust, or high value.94 Understood this way, it is easier
to see how defamatory speech harms reputation—the allegation leads people
to negatively update their opinions so that they will be less willing to trade,
socialize, or partner with its subject.
This understanding of reputation seems to suggest a concern with a per-
son’s actual standing in the community. Courts, however, have treated reputa-
tion as a normative concept, focusing on an imagined, normative audience.95 Ac-
cording to various rulings in this area, harm to reputation requires showing only
that the statement “would tend to hold the plaintiff up to scorn, hatred, ridicule
or contempt.”96 That is, there is no need to show that any member of the audi-
ence actually changed her mind about the plaintiff in response to the allegations.
Moreover, courts sometimes limit attention only to “the minds of any consid-
erable and respectable segment in the community.”97 Hence, not even all segments
of the imagined public are relevant, only those that reason as a “respectable”
92. See also SACK, supra note 65, § 3:12 (noting the tension and suggesting truth in this context would
be understood narrowly, as the product of a legal process rather than an ontological truth).
93. See RESTATEMENT (SECOND) OF TORTS § 559 (AM. LAW INST. 1977) (“A communication is de-
famatory if it tends so to harm the reputation of another as to lower him in the estimation of the community
or to deter third persons from associating or dealing with him.”).
94. See sources cited supra note 42.
95. Because the effect on the actual audience figures into the calculation of damages, the determination
of defamatory nature seems to be inconsequential. If no one found the statement to be defamatory, the scope
of damages would be zero. Speculating on why this filter is even used, two possible reasons emerge. First,
courts may use it to economize on litigation costs (if damages are likely to be zero, dismissing the case for
failing to meet the normative standard avoids the need for a trial). Alternatively, courts recognize that damages
are speculative and juries may compensate individuals even when they did not suffer any harm. Such a pre-
liminary screen thus protects against such outcomes, as the trier of fact will not be permitted to consider
cases that fail to meet the normative threshold. See Note, The Community Segment in Defamation Actions: A Dis-
senting Essay, 58 YALE L.J. 1387, 1388 (1949) (arguing that “[t]he emphasis is usually on normalcy: the eccentric
or ‘wrong-thinking’ segments [of the audience] albeit of considerable size, are disregarded”).
96. See Phelan v. May Dep’t Stores Co., 819 N.E.2d 550, 553 (Mass. 2004) (emphasis added) (quot-
ing Stone v. Essex Cty. Newspapers, Inc., 330 N.E.2d 161, 165 (Mass. 1975)).
97. Id. (emphasis added) (quoting Stone, 330 N.E.2d at 165); SIR P.H. WINFIELD, A TEXT-BOOK OF
THE LAW OF TORT § 72, at 242 (5th ed. 1950) (stating that “[d]efamation [consists of] statement[s] which
tend[] to lower a person in the estimation of right-thinking members of society generally; or which tends to
make them shun or avoid that person”).
Electronic copy available at: https://ssrn.com/abstract=3311527

<<PAGE_BREAK>>

4 ARBELMUNGAN 453-497 (DO NOT DELETE) 12/4/2019 7:18 PM
2019] The Case Against Expanding Defamation Law 469
person, which supposedly means that they are rational. Note, also, that the
“considerable . . . segment” requirement here is different from the one under
the publication requirement, which only requires a single third party.98 For an
example of the operation of this rule, a demeaning fake interview in Hustler
magazine with Andrea Dworkin was held not libelous.99 The ruling was not the
result of testimony from any reader of Hustler but rather the result of the court’s
assessment that the interview’s ludicrous nature made it unbelievable.100 The
Ninth Circuit expressed confidence “that the outrageous and the outlandish will
be recognized for what they are,” without consulting any actual reader of the
magazine.101 If the court believes the statement is believable, it will not help the
defendant to bring contrary evidence; such questions, courts hold, might miti-
gate damages but will not undermine the existence of defamation.102
C. Where Defamation Law Ends
Our analysis here demonstrates the complexity involved in trying to protect
reputation through stricter defamation law. This complexity belies some estab-
lished positions on defamation law, which tend to support an absolute relation-
ship between defamation law and reputation protection. For example, Richard
Epstein warns that failing to protect against defamation would result in “a world
with too much defamation, too much misinformation—in a word, too much
public fraud.”103 Similarly, Justice White warned in Gertz v. Robert Welch, Inc. that
limiting defamation law would “frustrate th[e] search [for truth]” and contribute
to “assaults on individuality and personal dignity.”104
Fortunately, such concerns are assuaged by the fact that defamatory speech
is already unregulated in broad domains, such as statements of opinions; de-
famatory statements regarding public officials; and group-based slander, or the
online hosting of defamatory statements made by third parties.105 In addition
to the legal exceptions to defamation law, there are important practical ones.
Litigation costs, judicial inaccuracy, jurisdictional limits on foreign speech, and
98. See Phelan, 819 N.E.2d at 553 (quoting Stone, 330 N.E.2d at 165).
99. Dworkin v. Hustler Magazine, Inc., 867 F.2d 1188, 1195–96 (9th Cir. 1989).
100. Id. at 1194.
101. Id.
102. Luster v. Retail Credit Co., 575 F.2d 609, 615 (8th Cir. 1978) (deciding under Arkansas law that
“[e]ven if the statement is disbelieved . . . damages may be mitigated, but nevertheless awarded”); Roeben v.
BG Excelsior Ltd. P’ship, 344 S.W.3d 93, 98 (Ark. Ct. App. 2009).
103. Epstein, supra note 37, at 799. In fact, Epstein shrewdly recognizes that audiences in this world
will be less credulous, but he sees that distrust as a negative: “The influence of the press will diminish as there
will be no obvious way to distinguish the good reports from the bad . . . .” Id. at 800.
104. Gertz v. Robert Welch, Inc., 418 U.S. 323, 392, 400 (1974) (White, J., dissenting).
105. See Communications Decency Act of 1996, 47 U.S.C. § 230 (2012); SACK, supra note 65, §§ 1.4–
1.5.
Electronic copy available at: https://ssrn.com/abstract=3311527

<<PAGE_BREAK>>

4 ARBELMUNGAN 453-497 (DO NOT DELETE) 12/4/2019 7:18 PM
470 ALABAMA LAW REVIEW [Vol. 71:2:453
anonymous speech all make it very difficult to pursue even meritorious ac-
tions.106 These considerations have led some to think that even in the domains
where defamation law applies, it is so ineffectual that its “[a]bolition would leave
victims of defamation little worse off than they are today.”107
In all of these diverse and broad contexts, false defamatory statements do
not result in legal liability. If defamation law was necessary to protect reputation,
we would expect to see broad discussions of how audiences are led astray by
expressions of opinions and political discussions—which clearly tend to include
hyperbole and falsehoods. Yet we find broad consensus that protection of opin-
ions should continue.108 The reasons for this protection are varied. Some courts
ground the distinction in liberty: “[T]he freedom to speak one’s mind is . . . an
aspect of individual liberty—and thus a good unto itself . . . .”109 Others look
more broadly at the social and democratic good brought about by the unham-
pered discussion of opinions.110 Still others suggest that allowing lawsuits for
expressions of opinion would bring about an unworkable deluge of litigation.111
Consequently, the Restatement provides that opinions are completely immune
unless the opinion implies some facts that are false and defamatory.112 These
views take a very pragmatic approach, seeing audiences as able to filter and
discount some falsities, and we observe the lack of serious pressure by courts,
lawmakers, and the public to reform this rule.
* * *
Defamation law, we saw, is understood as a bulwark against harm to repu-
tation. The doctrine itself is haphazard and confused, but the consensus on the
law’s aspirations is broad and deep. It is not surprising, then, that some harbor
anxieties about deregulation of speech, worrying that it would lead to the wan-
ton disregard of the truth and the trampling of individual rights. At the same
time, the existence of large pockets of unregulated speech in diverse areas is,
106. See generally Lidsky, supra note 53.
107. Anderson, supra note 41, at 490.
108. See, e.g., PROSSER AND KEETON, supra note 8, § 113A, at 813 (“The distinction [between opinions
and facts] is a necessary and important one.”); SACK, supra note 65, § 4:1, at 4–3.
109. Bose Corp. v. Consumers Union of U.S., Inc., 466 U.S. 485, 503 (1984).
110. Curtis Pub. Co. v. Butts, 388 U.S. 130, 149 (1967).
111. Wun-ee Chelsea Chen, Note, Pinning Opinion to the First Amendment Mat, 11 LOY. ENT. L.J. 567,
601–03 (1991) (responding to the Milkovich decision that loosened the protections of opinion in defamation
suits by predicting the courts “will be highly susceptible to a flood of litigation”).
112. RESTATEMENT (SECOND) OF TORTS § 566 (AM. LAW INST. 1977). As one court explains, “A
statement couched as an opinion that presents or implies the existence of facts which are capable of being
proven true or false can be actionable.” Levinsky’s, Inc. v. Wal-Mart Stores, Inc., 127 F.3d 122, 127 (1st Cir.
1997). The line between opinions and facts is fine. For example, some courts have held that a statement
indicating that a person did not pay for goods he owned is not defamatory but that a person refuses to pay a
debt is defamatory. Compare Sim v. Stretch [1936] 2 All E.R. 1237, with Neaton v. Lewis Apparel Stores, Inc.,
48 N.Y.S.2d 492, 495 (N.Y. App. Div. 1944).
Electronic copy available at: https://ssrn.com/abstract=3311527

<<PAGE_BREAK>>

4 ARBELMUNGAN 453-497 (DO NOT DELETE) 12/4/2019 7:18 PM
2019] The Case Against Expanding Defamation Law 471
hopefully, an effective anxiolytic. We now turn to develop the main argument
of this Article, that defamation law can actually undermine reputational inter-
ests.
II. DEFAMATION & AUDIENCES
The typical defamation case involves a charge that a speaker cast a false
aspersion on another person and, because of this statement, that person lost his
esteem, which led to a loss of business, social, and romantic opportunities.113
This is a simple narrative and one that is common to many actions in tort: a
tortfeasor-wrong-harm model. The application of the model is deceptively sim-
ple: a wrongdoer committed a wrong (false aspersion) that was the proximate
cause of an identifiable injury (loss of social standing).
The problem with this account is that it obscures the individual capacity of
audience members to judge the truth. In other torts, the harm is either direct or
mediated by objects: an aggressive assailant hits the victim with an iron pipe; a
reckless woodcutter fells a tree that falls on the victim’s house; a distracted
driver runs his car over the victim; an obsessed ex-lover hacks his partner’s
email account and exposes private information. In defamation, the harm does
not follow immediately from the wrongful act itself but is rather mediated by
the audience of the offending speech. For speech to be harmful, it must be
believed.
The bilateral model of speaker–victim treats audiences deterministically, as
if they immediately believe whatever they hear. This dim view of audiences is
unpersuasive. Members of the public are not perfect reasoners, but neither are
they opiated masses.114 Regarding political speech, the Supreme Court has re-
fused to judge audiences according to their lowest possible denominator.115
Professor Lyrissa Lidsky powerfully notes that “[d]emocratic theory demands
faith in the rationality of citizens, and several members of the founding gener-
ation, steeped in the ideals of the Enlightenment, publicly professed this
faith.”116 Even in the commercial-speech context, the Supreme Court noted
that the states could not ban advertising just because they mistrust their citizens’
abilities to reach the “right” conclusions.117 In advertising, courts permit “mere
113. See supra Part I.B. We focus on “retail”-level defamation—i.e., defamation by individuals against
individuals or businesses. While much of what we have to say applies to libel by media outlets as well, ad-
dressing that rich context will needlessly muddle the discussion.
114. Lidsky, Rational Audience, supra note 16, at 815 (“First Amendment doctrines rely on a model of
the audience as rational, skeptical, and capable of sorting through masses of information . . . .”).
115. See, e.g., FEC v. Wis. Right to Life, Inc., 551 U.S. 449, 469 (2007).
116. Lidsky, Rational Audience, supra note 16, at 811.
117. Va. State Bd. of Pharm. v. Va. Citizens Consumer Council, Inc., 425 U.S. 748, 769–70 (1976).
Electronic copy available at: https://ssrn.com/abstract=3311527

<<PAGE_BREAK>>

4 ARBELMUNGAN 453-497 (DO NOT DELETE) 12/4/2019 7:18 PM
472 ALABAMA LAW REVIEW [Vol. 71:2:453
puffery” because they believe that the public can sort between factual state-
ments and vapid boasting.118 Interestingly, members of the public show healthy
skepticism of speech in contexts where it is shielded from defamation law. For
example, a study of the credibility of news stories found that stories based on
anonymous sources were seen as far less credible than those with identifiable
sources.119 When individuals browse the web for information, they tend to
screen information given by unknown sources.120 To emphasize, both the
Founding Fathers and courts have recognized that people can be deceived and
misled.121 Overall, much of our understanding of the public involves the idea
that people, with differing degrees of ability, attempt to discern truth from false-
hoods.122
In what follows, we seek to tease out the implications of the basic insight
that audiences are also involved in reputational harms. We add to the bilateral
model of speaker–victim a third agent, the audience, and investigate the impli-
cations of various defamation law rules on all the relevant stakeholders. To de-
velop an intuitive explanation of our ideas, we use a stylistic example, but our
conclusions are general in nature, subject to a few caveats that we explore
later.123
A. Basic Example
Consider a case where 100 individuals each own a restaurant that advertises
its exclusive use of organic ingredients (or that it observes kosher, halal, or hy-
genic norms, or any other facts that would make patrons more likely to patron-
ize the restaurant). That is, we assume a situation where a person would like
others to believe certain favorable facts about her for owning such a restaurant,
as these would make others more likely to engage with her.
118. See generally David A. Hoffman, The Best Puffery Article Ever, 91 IOWA L. REV. 1395 (2006); Adi
Osovsky, Puffery on the Market: A Behavioral Economic Analysis of the Puffery Defense in the Securities Arena, 6 HARV.
BUS. L. REV. 333 (2016).
119. Miglena Mantcheva Sternadori & Esther Thorson, Anonymous Sources Harm Credibility of All Stories,
NEWSPAPER RES. J., Sept. 1, 2009, at 54; see also Ivanka Pjesivac & Rachel Rui, Anonymous Sources Hurt Credi-
bility of News Stories Across Cultures: A Comparative Experiment in America and China, 76 INT’L COMM. GAZETTE
641, 654 (2014) (finding that both American and Chinese audiences found stories citing anonymous sources
less credible than those using identified sources).
120. Miriam J. Metzger et al., Social and Heuristic Approaches to Credibility Evaluation Online, 60 J. COMM.
413, 416 (2010).
121. Lidsky, Rational Audience, supra note 16, at 811–17.
122. See, e.g., Abrams v. United States, 250 U.S. 616, 629–30 (1919) (Holmes, J., dissenting) (“[T]he
ultimate good desired is better reached by free trade in ideas . . . .”).
123. For a formal general analysis of this model, see Arbel & Mungan, supra note 27.
Electronic copy available at: https://ssrn.com/abstract=3311527

<<PAGE_BREAK>>

4 ARBELMUNGAN 453-497 (DO NOT DELETE) 12/4/2019 7:18 PM
2019] The Case Against Expanding Defamation Law 473
For reputation to have any meaning, differences between restaurants must
exist that are not immediately apparent to a casual observer. If casual inspection
were sufficient, reputation would not play such an important role in our lives
in choosing which restaurant to attend, which product to buy, whom to trade
with, and even whom to date.124 Thus, suppose that 80% of the restaurants are
high quality—i.e., they really do, as they claim, serve organic food, maintain
sanitary standards, and refrain from mixing transfats in their ingredients—and
that 20% of the restaurants that claim to do so actually do not, making them
low quality.
Next, we consider the existence of an audience. Suppose that 100 different
patrons each contemplate going to a different restaurant. The patrons do not
know whether the restaurant they are about to attend is high or low quality. At
best, they can estimate that twenty of these restaurants are low quality.125 Be-
cause we are interested in the effect of defamatory speech, we assume that,
despite the risk, all patrons have already formed an intention to visit a restau-
rant. In particular, we assume that patrons are willing to attend a restaurant as
long as the risk of it being low quality does not exceed 40%. That patrons, and
more generally individuals, are willing to bear some risk in real life is self-evi-
dent.126 In this case, since only 20% of restaurants are low quality, patrons judge
this risk acceptable and, thus, would choose to attend all 100 restaurants.
The last element of this hypothetical is the speaker. Suppose that, while on
the way to the restaurant, each patron meets an ex-employee of the restaurant.
After exchanging pleasantries, the patron tells the employee that she is headed
to the restaurant and asks for his opinion. The ex-employee is privy to the in-
ternal workings of the restaurant, so he knows whether the owner adheres to
high- or low-quality standards. The employee can respond by either giving a
positive or negative review of the quality standards of the restaurant. As the
quality standards are a factual matter, such an assertion can be actionable. For
simplicity, we will denote a favorable review by “thumbs-up” and a negative
review by “thumbs-down.”127
124. See generally Luís M B Cabral, The Economics of Trust and Reputation: A Primer (June 2005)
(unpublished manuscript) (on file with the New York University Library Systems), http://pages.stern.nyu.
edu/~lcabral/reputation/Reputation_June05.pdf.
125. It is not important for our general argument that patrons accurately gauge the distribution since
we are interested in how their perceptions change with different defamation regimes.
126. Consider risks associated with choosing where to dine (food poisoning), whom to date (infidelity),
and whom to lend money (default). In all of these cases, there tends to be some threshold level beyond which
the risk is unacceptable.
127. Reviews, such as a thumbs-up, tend to be protected. See, e.g., Browne v. Avvo, Inc., 525 F. Supp.
2d 1249, 1251–53 (W.D. Wash. 2007) (holding that a rating is constitutionally protected if it results from a
subjective interpretation of facts, even if it claims to be based on objectively verifiable criteria); see also Avia-
tion Charter, Inc. v. Aviation Research Grp./US, 416 F.3d 864, 868–71 (8th Cir. 2005) (applying Minnesota
law to a ratings system), abrogated on other grounds by Lexmark Int’l, Inc. v. Static Control Components, Inc.,
572 U.S. 118 (2014), as recognized in Syngenta Seeds, Inc. v. Bunge N. Am., Inc., 773 F.3d 58 (8th Cir. 2014).
Electronic copy available at: https://ssrn.com/abstract=3311527

<<PAGE_BREAK>>

4 ARBELMUNGAN 453-497 (DO NOT DELETE) 12/4/2019 7:18 PM
474 ALABAMA LAW REVIEW [Vol. 71:2:453
Defamation law exists because sometimes people choose to lie.128 If all em-
ployees were honest, each patron would trust the employee’s statement and
know for sure whether the restaurant she hopes to attend is high or low quality.
Unfortunately, this is not the case. Instead, to allow for the possibility of false
defamatory statements, we assume that some employees are prone to lying to
varying degrees.129 We capture the propensity to defame by thinking of ex-em-
ployees as deriving some value from denouncing their former employers, which
we denote by “v.” Specifically, ex-employees belong to one of three subgroups.
One subgroup of, say, sixty employees derives no value (i.e., “zero v”) from
besmirching its ex-employers; we will call such employees “honest.” Another
twenty ex-employees benefit slightly from besmirching their former employers
(“low v”), and the remaining twenty are disgruntled and thus derive intense
pleasure or value from badmouthing their former employers (“high v”). We will
call all positive v employees “dishonest” because they may want to lie by pre-
senting a high-quality restaurant as low-quality. Note also that employees’ val-
ues for v could very well be on a continuum rather than partitioned into the
discrete groups provided above, but this distinction does not matter for the
analysis.130 Figure 1 summarizes these basic assumptions. The stage is now set
to analyze the possible consequences of introducing defamation law into this
hypothetical.
Here we consider factual assertions such as “they never use organic materials” or “the kitchen is infested with
rats.”
128. Why people lie is a complicated question. See generally Arbel, Reputation Failure, supra note 10, at
18–21 & 28–29.
129. We take into account only false disparaging statements and table the discussion of “positive def-
amation.”
130. Indeed, each subgroup could be understood as comprised of heterogeneous employees who have
a value of “v” below or above the threshold (above zero or above “low”).
Electronic copy available at: https://ssrn.com/abstract=3311527

<<PAGE_BREAK>>

4 ARBELMUNGAN 453-497 (DO NOT DELETE) 12/4/2019 7:18 PM
2019] The Case Against Expanding Defamation Law 475
Figure 1. Basic Setup
B. Analysis
Imagine, first, a world with very lax defamation law, which we denote as
D . One can think of this world as one where it is too costly to file a lawsuit,
0
where damages are too low, or where standards of proof are too high. In D
0,
victims of defamation have no recourse.131 How would restaurant owners, em-
ployees, and, ultimately, patrons behave in this world?
In answering this question, it is useful to start first with the restaurant
owner and work backward towards the patron’s choice of whether to dine at
the restaurant. The owner’s choice without defamation law is nonexistent: even
if she is the unfortunate subject of a false aspersion, she cannot file a lawsuit.
131. As argued supra Part I.C, there are various areas today that are outside of defamation law’s ambit.
Electronic copy available at: https://ssrn.com/abstract=3311527

<<PAGE_BREAK>>

4 ARBELMUNGAN 453-497 (DO NOT DELETE) 12/4/2019 7:18 PM
476 ALABAMA LAW REVIEW [Vol. 71:2:453
She can only insist that her restaurant really uses fresh ingredients but so can
the owner of a low-quality restaurant. Thus, her protestations would not be very
credible.132
Next is the employee. He meets with the prospective patron and decides
whether to tell the truth. If he is honest, this decision is automatic: if the patron
is headed to a high-quality restaurant, the employee will give a thumbs-up; oth-
erwise, he will give a thumbs-down. In both cases, the review will be factually
correct. If, on the other hand, the employee is a positive v person, i.e., he derives
some benefit from besmirching his former employer, his decision-making will
be modified. Whether the restaurant is high or low quality, he will want to give
a thumbs-down to punish his former employer. The absence of defamation law
means that the employee will not be subject to liability; therefore, he can do as
he wishes—in this case, give a negative review regardless of the actual quality
of the restaurant. In other words, the employee will lie if the restaurant is high
quality or tell the truth if it is low quality.
Because there are 100 restaurants (eighty high-quality and twenty low-qual-
ity) and 100 employees (sixty honest and forty dishonest), we can assume the
following pairings of employees to restaurants.133 The sixty honest employees
will be matched with sixty restaurants, forty-eight high-quality and twelve low-
quality. The dishonest employees will be matched with forty restaurants, thirty-
two high-quality and eight low-quality. Because honest employees tell the truth,
they will give forty-eight thumbs-ups and twelve thumbs-downs. The dishonest
employees always give a thumbs-down, meaning they will give a thumbs-down
in forty cases (for a total of fifty-two thumbs-downs). Table 1 below summa-
rizes the ex-employees’ ratings.
132. For defamation to be relevant, accusations must “stick.” Of course, if the restaurant owner can
open her kitchen for all to see and the veracity of her claims can be checked, then the harm from defamation
may be negated, but reputation also becomes less important in the first place.
133. For simplicity of exposition, the matching is uniform with the same proportion of high- and low-
quality restaurants for honest and dishonest employees.
Electronic copy available at: https://ssrn.com/abstract=3311527

<<PAGE_BREAK>>

4 ARBELMUNGAN 453-497 (DO NOT DELETE) 12/4/2019 7:18 PM
2019] The Case Against Expanding Defamation Law 477
Table 1.
Finally, we consider the patron. Recall that we assume the patron is willing
to attend a restaurant so long as the risk of it being low quality falls under 40%.
Before meeting with the employee, she assesses the risk at 20%, as she estimates
that there are only twenty low-quality restaurants out of 100 restaurants. She
finds the risk acceptable and plans to attend. Stopped on the way, she meets the
employee, who in forty-eight cases gives a thumbs-up and in fifty-two cases
gives a thumbs-down. The patron then tries to assess the probability that a res-
taurant is low quality given the review she hears.
If the patron receives a positive review, it is likely to come from an honest
employee because disgruntled employees will want to paint their former em-
ployers negatively.134 Hence, she knows she can trust a positive review to be
true and can dine at the restaurant with confidence. This will occur in forty-
eight cases, as described in Table 2 below. When she hears a negative review,
however, she finds it more difficult to assess its validity. She can tell that, in the
absence of defamation law, falsehoods are prevalent. Of the fifty-two negative
statements she expects to receive, only twenty can be true, because there are
only twenty low-quality restaurants. In other words, if she hears a negative re-
view, there is a twenty in fifty-two, or a 38%, chance that it is accurate and that
the restaurant is low quality.135 Now, because the patron’s risk tolerance is 40%,
the patron should still be willing to attend a negatively reviewed restaurant—
she will simply reason that falsehoods are so prevalent in this harsh D world
0
134. In the example, the only positive reviews come from honest employees. This is because no dis-
honest employees would want to spread favorable lies. As we noted supra note 129, we table issues of “positive
defamation,” as they fit more naturally under discussion of false advertising.
135. As noted supra note 125, the example makes the admittedly strong assumption that patrons have
a good sense of the distribution of low- and high-quality restaurants, but the analysis and theses developed
here apply even when patrons have inaccurate estimates.
Electronic copy available at: https://ssrn.com/abstract=3311527

<<PAGE_BREAK>>

4 ARBELMUNGAN 453-497 (DO NOT DELETE) 12/4/2019 7:18 PM
478 ALABAMA LAW REVIEW [Vol. 71:2:453
that it is difficult to trust negative statements; so, she will discount the negative
review accordingly. This is not to say that negative reviews are not informative
at all; before hearing the negative review, she only considered 20% of
restaurants to be low quality, and now she realizes that she cannot identify those
20% from negative reviews since a negatively reviewed restaurant has a 38%
chance of being low quality. Still, such negative reviews are insufficiently trust-
worthy to make her abandon her plan to attend the restaurant. Hence, she might
choose to undertake the risk of attending a negatively reviewed restaurant in a
D world.
0
Table 2.
We move now to examine an alternative world, D , where defamation law
1
is very strict. In reality, the difference between D and D can be quite gradual;
0 1
it can simply be the difference between low and high damages; low and high
burdens of proof; lax and strict enforcement; or broad and narrow privileges.
In every case, we are contemplating an expansion of defamation law. For now,
however, let us maintain the clear distinction between these two “worlds.”
Starting again with the restaurant owner, she now has the option of bring-
ing a lawsuit against the ex-employee. Here, we must make some assumptions
about the relative costs and benefits of a defamation lawsuit; we assume for
now that a lawsuit is brought whenever an employee gives a false negative re-
view. This assumption is fairly innocuous; if the statement were positive, there
would be no incentive to bring a lawsuit, even if the statement were false. When
a statement is negative, there may be an incentive to bring a lawsuit, and our
assumption means that courts are sufficiently competent such that a plaintiff
will only consider it worthwhile to sue if the negative statement was false.136
How would employees behave in D ? An honest employee is not expected
1
to change her behavior. As we just analyzed, the restaurant owner is unlikely to
136. To be clear, it is not assumed that a meritorious lawsuit will always succeed but that the expected
recovery in such a case—given the probability of losing—is sufficient to motivate the restaurant owner to
file a lawsuit.
Electronic copy available at: https://ssrn.com/abstract=3311527

<<PAGE_BREAK>>

4 ARBELMUNGAN 453-497 (DO NOT DELETE) 12/4/2019 7:18 PM
2019] The Case Against Expanding Defamation Law 479
bring a lawsuit because true communications are always protected, meaning that
the employer would tend to lose in court. Of course, there is some chance that
the employer would win—some courts make mistakes, and some lawsuits are
brought strategically—but omitting these considerations favors defamation law,
so we can table them for the time being.137 Hence, we again expect a total of
forty-eight thumbs-ups and twelve thumbs-downs produced by honest employ-
ees. If the employee is dishonest and the restaurant is low quality, the analysis
will again remain unchanged. After all, a truthful negative review generally is
not actionable—that fact does not change even if the motivation is malicious.138
The main change from D will be with respect to dishonest employees
0
matched with high-quality restaurants. Here, we will assume—in line with the
Court’s reasoning and reality—that it is impossible to deter all falsehoods.139
Because some people will still make false allegations, defamation law as a
deterrent will be imperfect. Therefore, we assume that the potential cost of a
lawsuit (i.e., the combination of the risk of losing with the eventual money judg-
ment) is enough to dissuade some employees from lying but not others. Specif-
ically, we will assume that the costs of a lawsuit are enough to dissuade the low
v group but not the high v group, which may include disgruntled employees or
those who moved to work for a competitor. Here, there would be sixteen low
v employees matched with high-quality restaurants. Although they would want
to say something negative, they will worry about the prospects of a lawsuit and
thus truthfully provide a positive review instead.140 The high v employees will
remain unperturbed and continue to defame, despite the risk of a lawsuit. Table
3 below summarizes the employees’ behavior.
137. In other words, these effects imply a chilling effect on truthful speech, which is a strong reason
to limit defamation law.
138. See SMOLLA, supra note 47, § 5:1. Contra MASS. GEN. LAWS ch. 231, § 92 (2018); Noonan v. Sta-
ples, Inc., 556 F.3d 20, 28 (1st Cir. 2009) (“[U]nder Massachusetts law, even a true statement can form the
basis of a libel action if the plaintiff proves that the defendant acted with ‘actual malice.’”).
139. See supra notes 53–59 and accompanying text.
140. Disgruntled employees might choose not to endorse the business but rather remain silent; how-
ever, it will become apparent that their silence means that they would like to lie but are afraid to do so. In
other words, silence will suggest that the quality is actually high.
Electronic copy available at: https://ssrn.com/abstract=3311527

<<PAGE_BREAK>>

4 ARBELMUNGAN 453-497 (DO NOT DELETE) 12/4/2019 7:18 PM
480 ALABAMA LAW REVIEW [Vol. 71:2:453
Table 3.
Finally, let us consider the patron. In this case, there are sixty-four thumbs-
ups, and these are reliable measures of quality. Hence, the patron can safely
attend these sixty-four restaurants. In contrast, there are thirty-six thumbs-
downs. The patron will realize that some of these reviews are likely false despite
the presence of defamation law. Because there are only twenty low-quality res-
taurants, the probability that any negatively reviewed restaurant is indeed low
quality is twenty out of thirty-six, or 55%. In other words, negative reviews
become stronger indicators that the restaurant is indeed low quality. Because
this risk greatly exceeds 40%, the patron will be reluctant to attend any nega-
tively reviewed restaurant.141 Table 4 below summarizes the patron’s analysis:
Table 4.
141. The threshold of 40% is an arbitrary choice; the actual threshold in any specific case may be
different. But this will not change the point we make here. If, in this example, the risk tolerance was 50%,
patrons would still avoid the restaurant, as the perceived risk (55%) exceeds their threshold. Indeed, if we
were to imagine an even higher risk tolerance of, say, 80%, the result would change—patrons would assume
the risk in both D0 and D1. But this only demonstrates that the value and credibility of speech are lower when
people care less about its content.
Electronic copy available at: https://ssrn.com/abstract=3311527

<<PAGE_BREAK>>

4 ARBELMUNGAN 453-497 (DO NOT DELETE) 12/4/2019 7:18 PM
2019] The Case Against Expanding Defamation Law 481
C. Audience Effects: Evaluation & Generalization
Based on the stylized example above, we can now analyze the effects of
expanding defamation law by comparing the (extreme) move from a world
where defamation law is effectively nonexistent (D ) to a world with it (D ).142
0 1
The primary lesson from this analysis is that defamation law can harm owners of
high-quality goods. In the baseline case, where the patron does not encounter any
employee, the patron judges the risk that a specific restaurant is low quality to
be small (20%). Therefore, the patron assumes the risk and attends all restau-
rants—including all eighty high-quality restaurants. As we saw, the encounter
with the employee in D does not change this conclusion.143 Here, patrons meet
0
employees, and some of the employees indeed say negative things. However,
the flood of false negative reviews reduces the reliability of each negative re-
view. Hence, patrons—while still finding negative reviews useful—will not find
them to be sufficiently indicative of low quality. As a result, the risk of a nega-
tively reviewed restaurant being low quality is still low, even if it is somewhat
higher than the baseline case. And so, in D patrons will continue to attend all
0,
eighty high-quality restaurants.
The shift to D —the introduction of strict defamation law—changes these
1
results quite drastically. There are now fewer negative reviews overall, because
some employees are deterred by the prospect of being sued for falsely defaming
their previous employer. The decrease in quantity means that each negative re-
view is now more credible than it was when there was a greater quantity of false
negative reviews. As such, patrons feel much more confident in relying on these
negative reviews and are reluctant to attend any negatively reviewed restaurant.
This outcome is benign when the restaurant is indeed low quality, but the in-
creased credence is problematic for those honest owners of high-quality restau-
rants who are besmirched. Patrons who previously used their discretion and
discounted negative reviews are now more trusting and are misled into avoiding
some high-quality restaurants.
Let us focus on the interpretation of this key result before offering qualifi-
cations. The expansion of defamation law makes “false signals” more costly.144
The speaker would be more likely to face liability for false statements. This leads
to a decline in the frequency of such statements, as speakers worry about the
specter of civil liability. With the decline of false signals, audiences will learn
either from experience or from observing the legal norms that statements are
142. See infra Part II.D.
143. See supra Part II.A.
144. More accurately, “false signals” are signals the speaker knows to be untrue. But the veracity of
statements is often a matter of belief; a statement may communicate a strong conviction or a weak one.
Stronger defamation law could also cull statements that are likely to be true but for which the speaker lacks
conclusive evidence.
Electronic copy available at: https://ssrn.com/abstract=3311527

<<PAGE_BREAK>>

4 ARBELMUNGAN 453-497 (DO NOT DELETE) 12/4/2019 7:18 PM
482 ALABAMA LAW REVIEW [Vol. 71:2:453
generally reliable and will come to rely on them more often. The greater trust
the public places in statements, based on common-sense reasoning, the more
this makes victims susceptible to attacks, as the higher trust people place in
statements amplifies the pernicious effects of false aspersions and unfounded
statements.145 In this sense, stricter defamation law may undermine reputation
interests.
To illustrate, in the stylized example, the reputational harm to some owners
of high-quality restaurants is caused by the introduction of strict defamation
law (D ). Stated differently, without strict defamation law, lies are drowned out
1
by their own noise. When defamation law is expanded, falsehoods become rarer
and thus more harmful, as their rarity makes audiences more trusting.
A more general way to describe this result is by looking at signaling theory
again. Strict defamation law increases the cost of false statements; hence, it
strengthens the credibility of the signal a speaker sends. The greater credibility
of statements makes audience members more likely to act upon them. And
when the statement proves to be false, the audience is more easily deceived than
they otherwise would be. In sum, then, consideration of audience effects reveals
a basic trade-off, a “seesaw dynamic,” according to which reducing the number of
falsehoods increases their credibility.
Figure 2.
145. In the model, some speakers may have intentionally lied; however, statements of fact of which
the speakers are uncertain can be equally damaging, and no bad faith is required.
Electronic copy available at: https://ssrn.com/abstract=3311527

<<PAGE_BREAK>>

4 ARBELMUNGAN 453-497 (DO NOT DELETE) 12/4/2019 7:18 PM
2019] The Case Against Expanding Defamation Law 483
D. Qualifications & Richer Considerations
Our analysis of audience effects has shown that stricter defamation law
could, in some cases, result in weaker protection of reputational interests. We
now move to consider a few important qualifications regarding the scope of
audience effects.
The most immediate qualification is that stricter defamation law does not
always harm reputational interests. In some cases, defamation law will harm
reputational interests, and in others, it will protect them, although to a lesser
extent than scholars have previously assumed. The key point is not that defa-
mation law invariably undermines reputation but that the “virtually axiomatic”
understanding of defamation law, which holds that defamation law unambigu-
ously protects reputation, is erroneous.146 The trilateral model calls for a more
nuanced examination than the standard bilateral model admits.
Another important qualification is that our discussion so far is only focused
on estimating behavioral effects, not social welfare. Like the courts, we restrict
attention only to whether defamation law protects reputation, not whether def-
amation law is, on net, desirable.147 But of course, the net social effect of ex-
panding or restricting defamation law is of paramount importance. Investigat-
ing these issues is complex, as it requires consideration of all the relevant
stakeholders—victims, audience members, and speakers. In terms of the res-
taurant example, the investigation would involve an assessment of the harm
suffered by patrons from attending a low-quality restaurant measured against
the gains from attending a high-quality one. Then, the analysis would need to
evaluate the potential costs imposed on speakers, taking into account their risk
aversion and the value they place on speaking, truthfully or otherwise. From
there, the analysis should account for the potential victims, the restaurant own-
ers, by measuring their increased losses in terms of business volume. Finally,
and outside our basic model, one might worry about the incentive to tell the
truth and the supply of ideas to the market. Even that, however, will not con-
clude the investigation, because the expansion of defamation law will also have
ex ante effects. These effects may be wide-ranging, from the decision of whether
to invest in restaurant quality to the pricing of entrees or how to treat ex-em-
ployees. In conducting such an analysis, different commentators will place dif-
ferent weights on deterrence, redress, and vindication. Engagement with these
questions is also context dependent, so we do not make any categorical state-
ments besides rejecting the court’s supposition that defamation law is good be-
cause it protects reputation.148 The effect of defamation law is nuanced, com-
plex, and, at times, self-contradictory. We shall address the meta question of
146. See supra notes 9–10.
147. For further reflections on social effects and social welfare, see infra Part III.
148. See, e.g., Hustler Magazine, Inc. v. Falwell, 485 U.S. 46, 52 (1988) (citing Gertz v. Robert Welch,
Inc., 418 U.S. 323, 340, 344 n.9 (1974)).
Electronic copy available at: https://ssrn.com/abstract=3311527

<<PAGE_BREAK>>

4 ARBELMUNGAN 453-497 (DO NOT DELETE) 12/4/2019 7:18 PM
484 ALABAMA LAW REVIEW [Vol. 71:2:453
how we think courts should deal with this uncertainty, but for now, let us just
highlight our conclusion that even from the internal perspective of defamation
law, having stricter defamation law does not necessarily lead to better protection
of reputation.
A third, related qualification is that there are other benefits associated with
strict defamation law—ones rarely recognized by the courts. In particular, there
can be some value in increasing the perceived reliability of statements. If, in D ,
0
the patrons were hesitant to attend any restaurant, D would make speech more
1
credible and may persuade some patrons to attend some of the high-quality
restaurants. More generally, if one takes the view that audiences are overly cyn-
ical and skeptical, defamation law will have more value than the examples imply.
This qualification is important where the most pressing imperative is fighting
public skepticism. Inasmuch as the national context today is one of concern
that people are too trusting and reliant on fake news, we believe that there is a
good reason to be concerned with the credibility of falsehoods.
With these qualifications in mind, we now move to examine more closely
some of the assumptions used in the example. As we hope to show, the trilateral
model is applicable in broad settings. While the conclusions will differ based on
one’s assumptions, the framework itself continues to be useful under broad
settings.
1. Ignorant Audiences
People are sometimes ignorant, confused, or indifferent regarding the con-
tent of any law—and defamation law in particular. Therefore, it is possible that
members of the audience will erroneously think that a statement in a given do-
main is protected when it is not (“in my opinion, she is a deadbeat”) or unpro-
tected when it actually is (“she is good for nothing”).149 The possibility of igno-
rance of the law seems especially germane with respect to changes in
defamation law: would audiences know and react to the expansion (or contrac-
tion) of defamation law?
On reflection, ignorance of the law is less consequential than it appears.
Audience effects will continue to be important even when people only have a
very vague idea of the law. The only necessary trigger for the seesaw dynamics
is a vague (and possibly even erroneous) belief among audience members that
defamation law has changed. We believe that such a lax assumption is well
within reason; some libel cases receive considerable media coverage, and libel
policy is at the center of some political campaigns. More generally, defamation
law reformers essentially agree on this point: expanders believe that by making
149. Opinions that impute facts are actionable. RESTATEMENT (SECOND) OF TORTS § 566 (AM. LAW
INST. 1977); see also DOBBS, supra note 8, at 1113–14.
Electronic copy available at: https://ssrn.com/abstract=3311527

<<PAGE_BREAK>>

4 ARBELMUNGAN 453-497 (DO NOT DELETE) 12/4/2019 7:18 PM
2019] The Case Against Expanding Defamation Law 485
defamation law more strict, members of the public will be restrained from mak-
ing negative statements,150 whereas free-speech advocates worry that strict laws
will chill prospective speakers.151 Both sides agree, however, that legal reform
can translate to different behavioral responses by the public. We only extend
these behavioral effects to members of the public as listeners rather than speak-
ers. We do not deny the possibility that, in some cases, audiences will be com-
pletely unaware of changes in the law—in which case audience effects would
be negligible. But whether that is the case requires analysis and empirical sup-
port. Consideration of audience effects is warranted, then, even in these do-
mains.
2. Audience Rationality & Sticky Falsehoods
A related issue is audience rationality. Insofar as individuals diverge from
the model of a perfectly rational agent, they may treat suspect assertions with
either too much or too little trust. Of the two, there may be a particular reason
to worry that individuals will be overly trusting, i.e., that falsehoods will be
“sticky” even when they are clearly dubious. Such a concern is motivated in part
by the psychological phenomenon of “anchoring,” where individuals are said
to react to irrelevant information in a way contrary to what rational decision
theory would predict.152 Experiments suggest negotiations, for example, may be
influenced by introducing numbers and figures that have little bearing on the
issue.153 Moreover, one study found that telling subjects that a speaker is likely
to lie because of a financial incentive made them more likely to believe the
speaker.154
If falsehoods are completely sticky, then audience effects are unimportant.
It is more urgent to control the quantity of false statements, and the perceived
reliability of false statements can be neglected, as they are, by assumption, very
reliable.
However, it is highly unlikely that falsehoods are completely sticky and that
they hopelessly captivate individuals.155 Political campaigns frequently involve
a stream of lies, misstatements, and spurious allegations.156 Many marketing
150. See supra notes 4–11 and accompanying text.
151. See supra notes 54–59 and accompanying text.
152. Russell B. Korobkin & Thomas S. Ulen, Law and Behavioral Science: Removing the Rationality Assump-
tion from Law and Economics, 88 CALIF. L. REV. 1051, 1100–02 (2000).
153. See, e.g., Adam D. Galinsky & Thomas Mussweiler, First Offers as Anchors: The Role of Perspective-
Taking and Negotiator Focus, 81 J. PERSONALITY & SOC. PSYCHOL. 657, 658 (2001).
154. George Loewenstein et al., The Limits of Transparency: Pitfalls and Potential of Disclosing Conflicts of
Interest, 101 AM. ECON. REV. 423, 425–26 (2011).
155. Higher stakes might make lies more sticky, a point we develop infra Part III.A.1.
156. See generally Jacob Rowbottom, Lies, Manipulation and Elections—Controlling False Campaign Statements,
32 OXFORD J. LEGAL STUD. 507 (2012).
Electronic copy available at: https://ssrn.com/abstract=3311527

<<PAGE_BREAK>>

4 ARBELMUNGAN 453-497 (DO NOT DELETE) 12/4/2019 7:18 PM
486 ALABAMA LAW REVIEW [Vol. 71:2:453
campaigns involve deception, puffery, and images of people cheerfully laughing
while taking a payday loan.157 Even socializing and dating involve dissembling,
white lies, and putting on appearances.158 It is impossible to survive the modern
world without an ability to dismiss hyperbole and discount patent falsehoods.159
Importantly, even those who are concerned with the stickiness of lies would
take those concerns to their logical conclusion and support the imposition of
prior restraints, criminalization of lies, and agency review of media articles.160
The stickiness of falsehoods, then, is a matter of degree. And when false-
hoods are not completely sticky, audience effects continue to be important. One
corollary of the seesaw dynamic is that if it can be shown that a lie is especially
sticky, or that a certain type of falsehood is especially hard to refute, then there
is a stronger case for preferring to decrease the number of lies rather than con-
trol their credibility. And the obverse is also true: if some lies are simply “hot
air,” “bullshit,” or “puffery” and easily dismissed, the priority should be reduc-
ing their credibility.
3. Imperfect and Costly Enforcement, Litigation, and Execution
Enforcement is one of the biggest problems in law161: it is costly, emotion-
ally draining, and lengthy to pursue a lawsuit; winning the case may turn on
luck; damages may undercompensate the victim; and collecting the judgment is
always risky.162 All of these considerations make it less likely that a victim will
bring a lawsuit against the defaming party. Now, if it were possible to correct
these issues—i.e., to punish defamers with full expropriation of their wealth or
even to exact corporal punishment at all costs—then it is theoretically possible
to completely eliminate the incentive to lie. In such a world, the seesaw dynamic
would disappear: people could safely rely on statements, as all statements would
be truthful and none would dare to mislead. But because such a policy is neither
157. See, e.g., Payday Lender Withdraws Ad that Encourages ‘Worry-Free’ Borrowing, GUARDIAN (July 23,
2014, 5:13 AM), https://www.theguardian.com/money/2014/jul/23/pounds-to-pocket-payday-lender-
withdraws-advert-borrowing.
158. See generally Irina D. Manta, Tinder Lies, 54 WAKE FOREST L. REV. 207 (2019) (exploring various
lies used in the dating context).
159. Indeed, part of the tragedy of individuals suffering from neurodegeneration is that they start
falling prey to manipulations that they would otherwise avoid. See Tal Shany-Ur et al., Comprehension of Insincere
Communication in Neurodegenerative Disease: Lies, Sarcasm, and Theory of Mind, 48 CORTEX 1329, 1335 (2012) (doc-
umenting the loss of the ability to detect deception by patients with neurodegenerative diseases).
160. See Brandenburg v. Ohio, 395 U.S. 444, 447–48 (1969) (holding that even advocacy of violence,
unless it presents an imminent threat, is protected by the First Amendment).
161. See generally Yonathan A. Arbel, Adminization: Gatekeeping Consumer Contracts, 71 VAND. L. REV.
121 (2018) (analyzing the difficulty of enforcement in the context of private credit contracts).
162. See generally Yonathan A. Arbel, Shielding of Assets and Lending Contracts, 48 INT’L REV. L. & ECON.
26 (2016) (analyzing the ways debtors can circumvent creditors and the circumstances under which asset
shielding is most likely).
Electronic copy available at: https://ssrn.com/abstract=3311527

<<PAGE_BREAK>>

4 ARBELMUNGAN 453-497 (DO NOT DELETE) 12/4/2019 7:18 PM
2019] The Case Against Expanding Defamation Law 487
plausible nor advisable, under any feasible policy, there will always be some lies.
Thus, the seesaw principle is relevant.163
Still, audience effects bear on changes to the enforceability of defamation
lawsuits. Any removal of practical limitations to enforcement is equivalent to
increasing the scope of defamation law. Fewer practical hurdles mean more
lawsuits, increased litigation means an increase in potential defamation law en-
forcement, and increased enforcement creates further disincentives to keep
speakers from lying. Per the seesaw dynamics, more efficient enforcement
would lead to fewer, but more harmful, falsehoods and misstatements. Hence,
we can draw a broad conclusion regarding a host of interventions—cheaper
enforcement methods; larger or punitive judgments; fee-shifting arrangements;
subsidies to support plaintiffs; lower proof thresholds; or speedier legal pro-
cesses. In all of these cases, despite important nuances, audience effects would
lead to similar seesaw dynamics.
4. Social and Moral Norms
Most societies have social norms against lying, and individuals may have an
internal moral sense that spreading falsehoods is wrong. How does the presence
of such norms change the audience effects on defamation law?
Generally speaking, internalization of norms, social or moral, increases the
proportion of honest people. And if all men were angels, defamation law would
become obsolete.164
Of course, any discussion of defamation law rests on the recognition that
some people lie. And with this assumption, norms naturally fit into the trilateral
model. Recall that in the example, some individuals were assumed to be honest
(i.e., zero v). This honest attitude could be a matter of outside preference—
perhaps the example employees bear no ill will towards their ex-employers—or
it could be the result of more innate preferences—such as from internalizing
the norm against lying. Whatever the reason, some individuals could be ex-
pected to tell the truth independent of the law. As the proportion of such em-
ployees rises, consideration of audience effects reveals that all statements will
be viewed, on average, as more credible. In other words, the proportion of
honest speakers affects the baseline level of credibility of statements, independ-
ent of any specific defamation law regime. Changing defamation law would only
change the reliability of statements relative to this baseline.
This observation highlights the importance of considering audience effects
when making decisions regarding the scope of defamation law. The common
approach—assuming a simple relationship between stricter defamation law and
163. In Arbel & Mungan, supra note 27, we explain that overly strict defamation laws would also deter
truth speaking, rendering speech uninformative to audiences.
164. In terms of our analysis, this is equal to the possibility that enforcement is perfect.
Electronic copy available at: https://ssrn.com/abstract=3311527

<<PAGE_BREAK>>

4 ARBELMUNGAN 453-497 (DO NOT DELETE) 12/4/2019 7:18 PM
488 ALABAMA LAW REVIEW [Vol. 71:2:453
greater protection of reputation—fails to account for the prevalence of such
background norms.
E. Would Expanding Defamation Law Advance Its Goals?
Having surveyed audience effects and some of their qualifications, we can
now evaluate the outcomes of expanding defamation law on the basis of three
main goals of the law—deterrence, redress, and vindication.
1. Protecting Reputation Through Deterrence
Defamation law is often justified on the belief that it protects reputation by
deterring individuals from falsely besmirching others. The consideration of au-
dience effects adds an important qualification. While defamation law deters
some false statements—just as advertised—it also increases the perceived reli-
ability of undeterred statements.
The discussion of the example focused on this point exactly. On the posi-
tive side, defamation law reduced the thirty-two lies in D to only twenty-four
0
in D , or a 25% reduction. But, on the other hand, the false negative reviews in
1
D are less believable precisely because there are more lies. In this construct,
0
negative reviews are split between twenty truthful to thirty-two false, a truth-
to-lie ratio of 0.625. In D , there are, again, twenty truthful negative reviews but
1
only twenty-four false reviews, a higher truth-to-lie ratio of 0.833. As a result,
every negative statement in D is more credible (i.e., the diagnosticity of
1
negative reviews is higher). If lies are more credible, people are more likely to
trust and act on them, as the patrons do in the example, hence enhancing their
social harm. In conclusion, the deterrent effect of defamation law can under-
mine reputation, contrary to the literature on the topic.165
2. Protecting Reputation Through Redress
The second goal of defamation law is to provide redress to victims, a func-
tion that the Court emphasized in Milkovich.166 Justice Rehnquist’s narrative
highlights that defamation law is not only about protecting reputation but also
compensating injured victims of the false allegations.167 It is widely understood
that current defamation law often leads to under-compensation of victims.168
With that in mind, would the expansion of defamation law not better protect
victims?
165. See supra Part I.A.
166. Milkovich v. Lorain Journal Co., 497 U.S. 1, 12 (1990).
167. See id.; see also ELDREDGE, supra note 47, § 3, at 5–6.
168. On the intentional imperfection of defamation law, see supra notes 54–59 and accompanying text.
Electronic copy available at: https://ssrn.com/abstract=3311527

<<PAGE_BREAK>>

4 ARBELMUNGAN 453-497 (DO NOT DELETE) 12/4/2019 7:18 PM
2019] The Case Against Expanding Defamation Law 489
We believe that it is illogical to think about redress without considering
audience effects. The underlying assumption of the redress argument is that a
harm already exists and the law needs to allocate compensation. This argument,
however, ignores the effect that offering compensation will have on the crea-
tion of the harm. Consider again the restaurant example. There, shifting from
D to D led to reputational harm to all owners of high-quality restaurants be-
0 1
cause falsehoods became more reliable. In other words, one reason why owners
of some high-quality restaurants suffered a commercial loss—for which they
would seek redress—was defamation law itself.
A vivid illustration of some problems with the redress argument is a recent
spat on Twitter. Elon Musk, the outspoken billionaire, engaged in a heated de-
bate on Twitter with a British citizen, Vernon Unsworth.169 Angrily, Musk
tweeted to his 22 million followers an accusation that Unsworth was a pedo-
phile: “Sorry pedo guy, you really did ask for it.”170 Critically, no evidence was
presented to support this devastating allegation. Six weeks later, with still no
evidence being adduced, Musk tweeted a response to an inquiry made by a
Twitter user going by the handle “@yoda”171:
Musk used the absence of a lawsuit as positive evidence of Unsworth’s guilt.
It is because a lawsuit was not brought that any member of the audience could
surmise that Unsworth had something to hide. Rather than the standard narra-
tive of defamation law protecting reputation, defamation law was effectively
used here as a sword to undo it. This Tweet seems to have worked, and it “set
off a chain reaction on Twitter and in the media,” leading many members of
the public to accept Musk’s statement as true and greatly tarnish Unsworth’s
169. Elon Musk in New Rant at Thai Cave Rescuer, BBC (Sept. 5, 2018), https://www.bbc.com/news/
world-us-canada-45418245.
170. Elon Musk (@elonmusk), TWITTER (July 15, 2018, 10:10 AM), https://i.imgur.com/kNzmBOJ.
png. The original tweet has since been deleted.
171. Elon Musk (@elonmusk), TWITTER (Aug. 28, 2018, 12:41 PM), https://twitter.com/elonmusk/
status/1034481160783585280, https://i.imgur.com/xmXZMlD.png.
Electronic copy available at: https://ssrn.com/abstract=3311527

<<PAGE_BREAK>>

4 ARBELMUNGAN 453-497 (DO NOT DELETE) 12/4/2019 7:18 PM
490 ALABAMA LAW REVIEW [Vol. 71:2:453
reputation.172 A lawsuit was eventually filed,173 but one worries that it was too
late to reverse the harm. In other words, the harm that redress wishes to solve
can, in some cases, be exacerbated by the existence of financial compensation.
At the same time, we recognize some countervailing considerations in favor
of the redress argument. While defamation law may exacerbate the harm, it is
not the only reason why harm exists. It is possible that even in the absence of
any defamation law, falsehoods would have some negative effects. Moreover,
redress offers a venue for compensation for at least some victims, even if not
all sue. These are two important points, but they should not detract from the
existence of other considerations. When considering such effects, it is still crit-
ical to evaluate whether they are sufficiently strong to overcome the negative
effect that some victims will suffer from more expansive defamation law. How-
ever one chooses to answer this question, it must involve a consideration of
audience effects.
3. Protecting Reputation Through Vindication
The last justification for defamation law is that victims of defamation can
vindicate their good names by proving the falsity of the allegation. The im-
portance of vindication goes beyond judicial remedies. Defamation, after all,
involves the audience and one’s esteem in the community. Through the process
of adjudication, individuals are able to redeem themselves in the eyes of others
and regain their former esteem.
Much like redress, we start by highlighting that even proponents of defa-
mation law would agree that vindication is limited.174 Courts are not perfect
truth finders, and the costs and difficulties of bringing a lawsuit mean that some
innocent victims will not be able to vindicate their good names. So, again, we
are contemplating the imperfect fulfillment of this goal.
Beyond this preliminary concern, vindication suffers from three previously
unrecognized flaws: “circularity,” “entrenchment,” and “antivindication.” Like
its circularity in providing redress, defamation law may be the reason why vin-
dication is needed in the first place—i.e., defamation law self-perpetuates the
harm it attempts to remedy. The more audiences believe falsehoods, the more
important it becomes to offer victims a way to vindicate their good names.
Conversely, if falsehoods are not believed (as is possible under D ), then there
0
is much less to vindicate. The need for vindication is predicated on audiences
believing the statement, and while audiences may believe statements for reasons
172. Complaint at 14, Unsworth v. Musk, No. 2:18-cv-8048, 2018 WL 4403350 (C.D. Cal. Sept. 17,
2018); see also id. at 18–20 (arguing that the tweet was harmful to the plaintiff’s reputation).
173. Id. at 1.
174. See generally Anderson, supra note 41, at 509.
Electronic copy available at: https://ssrn.com/abstract=3311527

<<PAGE_BREAK>>

4 ARBELMUNGAN 453-497 (DO NOT DELETE) 12/4/2019 7:18 PM
2019] The Case Against Expanding Defamation Law 491
that are independent of the existence of defamation law, the availability of def-
amation law may exacerbate the problem.
The second issue is “entrenchment.” Judges and juries are limited in their
ability to determine factual truth.175 Given that, a world where the courts are
used as the final arbiters of truth—as the vindication argument assumes—is a
world where the stakes of judicial mistakes are dramatic. If an innocent victim
brings a lawsuit and—erroneously—loses the case, then this will entrench the
allegations against her in the public eye. After all, courts play a key role in cre-
ating reputational information.176
Third, consider the problem of “antivindication.” Recall the Elon Musk
example.177 There, the fact that a lawsuit was not brought was evidence that the
allegation was true—and in the court of public opinion, it was the only piece of
evidence. Antivindication is the (rational) inference that failure to litigate is ev-
idence of the veracity of the allegations, which is an acute problem if the victim
chooses not to bring a lawsuit for other reasons, such as funding, time, or avail-
ability of evidence. This is also troubling on the macro level, as stronger defa-
mation law may engender an environment, a social equilibrium, where failure
to bring suit is a signal that the allegation is true, thus inviting extensive litiga-
tion.
Taken together, circularity, entrenchment, and antivindication undermine
the claim that defamation law can be unambiguously justified on the basis of pro-
tecting reputation through vindication. While there might be cases where vin-
dication could justify an expansion of defamation law, this justification is not
general in nature and requires domain-specific analysis.
III. DEFAMATION LAW & AUDIENCE EFFECTS
A. The Desirable Scope of Defamation Law
Beyond critique, the trilateral model of defamation offers a new way of
thinking about the proper scope of defamation law. In what follows, we offer
a preliminary sketch of how such an analysis will proceed, although we empha-
size that we are not engaging in a full social-welfare analysis here. We follow
this analysis by showing how it sheds new light on defamation law doctrine by
evaluating political defamation.
175. See Frederick F. Schauer, Language, Truth, and the First Amendment: An Essay in Memory of Harry
Canter, 64 VA. L. REV. 263, 279 (1978).
176. The legal process also reveals important reputational information not through case outcomes but
through the process itself. See Kishanthi Parella, Reputational Regulation, 67 DUKE L.J. 907, 910 (2018).
177. See supra Part II.E.2.
Electronic copy available at: https://ssrn.com/abstract=3311527

<<PAGE_BREAK>>

4 ARBELMUNGAN 453-497 (DO NOT DELETE) 12/4/2019 7:18 PM
492 ALABAMA LAW REVIEW [Vol. 71:2:453
1. Defamation Law in Employment
Defamation doctrine has special rules that apply more strictly in the context
of employment than in any other context. In employment cases, a libelous state-
ment is actionable per se (i.e, without the need to prove special damages) as
long as it is likely to “injure a man in his profession and calling.”178 This added
protection is exceptional and is only afforded outside the employment context
against false criminal allegations or assertions that the victim suffers from a
“loathsome disease.”179 But the reason why these special protections apply is
poorly understood. Why is it more exigent to protect employment than, say,
social standing in the community? Should such a distinction be maintained?
Our framework resolves this puzzle.
In the context of employment, a perennial concern is that a vindictive em-
ployer may defame an ex-employee.180 While an employer may have valid com-
plaints about the ex-employee, the employer is also incentivized to besmirch
the employee. This may be done to prevent talent from defecting to the com-
petition; to send a warning message to current employees that they will face
difficulties in finding another place of employment; or to protect brand image
or save face.181
From the employee’s perspective, false allegations by a former employer
can be especially disastrous. In our society, employment is important not only
as a source of income but also as a matter of fulfillment and social status. But
prospective employers are likely to deny employment based on even a small risk
of employee malfeasance, as a single bad employee can cost the organization
dearly.182 Putting aside embezzlement and other criminal activities, undesirable
employee traits such as tardiness, insubordination, and poor attitude can cost a
business significant resources and production efficiencies. Perhaps the clearest
example is that of a nanny for whom any allegations of abuse can ruin any
chance of ever finding employment again.183
In such circumstances, even a low probability that an allegation against an
employee is true can lead to denial of future employment. Thus, the reliability
of the allegation is a secondary concern to the existence of an allegation. The
178. See, e.g., Lega Siciliana Soc. Club, Inc. v. St. Germaine, 825 A.2d 827, 832 (Conn. App. Ct. 2003)
(quoting Proto v. Bridgeport Herald Corp., 72 A.2d 820, 825 (Conn. 1950)).
179. See, e.g., Lent v. Huntoon, 470 A.2d 1162, 1168 (Vt. 1983).
180. See, e.g., Frank B. Hall & Co. v. Buck, 678 S.W.2d 612, 630 (Tex. App. 1984) (affirming an award
of $1.9 million for a wrongful reference). Note, however, that most states provide immunity to employers
who write letters of reference. See Markita D. Cooper, Job Reference Immunity Statutes: Prevalent but Irrelevant, 11
CORNELL J.L. & PUB. POL’Y 1, 11 (2001).
181. This context is also marked by a relatively unique form of liability for favorable false reviews, but
we leave this topic for future investigation.
182. See Cooper, supra note 180, at 2.
183. Insurance policies are unlikely to cover loss of employment due to loss of reputation.
Electronic copy available at: https://ssrn.com/abstract=3311527

<<PAGE_BREAK>>

4 ARBELMUNGAN 453-497 (DO NOT DELETE) 12/4/2019 7:18 PM
2019] The Case Against Expanding Defamation Law 493
focus should be on limiting the supply of false allegations. As the seesaw dy-
namics demonstrate, this goal can be achieved by making defamation law
stricter. This is why per se protection in such cases may be justified.
Interestingly, this logic may also explain the other special exceptions of per
se libel, allegations of crime or a “loathsome disease.”184 These are both contexts
where the small probability of the truth of the allegation can lead to ex-com-
munication or loss of critical social opportunities and the credibility of allega-
tions is a less pressing concern. Hence, limiting the supply of false allegations
can be more important than controlling their credibility—given that even a
small probability of truth is sufficiently damaging.
2. Defamation Law in Consumer Markets
Reputation for quality plays a key role in consumer markets. In this context,
reputational information is usually manifested through product and business
reviews and ratings. This information is then used by consumers to compara-
tively evaluate different products. In consumer markets, having a robust repu-
tation usually supplants more direct regulatory measures.185 In this context, def-
amation lawsuits usually contend that a spiteful consumer lied or that a
competing business faked a review.186 Importantly, such lawsuits are rarely suc-
cessful.187
The analysis suggests that the case for defamation law is weaker in the con-
text of consumer transactions. First, the distribution of reviews tends to follow
a “j-shaped” distribution with a small mass of negative reviews, very few mid-
dling reviews, and an overwhelming mass of positive reviews.188 Positive re-
views are obviously not sponsored by competitors; they may be the result of
either organic consumer reaction or deliberate attempts by the firm to bolster
its own reputation. If most of these positive reviews are from honest reviewers,
then the stakes for defamation law are low, as false reviews by disgruntled con-
sumers can be overwhelmed by the volume of positive reviews. There is another
reason to question the relevancy of defamation law in this context. There is
good reason to worry about the accuracy of judicial determinations in this area
because most reviews are based on intimate and not easily verifiable interactions
184. See Lent, 470 A.2d at 1168.
185. See Yonathan A. Arbel & Roy Shapira, Consumer Activism: From the Informed Minority to the Crusading
Majority, 69 DEPAUL L. REV. (forthcoming 2019) (discussing reputational pressures as a mode of consumer
governance).
186. See generally Yonathan A. Arbel & Roy Shapira, Theory of the Nudnik: The Future of Consumer Activism
and What We Can Do to Stop It, 73 VAND. L. REV. (forthcoming 2020) (evaluating how idiosyncratically moti-
vated consumers can enforce market norms).
187. See id.; see also Lidsky, supra note 53, at 883 n.144.
188. See Arbel, Reputation Failure, supra note 10.
Electronic copy available at: https://ssrn.com/abstract=3311527

<<PAGE_BREAK>>

4 ARBELMUNGAN 453-497 (DO NOT DELETE) 12/4/2019 7:18 PM
494 ALABAMA LAW REVIEW [Vol. 71:2:453
between a consumer and a product or between a consumer and a service pro-
vider. It is not an accident that most cases resolve in favor of the consumer,
albeit after protracted and costly litigation. Lastly, and outside our model, it is
unclear what benefits consumers receive from sharing opinions, and the impo-
sition of large costs—in the form of litigation risks—may deter many from pro-
ducing this public good.189
These considerations, although preliminary in nature, suggest a presump-
tion against liability or, at the very least, against the expansion of defamation
liability for consumer reviews. Elsewhere, one of us advocated the use of a con-
sumer-review privilege for different reasons, and the analysis presented here is
consistent with this recommendation.190
3. Political Speech
For political speech, the general rule is no liability under defamation law
absent a showing of some hard-to-prove conditions.191 Is this a wise rule? This
question is especially timely now due to the commonly heard allegation of “fake
news” and the President’s attempts to expand the reach of defamation law.192
Ironically, it is the very salience of the fake news debate that abates the risk
of fake news. Under the standard bilateral-tort model, a deluge of fake news
would provide a compelling reason to expand libel laws.193 However, under the
trilateral model presented here, which accounts for how audiences process in-
formation, it is clear to see that one way to combat the harmful effect of fake
news is to educate the public about the phenomenon. Now that the message is
out and it is widely recognized that some stories are outright fake or otherwise
politically biased, some—although not all—of the harm of fake news is miti-
gated. That this conclusion is not surprising suggests the practical relevance of
our main argument—one cannot think about the behavioral effects of laws
without accounting for how they affect beliefs. In any case, given the competing
considerations at play in this context—the importance of public speech, the
danger of letting the government decide what is politically true, and the im-
portance of free press—the default position should be for defamation law to
genuflect to free speech.
189. See id.
190. See id.
191. See supra Part I.B.
192. See supra note 4 and accompanying text.
193. See supra Part II.D.2.
Electronic copy available at: https://ssrn.com/abstract=3311527

<<PAGE_BREAK>>

4 ARBELMUNGAN 453-497 (DO NOT DELETE) 12/4/2019 7:18 PM
2019] The Case Against Expanding Defamation Law 495
B. Some Constitutional Ramifications
The application of constitutional protections to defamation law dates back
to the seminal 1964 decision in New York Times Co. v. Sullivan.194 The body of
constitutional law evolving from this decision has been built on one central
dilemma: How does one balance freedom of expression against the protection
of reputation? In the case law, one finds a careful balancing of these two com-
peting interests, with reputation prevailing in some cases and speech in the
rest.195
The analysis presented here has the potential to upend some parts of this
standard constitutional analysis. We currently view defamation law as a trade-
off between free speech and reputation, but in fact, the protection of reputation
is much weaker than traditionally recognized, and stronger defamation law may
undermine some reputational interests. As the seesaw dynamic highlights that
from the internal viewpoint of protection of reputation, the inevitable trade-off
is between fewer but more credible lies versus a greater number of lies of lesser
credibility. Whether one effect is deemed more important than the other is a
matter of analysis and cannot be ignored when considering the constitutionality
of expanding defamation law.
In many of the Supreme Court decisions, a media outlet was involved.196
Liability for defamation in this context raises more difficulties, as reporters
would often have less than full certainty about the accuracy of their own stories.
This difficulty is compounded by the problem of exposing sources. While our
focus here was on defamation between private parties, audience effects are also
relevant to the examination of regulation of libel by the media.
Without engaging in a full analysis, audience effects suggest that tighter reg-
ulation of the media would have the salutary effect of increasing the credibility
of reports, the undesirable effect of chilling the dissemination of some infor-
mation, and mixed effects on the reputation of the subjects of the reports. As
we have already noted, in the context of reporting about political figures, it is
the case today that the media has little exposure to defamation law. And indeed,
it would seem that the public treats political reporting with a greater degree of
suspicion.197
Doctrinally, courts should consider this trade-off in every case involving a
potential expansion—or contraction—of defamation law: would having fewer
falsehoods outweigh the cost of having more harmful falsehoods? Courts
should only adjust defamation law doctrine if the answer is a net positive. Only
then can a court appropriately balance protecting reputation against other val-
ues.
194. 376 U.S. 254 (1964).
195. See, e.g., Petro-Lubricant Testing Labs., Inc. v. Adelman, 184 A.3d 457, 461 (N.J. 2018).
196. E.g., New York Times Co., 376 U.S. at 256.
197. Kathleen M. McGraw et al., The Pandering Politician of Suspicious Minds, 64 J. POL. 362, 365 (2002).
Electronic copy available at: https://ssrn.com/abstract=3311527

<<PAGE_BREAK>>

4 ARBELMUNGAN 453-497 (DO NOT DELETE) 12/4/2019 7:18 PM
496 ALABAMA LAW REVIEW [Vol. 71:2:453
Even if one thinks that the net effect of defamation law is positive—i.e.,
that defamation law tends to protect reputation more than it harms it—it is still
critical to understand that the net effect is smaller than the gross effect of def-
amation law. Today, judges think of defamation law in terms of its gross effect
(protection of reputation), without recognizing that there is an internal trade-
off due to the seesaw principle, which makes the net effect of defamation law
on reputation smaller. Realizing the difference, even in cases where the net ef-
fect is positive, is important when judges purport to balance free speech against
reputational interests. That the net effect is smaller has especially acute impli-
cations for all of these cases where judges declared that the cases involved a
close call.198 If the net effect is smaller, it means that the close call was only
reached by overweighing the perceived importance of defamation law. Realiz-
ing this, the case no longer becomes a close call and may, indeed, come out the
other way.
Assessing the net effects of defamation law is not always straightforward,
and in some cases, there will be considerable uncertainty. Such difficulties are
common when policy changes are contemplated. However, in the context of
defamation law, the significance of these difficulties is quite limited, because
freedom of speech and the press are constitutionally protected. Consequently,
if there is uncertainty over whether the restrictions of these freedoms will result
in a benefit, such restrictions are unwarranted. In other words, if there is real
doubt whether expanding defamation law would provide any benefit, courts
should err on the side of free speech.
CONCLUSION
Defamation law is a feature of most modern systems of law. In the United
States, it challenges values enshrined in the First Amendment. Courts and
scholars have battled over the proper balance between truth finding, freedom
of speech, and protection of reputation. But despite the perennial struggle over
these issues, a fundamental idea was uncritically accepted—that defamation law
is necessary for the protection of reputation. But the idea that defamation law
protects reputation is misguided. Due to the failure to properly evaluate audi-
ence effects, courts failed to notice that stricter defamation law can actually
undermine reputational interests.
To properly account for audience effects, one has to recognize that defam-
atory speech necessarily involves a thinking, autonomous audience whose will-
ingness to believe any given proposition is not divorced from the legal rules. In
a world with no defamation law, the cost of sending false signals—misstate-
ments of fact—is low. Audiences would, therefore, tend to be more skeptical
and cautious. This skepticism, however, guards against the harmful effects of
198. See, e.g., Petro-Lubricant Testing Labs, Inc., 184 A.3d 457.
Electronic copy available at: https://ssrn.com/abstract=3311527

<<PAGE_BREAK>>

4 ARBELMUNGAN 453-497 (DO NOT DELETE) 12/4/2019 7:18 PM
2019] The Case Against Expanding Defamation Law 497
falsehoods. With defamation law, individuals would be much more willing to
believe statements of unknown veracity because they would believe that the
threat of legal liability would deter many from misstating the truth. The greater
credulity would make any residual falsehoods much more pernicious.
We imagine future work that seeks to establish and test the limits of these
ideas empirically, alongside work that seeks to deepen the investigation in the
context of tort doctrines and related First Amendment scholarship—expanding
it to adjacent fields, such as privacy law and advertisement law. We think there
is good reason to pause and reflect on the necessity of this costly social institu-
tion in the age of anonymous and untraceable online speech. For the time being,
however, our greatest hope is that our analysis will encourage the explicit con-
sideration of audience effects in the jurisprudence of defamation law.
Electronic copy available at: https://ssrn.com/abstract=3311527

---

## ssrn-3452662: J,V0N0 1
Year: 2020
Authors: Yonathan Arbel
Source: papers/ssrn-3452662/paper.txt

J,V0N0 1
Regulating Information With Bayesian Audiences
YonathanA.Arbel1andMuratMungan2
1SchoolofLaw,UniversityofAlabama
2ScaliaSchoolofLaw,GeorgeMasonUniversity
We analyze the regulation of false statements in the presence of Bayesian
audiences. We find that: (a) Often, moderate sanctions are optimal even
though strict sanctions can fully deter all false statements; (b) the existence
of separating equilibria—where only truthful statements are made—critically
depends on judicial accuracy; (c) the magnitude of sanctions trades-off
false information, chilling of truthful statements, and litigation costs; and (d)
private enforcement often dominates public enforcement despite the lack of
commitment. We emphasize the case of defamation law, and discuss other
contexts including securities regulation, whistle-blower incentives, jury trials,
andreportsofcriminalactivity.
WearethankfulforthecommentsofScottBaker,AlbertChoi,EzraFried-
man,NunoGaroupa,AlexLee,BenMcMichael,AlanMiller,SepehrShahsha-
hani, Kathy Spier, Bruno Srulovici, Abe Wickelgren, and the participants of
the2019LawandEconomicTheoryConference.
1. Introduction
In many contexts, we use the law to regulate the exchange of information
betweenprivateparties.Acommonconcernisthataninterestedspeakerwould
spreadfalseinformationtoadvanceitsownprivategoals.Topreventthis,the
lawwillsometimespunishfalsestatementsorrewardtruthfulones.
A common neglect in the literature is the interaction between the severity
of the law and the audience’s beliefs and actions. In reality, audiences pro-
cessinformationdifferentlywhenitsveracityisstrictlyregulated.Thisneglect
maybeduetothenaturaltendencytofocusonthepartiesthattakeanactive
partinthelegalprocess(thevictim-defendantandthespeaker-plaintiff)andto
abstractfromnon-participatingparties,namelythepublic(Heymann, 2012).
Whateverthereason,regulationoftheinformationenvironment—theflowand
qualityofinformationtothepublic—affectsaudiencesandtheirbeliefsquite
directly.
Ourobjecthereistobridgetheaudiencegapbyformalizingtheinteraction
betweenspeakers,thetargetsoftheirspeech,andmembersoftheaudience.We
employatoolthatisnaturallyaptatanalyzingthisissue,namely,aBayesian
game,andweinvestigatetheimpactofthestrictnessofthelawontheemerg-
ingPerfectBayesianEquilibria(PBE).Underthisframework,aspeaker,who
has private information about a business or individual (“target”), may make
Draft,Vol.0,No.0,
doi:/ewmxxx
(cid:13)c .
Allrightsreserved.ForPermissions,pleaseemail:
Electronic copy available at: https://ssrn.com/abstract=3452662
2 .V0N0
claims about the target to an audience member. The audience member then
decideswhethertointeract—trade,trust,socialize—withthetarget.Ifthetar-
get loses an interaction, he may bring a lawsuit against the speaker. Within
thisframework,itissociallyoptimalforaudiencestoonlyinteractwithhigh-
quality targets and avoid low-quality ones. The key variable of interest is the
strictness of the law, which we operationalize through the level of damages
awarded to the target if the lawsuit is successful—this reflects the relatively
broaddiscretioncourtshaveinthedeterminationofdamages(Steenson2014).
Our model contains four key features: (i) The information is provided by
aparty(thespeaker)whoisinterestedininfluencingtheaudience’sbehavior,
(ii)theaudiencemakesdecisionsinlightofthecontentofthesuppliedinfor-
mation,(iii)thespeaker’sobjectiveconflictswiththatofanotherparty(thetar-
get),and(iv)thelawpenalizesthesupplyoffalsenegativeinformationbythe
speaker.Thesekeyfeaturesarepresentinmanycontexts,including: defama-
tion law, whistle-blower rewards, complaint-driven law enforcement, and se-
curities regulation. In some of these contexts, legal proceedings are initiated
by the target (private enforcement) and in others by a governmental agency
(publicenforcement).Giventhegrowingpressuretoincreasetheregulationof
defamatoryspeechcomingfromtheSupremeCourt,politicalleaders,lawyers,
andscholars(Arbel&Mungan, 2019),wefocusondefamationlawasourrun-
ningexamplewithprivateenforcementinourbaselinemodel(Sections3and
4).Wesubsequentlyextendtheanalysistocomparepublicandprivateenforce-
ment,anddiscussspecificfieldsbesidesdefamationlaw(inSection5).
Our analysis reveals five central findings. First, the harmful effect of dis-
paraging statements is deeply related to the strictness of the law itself. A
speaker’sstatementsmayinformtheaudience’sbeliefsandactions.Inchoos-
ing whether to make disparaging statements, speakers will consider the ex-
pectedcostofapotentiallawsuitagainstthem.Stricterlawsincreasethiscost.
Thus, inequilibrium, thestrictnessofthelawaffectsspeakersand, anticipat-
ingthis,alsotargetsandaudiences.Theseeffectssometimesresultincounter-
intuitive implications, such that targets of speech who are ‘good’ types may
preferlaxerlaws,eventhoughitwouldlimittheirrecoveryinasuccessfullaw-
suit.Suchaconclusionispossiblebecausestrictlawsmakestatementsamore
costlysignal,andthus, amorereliableoneintheeyesofaudiencemembers.
Adeterminedspeakercouldabusethistrustandspreadfalsitieseffectively.
The second conclusion is closely related to the dynamics which we just
highlighted. We find that both very strict and lax laws have similar negative
informationalconsequences.Whenthelawislax,i.e.damagesarelow,speak-
ersfrequentlymisstatethetruthandaudiencesrelymoreontheirpriorsrather
than on statements (akin to babbling equilibria under cheap talk). However,
if defamation laws are very strict, i.e., expected damages are high, then this
may deter speakers from making even truthful assertions (“overpriced talk”).
Whereas truth is a defense to a lawsuit, the risk of judicial mistake may be
too great, and so speakers would refrain from sharing negative private infor-
mation.Therefore,overlystrictlawsdeprivetheaudienceofmeaningfulinfor-
Electronic copy available at: https://ssrn.com/abstract=3452662
-- 3
mation.1Thus,ouranalysisrevealsabasicinsightwithrespecttoregulationof
the information environment: Both cheap and overpriced talk can undermine
informationdissemination.
Third,ouranalysisilluminatestheimportanceofinstitutionalconsiderations
indesigninginformationregulatinglaws.Onekeyconsiderationisthecourt’s
subject-matter expertise and likelihood of delivering accurate judgments. If,
in a given area, judges can fairly accurately detect false statements, impos-
ingrelativelylargedamagesthatdeterfalsestatementscanleadtoseparating
equilibriawhereonlytruthfulstatementsaremade.Usingthelawtoregulate
informationcontinuestobeoptimalincaseswherecourtsdonothavetheac-
curacynecessarytoimplementseparatingequilibria,but,candetermostfalse
statementswithoutchillingtruthfulstatements.Whencourtsarelesscapableof
accuratelyadjudicatingstatements,thesocialcostofusingthecourtsystem—
operationalizedbylitigationcosts—iskeyindeterminingwhetherinformation
shouldberegulated.Eveninthesecases,whenthegainsfromfacilitatingbene-
ficialinteractionsanddeterringharmfulonesdwarfslitigationcosts,moderate
damagesemergeastheoptimalchoice.2
Anotherimplicationpertainstothepotentialdynamicimpactofinformation
regulating laws. Specifically, moderate laws that cause the audience to ratio-
nally rely on speakers’ statements broadens the gap between the frequency
withwhichtheaudienceinteractswithgoodtypesversusbadtypes.Thisnat-
urally increases the returns from being a good versus a bad type, thereby in-
centivizing individuals and firms to increase the quality of their products or
services.
Lastly, our comparison of public and private enforcement reveals the rela-
tivemeritsofprivateenforcement.Apublicagencymaybeabletocommitin
advancetoacertainlevelofenforcement.Whereasprivatepartiesarelessca-
pableofcommitment,theyenjoyanaturalinformationaladvantageregarding
the merit of the lawsuit, as they know their own type. Consequently, private
enforcement leads to more accurate litigation decisions, and an intuitive ad-
vantage of private enforcement emerges in our model: separating equilibria
canonlybeachievedthroughprivateenforcement.
Overall,ourframeworkandresultsaddtotheliteratureoninformationreg-
ulation by spotlighting the importance of audience effects, offering a formal
framework that accounts for audiences, and emphasizing the risks of overly-
stringentandlaxregulatoryregimes.
Thenextsectionofferssomebackgroundandreviewstherelatedliterature.
Section3presentsthemodelanditsanalysiswithafocusoncaseswherethe
courts are relatively accurate. Section 4 explains, in detail, the more compli-
cated trade-offs that emerge when courts are not accurate enough to achieve
separatingequilibria.Section5includesseveralpotentialextensionsoftheba-
1. Whenweconsiderhonestandothertypesofspeakers,wealsoshowthatstrictlawscanbe
worsethanlaxones,forsimilarinformationalreasons.
2. Incidentally,thisconclusioncanofferarationaletothelongstandingdistinctionindefama-
tionlawbetweenfactsandopinions,whicharegenerallyunregulated.
Electronic copy available at: https://ssrn.com/abstract=3452662
4 .V0N0
sicmodel,suchasthepublicenforcementcase,thegeneralizationofthemodel
tocaseswherespeakersmaybemotivatedtospeaktruthfullyortoexcessively
praisethetarget, anddiscussionsofcontextsotherthandefamationlaw.Sec-
tion6providesconcludingremarks.
2. Backgroundandrelatedliterature
Variouslawsregulateinformationbysanctioningfalsedisclosureorreward-
ing truthful sharing of information. Defamation is a classic example of the
formerandwhistle-blowersofthelatter.Theliteratureonthesetopicsisdis-
parate, but contain the same question: How to design sanctions and rewards
that would incentivize the optimal sharing of information. A common recur-
ring omission is the possibility that the audience may update its beliefs, in a
Bayesianmanner,basedonthesizeofthesanctionsorrewards.Becauseofthe
fragmentednatureoftheliterature,wewillconsiderfourexamples.
Defamationlawisperhapsthequintessentialexampleoftheproblemofin-
formationregulationandthusservesasourrunningexample.Underdefama-
tionlaw, atargetofa(1)publicstatementthatis(2)falseand(3)harmfulto
one’sreputation,cansueforallresultingdamages.Judgmentsinthisareacan
resultinhighpayments, withsomecasesreportingjuryjudgmentsoftensof
millions of dollars (Lesher v. Does, 2013). While courts and legislators un-
derstandthebehavioraleffectsofdefamationlaw,theyaremostlypreoccupied
withtheeffectofdefamationlawonspeakers’incentives(’chillingeffect’)and
victim’srights(Bar-Gill&Hamdani, 2003,Acheson&Wohlschlegel, 2018).
Consequently, they share a virtually axiomatic belief that stricter defamation
lawswouldbetterprotectvictims(McNamara, 2007).
Until very recently, scant attention has been given to the audience effects
ofdefamationlaw.Thisomissionissignificant, asdefamatoryspeechisonly
harmfulifitisbothbelievedandactedupon.Thefocusofeconomicworkin
thisareawasmediaoutlets,responsibleinvestigativejournalism,andpolitical
corruption(Garoupa, 1999a,b,Bar-Gill&Hamdani, 2003,andDalvi&Re-
falo, 2007).Weamplifyhereontwoinformalcontributionsthatrecognizethe
potentialimplicationsofaudienceeffects(Arbel&Mungan, 2019,Hemel&
Porat, 2019)byofferingaformalandbroaderaccount.
Another example of information regulation comes from the literature on
whistle-blowers,whichstudiestheoptimalrewardspaidtothewhistleblower.
There,aprimaryconcernisfalsereportsbythewhistle-blowerstoanenforce-
mentagency(Givati, 2016,Buccirossietal.2017,Deoorter&DeMot, 2005).
Onefindingisthatwhentheriskoffalsereportingishigh,itmightbeneces-
sarytoavoidrewardingwhistleblowersaltogether,eventhoughthismeansloss
of information. What is not accounted for is how the agency, the ”audience”
of the report, reacts to information, given the size of the reward. With large
rewards,theagencywouldbemorelikelytoexpectfalsereports.
Lawenforcementprovidesanotherillustrativeexample.Althoughthepolice
oftenhastoweighthecredibilityofacriminalactivityreport,thisrealityisnot
capturedinthestandardlawandeconomicsliterature(forareview,seePolin-
Electronic copy available at: https://ssrn.com/abstract=3452662
-- 5
skyandShavell2017),whichtypicallyreliesonmodelswheretheprobability
ofdetectionisonlyafunctionofenforcementexpenditures.Inreality,thepo-
lice seeks to economize resources by investigating more thoroughly reports
that appear credible—and its estimation is likely influenced by the sanctions
leviedagainstthosewhofilefalsereports.
A final example comes from securities regulation. There, a company self-
reports its performance, under an enforcement threat by the Securities and
ExchangeCommission(SEC).Theliteraturerecognizesthattheagency’sen-
forcementcanbeanimportantcredibilitymechanism(Stulz2009),butitpays
littleattentiontohowstrictenforcementinteractswithinvestorsandthetrust
theyplaceincompanydisclosure.
Methodologically, our article borrows tools from the rich literature on sig-
naling(Spence1973)andcheaptalk(Crawford&Sobel, 1982).Ouranalysis
canalsobeinterpretedaspartofanemergingliteraturethatlooksathowlaws
canbeusedtocreateinformalsanctionsthroughthebehaviorofthirdparties
(e.g.,Deffains&Fluet, 2019,Mungan2016,Be´nabou&Tirole, 2011,2006,
Rasmusen1996.)
3. Model
Tostudythebehavioraleffectsofinformationregulationwefocusontheex-
ampleofdefamationlaw,forthereasonsnotedintheintroduction.Wemodel
theinteractionsbetweenthreetypesofparties: thespeaker(S,she),thetarget
ofthespeech(T,he),andtheaudience,capturedbyarepresentativemember
(A,it).Afacesaninformationalproblem:T iseitheragoodorabadtype,and
A’svalueofinteractingwithT dependsonT’stype,whichisunknowntoA.
Before deciding, S, who knows T’s type, communicates with A and may ei-
therdisparageT ormakeanon-disparagingcomment.Asweareinterestedin
defamation,weassumethatS mightbenefitfromblockinganinteractionbe-
tweenAandT,andsoSmaychoosetodefameT–i.e.,liethatT isabadtype3.
Ofcourse,manyspeakersmaybemotivatedbyadesiretospeaktruthfullyor
tofacilitateinteractionsbetweenT andA,andweconsiderthispossibilityin
section5.2.
WemodeltheinteractionsasaBayesiangame,anduseittoidentifyPerfect
Bayesian Equilibria. Figure 1, below, depicts the interactions between these
threepartiesandishelpfulinfollowingthedetaileddescriptionsoftheinter-
actionsthatweprovide,next.4
3.1 PreliminaryNotation
We consider a game where T may be one of two types t ∈ {B,G} where
thelettersabbreviatebad andgood, respectively.T’stypeisprivatelyknown
to himself and S, but not to A, who only knows that the proportion of good
3. Consistentlywiththelaw,truthfulnegativestatementsarenotconsidereddefamatory.How-
ever,thecourtmaymakeerrorsinascertainingwhetheranegativestatementistruthful,andthis
possibilityisincorporatedinourmodel,asweexplainbelow.
4. ThefiguredoesnotdepictNature’sdrawofS’stype,duetoreasonsweexplain,below.
Electronic copy available at: https://ssrn.com/abstract=3452662
6 .V0N0
Figure1Extendedgametreeofthemodel.
Electronic copy available at: https://ssrn.com/abstract=3452662
-- 7
typesisγ ∈ (0,1).5 Apreferstointeractwithgoodtypes, butnotbadtypes,
because this results in a payoff of g > 0 > −b where b is the cost A bears
from interacting with a bad type. On the other hand, T always prefers to in-
teractwithAandobtainsabenefitofrfromtheinteraction.Finally,S hasan
interestinwhetherAandT interactandobtainsagainofv whentheydonot
interact(alternatively,v canbeinterpretedasalossincurredwhenAchooses
to interact with T); v is a random variable drawn from the continuum (0,v]
withthecumulativedistributionfunctionF(v).Thespecificv-drawisprivate
informationavailableonlytoS,andwecallv thespeaker’stype.Weassume
thatinteractionsbetweenAandT aresociallyvaluableif,andonlyif,T isa
goodtype,i.e.r+g >v >0>r−b.
AfterNaturedeterminesthetypesofT andS, T’stypebecomescommon
knowledge among T and S (but not A). At this point, S chooses what type
of statement to send A regarding T’s type. The types of possible statements
follow defamation law’s distinction between disparaging statements, which
are potentially actionable, and non-disparaging statements, which are non-
actionable(e.g.,positiveremarks,silence,opinion,etc.).6
Subsequently, A decides on whether to interact with T or to avoid him,
and, finally, T, decides whether to bring a lawsuit against S if a disparaging
remarkwasfollowedbyA’schoicetoavoidinteractingwithT.Wenotethat
this setting includes the possibility of T suing S, even if T is in fact a bad
type,i.e.,afrivolouslawsuitmaybebrought.Thisisanimportantpossibility
becausecourtsmayerrintheirjudgment.7 Tocapturetheparties’payoffs,we
definethefollowing:
d: damagespaidbyS toT whenthecourtfindsforT.
l: totallitigationcosts.Weassumethatlitigationcostsarenotprohibitive(l<v)
and,withoutlossofgenerality,thatthecostsareequallysharedbytheparties.
q : probabilityofplaintiffvictorywhenT isoftypet∈{B,G}.
t
Figure1summarizestheparties’payoffsattheterminalnodesonthebottom
in the order S,A,T. We note two graphical limitations of Figure 1. First, it
doesnotshowinformationsetsdescribingA’sknowledgeregardingS’stype,
due to the depiction difficulty caused by S drawing her type from a contin-
uum.Second,foreaseofexposition,Figure1doesnotdepictNature’svdraw
determiningS’sinclinationtodisparage.
Weusethevariabledasthekeypolicylevertooperationalizedifferentkinds
ofdefamationlawregimes, since, aswenoteintheintroduction, courtshave
verywidediscretioninsettingdamages.dcanbeinterpretedmostdirectlyas
thelevelofdamagesawardedtoavictimofdefamation.Thecasewhered=0
representsasituationwheretherearenodamagesfordefamation,whichis,in
oursetting,functionallyequivalenttonodefamationlaw.
5. Insection5wediscusstheconsequencesofendogenizingγ.
6. Weexplainhowouranalysisinformsthediscussionofwhattypesofstatementsoughtto
giverisetodefamationclaimsinSection5.4
7. TherequirementofharmmakesalawsuitbyT whenthepartiesdointeractunlikely
Electronic copy available at: https://ssrn.com/abstract=3452662
8 .V0N0
Itisalsoworthnotingthatwetaketheoddsofwinningattrial,q andq ,as
B G
exogenouslygiven.Thisimpliesthatcourtsarecommittedtoreviewingcases
onlyontheirmerit,andwithoutbringingintheirinformedestimatesaboutthe
proportion of frivolous cases. This is a standard commitment assumption in
the enforcement literature, and with it in place, the ratio between q and q
B G
correspondstoameasureofjudicialaccuracy.Inouranalysis,below,wevary
thisparametertostudyhowitaffectsequilibria.
3.2 Players’Actions,BeliefsandStrategies
Next,wedescribetheplayersstrategies,beliefs,andactions.Forsimplicity,
eachplayer’sactionislabelledaseither0or1,asfollows:
Table1Players’PotentialActions
Player Action
0 1
S Don’tDisparage Disparage
A Interact Avoid
T Don’t Litigate
Thus,asindicatedinFigure1,asuitisfiledonlyincaseswhereallplayers’
actionsare1.Usingthisnotation,wecandescribethestrategiesofeachplayer
asfollows:
Table2Players’Strategies
Player Strategy
S s(t,v):{B,G}×(0,v]→{0,1}
A a(z):{0,1}→{0,1}
T p(t):{B,G}→{0,1}
Here,inspecifyingA’sstrategy,zdenotesthestatementreceivedbyA.
InordertoidentifyPerfectBayesianEquilibria(henceforth:PBE),wespec-
ifyA’sbeliefsregardingT’stype,as:8
x =BeliefthatT =ggivenz =0
0
(1)
x =BeliefthatT =ggivenz =1
1
3.3 PerfectBayesianEquilibriumRequirementsandDefinitions
As our solution concept is PBE, there are standard requirements that must
be satisfied. Specifying these necessitates references to the conditional prob-
abilitiesofT beingaparticulartype, givenastrategyplayedbyS.Todoso,
we first specify the unconditional (or ex ante) probability with which S will
8. BecauseA’svaluationofhisinteractionwithT dependsonlyonT’stype, weneednot
specifyA’sbeliefsregardingS’stypeforpurposesofidentifyingthePBE.
Electronic copy available at: https://ssrn.com/abstract=3452662
-- 9
disparageT givenanystrategy,s,asfollows:
(cid:90) v
µ(s)≡ [γs(G,v)+(1−γ)s(B,v)]dF(v) (2)
0
When µ(s) ∈ (0,1), we can use Bayes’ rule to calculate the probability
ofT’stype, goodorbad, conditionalonthestatementmadeaboutT.Onthe
otherhand,whenµ(s) ∈ {0,1},itfollowsthatS isplayingastrategywhere
he(almost)always avoidsdisparaging(0)ordisparages(1) T, inwhichcase
Bayes’rulecannotbeusedtocalculatetheprobabilityofT beingaparticular
type, conditional on the strategy which is (almost) never played by S. Thus,
wedenotebothpossibilities,asfollows:
(cid:82)vs(G,v)dF(v)
γ 0 if µ(s)(cid:54)=0
Γ(t=G|1,s)≡ µ(s) (3)
Υ otherwise
(cid:82)v(1−s(G,v))dF(v)
γ 0 if µ(s)(cid:54)=1
Γ(t=G|0,s)≡ 1−µ(s) (4)
Υ otherwise
Here, the symbol Υ indicates that the strategy in question is (almost) never
chosenbythespeaker.
GiventhisnotationwemaycharacterizePBEasanassessmentconsistingof
thestrategyprofilea∗,s∗ andp∗ alongwithasetofbeliefsx∗ andx∗,which
0 1
satisfiesthefollowingfourrequirements.
Requirement 1 (R1): A has no profitable deviation given its beliefs. Let
x≡ b ,then:
(cid:98) g+b
a∗(z)=0 if x >x forz ∈{0,1}
z (cid:98) (5)
a∗(z)=1 if x <x forz ∈{0,1}
z (cid:98)
Here, x represents A’s risk threshold for engaging with T. Requirement 1
(cid:98)
states that A interacts with T only if A believes, given S’s statement, that
the probability that T is a good type exceeds the threshold probability of x.
(cid:98)
Similarly, if A believes that T is a good type with a probability that is lower
thanx, AdoesnotinteractwithT.Intheexceptionalcasewherex = x, A
(cid:98) z (cid:98)
isindifferentbetweeninteractingwithT andnot,and,thusitmayplayeither
strategy. When γ = x, this possibility is realized in all equilibria where the
(cid:98)
audience disregards newly acquired information in forming its beliefs. This
unnecessarilycomplicatesformalderivationsandmakesexpositionsmoredif-
ficult.Therefore,intheremainderofouranalysisweignoretheseexceptional
casesbyassumingthatγ (cid:54)= x,buttheanalysiscaneasilybeextendedtothis
(cid:98)
case.
Requirement2(R2):T hasnoprofitabledeviationsinsub-games:
0 if q d<l/2 fort∈{B,G}
p∗(t)= t (6)
1 if q d>l/2 fort∈{B,G}
t
Requirement2statesthatthePBEstrategyofT mustbesuchthatinsubgames
whereS disparageshim, T litigateswheneverthecostsofdoingso(l/2)are
Electronic copy available at: https://ssrn.com/abstract=3452662
10 .V0N0
lower than the expected damage rewards that he can obtain from litigation.
Conversely,T choosesnottolitigatewhenthecostsarehigherthanexpected
damages. In the exceptional case where q d = l/2, T is indifferent between
t
litigatingandnot.
Requirement 3 (R3): S has no profitable deviations: For all t,v pairs,
s∗(t,v)maximizesplayerS’spayoff,whichcanbeexpressedas
l
U ≡a∗(s(t,v))(v−p∗(t)s(t,v){q d+ }) (7)
S t 2
The requirement with respect to S appears more complex than the re-
quirementsthatpertaintoT andA’sstrategies,becauseS choosesheractions
in anticipation of the other players’ actions. Still, the requirement is simply
that,givenherowntype,T’stype,andtheanticipatedbehaviorofAandT,S
mustchoosethecourseofactionthatwouldmaximizeherpayoff.
Requirement4(R4):A’sbeliefsareconsistent:
x∗ =Γ(t=G|z,s∗)wheneverΓ(t=G|z,s∗)(cid:54)=Υforbothz ∈{0,1} (8)
z
Requirement 4 simply states that A’s beliefs must be consistent with the im-
plied conditional probability of T being a particular type based on the equi-
libriumstrategyofS.Thisrequirementisapplicableonlytostrategieswhich
haveapositiveprobabilityofbeingplayedbyS.
Ouranalysisrevealsthattherearetwotypesofassessmentswhichsatisfyre-
quirements1-4,i.e.twotypesofequilibrium.One,inwhichthespeaker’sstate-
mentshavenobearingontheaudience’sbehavior,inthesensethattheydonot
causetheaudiencetochangetheirbehaviorrelativetowhattheywouldhave
doneiftheyreliedonlyontheirpriors.Becausethespeaker’sstatementhasno
effectonaudience’sbehavior,wetermthesePBEIneffectiveCommunication
Equilibria. By contrast, when statements may affect behavior, the resulting
PBE are dubbed Effective Communication Equilibria. To avoid any ambigu-
ities in our usage of these terms, we define these two types of equilibria, as
follows.
Definition 1: A PBE is an effective communication equilibrium if, and only
if,thereexistsz ∈{0,1}suchthata∗(z)= xˆ−min{γ,xˆ} andµ∗(s∗)(cid:54)=1−z.
xˆ−γ
In classifying equilibria, we use these new definitions, instead of concepts
like babbling equilibria and informative equilibria, because, although these
concepts are related to our defined categories, they differ from each other in
meaningfulways.Specifically,althoughallbabblingequilibriaareineffective
communication equilibria, the converse is not true. This can be seen by not-
ing that, in some equilibria, S can play type-dependent strategies which do
not impact the behavior of A. These equilibria would not fit the definition of
babblingequilibria,butwouldnotcauseachangeinA’sbehaviorcomparedto
babblingequilibria.Sinceweareinterestedinclassifyingequilibriabasedon
Electronic copy available at: https://ssrn.com/abstract=3452662
-- 11
behavior,werelyonourbehavior-baseddefinitionofeffectivecommunication
equilibria.
3.4 ImpactofDefamationLawsonEquilibriumBehavior
ByusingRequirements1-4weidentifyandinterpretthePBEobtainedwith
different damages, through the help of four propositions, below. Our obser-
vations can be briefly summarized as follows. Proposition 1 shows that, re-
gardlessofthelevelofdamages, therearealwaysineffectivecommunication
equilibria where A acts according to its priors, i.e., where A essentially ig-
noresthecontentofSsstatement.Intheseequilibria,partiescannoteffectively
communicateprivateinformation.Infact.whendefamationlawsareextreme,
i.e. either too lax or too strict, ineffective communication equilibria are the
onlyPBEofthegame, aswenoteviaProposition2.Onlymoderatedefama-
tionlawscanengendereffectivecommunicationequilibria.Then,wequestion
whethereffectivecommunicationequilibriaaresociallypreferabletoineffec-
tiveones.Theanswertothisquestionissurprisinglyambiguousanddepends
in part on the accuracy of the courts. Proposition 3 shows that when courts
are sufficiently accurate, it is possible to set damages moderately such that
defamatorystatementsarefullydeterred,withoutinvitingfrivolouslitigation.
Thus, separating equilibria are obtainable, and they are socially preferable to
anyotherequilibria.Proposition3alsonotesthatevencourtswhicharefairly
accurate, but not accurate enough to facilitate separating equilibria, can en-
hancewelfarethroughmoderatedamagesthroughsemi-separatingequilibria.
Finally, Proposition 4 reveals that when the value of A’s returns from inter-
actionsdwarfsotherconsiderations,PBEassociatedwitheffectivedefamation
lawsarealwayssociallypreferable.
Proposition 1. (i) Under all defamation regimes, there exists ineffective
communication equilibria. (ii) In these equilibria, A either always interacts
(γ > x) or never interacts (γ < x) with the target, and litigation never takes
(cid:98) (cid:98)
place.
Proof. (i)Theassessmentconsistingofx∗ =x∗ =γ,
1 0
0forallz if γ >x
a∗(z)= (cid:98) ;
1forallz if γ <x
(cid:98)
s∗(t,v)=0forallvandt;
0 if q d(cid:54)l/2 forallt∈{B,G}
andp∗(t)= t satisfiesRequirements
1 if q d>l/2 forallt∈{B,G}
t
1-4,andthusconstitutesaPBEwhereAactsbasedonitspriors.
(ii)Bydefinition,inineffectivecommunicationequilibriaAactsaccordingto
itspriors, and, thusitalwaysinteractsifγ > xandneverinteractsifγ < x.
(cid:98) (cid:98)
In the former case, litigation never takes place as there is always interaction.
In the latter case, if a∗(0) = 1, S could profitably deviate from her strategy
byneverdefamingsincethiswouldsaveherlitigationcosts.Thus,itmustbe
thecasethata∗(0) = 0,whichispossibleonlyifµ(s∗) = 1since,bydefini-
tion,interactionnevertakesplace.ButthenS canprofitablydeviatefromher
Electronic copy available at: https://ssrn.com/abstract=3452662
12 .V0N0
strategy s∗ by choosing not to defame whenever t = G and v < q d+ l.
G 2
Thus,litigationcannotbetakingplaceinanineffectivecommunicationequi-
librium.
Proposition 1 reveals that it is always possible in equilibrium for the audi-
encetoactaccordingtoitspriors.GiventhisresponsebyA,S hasnothingto
gainbydisparagingthepotentialplaintiff,becauseherstatementshavenoef-
fectonA’sbehavior,yetitmaycauseT toinitiatealawsuit.Thus,nolitigation
canbeobservedinsuchequilibria.
Next, we turn to the question of whether defamation laws can cause A to
change its behavior relative to its behavior based on its priors. Because the
answer to this question depends on d, the magnitude of damages, it is worth
identifyingfourcriticaldamagelevelswhichplayakeyroleintheinterpreta-
tionofresults.Figure2belowdepictstheselevels.
Figure2Criticallevelsofdamages
Theupperlinedepictsthefirsttwolevels( l and l )whichrelatetothe
2qG 2qB
potentialplaintiff’sincentives,whereasthesecondlineincludestheothertwo
levels (2v−l and 2v−l) which relate to the speaker’s incentives. These levels
2qG 2qB
aredepictedontwoseparatelinesbecause,absentfurtherassumptions,twoof
thesevalues(namely l and 2v−l)cannotbeunambiguouslyranked.Wecan,
2qB 2qG
however,notethatthecriticalvaluesthatrelatetothespeaker’sincentivesare
greaterthanthecorrespondingcriticalvaluesthatrelatetothetarget’sincen-
tives(i.e. l < 2v−l fori∈B,G),givenourassumptionthatlitigationcosts
2qi 2qi
arenotprohibitivelyhigh,i.e.l<v.
We observe that when damages are low, i.e., d < l , as Figure 2 notes
2qG
T lackstheincentivestobringsuitevenwhenheisfalselydisparaged.When
damagesareveryhigh,i.e.,d > 2v−l,itfollowsthatalleffectivedisparaging
2qB
Electronic copy available at: https://ssrn.com/abstract=3452662
-- 13
statementsaredeterred.9Thus,inneithercasedostatementshaveanimpacton
theaudience’sbehavior.Wedistinguishbetweentheseextremedamages(i.e.,
(cid:104) (cid:105) (cid:104) (cid:105)
d (cid:54)∈ l ,2v−l )andmoderatedamages(i.e., d ∈ l ,2v−l .)Theabove
2qG 2qB 2qG 2qB
observationshighlightthatextremedamagescanonlyleadtoineffectivecom-
munication PBE. A question that remains is whether moderate damages can
lead to effective communication equilibria. Proposition 2 answers this ques-
tionaffirmativelyandformalizesrelatedobservations.
Proposition2. (i)Extremedefamationlawsonlygenerateineffectivecom-
municationequilibria.(ii)Effectivecommunicationequilibriacanbeobtained
only when the audience acts consistently with the speaker’s statement, i.e.
a∗(z) = z. (iii) There are moderate defamation laws which generate effec-
tivecommunicationequilibria.
Proof. SeeAppendix.
Proposition2holdsthatextremedefamationlawsonlyallowforineffective
communicationequilibria,and,asnotedinproposition1,theseequilibriaalso
exist under moderate defamation laws. However, moderate defamation laws
alsogenerateeffectivecommunicationequilibria.Thisimpliesthatswitching
fromanextremedefamationlawregimetoamoderateregimecanexpandthe
typesofequilibriathatmaybeobtained.Thus, itbecomesimportanttocom-
parethepropertiesofthetwotypesofequilibriatoascertaintheirwelfareim-
pacts,amongotherthings.Thiscomparisonhingesonhowaccuratethecourt
isinreturningcorrectverdicts.Byaccuracy,wemeanthefollowing:
Definition2(i) qG ∈(1,∞)measuresthecourts’accuracy.(ii)π ≡ 2v−1is
qB l
acriticallevelofcourtaccuracyusedtoevaluatethepotentialwelfareimpacts
ofdefamationlaws.
Wereporttherelationshipbetweenthecourt’saccuracy,asdefinedabove,and
thePBEobtainable,asfollows.
Proposition3. (i)SeparatingEquilibrium:Whenthecourtissufficientlyac-
curate(i.e. qG (cid:62) π)therearemoderatedefamationlawsassociatedwithPBE
qB
where: S disparagesT if,andonlyif,heisabadtype;theaudienceactscon-
sistentlywiththisinformation(i.e.a∗(z) = z); andthereisnolitigation.(ii)
Separating equilibria lead to greater expected welfare than all other equilib-
ria.(iii)Whenthecourtisinsufficientlyaccurate(i.e. qG < π), allequilibria
qB
involve a positive likelihood with which the audience does not interact with
a good type, interacts with a bad type, or both. (iv) When the court is only
9. Weintentionallyrefertothedeterrenceofeffectivedisparagingstatements,becausethere
couldbeequilibriawheretheaudiencedisregardsdisparagingcommentsandinteractswithT,
and,insuchinstances,disparagingcommentswouldnotbedeterredbecausetheywouldnotgive
risetolitigation.
Electronic copy available at: https://ssrn.com/abstract=3452662
14 .V0N0
slightly inaccurate, i.e. π − qG > 0 is sufficiently small, there exist moder-
qB
atedefamationlawswhichgenerateequilibriathatleadtogreaterwelfarethan
thosegeneratedbyineffectivecommunicationequilibria.
Proof. SeeAppendix
Intuitively, when courts are sufficiently accurate it ought to be possible to
set damages large enough to deter defamatory statements without generating
frivolous lawsuits. When qG (cid:62) π, this is in fact the case, because the am-
qB
biguousrankingbetweenthecriticaldamagelevelsdepictedinFigure2, l
2qB
and 2v−l, vanishes, and it follows that 2v−l < l , as depicted in Figure 3
2qG 2qG 2qB
below. Therefore, by choosing damages in between these two threshold val-
(cid:16) (cid:17)
ues,i.e.d∈ 2v−l, l ,onecanachievetwoimportantgoalsatonce: deter
2qG 2qB
defamationaswellasfrivolouslawsuits.
Figure3Criticallevelsofdamages
Separating equilibria that achieve these two goals at once naturally maxi-
mizewelfare,because(1)theyleadtointeractionsonlywhentheseinteractions
enhance welfare and (2) there are no litigation costs. This reasoning extends
to the case where the court is only somewhat accurate through a simple con-
tinuity argument. In this case, moderate defamation laws are associated with
semi-separatingequilibria,whereinanon-disparagingcommentrevealsthatT
is a good type, but where good types face a very small likelihood of being
disparaged.Theseequilibrialeadtoonlyslightlylowerexpectedwelfarethan
separating equilibria and, thus, are associated with greater expected welfare
thanineffectivecommunicationequilibria.
Propositions 1-3, together, reveal that when courts perform well in distin-
guishinggoodandbadtypes,moderatedefamationlawscanbeusedwithrel-
ativeeasetoenhancewelfareandtoincreasetheinformationalvalueofstate-
ments made by speakers. In these cases, (semi-)separating equilibria lead to
obviousandunambiguousimprovementscomparedtoequilibriawheretheau-
dienceislefttouseitspriorstomakedecisions.Inpractice,however,thereare
manycaseswherethereisexpressedconcernamongjudgesandlawyersthat
discoveringthetruthisdifficultandthatlitigationisfraughtwithinaccuracies.
Theanalysisinthenextsectionthusfocusesonthesesituations.
Electronic copy available at: https://ssrn.com/abstract=3452662
-- 15
4. DynamicswhenCourtsareInaccurate
The previous section explained why it is impossible to obtain separating
equilibriaifcourtsareinaccurate.AsnotedinProposition3,thisimpliesthat
withsomepositiveprobabilityeitherinteractionswithgoodtypesaredeterred
(i.e.type-1errors),interactionswithbadtypesareundeterred(type-2errors),
orboth.Inthesecases,usingstricterdefamationlaws(i.e.higherd)cangener-
ateatrade-offbetweencostsassociatedwiththesetwotypesoferrorsandmay
alsoimpactexpectedlitigationcosts.Inthissection, wedescribethesetrade-
offs. We focus exclusively on moderate defamation laws and the impact of
changingdoneffectivecommunicationequilibriabecause,asnotedinPropo-
sition 3, in all other cases the audience acts according to its priors and no
litigation takes place. Subsequently, we identify a sufficient condition under
which achieving effective communication equilibria through moderate dam-
agescontinuestobesociallypreferabletohavingextremedefamationlaws.
Toexplainthedynamicsthatemerge,wefirststartbycalculatingtheequi-
libriumbeliefs,i.e.x∗ andx∗ thatwouldemergeinaPBEwherea∗(z) = z,
0 1
assuming that such an equilibrium exists. We plot these beliefs in Figure 4,
below,throughaspecificbutrepresentativeexample.Thehorizontalaxisrep-
resentsdamages, onwhichwemarkthefourcriticaldamageslevelslistedin
Figure2.Thistime,however,thecourt’saccuracyislowerthanπ,sotherank-
ingoftheintermediatecriticaldamages(i.e. l and 2v−l)istheoppositeof
thatdepictedinFigure3.Inadditiontoplottin 2 g qB beliefs, 2 i q . G e.,x∗andx∗,inFig-
0 1
ure4wealsoplottheex-anteprobabilityofT beingdisparagedinthesePBE.
Thesearelabeledδ andδ forgoodtypesandbadtypes,respectively.Next,
G B
we explain how these expressions are derived in the three relevant ranges of
damages.
(1) In the range ( l , l ), damages are too low to incentivize bad types
2qG 2qB
to sue. Thus, S faces no consequences from disparaging bad types. Whereas
goodtypeswillbringalawsuit,Smightstilldisparagethemifitsbenefitfrom
blockinganinteractionissufficientlyhigh, i.e., v > v ≡ q d+ l.Thus, a
G G 2
badtypeisdisparagedwithcertainty,i.e.δ =1,andagoodtypemayormay
B
not be disparaged with positive probability. From A’s perspective this means
thatapersonwhoisnotdisparagedisdefinitelyagoodtype,i.e.x∗ =1,while
0
a target who is disparaged may or may not be a good type, but is no more
likelytobeagoodtypethanarandomdrawfromthepopulation,i.e.x∗ < γ.
1
The ex-ante probability with which S draws a benefit that is higher than v
G
isδ = 1−F(v ),and,thus,thisistheprobabilitywithwhichagoodtype
G G
is disparaged. Using this expression, x∗ can be more precisely expressed as
1
x∗ = γδG <γ.
1 γδG+1−γ
(2)Intherange( l ,2v−l),damagesaresufficienttotriggerfrivoloussuits
2qB 2qG
by bad types who are disparaged. The threat of a suit causes the speaker to
refrainfromdisparagingevenabadtype,unlessherbenefitfromblockingan
interactionissufficientlyhigh.Still,theminimumbenefitthatleadsaspeaker
to disparage a bad type, v ≡ q d+ l, is lower than the minimum benefit
B B 2
thatwouldmakeherdisparageagoodtype,v =q d+ l,asfrivolousclaims
G G 2
Electronic copy available at: https://ssrn.com/abstract=3452662
16 .V0N0
Figure4. IllustrationofBeliefsandtheLikelihoodofaDisparagingStatement.
Damages=d,x∗
0
,x∗
1
arebeliefs.qG=0.8,qB =0.2,l=0.3,andF(v)=vwithsupport
(0,1].
are less likely to be successful. Thus, the ex-ante probability with which S
disparages a bad type, δ = 1−F(v ), is greater than the likelihood with
B B
which she disparages a good type, δ = 1 − F(v ). Consequently, in this
G G
range,x∗ = γ(1−δG) >γ >x∗ = γδG asδ <δ .
0 γ(1−δG)+(1−γ)(1−δB) 1 γδG+(1−γ)δB G B
(3)Intherange(2v−l,2v−l),damagesaresufficientlyhightodeterS from
2qG 2qB
disparaginggoodtypes,evenifherbenefitfromblockinginteractionsismaxi-
mal,i.e.v.Shewillonlydisparagebadtypesifherbenefitfromblockinganin-
teractionissufficientlyhigh.Thus,inthisrange:x∗ =0<γ < γ =
x∗andδ =0<δ =1−F(v ).
1 γ+(1−γ)(1−δB)
0 G B B
This brief analysis, and its depiction in Figure 4 can be used to identify
someofthewelfareimplicationsofalteringthelevelofdamages.Inthelower-
moderate range (i.e. ( l , l )) damages are insufficient to completely pre-
2qG 2qB
ventdisparagingremarksagainstgoodtypes,buttheyarealsolowenoughto
deter frivolous litigation by bad types, leading to their disparagement. Thus,
in this range, the only impact of increasing damages is to reduce the number
ofgoodtypesbeingdisparaged.Thisreductionconsequentlyreducesexpected
litigation costs, and increases the likelihood of interactions with good types.
Therefore,increasingdamagesinthisrangemonotonicallyenhanceswelfare,
becauseinteractionswithgoodtypesaresociallydesirable,andlitigationcosts
reducewelfare.
Intheintermediate-moderaterange(i.e.( l ,2v−l))damagesarelargeenough
2qB 2qG
toinducefrivolouslitigationbybadtypes,butnotlargeenoughtocompletely
deterdisparagingremarksagainstgoodtypes.Therefore,increasingdamages
Electronic copy available at: https://ssrn.com/abstract=3452662
-- 17
in this range generates more meaningful trade-offs by increasing the likeli-
hoodofbeneficialinteractionsaswellasharmfulinteractions,whilereducing
the likelihood of litigation. Thus, it is desirable to increase damages in this
rangeonlyifthesavingsfromlowerlitigationcostsandtheincreasedvalueof
beneficialinteractionsexceedthecostinvolvedwithharmfulinteractions.Ab-
sent more restrictive assumptions, one cannot unambiguously compare these
benefitsandcosts, becausetheirmagnitudesdepend, inpart, onthemarginal
changesinδ andδ ,whichcantakemanyformsdependingontheshapeof
B G
thedistributionofspeakerbenefits(i.e.F(v)).
Finally,inthehigher-moderaterange(i.e.(2v−l,2v−l)),damagesarehigh
2qG 2qB
enoughtodeterdisparagingcommentsagainstallgoodtypes,butarenotsuf-
ficiently high to deter disparaging remarks against bad types. An increase in
damages in this range causes an increase in the expected costs from harmful
interactions, but reduces litigation costs. Thus, as long as litigation costs are
lowerthanthegainsfromblockingharmfulinteractions,socialwelfareisim-
provedbyreducingdamagesinthisrange.
This analysis reveals the complex nature of trade-offs involved when the
courtisinaccurateinmakingdecisions.Thereisnogeneralreasonwhyhigher
damageswouldbebetterthanlowerdamages.Courtsandpolicymakersmust
account for domain-specific considerations which can tilt the balance in any
givendirection.
Asomewhatcounterintuitiveconclusionisthat,withinaccuratecourts,itis
noteventrueingeneralthatonecanimproveuponineffectivecommunication
equilibria where the audience acts upon its priors. Moving to an equilibrium
wheretheaudienceactsconsistentlywiththeinformationitreceivesfromthe
speakercanbehelpfulinpromotingbeneficialinteractionsordissuadingharm-
fulones.However,itcomesatthecostofincreasedlitigation,andmayreduce
thetarget’sbenefitfromincreasedmissedinteractionsorthespeaker’sbenefit
from blocking interactions. An aspect of this analysis is that higher damages
inthemoderaterangesometimessacrificethewell-beingofsomegoodtypes,
thus calling into question a widely-held belief among lawyers that stronger
defamationlawsprotectgoodtypes(Arbel&Mungan, 2019,Hemel&Porat,
2019).
Adding to these complexities is the fact that, given any damage level, d,
effective communication PBE are possible only if A’s risk tolerance, xˆ, lies
inbetweenx∗ andx∗,asdepictedinFigure4.Despitetheseambiguities,one
1 0
canalwaysusemoderatedamagesthatleadtoeffectivecommunicationPBE.
Thus,onecanimprovetheoddsofbeneficialinteractionstakingplaceand/or
harmfulinteractionsnottakingplace.Thus,iftheaudience’swell-beingisthe
predominant consideration in the welfare analysis, it follows that moderate
damages can always improve upon extreme damages. The next proposition
formalizesthisresult.
Proposition4. Thereexistmoderatedamagesleadingtoeffectivecommu-
nicationequilibria,whichgenerategreaterwelfarethanineffectivecommuni-
cationequilibria,aslongasgandbarelargerelativetoothercostsandbenefits.
Electronic copy available at: https://ssrn.com/abstract=3452662
18 .V0N0
Proof. Theexpectedpay-offoftheaudienceinanequilibriumwherea∗(z)=
zforallzis
U =γ(1−δ )g−(1−γ)(1−δ )b (9)
A G B
Ontheotherhand,0andγg−(1−γ)baretheexpectedpay-offsthattheau-
diencewouldhavereceivedbyactingaccordingtoitspriors,whenγ <xand
(cid:98)
γ >x,respectively.InthesePBE,itfollowsthatU =γ(1−δ )g >0when
(cid:98) A G
d∈( l , l ),and,similarly,U =γg−(1−γ)(1−δ )b>γg−(1−γ)b
2qG 2qB A B
when d ∈ (2v−l,2v−l). Thus, for any given x, the increase in the expected
2qG 2qB (cid:98)
pay-offoftheaudiencestemmingfromamovefromaPBEwhereitactsac-
cordingtoitspriorstoonewhereitactsaccordingtotheinformationitreceives
fromthespeakerislinearlyincreasinging andb,respectively.Moreover,the
magnitudes of g and b only affect A’s payoff, and, hence, there exist large
enoughg andbwhichcausethesePBEtogenerategreaterwelfarethanPBE
wheretheaudienceactsaccordingtoitspriors.
Proposition 4 reveals that when the value of interactions are large in com-
parison to other considerations, like litigation costs and the benefits that the
speakergetsfromblockinginteractions,moderatedefamationlawscanbeused
toenhancewelfare.Thisisbecause,undertheseconditions,thedominantcon-
siderationbecomesthemaximizationoftheaudience’spay-off,whichbenefits
fromhavingeffectivecommunicationequilibria.
5. Discussion
In Sections 3 and 4, we provided a model that allowed us to clearly focus
ondefamationlaws’impactontheaudience’sequilibriumbeliefsandactions.
Indoingso,weabstractedfrommanyissuesthatbearontheregulationofin-
formationinmoregeneralsettings,particularly,thepossibilityofacommitted
publicenforcer,qualitybeingendogenouslychosenbythetarget,andtheexis-
tenceofhonestandothertypesofspeakers.Hereweturnourattentiontothese
issues.
5.1 EndogenousTypesandDynamicEfficiencies
Inouranalysisthusfar,weassumedthatthetarget’stypetwasexogenously
determinedbynaturetobeeitherGorBwithprobabilitiesγand1−γ,respec-
tively.Onemightquestiontherealityofthisassumption,aspeoplecanmake
investmentsthatwouldmakethembetterorworsetradingpartners, e.g., cre-
atehigherqualityproducts,maintainsafetystandards,orkeephigherhygiene
standards.
One option of incorporating quality investments into our analysis is to re-
place Nature’s choice of types with a preliminary stage where the target, T,
makes a costly investment (c) that can increase her likelihood of becoming
a good type. Formally, we may assume that γ = γ(c) with γ(cid:48) > 0 > γ(cid:48)(cid:48),
limγ(cid:48)(c) = ∞, γ(0) = γ and limγ(c) = γ where1 > γ > γ > 0.More-
c→0 c→∞
over,tokeepthedescriptionofthisextensionbrief,wefocusonthecasewhere
Electronic copy available at: https://ssrn.com/abstract=3452662
-- 19
γ >x.
(cid:98)
Thequalityinvestmentdecisionisnowpartofalargergame.Givenanysub-
gameequilibrium,thebestresponseofT istomakeaninvestmenttomaximize
hisexpectedpay-off,whichcanbedenotedasγ(c)m +(1−γ(c))m −c
G B
wherem andm refertothepay-offsheobtainsinthesub-gameequilibria.
G B
This observation reveals a very clear result: When the laws are extreme,
(cid:104) (cid:105)
i.e.d(cid:54)∈ l ,2v−l ,thetargethasnoreasontoinvestinquality.Thisfollows
2qG 2qB
fromPropositions1&2,whichshowthatwithextremelaws,theaudienceacts
basedonitspriorsandinteractswiththetargetifγ issufficientlyhigh.Thus,
investmentshavenoprivatereturnsforthetarget.
Itisonlywhenthelawsaremoderatethattargetsmayhaveanincentiveto
invest in quality. This can be demonstrated by focusing on the lower bound
of intermediate damages, i.e. l . In this case, in PBE with a∗(z) = z, it
2qG
followsthatm =0(asallbadtypesaredisparaged)whilem =(1−δ )r
B G G
(because good types are disparaged with probability δ , in which case there
G
isalawsuitwhichpaysthetargetexpecteddamagesequaltolitigationcosts).
Thus,thetarget’spay-offisγ(c)(1−δ )r−c,and,therefore,thetargetprofits
G
(inexpectation)frominvesting.Whetherthisissociallygoodorbad,depends,
ofcourse,onwhethertherearenetsocialgainsfromsuchinvestments.Inour
context, this is socially valuable as long as the expected benefits from good
interactions ((1−δ )g)—which are not internalized by T—are greater than
G
the expected litigation costs l and the loss of benefit to S from blocking an
interaction, i.e. (1 − δ )E[v|v > l]. In fact, if investments in quality are
G 2
sociallyvaluable,thenincreasingdamageswithintheintermediaterangeupto
l will be desirable. This is because these higher damages lead to a lower
2qB
probability of disparaging remarks made against good types (as illustrated in
Figure 4) and, thus, increase m , while still keeping expected payoffs from
G
beingabadtypeatm =0.
B
Thediscussionherehighlightstheimportanceofinformationregulationfor
broadermarketdynamics.Theintuitionunderlyingourresultsarestraightfor-
ward.Extremelawsleadtoineffectivecommunicationequilibria.Incontrast,
moderate laws create an environment with more reliable information regard-
ing types, thus generating a greater gap between the payoffs obtainable by
goodtypesversusbadtypes.This,inturn,increasesthereturnsfrombeinga
goodtype,andleadstomoreinvestments.Inrealisticsettings,providingsuch
additionalincentivesissociallydesirablewhenthepotentialinvestorisunder-
incentivized due to problems like information asymmetries. The gains from
suchinvestmentsinqualityshouldbeaddedtotheotherbenefitsofmoderate
lawsthatwehaveidentified.
5.2 TruthSpeakersandEulogists
So far, we only considered speakers who had something to gain from sev-
ering the relationship between the audience and the target. This abstraction
followstheideaofspeaker’s’bias’inthecheaptalkliterature.Inreality,how-
ever,somespeakersmaynothavesuchmotivations.Quiteimportantly,many
Electronic copy available at: https://ssrn.com/abstract=3452662
20 .V0N0
people, when asked their opinion, provide an honest assessment of others.
Moreover,therearealsopeoplewhoaremotivatedbydoingtheexactopposite
of what the speakers in our model are motivated by; namely, promoting the
relationship between the target and the audience. In what follows we distin-
guishbetweenthefirsttype, “truthspeakers,”thelattertype, “eulogists,”and
theonesweformerlydiscussedinSection3as“disparagers.”Webriefly,and
informally, explain now what occurs when these kinds of speakers are incor-
poratedintoouranalysis.
Inourdiscussion,weconceiveofthesetypesasfollows.Disparagers,aswe
noted,receiveapositivevaluefromblockinganinteraction;truth-speakersare
indifferent with respect to whether the parties will interact but receive some
valuefromspeakingtheirmind; and,eulogistsreceiveavaluefromtherebe-
inganinteraction.Therefore,solongascostsofsodoingarenothigh,dispar-
agers will badmouth the target and truth-speakers will reveal their true type.
Eulogists, in contrast, would always want to praise the target, as there is no
recourse under defamation law for false positive statements (the question of
whythisasymmetryexistsgoesbeyondthethescopeofourarticle).
Theincorporationofthesetypesofspeakershasnoimpactontheobserva-
tionthatextremelystrongdefamationlawsleavetheaudiencetoactupontheir
priors. This follows, because once a critical threshold of damages is passed,
disparagers as well as truth speakers are deterred from making negative re-
marks.Thus,extremelystrongdefamationlawscausedisparagers,truthspeak-
ers, and eulogists alike to abstain from making negative statements, and the
audiencehasnooptionbuttoactaccordingtoitspriors.
The same cannot be said, however, for extremely weak defamation laws.
When damages are very low, targets lack an incentive to bring suit, making
talk“cheap.”Despitethat,disparagingstatementsarestillsomewhatinforma-
tive:Giventheexistenceofsometruth-speakers,thereissomeprobabilitythat
any negative statement is true. Consequently, an audience that hears a nega-
tive statement evaluates its credibility based on the ratio of truth-speakers to
disparagers.Thus, (inanassessmentwherea∗(z) = z)wecanformulatethe
audience’sbeliefthatthetargetisagoodtype,conditionalonanegativestate-
mentasx∗ = γ ∆ whereτ denotestheproportion oftruthspeakers,
1 ∆+(1−γ)τ
and ∆ is the proportion of disparagers. On the other hand, non-disparaging
remarksdonotnecessarilymeanthatT isagoodtype.Bysimilarlogic,there
is some probability that any given praise is false given the existence of eulo-
gists.Anaudiencewhichhearsapositivestatementevaluatesitsveracityasa
function of the ratio of eulogists to truth-speakers. Thus, we can express the
audience’sbeliefasx∗ =γ τ+ε ,whereεistheproportionofeulogists.
0 γτ+ε
Using these observations it is easy to verify that, under lax laws, both dis-
paraging and non-disparaging statements are somewhat informative of types.
Inotherwords,non-disparagingstatementsaremoreindicativeofgoodtypes
than no information at all (x∗ > γ), and disparaging statements are more
0
indicativeofbadtypesthannoinformationatall,i.e.x∗ <γ.Thus,iftheau-
1
dience’snecessarylevelofconfidenceforinteraction,(x),iscloseenoughtoγ
(cid:98)
Electronic copy available at: https://ssrn.com/abstract=3452662
-- 21
suchthatx∗ (cid:62) x (cid:62) x∗,onecanachieveanequilibriumwhereintheaudience
0 (cid:98) 1
meaningfullyusestheinformationprovidedbyspeakers,evenwhenthereare
nosanctionsforfalsestatements.If,however,x∈/ [x∗,x∗],thenlaxlawscause
(cid:98) 1 0
theaudience toignore thestatement andact accordingto its priors, as inour
analysisinSection3.Thus,wefocusourremainingdiscussiontocaseswhere
x∗ (cid:62)x(cid:62)x∗.
0 (cid:98) 1
Incaseswheredamagesaremoderate,someoftheclaimsmadeinSection3
need to be qualified, whereas others remain intact. In particular, it is still the
case that moderate damages improve the reliability of information over ex-
tremedamages.Toseethis,consider,forinstance,theimplicationsofraising
damagesfromlowlevelsto l .Amongspeakers,thischangeonlyaltersthe
2qG
incentives of “disparagers,” because these are the only speakers who have an
interestinmakingfalsestatementsaboutgoodtypes,who,giventhislevelof
damages, bring a lawsuit against them. Thus, the proportion of disparagers
who make false statements is reduced, which causes x∗ to fall and x∗ to in-
1 0
crease,i.e.itcausesinformationsuppliedbyspeakerstobemoreinformative.
This observation reveals another of our results that carries over in a modi-
fied way: when courts are sufficiently accurate, one can use damages equal
to 2v−l < l todeteralldisparagersfrommakingfalsestatementsandalso
2qG 2qB
guarantee that there are no lawsuits by bad type targets. In this case, it im-
mediatelyfollowsthatx∗ = 0, suchthatadisparagingstatementisperfectly
1
informative.
Thepresenceofeulogists,however,meansthatx∗ <1.Thus,fullyseparat-
0
ingequilibriaarenolongerobtainable.Still,eveninthepresenceofeulogists
and disparagers, semi-separating equilibria are possible. Moreover, as in the
previouscase,thesesemi-separatingequilibriaareoptimal,becausetheylead
to no litigation costs, cause all possible good interactions to take place, and
achievemaximumdeterrenceofbadinteractions.
We conclude that the introduction of honest speakers as well as what we
calledeulogists—peoplewhowishtopromotethetarget—doesnotaffectthe
superiorityofmoderatedamagesoverextremeformsofdamages.Whatdoes
changeisperhapssomewhatcounterintuitive: strictlawsturnouttobeworse
thanlaxlaws.Strictlawsleadtocompletelyuninformativespeechinequilib-
riumwhereaslaxlawsstillallowspeechtobesomewhatinformative,permit-
tingeffectivecommunicationequilibria.
5.3 CommitmentandPublicEnforcement
Our analysis so far focused on private enforcement of defamation laws,
where the target is the one to sue. However, private parties will only bring
alawsuitifitpaystodosoex-post, andthiscalculusexposesthemtostrate-
gicbehaviorbywould-bedefamers.Incontrast,someparties,typicallypublic
agencies, maybeabletocommitex-antetosue, evenifitdoesnotpaytodo
soex-post.Comparingprivateandpublicenforcementcanbeusefulinunder-
standing other contexts where information is regulated, and may also illumi-
natethereasonswhyprivateenforcementisusedindefamation.
Electronic copy available at: https://ssrn.com/abstract=3452662
22 .V0N0
Tohelpinthiscomparison,weconsiderasimplemodificationofouranal-
ysis wherein instead of the target, it is a public enforcement agency that can
bring suit against disparaging remarks. The agency, however, is not privy to
thetarget’sprivateinformationregardinghistype,whichisbyassumptionun-
observable,andsoitcannotconditionitsactiononT’stype.Theagencythus
choosessomeprobability,p∈(0,1),withwhichitwillbringalawsuit.Asthe
choiceofpdoesnotdependonanynewinformation,itismadeex-anteandis
communicatedto,orobservedby,would-bespeakers.Thechoiceofpreplaces
p∗(t) in (6). We retain all other assumptions, including the assumption that
the probabilities with which the speaker will be found liable in court are q
G
and q , when she makes disparaging statements against good and bad types,
B
respectively.
This simple modification allows us to calculate the the analogs of the two
critical values which describe the best responses of S depicted in Figure 2.
Specifically,thesetwocriticalvaluesnowbecome 2v¯−pl and 2v¯−pl.Thus,in
2pqG 2pqB
effective communication equilibria, when d > 2v¯−pl, the speaker does not
2pqG
make disparaging statements against good types, and refrains from making
disparaging statements against bad types when d > 2v¯−pl. It can be easily
2pqB
verified that each of these values is larger than their corresponding analog in
theprivateenforcementcontext,i.e. 2v¯−pl > 2v¯−l fori∈{B,G}.
2pqi 2qi
The commitment to bringing a lawsuit also changes the speaker’s behav-
ior, as a lawsuit is possible even when expected damages are low. We next
explainthebehaviorofthespeakerineffectivecommunicationequilibria,un-
der three different damages ranges, and subsequently compare them with the
correspondingbehaviorunderprivateenforcement.
Asunderprivateenforcement,itfollowsthatwhendamagesareveryhigh,
d > 2v¯−pl, all disparaging remarks are deterred. However, when damages
2pqB
aremoderate,d∈(2v¯−pl,2v¯−pl),thespeakerrefrainsfromdisparaginggood
2pqG 2pqB
types,butdisparagesbadtypeswheneverhervaluefromblockinginteractions
issufficientlyhigh(i.e.v˜ ≡p(q d−l)<v)whichhappenswithprobability
B B 2
δ˜ ≡ 1−F(vˆ ) > 0 (The tilde sign refers to analogs of values defined in
B B
the private enforcement context). Thus, in the moderate range, a disparaging
remark conclusively reveals to the audience that the target is a bad type; a
non-disparaging comment is an informative, but inconclusive, signal that the
target is a good type, i.e. x∗ = 0 < γ < x∗. When damages are low, i.e.,
1 0
d< 2v¯−pl,thespeakerisnolongernecessarilydeterredfromdisparaginggood
2pqG
types,andchoosestodefamethetargetifhervaluefromblockinginteractions
exceedsv˜ ≡p(q d− l).Thus,itfollowsthat0<δ˜ <δ˜ ,and,therefore,
G B 2 G B
0<x∗ <γ <x∗ <1.
1 0
Wecannowcomparedefamationlawsunderpublicandprivateenforcement
regimes.First,effectivecommunicationequilibriaarenotpossibleundereither
regimewhendamagesareextremelyhigh(i.e.higherthan 2v¯−pl and 2v¯−l in
2pqB 2qB
the public and private regimes, respectively). Thus, our previous conclusion
regardingtheineffectivenessofhighdamagesinsupportinginformativestate-
mentsextendstothepublicenforcementcaseaswell.
Electronic copy available at: https://ssrn.com/abstract=3452662
-- 23
Second, unlike private enforcement, public enforcement can sustain effec-
tivecommunicationequilibriaevenwithlowdamages.Underprivateenforce-
ment, the speaker will anticipate that the target will not sue if damages are
sufficiently low. This can lead the speaker to disparage regardless of the tar-
get’s type, which would make statements non-informative. With public en-
forcement, however, there is always a risk of a lawsuit, thus deterring some
would-bedefamersandsustainingthereliabilityofsomestatements.Thisim-
pliesthat,unlikeintheprivateenforcementcontext,verylowdamagescanbe
usedtosupporteffectivecommunicationequilibria—atleastwhenthethresh-
oldbeliefoftheaudience,i.e.xˆ,isnottoofarfromitspriors,i.e.when|xˆ−γ|
is not large, because then xˆ ∈ [x∗,x∗]. Note that this means that low dam-
1 0
agescanbesuperiortohighdamagesinfacilitatingeffectivecommunication
betweenthespeakerandtheaudience.
Third,andquiteimportantly,itisimpossibletoobtainaseparatingequilib-
rium with public enforcement, regardless of how accurate the courts are: as
noted above, any damages below d < 2v¯−pl result in δ˜ > 0, δ˜ < 1, or
2pqB G B
both.Thisimmediatelyimpliesthatwhencourtsareaccurate,privateenforce-
mentdominatespubicenforcementintermsofitswelfareconsequences.The
differenceinthewelfareobtainableunderthetworegimesisenhancedfurther
bythefactthatunderpublicenforcement,theenforcementagency’scommit-
ment results in some litigation whenever defamation laws are effective (i.e.
2v¯−pl >d).
2pqB
Thelastpointhighlightsamoregeneralandimportantadvantageofprivate
enforcement over public enforcement. Specifically,private enforcement dele-
gates the decision to litigate to the party with the best information about the
meritsofthecase.Moderatedamagescanbecraftedtoseparategoodandbad
types based on their willingness to sue, and this enables the speaker’s state-
mentstobemoreinformativeofthetarget’stype.
Insum,thiscomparisonilluminatetherelativevalueofpublicversuspublic
enforcement.However,asourfocushereisoncommitment,weabstractfrom
otherrelevantconsiderations, suchastherelativecostsoflearningaboutdis-
paragingremarksorproducingevidence.Inasmuchaspublicagenciesemploy
discretion, they are also susceptible to capture and other public choice prob-
lems.Theseconsiderationsshouldalsobetakenintoaccountincomparingthe
relative social desirability of pubic versus private enforcement in regulating
speech.
5.4 FeaturesofDefamationLaw
Ouranalysistookthedomainofpotentiallydefamatorystatements—disparaging
remarks—asgiven.However,theframeworkdevelopedherecouldalsobeused
toshedlightonsuchdeterminations,inparticular,thefactv.opinionandper-
se v. pro-quod distinctions. Defamation law renders expressions of opinion
non-actionable.Theanalysissuggestsarationale: itishardertodeterminethe
truth-valueofopinions,leadingtogreaterjudicialinaccuracyandmakingreg-
ulationlessvaluable.Itisalsopossiblethatthelawimplicitlyrecognizesthat
Electronic copy available at: https://ssrn.com/abstract=3452662
24 .V0N0
audiences are Bayesian, so that they inherently discount statements couched
in the form of an opinion. The other distinction involves regular defamatory
statements (pro-quod), and a category of per-se statements, which requires a
lower burden of proof. Per-se statements are allegations of criminal activity,
sexualmisconduct,contagiousdisease,orimproperbusinessdealings.Again,
our analysis offers a rationale: In such cases, the harm to the target and the
gain to the speaker may be especially high. Consequently, stricter protection
maybewarranted.
5.5 InformationRegulationinOtherSettings
Aswenotedintheintroduction,themodelpresentedinsections2and3has
keyfeatureswhicharepresentinmanycontexts, andwefocusedondefama-
tionlawduetoitscurrentimportance.Herewediscussthreeotherimportant
settingswherethesekeyfeaturesarepresent: lawenforcement,jurytrials,and
whistle-blowers.Thenwediscussanadditionalcontext,securitiesregulation,
wherethespeakerrevealsinformationaboutitself.Despitethisconceptualdif-
ference,thecurrentframeworkprovesilluminatinginconsideringtheoptimal
regulatoryframework.
5.5.1 BayesianPublicEnforcers Newsaboutcrimeswhichwerecommitted
after the police chose to ignore reports of abuse and other red flags are, un-
fortunately, not uncommon.10 At the same time, some people make false or
frivolousreportsaboutothers.11 Policeforceshavelimitedresources, sothey
needtoprioritizethecallstheyreceiveandfocusonthosetheyperceivetobe
mostcredible.
Onecanconceiveofthisdynamicassimilartotheonepresentedhere.Law
enforcerswhoreceivereportshavetoweighthecredibilityandtheimportance
ofeachclaim.Theydecidetotakeactiononlywhenitsexpectedbenefitsare
sufficientlylargegivenenforcementcosts.Assuch,enforcersactastheaudi-
ence. The person reporting the crime is akin to the speaker, and the alleged
criminalisthetarget.
Inthiscontext,punishingfalsereportshastheeffectofmakingreportsmore
credible, as in our analysis, and allowing law enforcers to more accurately
focustheirenforcementefforts.This,inturnhastheeffectofincreasingdeter-
renceby increasingthe opportunitycostto committingcrime(i.e. theanalog
of reducing δ ). However, if false reports are punished too severely, it will
G
have the effect of deterring truthful reports and, thus, lead to less than ideal
deterrenceoftheunderlyingcrime.
10. EmmaSnaith, Womankilledbyex-boyfriendafterpolicewerewarned18timesofhis
abuse,Independent(Aug.,16th,2019).JoelRose&BrakktonBooker,ParklandShootingSuspect:
AStoryOfRedFlags,Ignored,NPRNews(March,12018)
11. Swatting, e.g., is a practice of fraudulently reporting a bomb or other imminent threat
comingfromthevictiminordertohavepoliceforcesstormtheirresidence,sometimestotragic
ends
Electronic copy available at: https://ssrn.com/abstract=3452662
-- 25
5.5.2 Whistle-blowing Asimilardilemmaappliestowhistleblowers.TheUS
government sometimes issues rewards to whistleblowers (e.g., False Claims
Act and the IRS Whistleblower Law) in order to encourage them to report
wrongdoing despite their fears of retribution and informal sanctions (Givati,
2016). The concern is that rewards may incentivize false whistle-blowing
among people who face low costs and may also fail to appropriately incen-
tivize people with abnormally high costs. In analyzing this problem, one can
think of whistleblowers as speakers and law enforcement agencies as the au-
dience.Theagencydilemmaishowtosetrewardsandpenaltiesinawaythat
would allow for the effective transmission of private information without in-
volvingtoohighverificationandlitigationcosts.
5.5.3 Trials with Bayesian Juries Another potential application is liability
for the filing of false charges and frivolous lawsuits. Under the common law
tort doctrine of malicious prosecution a person who is falsely accused of a
crime may bring a lawsuit against the accuser. The harm here consists of a
false investigation and the reputational and dignitary harms that follow from
beingundercriminalinvestigation.Somewhatsimilarconcernsarisewiththe
filing of frivolous lawsuits, and under Rule 11 of the Federal Rules of Civil
Procedure,courtsmayimposefinancialliabilityonalitigant.Howwillingthe
courtsshouldbetoenforcemaliciousprosecutionclaimsorissuepenaltiesis
debated, because of concern that penalties may chill innocent victims of real
crimesfromcomingforward.
Theframeworkdevelopedhereisusefultotheanalysisofthesequestions,
especially because judges and jurors sometimes consider one’s record (even
whentheyoughtnotto)inassessingguiltorliability.Insuchcontexts,punish-
ingfrivolouslawsuitsmoderatelymayhavethe(additional)benefitofmaking
the trial process more accurate, and thereby amplify its deterrent effect by
increasing the opportunity cost of engaging in wrongdoing. Although many
additional dynamics can emerge in the trial context, especially in those re-
semblingthebilateralaccidentsframework,theimpactofpunishingfrivolous
lawsuits can be re-visited from the perspective provided here by analogizing
theplaintiff(orprosecutor)tothespeaker,thedefendanttothetarget,andthe
jurytotheaudience.
In fact, the framework provided in (Freidman & Wickelgren 2005) can be
usedtoevaluatetheoptimalpenaltiesinfightingfrivolousclaims.Intheirar-
ticle, Friedman and Wickelgren consider a context wherein jurors form be-
liefsregardingclaimsmadeagainstadefendantbasedontheevidencethatis
presented at trial. They use their setting to establish an upper bound on de-
terrence,buttheyalsofindthatthisupperbounddependsonthequalityofthe
evidencepresentedtojurors.Thefrequencyoffrivolousclaimsimpactstheac-
curacywithwhichjurorsformopinions,and,thus,reducingitoughttoincrease
theupperboundondeterrence.But,ofcourse,penalizingfrivolousclaimstoo
severely can have the impact of deterring legitimate claims, which will have
the opposite effect. Thus, as in our setting, the optimal penalty for frivolous
Electronic copy available at: https://ssrn.com/abstract=3452662
26 .V0N0
claimswouldhavetobemoderateandbalancethesetwoconsiderations.
5.5.4 Securities Regulation Public companies are required to disclose peri-
odical reports about their performance to the public. These reports affect the
propensityofinvestorstodealwiththereportingcompany,andthegoalofse-
curitiesregulationistoregulatetheaccuracyofthesereportsgiventheinherent
moralhazardcompanieshavetodistortinformation.
Thiscontextissimilartotheframeworkdevelopedhere,wheretheaudience
consistsofprospectiveinvestors, thecompanytakestheplaceofthespeaker,
and the regulator assumes the position of the target (in deciding whether to
bring a lawsuit).The question of optimal damages d, is akin to asking how
stricttheagencyshouldbeinitsenforcementofthelaw,aswellasthelevelof
finesthatitissues.Oneimmaterialdifferenceinthiscontextisthatthespeaker
makesstatementsaboutitself,ratherthananotherparty.Thesecondandrelated
differenceisthatthespeaker-companywouldnormallynotwanttodisparage
itself;rather,itwouldseektopraiseitself.Thisdifference,however,haslittle
analyticalsignificance,asitsimplyinvolvesreversingthelabelsinourinitial
analysis.
Applying the framework at hand to securities regulation could reveal, for
example,whystrictandlaxenforcementisinferiortomoremoderateenforce-
ment. It could also be useful in highlighting the importance of making infor-
mation revealed by companies actionable and the conditions under which it
is desirable to do so. Yet another potential insight concerns the importance
of understanding judicial competency in any given area of disclosure and its
relevancetothelevelofinformationregulation.
6. Conclusion
Thelawregulatesinformationdisseminationinavarietyofcontexts.Work
in this area has tended to focus on the effect of such regulation on speakers
and their targets, and has not paid much attention to audience effects. In this
articlewehighlighttheimportanceofaudienceeffectsbyshowingthatinthe
presenceofBayesianaudiences,stricterregulationofinformationmayjeopar-
dizeitsvalue.Whilelaxregulationresultsinnon-credible“cheaptalk,”strict
regulationcanresultinequallyuninformative“overpricedtalk.”
7. Appendix
Proof of Proposition 2 The proof begins with part (ii), which is used in
provingpart(i).
(ii)Weproceedbydemonstratingthattheonlyequilibriawheretheactions
of the audience are not described by a∗(z) = z for all z are (1) those where
theaudienceendsupalwaysinteractingwhenγ > x,and(2)thosewherethe
(cid:98)
audienceendsupneverinteractingwhenγ <x.
(cid:98)
(1)γ <x:
(cid:98)
Suppose there is a PBE where a∗(z) = 0 for all z. Then, x∗,x∗ (cid:62) x per
0 1 (cid:98)
R1. But,ifµ=i∈{0,1},thenitimmediatelyfollowsthatΓ(t=G|i,s∗)=
Electronic copy available at: https://ssrn.com/abstract=3452662
-- 27
γ < x (cid:54) x∗,whichisaviolationofR4.Ontheotherhand,ifµ(s∗) ∈ (0,1),
(cid:98) i
observethat, perR4, x∗ > γ impliesthatx∗ < γ, becausex∗(1−µ(s∗))+
0 1 0
x∗µ(s∗) = γ. Thus, x∗ (cid:62) x > γ implies that x > γ > x∗, which is a
1 0 (cid:98) (cid:98) 1
contradictionwithR1’simplicationthatx∗ (cid:62)x.
1 (cid:98)
Suppose there is a PBE where a∗(z) = 1 − z for all z. Then, per R3,
s∗(t,v) = 0 for all v and t, and, thus, the audience never interacts in such
assessments.
SupposethereisaPBEwherea∗(z) = 1forallz.Bydefinition,theaudi-
enceneverinteractsinsuchassessments.
(2)γ >x:
(cid:98)
SupposethereisaPBEwherea∗(z) = 0forallz.Bydefinition,theaudi-
encealwaysinteractsinsuchassessments.
Suppose there is a PBE where a∗(z) = 1 − z for all z, then per R3,
s∗(t,v) = 0 for all v and t, and, therefore, µ(s∗) = 0, which implies that
Γ(t = G|0,s∗) = γ.ThisimpliesviaR4thatx∗ = γ,which,inturnimplies
0
viaR1that a∗(0)=0,whichcontradictstheassumptionthata∗(0)=1.
Suppose there is a PBE where a∗(z) = 1for all z. If µ(s∗) = i ∈ {0,1},
then Γ(t = G|i,s∗) = γ, which implies via R4 that x∗ = γ. This implies
i
viaR1thata∗(i)=0,whichisacontradictionwiththeinitialsupposition.If,
on the other hand, µ(s∗) ∈ (0,1), observe that, per R4, x∗ (cid:54) γ implies that
0
x∗ (cid:62) γ, because x∗(1−µ(s∗))+x∗µ(s∗) = γ. Thus, x∗ (cid:54) γ implies that
1 0 1 0
x∗ (cid:62)γ >x,whichisacontradictionwiththeimplicationofR1thatx∗ (cid:54)x.
1 (cid:98) 1 (cid:98)
(1)and(2)togetherdemonstratethatallPBEwheretheactionsoftheaudi-
ence are not described by a∗(z) = z for all z involve the audience behaving
accordingtoitspriors.
(i)Considerdamagesd < l ,andsupposea∗(z) = z forallz.Itfollows
viarequirement2thatp∗(t) =
2qG
0forallt.Thus,R3impliesthats∗(t,v) = 1
for all v and t, and, therefore, x∗ = γ due to R4 . Thus, in equilibrium, the
1
audienceactsaccordingtoitspriors.
Next,considerdamagesd > 2v−l.ItfollowsperR2thatp∗(t) = 1.Thus,
2qB
per R3, s∗(t,v) = 0 for all v and t, because d > 2v−l. This implies via R4
that x∗ = γ. Thus, in equilibrium, the audience ac
2
ts
qB
according to its priors.
0 (cid:104) (cid:105)
The analysis of these two cases demonstrates that when d (cid:54)∈ l ,2v−l , in
2qG 2qB
all PBE where a∗(z) = z for all z, the audience acts according to its priors.
Inaddition,part(ii)ofthispropositiondemonstratesthattheaudienceactsac-
cordingtoitspriorsinallPBEwheretheaudience’sbehaviorisnotdescribed
(cid:104) (cid:105)
bya∗(z) = z.Thus,wheneverd (cid:54)∈ l ,2v−l ,theaudienceactsaccording
2qG 2qB
toitspriorsinallPBE.
(iii) Equilibria described (and whose existence are proven) in proposition
3-(i)andsection4.demonstratethatsuchdefamationlawsexistunderallcir-
cumstances.
ProofofProposition3(i)Considerdefamationlawswithd= 2v−l.Itcan
easilybeverifiedthattheassesmentwherea∗(z)=zforallz;x∗ =
2
1
qG
,x∗ =0;
(cid:26) (cid:26) 0 1
1 if t=B 0 fort=B
s∗(t,v) = forallv;andp∗(t) = sat-
0 if t=G 1 fort=G
Electronic copy available at: https://ssrn.com/abstract=3452662
28 .V0N0
isfiesR1-R4.Inthisequilibrium,thereisnolitigationbecauseifs∗(t,v)p∗(t)=
0foralltandv.
(ii)Whent=G,thisequilibriumleadstoatotalpay-offofr+g,andwhen
t = B,itleadstoatoalpay-offofv.Thesetwovaluesconstitutethehighest
pay-offs that can be generated (see, e.g., figure 1) conditional on the target
beingagoodtypeandabadtype,respectively,becauser+g >v >0>r−b.
Thus,therecanbenoPBEthatleadstohigherpay-off.
(cid:104) (cid:105)
(iii) Consider imprecise courts. If d (cid:54)∈ l ,2v−l , the audience acts ac-
2qG 2qB
cording to its priors in all equilibria as proven in proposition 2, and thus it
either always interacts, which leads to bad interactions with a probability of
1 − γ; or it never interacts, which leads to no interactions with good types
(cid:104) (cid:105)
withaprobabilityofγ.Ifd ∈ l ,2v−l , thesameresultholdsinallPBE
2qG 2qB
except, potentially, in PBE where a∗(z) = z for all z. Thus, consider next
the interaction probabilities in equilibria where a∗(z) = z for all z when
(cid:104) (cid:105)
d∈ l ,2v−l .
2qG 2qB
(cid:16) (cid:17)
(a)Supposed∈ l ,2v−l :
2qG 2qG
It follows per requirement 2 that p∗(G) = 1. Thus, per R3, s∗(G,v) =
1 if v >q d+ l
G 2 for all v. This implies that, with probability γ(1−
0 if v <q d+ l
G 2
F(q d+ l)) > 0, the audience does not interact with a good type in such
G 2
PBE(ifthereexistany).
(cid:16) (cid:105)
(b)Supposed∈ l ,2v−l :
2qB 2qB
It follows per R2 that p∗(B) = 1, and because d (cid:54) 2v−l it follows that
2qB
1 if v >q d+ l
s∗(B,v) = B 2 for all v < v. This implies that with
0 if v <q d+ l
B 2
probability (1−γ)F(q d+ l), the audience interacts with a good type in
B 2
suchPBE(ifthereexistany).
(c)Supposed= l :
2qG
Ifp∗(G) = 1, thesamestepsinpart(a)implythatwithprobabilityγ(1−
F(q d+ l)) > 0, the audience does not interact with a good type in such
G 2
PBE(ifthereexistany).Ifp∗(G) = 0,perR3,s∗(G,v) = 1forallv,which
impliesthattheaudienceneverinteractswithagoodtypeinsuchPBE(ifthere
existany).
Thus,inallPBEobtainedthroughmoderatedamageswherea∗(z) = z for
allz ,eithertheprobabilityofnointeractionwithagoodtypeispositive,the
probabilityofinteractionswithabadtypeispositive,orboth.
(iv) Let d = l . Consider an assessment where a∗(z) = z for all z, and
2qB
Electronic copy available at: https://ssrn.com/abstract=3452662
REFERENCES 29
p∗(G)=1 and p∗(B)=0(satisfiesR2)
(cid:26) 1 if v >q d+ l
s∗(G,v)= G 2 and s∗(B,v)=1(satisfiesR3);
where 0 if v <q d+ l
G 2
1−F(l{qG +1})
x∗ =1 and x∗ = 2qB 2 (satisfiesR4)
0 1 1−F(l{qG +1})+1−γ
It follows that lim x∗ = 0, and, thus, for all x, there exists qG <
2
π
qB
suf
2
fi-
γ
qG→π 1 (cid:98) qB
cientlycloseto q π B suchthatx∗ >x>x∗,whichguaranteesthattheassessment
0 (cid:98) 1
alsosatisfiesR1,andisthereforeaPBE.
ItfollowsthattheexpectedwelfareassociatedwiththisPBEis
q 1 q 1 l(q +q )
W(cid:99) =γ[F(l{ G + })(r+g)+(1−F(l{ G + }))E[v|v > G B ]]+(1−γ)E[v]
2q 2 2q 2 2q
B B B
(10)
whereE[.]referstoexpectedvalues.Itfollowsthat
lim W(cid:99) =γ(r+g)+(1−γ)E[v] (11)
qG→π
qB
If,x > γ,welfareobtainedinequilibriawheretheaudienceactsaccording
(cid:98)
toitspriorsisE[v],andifx<γ,thewelfareobtainedinequilibriawherethe
(cid:98)
audienceactsaccordingtoitspriorsr−b<0.Because,r+g >v,itfollows
that
lim W(cid:99) >E[v]>r−b (12)
qG→π
qB
Becausethefirstinequalityisstrict,thereexists qG <πsufficientlyclosetoπ
qB
suchthatW(cid:99)exceedsthewelfareobtainablewhentheaudienceactsaccording
to its priors. Thus, when courts are only slightly imprecise there is a PBE
associated with d = l which leads to greater welfare than PBE where the
2qB
audienceactsaccordingtotheirpriors.
References
1. Arbel, Yonathan A. and Mungan, Murat. 2019. The Uneasy Case for Ex-
pandingDefamationLaw.AlabamaLawReview1-999
2. Acheson, D. J.; Wohlschlegel, A. (2018). The economics of weaponized
defamationlawsuits.SouthwesternLawReview,47(2),335-384.
3.Be´nabou,Roland,andJeanTirole.2006.IncentivesandProsocialBehavior.
AmericanEconomicReview96.5,1652-1678.
4.Be´nabou,Roland,andJeanTirole.2011.LawsandNorms.NationalBureau
ofEconomicResearchNo.w17579.
5.Bar-Gill,OrenandAssafHamdani.2003.OptimalLiabilityforLibel.Con-
tributionsinEconomicAnalysis&Policy.2(1)
Electronic copy available at: https://ssrn.com/abstract=3452662
30 .V0N0
6. Buccirossi, Paolo, Giovanni Immordino, and Giancarlo Spagnolo. 2017.
Whistleblower Rewards, False Reports, and Corporate Fraud. CEPR Dis-
cussionPaperNo.DP12260
7. Crawford, Vincent and Sobel, Joel 1982. Strategic Information Transmis-
sion.Econometrica50,143151.
8. Dalvi, Manoj and James F. Refalo. 2007. An Economic Analysis of Libel
Law.EasternEconomicJournal.74-94
9. Depoorter, Ben and Jef De Mot. 2005. Whistle Blowing. Supreme Court
EconomicReview,2-28.
10.Deffains,BrunoandClaudeFluet.2019.SocialNormsandLegalDesign.
JournalofLaw,Econ.,andOrganizations1-31
11.Friedman,Ezra,andAbrahamL.Wickelgren.2005BayesianJuriesandthe
Limits to Deterrence. Journal of Law, Economics, and Organization 22.1:
70-86
12.Hemel,DanielandArielPorat.2019.FreeSpeechandCheapTalk.Journal
ofLegalAnalysis46-103
13. Garoupa, Nuno. 1999. Dishonesty and Libel Law The Economics of the
”Chilling”Effect,JITE284-300
14.Garoupa,Nuno.1999,TheEconomicsofPoliticalDishonestyandDefama-
tion,InternationalReviewofLawandEconomics167-180
15.Givati,Yehonatan.2016,ATheoryofWhistleblowerRewards,Journalof
LegalStudies43-72
16.Heymann,LauraA.2012.TheLawofReputation,andtheInterestofthe
Audience,B.C.L.Rev.1341-1999
17.McNamara,Lawrence.2007.ReputationandDefamation
18.Mungan,MuratC.2016.AGeneralizedModelforReputationalSanctions
and the (ir)Relevance of the Interactions between Legal and Reputational
sanctions.InternationalReviewofLawandEconomics46.86-92.
19. Polinsky, A. Mitchell, and Steven Shavell. 2007. The Theory of Public
EnforcementofLaw.HandbookofLawandEconomics1: 403-454.
20.Rasmusen,Eric.1996.Stigmaandself-fulfillingexpectationsofcriminal-
ity.TheJournalofLawandEconomics39(2)(1996),519-543.
21.Spence, Michael.1973.JobMarketSignaling.QuarterlyJournalofEco-
nomics87(3),355-374.
22.Steenson,Mike.PresumedDamagesinDefamationLaw.WilliamMitchell
LawReview40(4)(2014),1492-1542
Electronic copy available at: https://ssrn.com/abstract=3452662
REFERENCES 31
23.Renee´.Stulz,SecuritiesLaws,Disclosure,andNationalCapitalMarketsin
the age of Financial Globalization, Journal of Accounting Research, 2009,
v47(2),349-390.
Electronic copy available at: https://ssrn.com/abstract=3452662

---

## ssrn-3501175: 1_Arbel Shapira (Do Not Delete) 5/12/2020 5:51 PM
Year: 2020
Authors: Yonathan Arbel
Source: papers/ssrn-3501175/paper.txt

1_Arbel Shapira (Do Not Delete) 5/12/2020 5:51 PM
VANDERBILT LAW REVIEW
________________________________________________________________________
VOLUME 73 MAY 2020 NUMBER 4
________________________________________________________________________
ARTICLES
Theory of the Nudnik:
The Future of Consumer Activism and
What We Can Do to Stop It
Yonathan A. Arbel*
Roy Shapira**
How do consumers hold sellers accountable and enforce market norms?
This Article contributes to our understanding of consumer markets in three
ways. First, the Article identifies the role of a small subset of consumers—the
titular “nudniks”—as engines of market discipline. Nudniks are those who call
to complain, speak with managers, post online reviews, and file lawsuits.
Typified by an idiosyncratic utility function and certain unique personality
traits, nudniks pursue action where most consumers remain passive. Although
derided in courtrooms and the court of public opinion, we show that nudniks
* University of Alabama School of Law.
** Radzyner Law School, Interdisciplinary Center (“IDC”). We thank Ronen Avraham, Lisa
Bernstein, Matt Bruckner, Shahar Dillbary, Meirav Furth, Eric Goldman, Nancy Kim, Ronald
Krotozinsky, Stephen Laandsman, Ben McMichael, Colin Rule, Tony Sebok, Catherine Sharkey,
Steve Shavell, Rory Van Loo, and Eyal Zamir, as well as participants of conferences and workshops
at Berkeley, Chicago, DePaul, Emory, Haifa, IDC, Tel-Aviv, and Stanford for helpful comments
and discussions. McGavinn Brown, Bret Linley, Victoria Moffa, and Talya Yosphe provided
excellent research assistance. We collect examples of nudniks in action at our companion website,
Yonathan Arbel, Theory of the Nudnik, BATTLE FORMS (Feb. 1, 2019),
http://battleoftheforms.com/theory-of-the-nudnik/ [http://perma.cc/6GFS-JNTQ], and solicit
readers to contribute more examples.
929
Electronic copy available at: https://ssrn.com/abstract=3501175

<<PAGE_BREAK>>

1_Arbel Shapira (Do Not Delete) 5/12/2020 5:51 PM
930 VANDERBILT LAW REVIEW [Vol. 74:4:929
can solve consumer collective action problems, leading to broad market
improvements.
Second, the Article spotlights a disconcerting development: sellers’
growing usage of big data and predictive analytics allows them to identify
specific consumers as potential nudniks and then disarm or avoid selling to
them before they can draw attention to sellers’ misconduct. The Article therefore
captures an understudied problem with big data tools: sellers can use these tools
to shield themselves from market accountability.
Finally, the Article evaluates a menu of legal strategies that would
preserve the benefits of nudnik-based activism in light of these technological
developments. In the process, we revisit the conventional wisdom on the
desirability of form contracts, mandatory arbitration clauses, defamation law,
and standing doctrines.
INTRODUCTION ............................................................................... 931
I. HOW NUDNIKS AFFECT SELLER BEHAVIOR ......................... 935
A. Who Are the Nudniks? ............................................. 936
B. What Nudniks Do: Motivating Examples ................ 939
C. How Nudniks’ Activity Impacts Sellers ................... 944
1. Facilitating Introspection by Sellers ........... 945
2. Facilitating Legal and Reputational
Sanctions Against Sellers ............................. 947
D. Relation to the Extant Literature and
Limitations .............................................................. 950
1. From an “Informed Minority” to Nudniks ... 950
2. The Limits of Nudniks ................................. 957
II. HOW SELLERS REACT TO NUDNIKS: THE FUTURE OF
CONSUMER ACTIVISM .......................................................... 959
A. Targeting Nudniks ................................................... 960
1. Identifying Nudniks ..................................... 962
2. Disarming Nudniks ...................................... 965
B. The Implications of Targeting Nudniks .................. 968
1. Diluting Legal Deterrence ............................ 969
2. Diluting Reputational Deterrence ............... 971
III. HOW TO STOP THE FUTURE.................................................. 974
A. Why Legal Intervention Is Needed ........................... 975
B. Why Existing Modes of Intervention Are Less
Likely to Work .......................................................... 976
C. Proposed Solutions .................................................. 977
1. Lessons for Regulators ................................. 977
2. Lessons for Courts ........................................ 981
3. Lessons for Scholars ..................................... 984
Electronic copy available at: https://ssrn.com/abstract=3501175

<<PAGE_BREAK>>

1_Arbel Shapira (Do Not Delete) 5/12/2020 5:51 PM
2020] THEORY OF THE NUDNIK 931
D. On Optimizing (Rather than Maximizing) Nudnik
Behavior ................................................................... 985
CONCLUSION ................................................................................... 986
INTRODUCTION
Can consumers hold sellers accountable and enforce market
norms? This Article spotlights the disciplinary power of a small subset
of consumers, who we dub “nudniks.”1 Nudniks are those consumers
who call to complain, complete satisfaction surveys, demand to speak
with managers, post detailed online reviews, and file lawsuits. They
usually have an innate sense of justice, atypical motivations, or an
idiosyncratic utility function, which leads them to pursue action in
situations where most consumers remain passive. In courtrooms and in
the court of public opinion, nudniks are often derided as petty and
vindictive. Yet through their actions, nudniks direct attention to seller
underperformance, leading to a variety of legal and reputational
sanctions in ways that complement, and sometimes substitute, direct
legal intervention. The much-maligned nudniks can therefore generate
positive spillovers that reverberate throughout the economy.
Sellers, however, do not remain passive. They have long tried to
minimize the legal and reputational risks posed by nudniks. The advent
of big data and predictive analytics provides sellers with a game
changer: the ability to identify which consumer is a potential nudnik
(that is, which consumer is likely to complain publicly and draw
attention to seller underperformance), before that consumer even sets
foot in their store. Sellers can then silently disarm nudniks or avoid
selling to them altogether. This development benefits sellers, as it
reduces the legal and reputational risks from nudniks. It may even
benefit nudniks themselves, to the extent sellers disarm them by
offering them preferential treatment. Yet the development poses a large
risk to the greater consumer body, as it deprives consumers of a
valuable source of information on seller misbehavior, thereby reducing
the effectiveness of market discipline.
This Article’s first contribution is to explore the role of the
nudniks as engines of market discipline that complement legal
institutions. Its second contribution is to shed light on sellers’ growing
technological ability to circumvent nudniks and dilute market
1. The word nudnik derives from Yiddish. It can be roughly translated to “busybody” or
“nag.” LION KOPPMAN & STEVE KOPPMAN, A TREASURY OF AMERICAN-JEWISH FOLKLORE 232 (First
Jason Anderson Inc. 1998) (1996) (defining a nudnik as a “pest, gossip, or busybody”); LEO ROSTEN,
THE NEW JOYS OF YIDDISH 272 (Lawrence Bush ed., 2001) (defining a nudnik as “[a] pest, a nag,
an annoyer, a monumental bore”). For more on terminology, see infra Section I.A.
Electronic copy available at: https://ssrn.com/abstract=3501175

<<PAGE_BREAK>>

1_Arbel Shapira (Do Not Delete) 5/12/2020 5:51 PM
932 VANDERBILT LAW REVIEW [Vol. 74:4:929
discipline. The Article’s third contribution is to propose and evaluate
legal strategies that would protect the ability of nudniks to continue
generating valuable information on seller behavior.
To illustrate the nudnik phenomenon, consider the case of Ben
Edelman, a Harvard Business School professor. When Professor
Edelman ordered takeout from Sichuan Garden, a local Chinese
restaurant, he compared the prices on the receipt to the prices on the
online menu and discovered he was overcharged by $4. Annoyed,
Edelman sent a complaint through the restaurant’s website, which he
then followed with an email. The owner responded that although the
website was not regularly updated, the current prices were accurately
printed on the in-restaurant menus. Although the owner stated that he
would fix the error, the correspondence suggests that he did not offer
Edelman compensation for the overcharge.2 In response, Edelman
demanded that he be compensated $12 for the mishap, citing a local
consumer protection law that trebles damages for unfair business
practices.3 When the owner refused, Edelman complained to the
relevant regulator. Eventually the overcharging story reached local
media. The public response largely mocked Edelman’s insistence as
petty and privileged.4 It failed to recognize the important public service
Edelman provided: namely, deterring overcharging. Nor did the public
appreciate the fact that one has to be idiosyncratic to provide such a
public good. The opportunity cost of the time Edelman spent
complaining dwarves the $12 he sought. If it were not for people like
Edelman who go to the trouble, restaurants would have a much easier
time systematically overcharging us all.5
Whereas the legal literature has largely neglected the effects of
such nudnik-consumers,6 commercial firms have long invested
2. Hilary Sargent, Ben Edelman, Harvard Business Professor, Goes to War over $4 Worth of
Chinese Food, BOS. (Dec. 9, 2014), https://www.boston.com/culture/restaurants/2014/12/09/ben-
edelman-harvard-business-school-professor-goes-to-war-over-4-worth-of-chinese-food
[https://perma.cc/Y842-L7S5].
3. MASS. GEN. LAWS ch. 93A, § 9 (2019).
4. Elizabeth Barber, A Harvard Professor Launched an Epic Rant over an Extra $4 on his
Chinese Takeout Bill, TIME (Dec. 10, 2014), http://time.com/3627282/harvard-professor-chinese-
takeout-ben-edelman/ [https://perma.cc/G3P6-RYRM].
5. On March 1, 2019, we put on our investigative reporter hats and called the restaurant to
inquire about the entrée pricing, and we found that the prices indicated on the website match
exactly those offered by the restaurant. Telephone interview with Victoria Moffa, Research
Assistant, Univ. of Ala. (Mar. 1, 2019).
6. To the extent that legal scholars have touched these issues, it was usually within the
context of how the haves assert their rights more than the have-nots. In other words, existing
treatments focus on how sociodemographic differences between those who complain and those that
do not suppress the voices and concerns of marginalized groups. See, e.g., Amy J. Schmitz, Access
to Consumer Remedies in the Squeaky Wheel System, 39 PEPP. L. REV. 279 (2012); Lauren E. Willis,
Performance-Based Consumer Law, 82 U. CHI. L. REV. 1309, 1326 (2015).
Electronic copy available at: https://ssrn.com/abstract=3501175

<<PAGE_BREAK>>

1_Arbel Shapira (Do Not Delete) 5/12/2020 5:51 PM
2020] THEORY OF THE NUDNIK 933
resources in identifying and minimizing their risks. Indeed, a rich
literature in marketing explores consumer complaining behavior and,
in particular, how to handle serial complainers.7 In recent years, sellers
have enjoyed a breakthrough in their ability to target and disarm
nudniks. Rather than dealing with nudniks as they complain, sellers
can use big data and predictive analytics to identify which of their
consumers are nudniks long before the nudniks even buy from them.
The early identification allows sellers to effectively silence these
nudniks by offering preferential treatment or avoiding servicing them
altogether. In other words, new technological tools allow sellers to
dampen the flow of negative information to the market and reduce the
risk of legal and reputational sanctions.
In this sense, the Article dovetails with the burgeoning legal
literature on big data and personalized contracts. The existing
literature has focused either on the promise of tailoring services to each
consumer’s preferences or on concerns with privacy and
discrimination.8 In other words, the scholarship focuses on efficiency
and fairness considerations as they affect the individual receiving
personalized treatment. In contrast, this Article focuses on third-party
effects. As we show, these tools are increasingly effective at allowing
firms to escape market accountability.
The Article proceeds in three parts. Part I explains who the
nudniks are, what they do, and how they can, in some cases, generate
significant social benefits. Drawing on a number of examples, we show
that nudniks can effectively solve some of the collective action problems
that plague consumer markets; they take action even when a cold cost-
benefit analysis counsels inaction. We note that some of the nudniks’
actions can be frivolous or focus on parochial interests and that more
research is needed to identify the exact conditions under which nudniks
provide the most value. Yet, drawing on studies in the consumer
complaining behavior literature, we show why the impact that nudniks
have on seller behavior cannot be dismissed as immaterial or
predominately negative. Rather, the existing evidence indicates that
nudniks impose considerable market discipline. Traditional theories of
7. See infra Part I. Note, for example, the calls in the marketing literature to study nudniks
so “that businesses could identify individuals with this proclivity and steer them away from their
establishments.” RICHARD L. OLIVER, SATISFACTION: A BEHAVIORAL PERSPECTIVE ON THE
CONSUMER 402 (2d ed. 2015).
8. See Gerhard Wagner & Horst Eidenmüller, Down by Algorithms? Siphoning Rents,
Exploiting Biases, and Shaping Preferences: Regulating the Dark Side of Personalized
Transactions, 86 U. CHI. L. REV. 581 (2019); infra note 193.
Electronic copy available at: https://ssrn.com/abstract=3501175

<<PAGE_BREAK>>

1_Arbel Shapira (Do Not Delete) 5/12/2020 5:51 PM
934 VANDERBILT LAW REVIEW [Vol. 74:4:929
market discipline focus on consumers who read contracts.9 But recent
empirical studies suggest that very few consumers actually read
contracts.10 Thus, it will be productive for scholars and policymakers to
shift focus from those who read to those who complain. While serial
readers are almost mythical creatures, serial complainers are very real.
Part II switches attention from nudniks to the firms that deal
with them. This Part emphasizes the disconcerting development of
sellers’ ability to identify and target nudniks earlier in the transaction
process. The earlier targeting limits the positive spillovers from
nudniks’ complaints. Part II therefore dovetails with the longstanding
legal literature on private versus public resolution of disputes:
settlement versus trial, secrecy versus openness, and so on. While the
extant literature focuses on what happens when the consumer is in the
“claiming” stage (say, after she files her complaint), we show that new
technological tools allow sellers to dismiss the issue much earlier.11 The
ability to dissolve potential conflicts earlier may save some
administrative costs, but it comes at the expense of legal and
reputational deterrence. When a dissatisfied consumer posts a detailed
review online, the information may be forever etched in the internet’s
memory, even if the consumer is later appeased. When the consumer
files a lawsuit, even if it is later settled, the filing leaves a public trail.
Prospective consumers and information intermediaries, such as
investigative reporters and consumer watchdogs, are able to pick up
these public indications of seller misbehavior and use them to inform
consumer decisions. By contrast, when the seller knows which
consumers are likely to post reviews and file complaints, and targets
these specific complainers before they even form their claims, this
aspect of reputational deterrence is undermined.
Part III develops legal strategies that would preserve nudnik-
based activism in light of these emerging technological threats. Unlike
most law and economics analyses, which invoke the prospect of
reputational deterrence as justification for scaling back legal
intervention, we argue that legal intervention may be required to
facilitate reputational deterrence. Permitting sellers to silence
complainers before their complaints reach the market weakens the
9. See, e.g., Alan Schwartz & Louis L. Wilde, Intervening in Markets on the Basis of Imperfect
Information: A Legal and Economic Analysis, 127 U. PA. L. REV. 630 (1979) (arguing that a
minority of consumers who read can enforce market discipline).
10. See Ian Ayres & Alan Schwartz, The No-Reading Problem in Consumer Contract Law, 66
STAN. L. REV. 545 (2014). On the critiques of the Informed Minority Theory, see infra notes 87–
106.
11. For the “naming, blaming, claiming” typology, see William L.F. Felstiner et al., The
Emergence and Transformation of Disputes: Naming, Blaming, Claiming . . . , 15 LAW & SOC’Y
REV. 631 (1980).
Electronic copy available at: https://ssrn.com/abstract=3501175

<<PAGE_BREAK>>

1_Arbel Shapira (Do Not Delete) 5/12/2020 5:51 PM
2020] THEORY OF THE NUDNIK 935
functionality of the market for sellers’ reputations. This Part shows why
existing frameworks for regulating big data and scoring algorithms are
ill-equipped to deal with the particular problem of nudnik targeting. We
then sketch concrete strategies for judges, regulators, and legislators,
such as relaxing standing requirements, amending defamation laws, or
closing loopholes in the Consumer Review Fairness Act.12
We conclude by reflecting on some of the broader lessons, such
as the underappreciated dangers of personalizing contracts. Bottom-up
market discipline is an essential part of functioning markets, yet it
remains understudied in the legal literature. We seek to highlight one
specific aspect of market discipline, namely, how it benefits from the
efforts of a small subset of consumers. This aspect makes market
discipline vulnerable to technologies that allow the accurate and early
targeting of these consumers.
I. HOW NUDNIKS AFFECT SELLER BEHAVIOR
What makes a certain consumer a nudnik? And what is it exactly
that nudniks do—how do they affect seller behavior? This Part defines
nudniks and clarifies the role they play in enabling consumer markets
to function effectively.
Section A defines nudniks by juxtaposing them with prototypical
consumers. Nudniks are unlike the majority of consumers, who remain
passive both before entering a transaction (e.g., not reading the terms
of the contract) and after it (e.g., not noticing seller underperformance
or noticing but doing nothing about it). Nudniks also differ from other
active consumers in that their activism does not come from shopping for
the best deal ex ante but rather from demanding that their
transactional expectations be met ex post.13 To further underscore the
unique characteristics of nudniks, Section B provides motivating
examples of nudniks in action. Section C then categorizes the various
channels through which nudniks express their dissatisfaction with
sellers. Nudniks often voice their concerns about the seller publicly—
for example, by filing a lawsuit, posting a detailed negative review
online, or enlisting the help of the media. As a result, nudniks’ actions
draw the attention of other market players, setting a reputational
sanction in motion and deterring seller misbehavior. Section D homes
12. Consumer Review Fairness Act of 2016, Pub. L. No. 114-258, 130 Stat. 1355 (to be codified
at 15 U.S.C. § 45b).
13. Transactional expectations are the full set of expectations that consumers form about the
transaction. These expectations are informed by the contract, but also by seller representations,
advertisements, seller reputation, background knowledge, and life experience. See infra notes 112–
113 and accompanying text.
Electronic copy available at: https://ssrn.com/abstract=3501175

<<PAGE_BREAK>>

1_Arbel Shapira (Do Not Delete) 5/12/2020 5:51 PM
936 VANDERBILT LAW REVIEW [Vol. 74:4:929
in on the deterrence point by comparing our theory of the nudnik with
prevalent theories of market discipline and considering some of their
limitations. One key observation is that nudniks pressure sellers not
just to honor their contractual commitments but also to go beyond the
contract and meet supracontractual expectations.
A. Who Are the Nudniks?
What do we mean by “nudnik”? The term derives from Yiddish
and can be translated as “a bore, a nag, a jerk,” or a “busybody” and a
“pest.”14 We chose this term for our purposes precisely because it is
relatively unfamiliar. The abovementioned familiar terms carry strong,
negative connotations, whereas we wish to employ “nudnik” as a
judgment-neutral description of a certain type of consumer: one who is
constantly active in vindicating violations of her transactional
expectations of the seller.
A nudnik is someone who demands to speak with the manager,
writes an angry letter to the editor, or brings a lawsuit over a torn pair
of pants that cost $40. More precisely, the definition of “nudnik” for our
purposes is two-pronged: (1) an active consumer, (2) who acts even when
a cold cost-benefit analysis suggests otherwise. Nudniks act even when
others conclude that “it’s not worth it” because they possess an
idiosyncratic utility function. Nudniks therefore belong to a broader
category that the socioeconomic literature dubs “willing punishers”:
individuals who are willing to incur personal costs in order to punish
others who misbehave.15
Consider first the “active consumers” prong. Nudniks are unlike
the overwhelming majority of consumers, who regularly remain
passive.16 These passivists—which is to say, most of us—engage with
14. KOPPMAN & KOPPMAN, supra note 1, at 232 (“[A] pest, gossip, or busybody.”); Nudnik,
WIKTIONARY, https://en.wiktionary.org/wiki/nudnik (last visited May 7, 2020)
[https://perma.cc/NB7R-RTUS] (“[A] bore, a nag, a jerk.”). On the long line of terms from the “legal
Yiddish” family tree, see Alex Kozinski & Eugene Volokh, Lawsuit, Shmawsuit, 103 YALE L.J. 463
(1993).
15. See Elinor Ostrom, Collective Action and the Evolution of Social Norms, 14 J. ECON.
PERSP. 137, 142 (2000) (discussing how certain individuals are “willing punishers”: they engage in
costly sanctions to facilitate social control).
16. The marketing literature has long documented that most consumers remain passive.
LEON G. SCHIFFMAN & JOSEPH WISENBLIT, CONSUMER BEHAVIOR 421 (11th global ed. 2015)
(“Research indicates that only a few unsatisfied customers actually complain.”); TECH. ASSISTANCE
RESEARCH PROGRAMS, U.S. OFFICE OF CONSUMER AFFAIRS, CONSUMER COMPLAINT HANDLING IN
AMERICA: A FINAL REPORT (1979) [hereinafter TARP]; Stephen S. Tax & Stephen W. Brown,
Recovering and Learning from Service Failure, 40 MGMT. REV. 75, 77 (1988) (finding that ninety
percent of consumers do not complain); Clay M. Voorhees et al., A Voice from the Silent Masses:
An Exploratory and Comparative Analysis of Noncomplainers, 34 J. ACAD. MARKETING SCI. 514,
514 (2006) (“The majority of dissatisfied customers fail to complain.”).
Electronic copy available at: https://ssrn.com/abstract=3501175

<<PAGE_BREAK>>

1_Arbel Shapira (Do Not Delete) 5/12/2020 5:51 PM
2020] THEORY OF THE NUDNIK 937
the product and service only at a basic level, both ex ante (when
shopping) and ex post (when feeling dissatisfied with the service or
product). When problems arise—the contractor did not show up on time,
the fridge is less energy efficient than advertised, or the medical bill
includes an unidentified small charge—the passivists may not notice,
or may notice but do nothing about it. At most, the passivist will refrain
from buying the same product again, passive-aggressively mention to
the contractor that he was expected earlier, or note her disappointment
to her immediate surroundings. As one marketing textbook
summarizes: “Consumers do not do anything, in the main, in response
to consumption.”17
Why are so few consumers active? Many factors contribute to
passivism, including the opportunity cost of spending time to complain,
conflict aversion, personality type, and ignorance about one’s rights.18
Importantly, remaining a passive consumer and free riding others’
efforts is often the rational thing to do—another example of the well-
documented rational apathy phenomenon we see with voters and
investors.19 After all, standing up for one’s rights comes at immediate
costs. It involves social discord and may require a considerable
investment of time and effort.20 The benefits of taking such action, by
contrast, are uncertain. The seller may not yield to the consumer’s
demands, and even if she does, the value of remedial action may not be
significant. In sum, the value of an uncertain replacement of a product
one complains about is often outweighed by the certain investment of
time and effort complaining.21
For most of us, what Ben Edelman did defies logic. The
opportunity cost of the time that Professor Edelman—a well-paid
speaker and consultant22—spent corresponding with the restaurant
17. OLIVER, supra note 7, at 385; see also John W. Huppertz, Firms’ Complaint Handling
Policies and Consumer Complaint Voicing, 24 J. CONSUMER MARKETING 428, 428 (2007).
18. See, e.g., Robin M. Kowalski, Complaints and Complaining: Functions, Antecedents, and
Consequences, 119 PSYCHOL. BULL. 179 (1996) (examining how different personality types
experience the lodging of complaints); Marsha L. Richins, A Multivariate Analysis of Responses to
Dissatisfaction, 15 J. ACAD. MARKETING SCI. 24 (1987).
19. On rational apathy among consumers, see William M. Landes & Richard A. Posner, The
Private Enforcement of Law, 4 J. LEGAL STUD. 1, 33 (1975), and Roger Van den Bergh & Louis
Visscher, The Preventive Function of Collective Actions for Damages in Consumer Law, 1 ERASMUS
L. REV. 5 (2008).
20. For a review of the marketing literature on the costs and benefits of complaints, see
Huppertz, supra note 17, at 429–30. To illustrate, in a study of 149 dissatisfied consumers who did
not complain, shortage of time was the leading professed reason for inaction. Voorhees et al., supra
note 16, at 519.
21. Huppertz, supra note 17, at 429–30.
22. See Biography, BEN EDELMAN, http://www.benedelman.org/bio/ (last visited May 7, 2020)
[https://perma.cc/45ZJ-HW73]; CV of Benjamin G. Edelman, BEN EDELMAN,
http://www.benedelman.org/cv.pdf (last visited May 7, 2020) [https://perma.cc/Z3JB-HR8V].
Electronic copy available at: https://ssrn.com/abstract=3501175

<<PAGE_BREAK>>

1_Arbel Shapira (Do Not Delete) 5/12/2020 5:51 PM
938 VANDERBILT LAW REVIEW [Vol. 74:4:929
was well in excess of the $12 he sought. For nudniks, however, spending
the time to assert their claim is simply the right and natural thing to
do.
This brings us to the second prong in the nudnik definition—
their unique makeup. These crusading consumers tend to share certain
values and innate personality traits. Studies in consumer psychology
find that certain consumers have traits that make them more “eager to
complain . . . while others . . . simply hate the idea of complaining.”23
Some of the serial complainers are simply more assertive and
aggressive than the rest of us.24 Others have a strong level of
“commitment,” meaning they hold certain things as extremely
important or, more concretely, have a strong innate belief that contracts
should be honored.25 Still others operate on spite: they are more prone
than others to feel that a seller providing inferior service or a defective
product is disrespecting them. In all, nudniks are consumers who
possess what an economist might call an “idiosyncratic utility
function”:26 they are not wired like the rest of the consumer body. For
most of us, spending hours fighting a $4 overcharge is not worth our
time; for nudniks, it comes instinctively—it is the “rational” thing to do.
Nudniks, then, are active. Yet not all active consumers are
nudniks. Within the category of active consumers, there are different
varieties.27 Some consumers are active in the sense that they take time
to read and understand each term in the contract. These consumers are
active shoppers, comparing not just the price and quality of the good or
service, but also the terms of the transaction.28 They will not fly with a
certain airline if it does not regularly compensate for delays and will
not go to car dealerships that do not offer warranties.
23. Min Gyung Kim et al., The Relationship Between Consumer Complaining Behavior and
Service Recovery: An Integrative Review, 22 INT’L. J. CONTEMP. HOSP. MGMT. 975, 978 (2010).
24. Richins, supra note 18, at 25 (“[C]onsumer assertiveness and aggression have recently
been recognized as correlates of complaint behavior.”).
25. See Nancy Stephens & Kevin P. Gwinner, Why Don’t Some People Complain? A Cognitive-
Emotive Process Model of Consumer Complaint Behavior, 26 J. ACAD. MARKETING SCI. 172, 178
(1998).
26. See, e.g., Michael H. Riordan, Contracting in an Idiosyncratic Market, 14 BELL J. ECON.
338 (1983). To be sure, some nudniks may be motivated by material gains—compensation, future
discount, or “freebies”—but as the Edelman example illustrates, the value of the (private) gain
often pales in comparison to the effort required to earn it.
27. In a recent symposium on the future of private law, we offered a classification of various
consumer types and how they relate to consumer activism. See Yonathan A. Arbel & Roy Shapira,
Consumer Activism: From the Informed Minority to the Crusading Minority, 69 DEPAUL L. REV.
(forthcoming 2020) (on file with authors).
28. Such “shoppers” are usually the focus of economic theories of search behavior. See, e.g.,
Sara Fisher Ellison, Price Search and Obfuscation: An Overview of the Theory and Empirics, in
HANDBOOK OF ECONOMICS RETAILING & DISTRIBUTION 287 (Emek Basker ed., 2016) (discussing
price search and its equilibrium effects).
Electronic copy available at: https://ssrn.com/abstract=3501175

<<PAGE_BREAK>>

1_Arbel Shapira (Do Not Delete) 5/12/2020 5:51 PM
2020] THEORY OF THE NUDNIK 939
Unlike these shoppers, nudniks do most of their work post-
consumption. Rather than focusing on shopping for better contracts,
nudniks focus on enforcement. Whenever they feel wronged, nudniks
fight back, even when other types of active and sophisticated consumers
would not bother. To be sure, there is bound to be some categorical
overlap: some nudniks are also sophisticated and shop aggressively
before they purchase. But many nudniks often choose a product based
on a superficial comparison, the way most passivists do. This cursory
shopping effort does not preclude the nudnik from exerting maximum
effort when the product fails to meet her expectations.29
Nudniks are therefore part of the small subset of private
enforcers. A classic example here is class action plaintiffs (or, more
generally, “private attorneys general”),30 who through their
enforcement action can generate market discipline. Private attorneys
general are, in a sense, bounty hunters: they pursue action only when
a cold cost-benefit analysis justifies it. If the costs of collecting their
bounty become high—think, for example, about the recent rise of
mandatory arbitration clauses and class action waivers31—bounty
hunters stop enforcing. Nudniks, by contrast, fight against seller
underperformance almost instinctively, even at a personal cost, because
it is “in their blood.” As such, nudniks can fill important gaps in legal
and market discipline.
B. What Nudniks Do: Motivating Examples
To provide some context for the nudnik phenomenon, let us
consider a few cases of nudniks in action and then highlight several
recurring themes.
Consider first the case of Hasan Syed, a Chicago businessman.
In 2013, British Airways lost Syed’s father’s luggage en route to Paris.32
29. On acting based on violated expectations see infra note 112 and accompanying text; see
also Ayres & Schwartz, supra note 10, at 550–51 (noting that consumers often have a good grasp
of some of the terms that govern their relationship with sellers, even without reading their
contract). Note that sophistication often leads to negative spillovers and cross-subsidies from less
sophisticated consumers. See generally Peter A. Alces & Jason M. Hopkins, Carrying a Good Joke
Too Far, 83 CHI.-KENT L. REV. 879, 890 (2008); Xavier Gabaix & David Laibson, Shrouded
Attributes, Consumer Myopia, and Information Suppression in Competitive Markets, 121 Q.J.
ECON. 505 (2006); Amy J. Schmitz, Remedy Realities in Business-to-Consumer Contracting, 58
ARIZ. L. REV. 213, 238–39 (2016). With nudniks, by contrast, partly because the activity is done at
the enforcement stage, the possibility of positive spillovers (as in drawing others’ attention) is
greater.
30. See, e.g., Bryant Garth et al., The Institution of the Private Attorney General: Perspectives
from an Empirical Study of Class Action Litigation, 61 S. CAL. L. REV. 353, 355 (1988).
31. See AT&T Mobility LLC v. Concepcion, 563 U.S. 333, 349 (2011).
32. See Angry Traveler Pays Big Bucks for Tweet, CNN MONEY, https://money.cnn.com/
video/news/2013/09/04/n-british-air-twitter-war-mclaughlin.cnnmoney/index.html (last visited
Electronic copy available at: https://ssrn.com/abstract=3501175

<<PAGE_BREAK>>

1_Arbel Shapira (Do Not Delete) 5/12/2020 5:51 PM
940 VANDERBILT LAW REVIEW [Vol. 74:4:929
Annoyed, Syed took his grievance to social media, where he tweeted the
following:
This otherwise common tweet had one uncommon twist: as seen
in the bottom left, the tweet was promoted by Syed. Syed paid Twitter
$1,000 to have this tweet and similar ones broadcasted to over seventy
thousand potential British Airways consumers.33 In a short time, the
wide exposure of his tweets drew the attention of mass media outlets,
which exponentially increased the exposure. Syed’s efforts in airing his
grievances received their own term: “complaintvertising.”34 His
guerrilla campaign bore fruit: British Airways located the luggage,
hand-delivered it to his dad in Paris, and issued a public apology.35 Syed
declared victory,36 while the company suffered substantial losses, and
its mishandling of Syed’s original claim is now studied by marketing
scholars and practitioners.37
Similar tactics were used by Eugene Mirman, a comedian
annoyed with Time Warner Cable because they twice failed to show up
for their installation appointment. Like Syed, Mirman invested in
widely disseminating his grievances. He took out a full-page
advertisement in the New York Press, where he mocked the company’s
policy of failing to notify customers of rescheduled appointment times:
“Did Stalin ever call people before he arrested them and sent them to
May 7, 2019) [https://perma.cc/73JT-PVXK] (reporting that Syed acknowledged his tweet as an
ad).
33. Hasan Syed (@HVSVN), TWITTER (Sept. 3, 2013, 3:46 PM), https://twitter.com/HVSVN/
status/375026963347304449 [https://perma.cc/X5FH-6ERR]; see also Kevin Foresti (@Kforesti),
TWITTER (Sept. 4, 2013, 9:08 AM), https://twitter.com/Kforesti/status/375289284276006912
[https://perma.cc/PF7J-FXZN].
34. Jason King, Complaintvertising: Word of Mouth’s Evil Twin, HUFFINGTON POST (Oct. 23,
2013, 1:14 PM), https://www.huffingtonpost.com/jason-king/complainvertising-word-of_b_4143073
[https://perma.cc/EZ8M-2NPV].
35. See Angry Traveler Pays Big Bucks for Tweet, supra note 32.
36. Hasan Syed (@HVSVN), TWITTER (Sept. 3, 2013, 9:56 PM), https://twitter.com/HVSVN/
status/375120159477755904 [https://perma.cc/WRB6-5HVV].
37. See, e.g., Gisèlede Campos Ribeiro et al., The Determinants of Approval of Online
Consumer Revenge, 88 J. BUSINESS RES. 212 (2018).
Electronic copy available at: https://ssrn.com/abstract=3501175

<<PAGE_BREAK>>

1_Arbel Shapira (Do Not Delete) 5/12/2020 5:51 PM
2020] THEORY OF THE NUDNIK 941
die in Siberian work camps? No! Why should Time Warner Cable have
a policy that is any different from Stalin’s?”38
The Syed and Mirman examples showcase the idiosyncratic
utility function emblematic of nudniks. Both were willing to invest time,
effort, and valuable resources—at least $1,000 in Syed’s case—to widely
disseminate their dissatisfaction, even though such an outlay far
outweighs the remedy they sought (getting the bag back or having the
cable guy show up on time). Syed was perhaps motivated by spite. With
Mirman, the idiosyncratic utility function probably stemmed from the
unique private benefits he gets from complaining publicly: his strong
interest in publicity.39 Others invest money to raise public awareness of
product and service issues because of their personal ideology. A case in
point is drywall pioneer and multimillionaire Phil Sokolof, who suffered
a heart attack at a young age and decided to spend millions on public
campaigns against the “McDonald’ses” of the world for using too much
fat in their products.40 Public opinion polls showed that Sokolof’s
campaign got people to frequent the restaurants he targeted less and
eventually got the restaurants to change their products.41
Not all nudniks have money to purchase ads in national
newspapers. Some air their grievances by singing. When country music
artist Dave Carroll was frustrated with United Airlines for mishandling
and breaking his favorite guitar, he wrote a song and uploaded it to
38. Eugene Mirman, My Letter to Time Warner Cable, EUGENE MIRMAN (May 25, 2011),
http://www.eugenemirman.com/news/2015/5/19/my-letter-to-time-warner-cable [https://perma.cc/
JQQ8-TLHM]. Mirman’s efforts attracted attention, as they were reported on in the media. See,
e.g., Megan Angelo, This Guy Just Took Out a Full Page Ad to Tell Time Warner How Much They
Suck, BUS. INSIDER (May 26, 2011, 3:46 PM), https://www.businessinsider.com/time-warner-cable-
eugene-mirman-ad-2011-5 [https://perma.cc/XZJ6-HCVC].
39. To be sure, the examples we use throughout this piece illustrate that there is no one
“classic” format of a nudnik: for some, the private benefits play a bigger role than for others. For
all of them, though, the cold cost-benefit calculation works differently than for most other
consumers.
40. Businessman Takes Out Ad Against Fast-Food Fat, DESERET NEWS (Apr. 5, 1990),
https://www.deseret.com/1990/4/5/18854935/businessman-takes-out-ad-against-fast-food-fat
[https://perma.cc/JT57-SPA4]; Marcella S. Kreiter, Group Accuses McDonald’s of ‘Poisoning’
America, UNITED PRESS INT’L (Apr. 4, 1990), https://www.upi.com/Archives/1990/04/04/Group-
accuses-McDonalds-of-poisoning-America/3593639201600/ [https://perma.cc/NWB2-9UV7].
41. See Scott Hume, Fast-Food Faces Wary Public, ADVERT. AGE, July 2, 1990, at 1 (noting
the decline in people willing to frequent these restaurants). Shortly after the aforementioned
public opinion polls, McDonald’s announced the switch from animal fat to vegetable oil for its fries.
For reviews of Sokolof’s campaign that include criticisms and objections, see Ronald J. Adams &
Kenneth M. Jennings, Media Advocacy: A Case Study of Philip Sokolof’s Cholesterol Awareness
Campaigns, 27 J. CONSUMER AFF. 145 (1993), and Malcolm Gladwell, McDonald’s Broke My Heart,
REVISIONIST HIST., http://revisionisthistory.com/episodes/19-mcdonalds-broke-my-heart (last
visited May 7, 2020) [https://perma.cc/YD77-4JCC].
Electronic copy available at: https://ssrn.com/abstract=3501175

<<PAGE_BREAK>>

1_Arbel Shapira (Do Not Delete) 5/12/2020 5:51 PM
942 VANDERBILT LAW REVIEW [Vol. 74:4:929
YouTube.42 His “United Breaks Guitars” song went viral, reaching
number one on the iTunes Music Store and earning over nineteen
million views as of this writing.43 Here as well, mainstream media
picked up the story and widely publicized it. United suffered a huge
reputational hit; some estimated that the incident led to a ten percent
decline in its market capitalization.44 Beyond compensating Carroll,
United reacted by committing to change its customer service policy, and
it now uses Carroll’s video in its internal trainings.45
Nudniks who do not have deep pockets or a singing talent can
still go to great lengths to disseminate their claims through other
channels—for example, by enlisting the help of mass media. When
Philadelphians Diana and Jason Airoldi were frustrated with Comcast
for skirting appointments for six weeks, they called a local journalist.46
The reporter ran a story about their travails and called the mother of
Comcast’s CEO to complain about her son’s company’s behavior.47 The
paper followed up with an update when Comcast subsequently changed
its ways.48
42. See United Breaks Guitars, DAVE CARROLL MUSIC, https://www.davecarrollmusic.com/
songwriting/united-breaks-guitars/?v=7516fd43adaa (last visited May 7, 2020) [https://perma.cc/
5GAV-4SXF].
43. See David Dunne, United Breaks Guitars, JOSEPH L. ROTMAN SCH. MGMT.,
https://3gz8rn1ntxn33t9p221v8mlgtsq-wpengine.netdna-ssl.com/wp-content/uploads/United-
Breaks-Guitars-Case-Jan-11-10-21.pdf (last visited May 7, 2020) [https://perma.cc/9M42-PCVA]
(prepared by Dunne as a case study for in-class discussion).
44. See Eddie Wrenn, The Sweet Music of Revenge: Singer Pens YouTube Hit After United
Airlines Breaks His Guitar . . . and Shares Plunge 10%, DAILY MAIL (July 24, 2009, 9:12 AM),
https://www.dailymail.co.uk/news/article-1201671/Singer-Dave-Carroll-pens-YouTube-hit-
United-Airlines-breaks-guitar—shares-plunge-10.html [https://perma.cc/3CEQ-5P85]; see also
Allison R. Soule, Fighting the Social Media Wildfire: How Crisis Communication Must Adapt to
Prevent from Fanning the Flames 35–49 (2010) (unpublished Master’s thesis, University of North
Carolina at Chapel Hill) (on file with authors) (detailing the sentiment in YouTube comments
about the United Airlines smashed guitar incident).
45. See Broken Guitar Song Gets Airline’s Attention, CBC NEWS (July 8, 2009, 3:00 PM),
https://www.cbc.ca/news/entertainment/broken-guitar-song-gets-airline-s-attention-1.802741
[https://perma.cc/K8KX-S4AP]. Carroll’s is not the only case of a consumer holding sellers
accountable by singing. When Bank of America customers were frustrated with how the bank
stealthily delayed mortgage approvals, they posted a video of themselves singing a plea to hear
back. The musical plea was successful, and the bank issued a public apology, closed the loan, and
offered monetary compensation. See Christina Ng, Georgia Couple Pleads with Bank of America
in Music Video, ABC NEWS (Dec. 16, 2011), https://abcnews.go.com/blogs/business/2011/12/
georgia-couple-pleads-with-bank-of-america-in-music-video/ [https://perma.cc/U837-V7NU].
46. See Ronnie Polaneczky, Bombast from Comcast?, PHILA. INQUIRER (Feb. 7, 2015, 3:01
AM), https://www.philly.com/philly/news/20150208_Bombast_from_Comcast_.html [https://
perma.cc/ZVU3-8YVB].
47. Id.
48. See id.
Electronic copy available at: https://ssrn.com/abstract=3501175

<<PAGE_BREAK>>

1_Arbel Shapira (Do Not Delete) 5/12/2020 5:51 PM
2020] THEORY OF THE NUDNIK 943
All these examples (and others49) showcase four recurring
themes. We already highlighted the first one, namely, how nudniks
have idiosyncratic utility functions: they will take action even when the
costs far outweigh the immediate financial benefits. Second, because of
their idiosyncratic utility functions, nudniks tend to be repeat players.
Professor Edelman did not just target Sichuan Garden; according to
some reports, he had previously complained about various other
“misbehaving” restaurants in the Boston area.50 Syed and Mirman
reportedly have a history of complaintvertising against various
companies.51 Sokolof did not just spend $3 million on ads against
McDonald’s; he went on to campaign against other companies as well,
spending $15 million overall.52
A third recurring theme, which is probably also attributed to
nudniks’ idiosyncratic makeups, is that they are quite often derided by
the public. To return to our opening example, Professor Edelman was
widely mocked for being petty, privileged, and ruthless.53 Even
academics often refer to nudniks in pejorative terms, such as
49. At the risk of stating the obvious, we note that most nudniks’ efforts go unreported, as
their daily actions against underperforming sellers rarely receive widespread media attention. The
reader can probably summon ample examples from her own personal experience with nudniks in
her close and intermediate circles.
50. In one case, Edelman presented a discount coupon at a sushi restaurant, and when the
restaurant refused to honor it, he threatened that he would write to the Boston Licensing Board
to have their food and liquor licenses revoked. See Hilary Sargent, There’s More: Edelman Did this
Before, and Worse, BOSTON.COM (Dec. 10, 2014), https://www.boston.com/culture/restaurants/
2014/12/10/theres-more-edelman-did-this-before-and-worse [https://perma.cc/KG96-NEPK].
51. See, e.g., Will Robinson, Bob’s Burgers Voice Actor Eugene Mirman Buys Newspaper Ad
to Bemoan Parking Ticket, ENT. WKLY. (July 14, 2015, 12:00 PM), https://ew.com/article/
2015/07/14/bobs-burgers-eugene-mirman-parking-ticket/ [https://perma.cc/SBJ2-W923] (reporting
that Mirman used a full newspaper advertisement to publicize his disappointment in a $15 parking
ticket); Best Full Page Ad Ever, IMGUR (July 12, 2015), https://imgur.com/xjrCG0E
[https://perma.cc/GL8Z-VCCD] (depicting Mirman’s complaint about an unreasonable $15 parking
ticket); Hasan Syed (@HVSVN), TWITTER (Oct. 18, 2013, 4:07 PM),
https://twitter.com/HVSVN/status/391309476617154560 [https://perma.cc/5SXL-7LDR] (“Before
you use @Square Cash, read about their horrible customer service here bit.ly/nCcLxl.”).
52. Wolfgang Saxon, Phil Sokolof, 82, a Crusader Against Cholesterol, Is Dead, N.Y. TIMES
(Apr. 17, 2004), https://www.nytimes.com/2004/04/17/us/phil-sokolof-82-a-crusader-against-
cholesterol-is-dead.html [https://perma.cc/5X4S-Q9CQ].
53. See Nathan J. Robinson, Stop Eviscerating the Harvard Professor Who Threatened to Sue
a Chinese Restaurant Over $4. He Has a Point., NEW REPUBLIC (Dec. 13, 2014),
https://newrepublic.com/article/120558/ben-edelman-harvard-prof-angry-over-4-overcharge-has-
point [https://perma.cc/UB33-CP9T] (“By now even Ben Edelman thinks Ben Edelman is fairly
despicable. . . . The consensus is that he’s a cheap, entitled bully and that the immigrant
restaurant owner is a hapless victim.”).
Electronic copy available at: https://ssrn.com/abstract=3501175

<<PAGE_BREAK>>

1_Arbel Shapira (Do Not Delete) 5/12/2020 5:51 PM
944 VANDERBILT LAW REVIEW [Vol. 74:4:929
“squawk[ers]”54 or “terrorists.”55 Notwithstanding this public derision,
a fourth recurring theme is that nudniks’ efforts tend to generate
positive spillovers that benefit the entire consumer body, including
those who mock them. In the abovementioned examples, the targeted
companies did not just compensate the specific nudnik, but also
apologized publicly and implemented policy changes.
To be sure, not all nudnik activities benefit other consumers.
Some nudniks raise frivolous complaints. Others voice legitimate
concerns but their voices do not echo enough to reach others and effect
change. To better understand when and how nudniks create positive
spillovers, we now move to categorizing nudniks’ various modes of
operation.
C. How Nudniks’ Activity Impacts Sellers
How do consumers react to seller failure? Lawyers naturally
tend to think about the aggrieved consumer’s legal options: Does she
have a case? Would the seller settle? Is the expected recovery likely to
offset the costs of filing a lawsuit? Outside the legal literature, however,
awaits an entire body called consumer complaining behavior (“CCB”)
literature, which studies how consumers respond to failure in ways
other than litigation.56 When a consumer feels dissatisfied with her
purchase, she faces an action/no-action decision. Those that decide to
act face a second-level choice on how to act. Most act privately; that is,
they do not buy the product anymore.57 They act without confronting
others. A small minority of dissatisfied consumers decides to act more
publicly and does confront others.58 They then face a third-level choice:
either seek redress from the company directly, as in talking to the
manager, or air their grievances outside, as in notifying a regulator,
filing a lawsuit, or posting a negative review online.
54. See Jack Dart & Kim Freeman, Dissatisfaction Response Styles Among Clients of
Professional Accounting Firms, 29 J. BUS. RES. 75, 75–76 (1994) (analogizing customer complaints
to “the firm, authorities, or media” to a “squawk”).
55. See SCHIFFMAN & WISENBLIT, supra note 16, at 44. (“The Terrorists are customers who
have had negative experiences with the company and spread negative word-of-mouth. Companies
must take measures to get rid of terrorists.”).
56. Hirschman’s model of voice, exit, and loyalty is perhaps the most familiar to legal
scholars. See ALBERT O. HIRSCHMAN, EXIT, VOICE, AND LOYALTY (1970). Other models are less
familiar to us but even more influential in the CCB literature. See, e.g., Ralph L. Day & E. Laird
Landon, Jr., Toward a Theory of Consumer Complaining Behavior, in CONSUMER AND INDUSTRIAL
BUYING BEHAVIOR 425 (Arch G. Woodside et al. eds., 1977).
57. HIRSCHMAN, supra note 56, at 30–43 (noting that in the consumer markets context, “exit”
is far more prevalent than “voice”).
58. See Kowalski, supra note 18; Richins, supra note 18.
Electronic copy available at: https://ssrn.com/abstract=3501175

<<PAGE_BREAK>>

1_Arbel Shapira (Do Not Delete) 5/12/2020 5:51 PM
2020] THEORY OF THE NUDNIK 945
The type of consumer response that generates the most positive
spillovers is airing one’s grievances publicly. Airing it out publicly
informs other consumers and helps them calculate their decisions. Yet
public confrontation requires much more effort than “[p]ersonal
boycotting,”59 so most consumers avoid it. Nudniks, with their
idiosyncratic utility functions, do not. Most consumers stop at the first
level by deciding not to act. Many others halt at the second level by
deciding to act without confronting others. Nudniks, by contrast, do not
fear the confrontation and go all the way. As a byproduct, their actions
diffuse information about seller behavior and allow other consumers to
decide with whom they want to keep doing business and with whom
they do not.
1. Facilitating Introspection by Sellers
Albert Hirschman famously introduced the notions of “voice”
and “exit.”60 Voicing dissatisfaction is not a nudnik-specific action.
Many of us passive consumers occasionally employ voice, as in telling
our waiter that the dish we ordered was not cooked to our liking. What
distinguishes nudniks (besides using their voices more frequently) is
that they are more likely to escalate their complaints up the
organization’s ladder. They do not stop at the bulwark of the front
desk.61
Exit, the quintessential private action, is similarly not unique to
nudniks. Many passive consumers will stop purchasing from a seller
who disappointed them and will switch to a competitor. What separates
nudniks from passivists is the degree to which they are willing to go
when exiting. Most passive consumers would not exit in concentrated
markets, where there are few viable alternatives (and thus no
competitors to switch to).62 Nudniks, with their unique convictions and
preferences, will. Consider for example Drew Weaver, a Coloradan who
was annoyed by his internet provider’s data overage charges. The fact
that Weaver did not have any viable alternatives in his area did not
59. See Claire P. Bolfing, How Do Customers Express Dissatisfaction and What Can Service
Marketers Do About It?, J. SERVS. MARKETING, Spring 1989, at 5, 7.
60. See HIRSCHMAN, supra note 56.
61. Amy Schmitz summarized the barriers to meaningful voice thusly: “Anger may fuel a
consumer’s initial e-mail, phone call, or negative online review, but consumers generally do not
follow up after receiving no reply or facing long hold times on customer service phone lines.”
Schmitz, supra note 29, at 233. Nudniks are more persistent in following up.
62. See, e.g., T. Randolph Beard et al., “Can You Hear Me Now?” Exit, Voice, and Loyalty
Under Increasing Competition, 58 J.L. & ECON. 717, 718 (2015) (“Consumers’ discipline of firms is
thought to be least effective under monopoly and presumably increases in effectiveness as market
structure atomizes.”).
Electronic copy available at: https://ssrn.com/abstract=3501175

<<PAGE_BREAK>>

1_Arbel Shapira (Do Not Delete) 5/12/2020 5:51 PM
946 VANDERBILT LAW REVIEW [Vol. 74:4:929
stop him from making the principled decision to disconnect from
internet services altogether.63
By escalating their voices (or exiting in unusual circumstances),
nudniks can lead to a change in the seller’s policies.64 High-level
managers or owners are not always aware of failures in their own
organizations. The nudnik’s voice may alert top decisionmakers to
underperformance among lower-level employees, failures in product
lines, or changes in consumer preferences and market conditions.65 In
these scenarios, nudniks are effectively providing free monitoring
services for sellers, which may in turn lead to meaningful introspection
and reform in seller practices. Indeed, marketing scholars have long
recognized the value (to sellers) of feedback that nudniks generate.66 A
concrete example comes from Amazon’s Jeff Bezos, who made his email
address publicly available and actively monitors it, calling on
dissatisfied buyers to reach out directly to him and flush out problems
he may not be aware of in his giant organization.67
In other words, nudniks’ loud voices can serve as a much-needed
wake-up call, which benefits the seller and, by extension, passive
buyers.
Still, all too often the problem is not that sellers inadvertently
underperform, but rather that they deliberately save costs by cutting
corners.68 In these scenarios, keeping the complaint in-house would not
bring improvement in seller behavior. This is where the more potent
channels of nudnik behavior enter: airing grievances publicly.
63. See Jon Brodkin, Comcast Said He Used Too Much Data—So He Opted to Live Without
Home Internet, ARSTECHNICA (Sept. 15, 2017, 8:41 AM), https://arstechnica.com/information-
technology/2017/09/a-comcast-data-cap-tale-unexplained-overage-drives-man-to-cancel-service/
[https://perma.cc/DXN9-MXL7].
64. To be sure, individual exit in itself may not be enough, but unusual and visible exit could
sometimes lead to a cascade of exits or a consumer boycott. See MONROE FRIEDMAN, CONSUMER
BOYCOTTS: EFFECTING CHANGE THROUGH THE MARKETPLACE AND THE MEDIA 1–21 (1999)
(discussing the basic mechanics of consumer boycotts).
65. See HIRSCHMAN, supra note 56, at 31.
66. See, e.g., Kim et al., supra note 23, at 980 (“[S]ervice providers are advised to encourage
consumers to lodge complaints in order to have an opportunity to recover from the failure.”).
67. See Catherine Clifford, The Brilliant Business Lesson Behind the Emails Jeff Bezos Sends
to His Amazon Executives with a Single ‘?’, CNBC (May 7, 2018, 1:37 PM),
https://www.cnbc.com/2018/05/07/why-jeff-bezos-still-reads-the-emails-amazon-customers-send-
him.html [https://perma.cc/SC3A-EZM8] (“[T]he tech executive still has a customer-facing email
address at Amazon, because hearing from consumers helps him identify pain points.”). Another
example comes from Sheraton Hotels, which reportedly provided financial compensation to
consumers who voiced their concerns to the hotel’s managers. Stephanie Paterik, Sheraton Plans
to Burnish Image by Paying Guests for Bad Service, WALL STREET J. (Sept. 6, 2002, 12:07 AM),
https://www.wsj.com/articles/SB1031256929121917755 [https://perma.cc/YJG8-UNAR].
68. See OLIVER, supra note 7, at 385 (summarizing work in marketing on how too often
management actually opts to “shield itself from the onus of complaint data”).
Electronic copy available at: https://ssrn.com/abstract=3501175

<<PAGE_BREAK>>

1_Arbel Shapira (Do Not Delete) 5/12/2020 5:51 PM
2020] THEORY OF THE NUDNIK 947
2. Facilitating Legal and Reputational Sanctions Against Sellers
Nudniks express their concerns publicly, and alert others in the
process, through four primary channels.
First, nudniks can litigate their grievances. Although every
consumer can file a lawsuit for breach, few do.69 After all, most breaches
of consumer contracts involve sums that are too low to justify litigation.
As Judge Posner quipped, “only a lunatic or a fanatic sues for $30.”70 To
solve this problem, commentators have proposed a litany of measures:
class actions, punitive damages, waiving fees, subsidizing legal
representation, shifting attorney’s fees to the winning party, changing
burdens of proof, and so on.71 Yet each of these measures is too imperfect
or malleable to dramatically alter the cost-benefit analysis so that filing
small-yet-meritorious claims would become common. Nudniks, by
contrast, do not rely on these measures—they may invest in litigating
their claim out of their strong sense of principle, spite, or ideology,
disregarding the monetary cost-benefit calculation. Once nudniks file a
lawsuit, they are also the type of plaintiffs who will not readily accept
a settlement offer.72
When nudniks air their grievances in public courtrooms, they
not only contribute to the development of decisional law and legal
deterrence, but also create a public record of seller behavior, thereby
contributing to better reputational deterrence. Litigating their claims,
even when small and seemingly petty, produces information about
seller behavior, which in turn helps other consumers decide from whom
they want to purchase.73
69. See Carnegie v. Household Int’l, Inc., 376 F.3d 656, 661 (7th Cir. 2004) (“The realistic
alternative to a class action is not 17 million individual suits, but zero individual suits.”).
70. Id.
71. See Yonathan A. Arbel, Adminization: Gatekeeping Consumer Contracts, 71 VAND. L. REV.
121, 157–71 (2018) (reviewing initiatives designed to increase consumer participation).
72. See Julie Macfarlane, Why Do People Settle?, 46 MCGILL L. J. 663 (2001) (highlighting
litigants’ nonfinancial motivations to reject settlements).
73. We come back to this point later, in Section II.B. The idea is that even if the media does
not report on any small-claim litigation, the mere filings of such lawsuits by nudniks create a
public database of seller misbehavior. Court documents allow investigative reporters to engage in
what they call “pattern-identifying.” See Roy Shapira, Law as Source: How the Legal System
Facilitates Investigative Journalism, 37 YALE L. & POL’Y REV. 153, 210 (2018) [hereinafter Shapira,
Law as Source] (“We learned from interviews, tip sheets, and successful investigative projects, that
pattern-identifying is perhaps the most important way in which the legal system helps
investigative reporters.”). On the link between legal and reputational sanctions, see also Scott
Baker & Albert H. Choi, Reputation and Litigation: Why Costly Legal Sanctions Can Work Better
than Reputational Sanctions, 47 J. LEGAL STUD. 45 (2018), and Roy Shapira, Reputation Through
Litigation: How the Legal System Shapes Behavior by Producing Information, 91 WASH. L. REV.
1193 (2016) [hereinafter Shapira, Reputation Through Litigation].
Electronic copy available at: https://ssrn.com/abstract=3501175

<<PAGE_BREAK>>

1_Arbel Shapira (Do Not Delete) 5/12/2020 5:51 PM
948 VANDERBILT LAW REVIEW [Vol. 74:4:929
Second, nudniks often enlist the help of the media. For example,
when a consumer named Liz found an unexpected charge for the safe in
her hotel room (supposedly to cover the costs of a warranty for the safe’s
content), she approached NBC and complained. “[I]t’s totally sneaky,”
she said, arguing that the hotel should have informed her of the charges
“up front.”74 Her story led to a full-blown investigative report of hidden
fees in hotels.75 Liz’s charges were reversed, many other consumers
were forewarned, and other hotels observed the reputational backlash
that such practices can create.76
From a journalist’s perspective, such tips and stories provide a
valuable source of interesting stories about seller misconduct—an
“information subsid[y].”77 Yet most dissatisfied consumers do not share
their stories with the media, either because they do not have the time
or do not wish to risk their privacy and potential confrontations with
disgruntled sellers. It often takes a nudnik to jumpstart media scrutiny.
A third potential venue for dissatisfied consumers is
complaining to the regulator.78 In some circumstances, complaining to
the regulator can prove advantageous to the complainer, so even non-
nudniks engage in it. The Consumer Financial Protection Bureau
(“CFPB”), for example, collects consumer complaints, routes them to the
company, and then follows up to make sure the company responds
properly.79 In many other instances, however, complaints to the
regulator do not result in private benefits to the consumer. The Federal
Trade Commission (“FTC”), for instance, explicitly informs consumers
74. See How to Avoid Hidden Hotel Fees, NBC4 WASH. (Feb. 8, 2019, 11:10 PM),
https://www.nbcwashington.com/on-air/as-seen-on/How-to-Avoid-Hidden-Hotel-Fees_Washington
-DC-505584862.html [https://perma.cc/9ZVA-8W2W].
75. Id.
76. Id.
77. For example, NBC4 Washington invites consumers to share issues with the promise that
“we are responding to EVERY consumer issue!” See Do You Have a Consumer Issue to Report? Tell
NBC4 Responds!, NBC4 WASH., https://www.nbcwashington.com/news/local/NBC4-Responds-
Consumer-Complaint-IssueReport-Susan-Hogan-378873701.html (last updated Dec. 12, 2019,
10:49 AM) [https://perma.cc/49FV-THLG]. On the “information subsidies” term and its relevance,
see Shapira, Law as Source, supra note 73, at 166–67, explaining that “information subsidies” are
“stories provided to newsrooms by insiders, public relations departments, think tanks, NGOs, and
the like.”
78. The argument in this paragraph can extend to “private regulators,” such as the Better
Business Bureau, which collects as many as 800,000 complaints annually. See US BBB 2018
Statistics, BETTER BUSINESS BUREAU, https://www.bbb.org/globalassets/local-bbbs/council-
113/media/complaint-stats/2018/us-bbb-2018-statistics-complaints.pdf (last visited May 7, 2020)
[https://perma.cc/WM48-CYCY]. For more on private handling of complaints, see Rory Van Loo,
The Corporation as Courthouse, 33 YALE J. ON REG. 547 (2016).
79. See Learn How the Complaint Process Works, CONSUMER FIN. PROTECTION BUREAU,
https://www.consumerfinance.gov/complaint/process/ (last visited May 7, 2020)
[https://perma.cc/N9RB-UJGS] (“We’ll forward your complaint and any documents you provide to
the company and work to get a response from them.”).
Electronic copy available at: https://ssrn.com/abstract=3501175

<<PAGE_BREAK>>

1_Arbel Shapira (Do Not Delete) 5/12/2020 5:51 PM
2020] THEORY OF THE NUDNIK 949
that it “cannot resolve individual consumer complaints.”80 Complaining
under these conditions is costly to the complainer. So most consumers
do not invest the time in complaining, even though complaining would
be beneficial for society by facilitating better-informed regulations,
helping the regulator warn other market participants, and shaming
underperforming sellers.81 It takes consumers with idiosyncratic utility
functions—nudniks—to initiate such privately costly yet socially
beneficial complaints.
Finally, nudniks engage in the production and dissemination of
peer-to-peer reputational information.82 Consumers increasingly rely on
online customer reviews when making purchasing decisions.83
Consumers often do read and engage with other consumers’ reviews,
unlike the fine print.84 Yet most consumers who are dissatisfied with
their purchases do not share their dissatisfaction online. One study, for
example, estimates that only fifteen in a thousand consumers produce
reviews.85 Of these reviewers, only a handful include a detailed
description of what exactly went wrong, thus making most reviews
minimally informative.86 The upshot, again, is that an important
80. See Submit a Consumer Complaint to the FTC, FED. TRADE COMMISSION,
https://www.ftc.gov/faq/consumer-protection/submit-consumer-complaint-ftc (last visited May 7,
2020) [https://perma.cc/6WFA-NBWL]; see also Rory Van Loo, The Missing Regulatory State:
Monitoring Businesses in an Age of Surveillance, 72 VAND. L. REV. 1563 (2019).
81. For a discussion about regulators’ increased reliance on publicizing complaints online, see
Nathan Cortez, Regulation by Database, 89 U. COLO. L. REV. 1 (2018).
82. See Yonathan A. Arbel, Reputation Failure: The Limits of Market Discipline in Consumer
Markets, 54 WAKE FOREST L. REV. 1239, 1254–55 (2019) (“While everyone benefits from having
this public resource, producers of reputational information are not directly compensated for their
contributions.”); Shmuel I. Becher & Tal Z. Zarsky, E-Contract Doctrine 2.0: Standard Form
Contracting in the Age of Online User Participation, 14 MICH. TELECOMM. TECH. L. REV. 303, 316–
20 (2008) (“[L]ate recognition of biased [contractual] terms will not change the vendors’ actions
vis-à-vis other consumers—unless the information concerning the transaction flows from the
aggrieved consumer to the ex ante consumers contemplating a transaction with the same vendor.”).
83. See Michael Anderson & Jeremy Magruder, Learning from the Crowd: Regression
Discontinuity Estimates of the Effects of an Online Review Database, 122 ECON. J. 957, 983 (2012).
84. See, e.g., How Online Reviews Influence Sales, SPIEGEL RES. CTR. 2,
https://spiegel.medill.northwestern.edu/_pdf/Spiegel_Online%20Review_eBook_Jun2017_FINAL.
pdf (last visited May 7, 2020) [https://perma.cc/Z7WZ-L3NV] (reporting that nearly ninety-five
percent of shoppers read reviews before shopping); Local Consumer Review Summary 2019,
BRIGHT LOCAL (Dec. 11, 2019), https://www.brightlocal.com/research/local-consumer-review-
survey/ [https://perma.cc/J4Z3-BJ94] (putting that number at eighty-two percent of shoppers who
read reviews when considering shopping at local businesses).
85. See Eric T. Anderson & Duncan I. Simester, Reviews Without a Purchase: Low Ratings,
Loyal Customers, and Deception, 51 J. MARKETING RES. 249, 251 (2014).
86. See, e.g., Wayne R. Barnes, The Good, the Bad, and the Ugly of Online Reviews: The
Trouble with Trolls and a Role for Contract Law After the Consumer Review Fairness Act, 53 GA.
L. REV. 549, 553–54 (2019) (illustrating the difficulty of distinguishing between helpful (factual)
and unhelpful (“uninhibited, over-the-top hyperbole”) reviews); Max Woolf, A Statistical Analysis
of 1.2 Million Amazon Reviews, MAX WOOLF’S BLOG (June 17, 2014), http://minimaxir.com/2014/
Electronic copy available at: https://ssrn.com/abstract=3501175

<<PAGE_BREAK>>

1_Arbel Shapira (Do Not Delete) 5/12/2020 5:51 PM
950 VANDERBILT LAW REVIEW [Vol. 74:4:929
mechanism of market governance—online reviews—is carried by the
efforts of a small subset of consumers who are willing to incur the costs:
nudniks.
To be sure, these channels of voicing dissatisfaction are
disparate: some, such as litigation, require much higher private and
social costs than others, such as posting reviews online. We group them
together here to underscore one crucial yet underappreciated point: the
overwhelming majority of consumers do not engage with any of these
channels. To the extent that these channels carry information on seller
behavior, it is largely through the work of a small subset of consumers—
nudniks.
* * *
Through all these channels of voicing dissatisfaction, nudniks
are an engine of market discipline. If restaurants can systematically
overcharge $4 without anyone contesting such a practice, they have
little incentive to reform. Nudniks, through various modes of action,
make restaurants pay for illicit practices. Nudniks hold sellers
accountable, thereby potentially benefiting the broader, mostly passive
consumer body. Our claim is not that every nudnik’s complaint
necessarily produces value, but rather that some do. Nudnik-type
activism is therefore an important, understudied aspect of market
discipline.
D. Relation to the Extant Literature and Limitations
To further shed light on nudniks’ contribution, this Section
juxtaposes nudnik-driven activism with other theories of market
discipline, such as the informed minority theory and the reputational
discipline theory. This Section then highlights several limitations of
nudnik-based activism.
1. From an “Informed Minority” to Nudniks
Perhaps the most influential theory of market discipline has
been Alan Schwartz and Louis Wilde’s “informed minority theory.”87
The theory concedes that many consumers are too uninformed and
06/reviewing-reviews/ [https://perma.cc/5F8C-3G5G] (finding that only ten percent of reviews
studied had a minimum of ten helpfulness data points).
87. See Schwartz & Wilde, supra note 9. On the theory’s influence, see R. Ted Cruz & Jeffrey
J. Hinck, Not My Brother’s Keeper: The Inability of an Informed Minority to Correct for Imperfect
Information, 47 HASTINGS L.J. 635, 647–48 (1996).
Electronic copy available at: https://ssrn.com/abstract=3501175

<<PAGE_BREAK>>

1_Arbel Shapira (Do Not Delete) 5/12/2020 5:51 PM
2020] THEORY OF THE NUDNIK 951
insufficiently sophisticated to fend for themselves. This does not mean,
however, that markets should be regulated. Schwartz and Wilde argued
that as long as a minority of consumers reads and negotiates contract
terms, contracts will reflect the preferences of most consumers,
including those who do not read the fine print.88 The idea is that if the
minority is sufficiently large to surpass a critical mass, then firms will
find it worthwhile to compete over this segment of the market. And
because firms tend to offer standard form contracts, the only way a firm
can win the hearts of the informed minority segment is by offering
better terms across the board.89 The informed minority theory quickly
gained prominence, becoming the lynchpin of economic analyses of
consumer law.90
Yet in recent years there has been a growing realization that the
assumptions underlying the theory may be unrealistic. A growing body
of research shows that the number of consumers who read the fine
print, at least in online contracts, is so small that it is unlikely to reach
a critical mass.91 This is not surprising—reading contracts is a time-
intensive activity that people dislike, with uncertain and often
marginal benefits.92 Further, in recent decades there has been a steady
increase in the volume and length of contracts and disclosures, making
reading and comprehending almost impossible.93 Accordingly, many
88. See Schwartz & Wilde, supra note 9, at 638 (“The presence of at least some consumer
search in a market creates the possibility of a ‘pecuniary externality’: persons who search
sometimes protect nonsearchers from overreaching firms.”).
89. See George L. Priest, A Theory of the Consumer Product Warranty, 90 YALE L.J. 1297,
1347 (“If a small group of consumers reads warranties and selects among products according to
warranty content, manufacturers may be forced to draft warranties responsive to the group’s
preferences, even though the large majority of consumers generally neglect warranty terms.”).
90. See Cruz & Hinck, supra note 87; Eyal Zamir, Contract Law and Theory: Three Views of
the Cathedral, 81 U. CHI. L. REV. 2077, 2102 n.77 (2014) (compiling references).
91. See, e.g., Yannis Bakos et al., Does Anyone Read the Fine Print? Consumer Attention to
Standard-Form Contracts, 43 J. LEGAL STUD. 1, 4 (2014) (“We find that the fraction of consumers
who read such contracts is so small that it is unlikely that an informed minority alone is shaping
software license terms.”). We elaborate on the flaws of the informed minority theory in Arbel &
Shapira, supra note 27.
92. See Omri Ben-Shahar, The Myth of the ‘Opportunity to Read’ in Contract Law, 5 EUR.
REV. CONT. L. 1, 15 (2009) (discussing the burdens of reading and how not reading is actually the
rational decision); Yonathan A. Arbel & Andrew Toler, All-Caps 4 (Ala. Working Paper Series
3519630, 2019), https://papers.ssrn.com/sol3/papers.cfm?abstract_id=3519630 [https://perma.cc/
WDB2-P27D] (discussing ways to make reading terms and conditions more bearable). Even the
use of conspicuous formatting to highlight terms does not seem to improve matters for consumers.
See Ben-Shahar, supra (finding, in a series of experiments, that capitalization of key clauses in
consumer contracts fails to improve consumer outcomes).
93. See OMRI BEN-SHAHAR & CARL E. SCHNEIDER, MORE THAN YOU WANTED TO KNOW: THE
FAILURE OF MANDATED DISCLOSURE 94–101 (2014) (discussing the “accumulation problem” of
disclosures and how they “compete with each other for people’s time and attention”); WENDY
WAGNER ET AL., INCOMPREHENSIBLE! 49 (2019) (“[I]n some cases the law even encourages sellers
to be more incomprehensible, rather than less.”).
Electronic copy available at: https://ssrn.com/abstract=3501175

<<PAGE_BREAK>>

1_Arbel Shapira (Do Not Delete) 5/12/2020 5:51 PM
952 VANDERBILT LAW REVIEW [Vol. 74:4:929
have abandoned the informed minority theory.94 Even Schwartz himself
seems to concede it is unrealistic.95
A related prominent theory is the reputational discipline theory.
This theory holds that sellers will sometimes perform even beyond the
letter of the contract in order to build their reputation and brand
name.96 On this view, one-sided clauses give the firm the power—but
not the obligation—to perform the contract in a self-serving way. Firms
have incentives to go beyond the contract and often do.97 While we agree
that reputational considerations shape seller behavior, the reputational
discipline theory is too simplistic, resting on unrealistic assumptions of
consumer learning and consumer sharing.98 The theory sweeps critical
issues under the rug: How is it exactly that quality reputational
information emerges? Who creates it? Who widely disseminates it?
Quality reputation information is, in a sense, a public good.99 Private
players often do not have the right incentives (or ability) to create and
disseminate this public good.100 As a result, reputational information is
too often unreliable; the market overreacts to certain types of seller
misbehavior and underreacts to others.101
In sum, there is a vacuum in theories of bottom-up market
discipline. Both prevalent theories—informed minority and
94. See BRIAN H. BIX, CONTRACT LAW: RULES, THEORY, AND CONTEXT 52 (2012) (“Electronic
contracting has raised doctrinal and practical problems that were not resolved well by existing
law.”); Zamir, supra note 90, at 2102–03 (“Outside of the law-and-economics community, most
people would quite confidently say . . . that hardly a soul reads standard-form contracts.”).
95. See Ayres & Schwartz, supra note 10, at 552 (“[T]he state should jettison the disclosure
project of making all terms accessible to consumers with the expectation that consumers can read
the entire document.”).
96. See Lucian A. Bebchuk & Richard A. Posner, One-Sided Contracts in Competitive
Consumer Markets, 104 MICH. L. REV. 827, 827–28 (2006) (“A seller concerned about its reputation
can be expected to treat consumers better than is required by the letter of the contract.”); Jason
Scott Johnston, The Return of Bargain: An Economic Theory of How Standard-Form Contracts
Enable Cooperative Negotiation between Businesses and Consumers, 104 MICH. L. REV. 857, 858
(2006) (“[A] firm will often provide benefits . . . beyond those that its standard form obligates it to
provide . . . . Firms do this because they have an interest in building and maintaining cooperative,
value-enhancing relationships with their customers.”).
97. See Shmuel I. Becher & Tal Z. Zarsky, Minding the Gap, 51 CONN. L. REV. 69, 90–91
(2019) (explaining that firms often account for characteristics like consumer power, emotion, and
sophistication when determining whether to go beyond the terms of a contract).
98. Others have criticized the reputational discipline theory on other grounds, such as
fairness. See, e.g., Eyal Zamir & Yuval Farkash, Standard Form Contracts: Empirical Studies,
Normative Implications, and the Fragmentation of Legal Scholarship, 12 JERUSALEM REV. LEGAL
STUD. 137, 162–67 (2015) (warning, for a number of reasons, against an entire reliance on the
reputational discipline theory).
99. See Shapira, Reputation Through Litigation, supra note 73, at 1211.
100. Id.
101. See generally Arbel, supra note 82, at 1286–87 (noting that informational distortions can
lead companies to either overreact or underreact to certain feedback); Shapira, Reputation
Through Litigation, supra note 73, at 1203–11.
Electronic copy available at: https://ssrn.com/abstract=3501175

<<PAGE_BREAK>>

1_Arbel Shapira (Do Not Delete) 5/12/2020 5:51 PM
2020] THEORY OF THE NUDNIK 953
reputational discipline—suffer from key theoretical and empirical
flaws. The theory of nudnik-based activism, by contrast, escapes these
flaws. Nudniks’ unique makeup and modes of operation make them a
more robust vector of market discipline for the following four reasons.
First, nudnik-based activism does not require a critical mass of
active consumers to effect change in seller behavior. One nudnik may
be enough. In the informed minority theory, the mechanism that brings
about change is market competition over the purses of active
consumers. The theory therefore requires a critical mass of comparison
shoppers, or else it would not be worthwhile for sellers to compete over
them.102 One comparison shopper electing to purchase elsewhere is not
enough. With nudniks, by contrast, the mechanisms that bring about
change are reputational and legal. In today’s interconnected world, a
single nudnik’s squawk can reach numerous other consumers and
convince them to take their business elsewhere.103 The threat of
reputational sanctions, in turn, makes sellers change their behavior ex
ante.104 YouTube allowed a single man—Dave Carroll—to call the
mighty United Airlines to order. Twitter helped another—Hassan
Syed—make British Airways apologize and change their practices.
To be sure, one nudnik will not always be enough. In fact,
sometimes even several nudniks and their repeated public complaints
may not be enough to solve market pathologies. Our claim here is more
modest: sellers care about their reputation and realize that one
complaining consumer may be enough to put reputational sanctions in
motion. Indeed, this is a recurring theme among marketing scholars
and reputation practitioners: beware of the single active consumer.105
102. See Florencia Marotta-Wurgler, Does Contract Disclosure Matter?, 168 J. INSTITUTIONAL
THEORETICAL ECON. 94, 98 (2012) (“If this critical mass of comparison shoppers exists, disclosure
will be effective in sufficiently competitive markets, because sellers will have an incentive to satisfy
the informed buyers.”).
103. See Franklin G. Snyder & Ann M. Mirabito, The Death of Contracts, 52 DUQ. L. REV. 345,
395 (2014) (“[A] handful of disgruntled consumers can seriously affect [firms’] reputations and
their businesses.”).
104. Nudniks’ complaints may also generate nonreputational disciplinary effects, such as
creating psychological pressures on sellers. See Mark Seidenfeld, Cognitive Loafing, Social
Conformity, and Judicial Review of Agency Rulemaking, 87 CORNELL L. REV. 486, 509–10 (2002)
(reviewing psychological studies on workers that demonstrate the significant demoralizing effects
of complaints).
105. See Chrysanthos Dellarocas, Reputation Mechanisms, in 1 HANDBOOKS IN INFORMATION
SYSTEMS: ECONOMICS AND INFORMATION SYSTEMS 629, 639 (Terrence Hendershott ed., 2006)
(explaining that, in some circumstances, “even a single negative rating on a seller’s feedback
history reveals the fact that the seller is not honest”); Corné Dijkmans et al., A Stage to Engage:
Social Media Use and Corporate Reputation, 47 TOURISM MGMT. 58, 59 (2015) (“Even a single
unhappy customer can cause reputational damage via social media platforms . . . .”); No Online
Customer Reviews Means BIG Problems in 2017, FAN & FUEl, https://fanandfuel.com/no-online-
customer-reviews-means-big-problems-2017/ (last visited May 7, 2020) [https://perma.cc/G74A-
Electronic copy available at: https://ssrn.com/abstract=3501175

<<PAGE_BREAK>>

1_Arbel Shapira (Do Not Delete) 5/12/2020 5:51 PM
954 VANDERBILT LAW REVIEW [Vol. 74:4:929
As one reputation management firm puts it: “[E]ven a single upset
individual can wreak havoc on your business—unless you catch the
problem early and do something about it.”106
A second key distinction that makes nudnik-based activism
more robust is that nudniks do not engage in monetary cost-benefit
analysis. Other types of active consumers (such as comparison
shoppers) would be active only if they deem it worthwhile. Therefore,
the prevalence of “readers” in a given market is largely a function of
outside circumstances, such as the length and complexity of contracts,
or the feasibility of negotiating ex ante with sellers. When contract
length and complexity increases, as they have in the digital age, fewer
consumers will read.107 The nudnik’s crusade, by contrast, is relatively
immune to the rising costs of activism.
The rise of the digital age therefore did not harm nudniks’ ability
to effect change but, in fact, increased it. Changes in the information
environment—the rise of the internet and, in particular, social media—
made nudniks potentially more impactful by boosting their signals.108
Nudniks have always noticed being overcharged, but now, they can post
a negative review online about it and reach a broad audience.109
Everyone searching for that seller in the future may find the nudnik’s
complaint that the seller fails to honor contractual obligations. What
may once have been an ephemeral signal is now etched forever in the
internet’s memory. It is not a coincidence that big business is often
behind campaigns for a “right to be forgotten.”110
Third, nudnik-based activism generates more spillovers. One
comparison shopper who reads through a contract does not make other
shoppers more sophisticated. By contrast, one nudnik who goes public
with her concerns can reduce the costs to other consumers of becoming
informed about a seller’s competence and integrity. She allows other
LZVE] (finding in a survey that thirty-five percent of respondents might avoid a product on the
basis of a single negative review).
106. Online Reputation Management, BERNSTEIN CRISIS MGMT.,
https://www.bernsteincrisismanagement.com/portfolio-item/online-crisis-and-issues-
management/ (last visited May 7, 2020) [https://perma.cc/UX5H-PKGE].
107. BEN-SHAHAR & SCHNEIDER, supra note 93, at 94–101.
108. See, e.g., Barnes, supra note 86, at 562 (“The reviews also increase consumers’ power over
the businesses they support.”); Becher & Zarsky, supra note 82, at 321–33 (discussing the flow of
information between customers and potential customers).
109. At the same time, the abundance of information nowadays may sometimes limit the
visibility of any individual signal.
110. See Amy Gesenhues, The Inevitable Happened: First Company Provides “Right to Be
Forgotten” Removal Service, SEARCH ENGINE LAND (June 25, 2014, 12:01 AM),
https://searchengineland.com/reputation-vip-online-management-firm-launches-site-assist-
googles-forget-form-194998 [https://perma.cc/4ED6-B7VS] (explaining that Google has entered the
business of helping peoples’ online activity be forgotten).
Electronic copy available at: https://ssrn.com/abstract=3501175

<<PAGE_BREAK>>

1_Arbel Shapira (Do Not Delete) 5/12/2020 5:51 PM
2020] THEORY OF THE NUDNIK 955
consumers to notice that they too were overcharged and may push them
to complain. By going through the takeout receipt and comparing it to
the prices on the restaurant’s website, the nudnik reduces the costs of
becoming active for other consumers.
Finally, nudniks impact seller behavior not just by making sure
sellers honor their contractual obligations, but also by pushing sellers
to go beyond the contract. According to the informed minority theory, a
small subset of consumers pushes sellers to offer better contracts to
everyone. With nudniks, by contrast, a small subset of consumers
pushes sellers to perform better, regardless of sellers’ contractual
obligations. Nudniks frequently assert transactional expectations: the
rights they believe they should have.111 The marketing literature has
long recognized the importance of consumer expectations, as captured
by the influential expectancy disconfirmation theory.112 According to
this theory, consumers often operate based on their expectations from
the transaction, and these expectations are not necessarily based on the
specific contract in question. Expectations rather come from consumers’
experience with similar transactions, their general sense of fairness,
and market norms.113 Importantly for our purposes, when a “regular”
(read: passive) dissatisfied consumer finds out that there is a mismatch
between her (violated) expectations and what is owed to her according
to the contract, she often gives up the fight. Nudniks do not.
To return to our example of the NBC story on a hotel charging
for a safe in the room: the hotel explicitly stipulated that a charge would
be imposed to cover a warranty on the safe.114 The hotel was therefore
111. See Bebchuk & Posner, supra note 96, at 830 (“The expected cost of the term to the buyer
must be discounted by the likelihood that reputational considerations will induce the seller to treat
the buyer fairly even when such treatment is not contractually required.”); Johnston, supra note
96, at 877 (explaining how consumer expectation can sometimes affect a seller’s probability of
expanding the terms of a contract); see also Clayton P. Gillette, Rolling Contracts as an Agency
Problem, 2004 WIS. L. REV. 679, 722 (explaining that, when a consumer does not read a contract,
a court might determine that “[s]ome terms may be sufficiently salient or evince a sufficient
identity of interests between readers and nonreaders that market mechanisms largely internalize
the interests of nonreading buyers”).
112. See Rolph E. Anderson, Consumer Dissatisfaction: The Effect of Disconfirmed Expectancy
on Perceived Product Performance, 10 J. MARKETING RES. 38, 43 (1973) (determining that, because
some might overestimate technology or innovation, “consumers may have unrealistically high
expectations for product performance even without the added boost of promotional claims”); see
also Andrew Dahl & Jimmy Peltier, A Historical Review and Future Research Agenda for the Field
of Consumer Satisfaction, Dissatisfaction, & Complaining Behavior, 28 J. CONSUMER
SATISFACTION, DISSATISFACTION & COMPLAINING BEHAV. 5, 5 (2015) (noting that the expectancy
disconfirmation theory is a “predominant theoretical approach”).
113. Legal scholars have recently become aware of, and accommodated, the expectation
disconfirmation theory. See, e.g., Ayres & Schwartz, supra note 10, at 551 (using the phrase “term
optimism” to explain that, for several reasons, “consumers expect a contract to contain more
favorable terms than it actually provides”).
114. See discussion supra note 74 and accompanying text.
Electronic copy available at: https://ssrn.com/abstract=3501175

<<PAGE_BREAK>>

1_Arbel Shapira (Do Not Delete) 5/12/2020 5:51 PM
956 VANDERBILT LAW REVIEW [Vol. 74:4:929
seemingly not in breach of any contractual obligation. Nevertheless, it
breached Liz’s expectations. Liz felt that hotels should not behave this
way, so she shared her complaints with the media and ignited a
reputational fallout. A much more famous and consequential example
came in 2017, when United Airlines evicted a paying passenger from
the flight to accommodate another passenger.115 Even though the
airline company’s contract stipulated it could deboard the passenger,
United Airlines stakeholders found the harsh treatment uncalled for
and unfair. The incident led to a swift and significant decline in
passengers’ willingness to fly United.116 The entire airline industry took
notice, and the industry practices changed.117
In all these examples, what separates nudnik-based activism
from other forms of market discipline is the mechanism of change.
Nudniks create a legal and reputational risk for sellers. Sellers who
narrowly adhere to their contractual obligations may win in the
courtroom but lose in the court of public opinion. Nudnik-driven
reputational effects are sometimes enough to push firms to conform to
consumers’ transactional expectations.118
Legal scholars should therefore shift from focusing on
consumers’ reading behavior to focusing on consumers’ complaining
behavior. Instead of an informed minority theory, we offer the theory of
the nudnik—a sort of “crusading minority.” Firms that anticipate the
existence of nudniks are more likely to observe their contractual
commitments ex post and invest in quality control and customer service
ex ante. To reiterate, such bottom-up market discipline can occur even
without a critical mass of consumers reading and comprehending
115. See Erin McCann, United’s Apologies: A Timeline, N.Y. TIMES (Apr. 14, 2017),
https://www.nytimes.com/2017/04/14/business/united-airlines-passenger-doctor.html
[https://perma.cc/R7FM-B7GT]; Christina Zdanowicz & Emanuella Grinberg, Passenger Dragged
Off Overbooked United Flight, CNN (Apr. 10, 2018), https://www.cnn.com/2017/04/10/travel/
passenger-removed-united-flight-trnd/index.html [https://perma.cc/D2DE-NKXH] (explaining
that the passenger paid for his ticket, refused to give up his seat, and was subsequently removed
from the plane—rather forcefully).
116. See, e.g., Kevin Quealy, How Much Would You Put Up With to Avoid United Airlines?,
N.Y. TIMES (Apr. 17, 2017), https://www.nytimes.com/2017/04/17/upshot/how-much-would-people-
put-up-with-to-avoid—united-airlines.html [https://perma.cc/H297-CW4S] (presenting survey-
based evidence that shows those with knowledge of the removal incident avoided United Airlines).
117. See Stacey Leasca, This Is How Likely It Is That You’ll Get Bumped from a Flight, TRAVEL
& LEISURE (Nov. 17, 2017), https://www.travelandleisure.com/airlines-airports/airlines-bumping-
passengers-less [https://perma.cc/C5AY-E8KE] (“Since the incident, major airlines — not just
United — have changed their policies for overbooking.”).
118. The incident led to a marked decrease in the rate of bumping passengers, from 0.62 per
10,000 to 0.44, the lowest rate in decades. Airline Bumping Rate Lowest in Decades, U.S. DEP’T
TRANSP. (Sep. 7, 2017), https://www.transportation.gov/briefing-room/dot6417 [https://perma.cc/
GV8M-KVWS].
Electronic copy available at: https://ssrn.com/abstract=3501175

<<PAGE_BREAK>>

1_Arbel Shapira (Do Not Delete) 5/12/2020 5:51 PM
2020] THEORY OF THE NUDNIK 957
contracts. All that is needed is (1) some consumers with nudnik-style
personality traits and (2) sellers who care about their reputations.
2. The Limits of Nudniks
As we have noted, not all nudnik activities create positive value.
Some complaints are petty and frivolous, exacting costs instead of
exposing real issues. To evaluate nudniks’ overall social impact, one
should consider both the benefits and the costs of nudniks’ actions. And
while we cannot offer an exact quantification of the two sides of the
equation, we offer here suggestive evidence based on a synthesis of the
marketing literature, which could inform how we design future
research or think of potential policy implications.
Perhaps the biggest potential limitation of nudnik-based
activism is that nudniks’ concerns and expectations are not always
aligned with the concerns of other (less idiosyncratic) consumers. To the
extent that nudniks complain about petty, inconsequential things, it is
unlikely that their complaints will effect meaningful positive change in
seller behavior. In other words, the concern is that nudniks will force
sellers to focus too much on things that only nudniks care about. This
concern, however, seems limited in practice. The CCB literature offers
several indications that most nudniks operate in what we would call
“good faith” and that their complaints seemingly implicate broader
consumer interests. For example, if nudniks complain about things only
nudniks care about, we would expect little correlation between product
quality and complaints. In reality, however, various studies show that
consumer complaining behavior is inversely related to product
quality.119 That is, when the quality of the product is higher, consumers
complain less, and vice versa. This finding suggests that nudnik
activism is tied to actual defects in a product that are relevant to the
broader consumer body.
Another related concern is that nudniks complain for selfish
motivations, to get “freebies” and “comps,” or to simply “troll” for
attention. Here as well, empirical evidence casts doubt on the scope of
the problem: serial complainers who raise an issue are more likely
(compared with passive consumers) to become repeat, loyal customers
if sellers learn from their mistakes and resolve the issue.120 This
119. See Beard et al., supra note 62, at 741 (claiming that, within the telephone industry,
“observed levels of changes in quality . . . are negatively and statistically significantly related to
complaint levels”); Silke J. Forbes, The Effect of Service Quality and Expectations on Customer
Complaints, 56 J. INDUS. ECON. 190 (2008) (providing empirical data based on complaints in the
airline industry).
120. See TARP, supra note 16, at 64 (finding that “profits increase as the percentage of
satisfactorily resolved complaints increases”); Amy K. Smith & Ruth Bolton, An Experimental
Electronic copy available at: https://ssrn.com/abstract=3501175

<<PAGE_BREAK>>

1_Arbel Shapira (Do Not Delete) 5/12/2020 5:51 PM
958 VANDERBILT LAW REVIEW [Vol. 74:4:929
suggests a certain degree of good faith on the side of nudniks. Similarly,
another finding in the literature is that serial complainers are not only
more likely to complain against firms that behave badly, but also more
likely to compliment firms that behave well.121 We read these studies as
suggesting that, on average, nudnik-consumers are simply the more
active version of the majority of passive consumers: they notice and
confront more readily, but they notice and confront real issues.
Instead of depicting nudniks as merely trolls who are out for
revenge or “comps,” the existing evidence suggests that many of them
are consumers who deeply care about how they are being treated.
But there is a broader point in play here. Our assessment of
nudniks’ social impact should be detached from our judgment of
nudniks’ motivations. All too often the court of public opinion tends to
focus on nudniks’ “weird” motivations and portray nudniks as vengeful
and petty. Even academics and judges treat nudniks as “freeloaders,”
“fraudulent returners,” and “peer-induced esteem-seekers.”122 Yet the
fact that a nudnik has some selfish motivations does not mean she
cannot advance the broader good.123 True, some nudniks may be seeking
revenge, attempting to receive material compensation, looking for
validation from others, or acting out of a sense of entitlement. Absent
such motivations, however, very few consumers would act when
dissatisfied, and sellers could continue to systematically overcharge
and underperform, assured of no negative consequences. These atypical
motivations help nudniks break out from consumers’ rational apathy.
We should therefore judge nudniks’ behavior based on the outputs—do
they push firms to meet other consumers’ expectations?—rather than
the inputs.
Further, even when some nudniks sound false alarms, several
mechanisms tend to screen frivolous nudnik complaints and highlight
worthwhile ones. Judges screen the merits of legal complaints.
Investigative reporters follow up on tips from nudniks only if the story
Investigation of Service Failure and Recovery: Paradox or Peril?, 1 J. SERV. RES. 65, 77 (1998)
(finding that, when complaints are addressed well, “excellent service recoveries can lead to
increased customer satisfaction and repatronage intentions”); Voorhees et al., supra note 16, at
523 (illustrating that complainers with “satisfactory recovery” were substantially likely to become
repeat purchasers).
121. See Arbel, supra note 82, at 1265–67 (documenting the high share of positive reviews on
Amazon and other platforms).
122. Kate L. Reynolds & Lloyd C. Harris, When Service Failure is Not Service Failure: An
Exploration of the Forms and Motives of “Illegitimate” Customer Complaining, 19 J. SERVS.
MARKETING 321, 325 (2005); see also Barnes, supra note 86, at 603–04 (calling consumers who
write emotional and nonfactual negative reviews “trolls”).
123. See ADAM SMITH, THE WEALTH OF NATIONS 9–10 (Jonathan B. Wight ed., Harriman
House 2007) (1776) (“It is not from the benevolence of the butcher, the brewer, or the baker, that
we expect our dinner, but from their regard to their own interest.”).
Electronic copy available at: https://ssrn.com/abstract=3501175

<<PAGE_BREAK>>

1_Arbel Shapira (Do Not Delete) 5/12/2020 5:51 PM
2020] THEORY OF THE NUDNIK 959
represents a wide pattern of seller misbehavior. And fellow consumers
discount baseless negative online reviews. The fact that other
consumers are passive does not mean that they are clueless. The other
consumers can infer, based on their own experience and common sense,
whether a nudnik’s complaint raises a valid problem that is indicative
of the seller’s behavior. If a nudnik frivolously complains about Amazon
not shipping items fast enough, other consumers can rely on their own
good experience with Amazon and discount the claim.
* * *
To be sure, much more research on the nudnik phenomenon is
needed. Our discussion thus far has focused on the overall impact of
nudniks, and we have cited some evidence suggesting that the net effect
is likely beneficial. Ideally, we would want further research that goes
beyond the “on average” claims and delves into the cross-sectional
variation—identifying the circumstances under which nudniks are
most or least likely to generate positive contributions.124 Yet the
existing examples and studies already indicate that some nudniks do
contribute to meaningful market discipline, thereby positively affecting
other consumers. At a minimum, then, the existing evidence suggests
that we cannot dismiss outright the role that nudniks play in affecting
seller behavior. The gaps left by other modes of market discipline leave
ample room for these active, idiosyncratic consumers to provide an
important public service.
II. HOW SELLERS REACT TO NUDNIKS:
THE FUTURE OF CONSUMER ACTIVISM
Thus far we have focused on one side of the equation—namely,
how nudniks fight underperforming sellers and hold them accountable.
But sellers do not remain passive. It is therefore time to switch focus to
how sellers fight back. More accurately, we must ask: How do sellers
reduce the legal and reputational risks posed by nudniks?
While the nudnik phenomenon has remained understudied in
the legal literature, the firms that face nudniks viscerally understand
their importance. Firms have long invested resources in attempts to
channel nudniks’ complaints to less visible backchannels or mollify
124. Another promising avenue for future research comes from potential concerns about the
equality aspects of nudnik activities. One could claim, for example, that nudniks “enjoy
disproportionate power due to social or economic status.” Schmitz, supra note 6, at 280. We
elaborate in Arbel & Shapira, supra note 27, at 22.
Electronic copy available at: https://ssrn.com/abstract=3501175

<<PAGE_BREAK>>

1_Arbel Shapira (Do Not Delete) 5/12/2020 5:51 PM
960 VANDERBILT LAW REVIEW [Vol. 74:4:929
them with preferential treatment.125 But in recent years, technological
advancements have started disrupting the balance of power between
sellers and nudniks. Sellers are increasingly enjoying access to big data
and predictive analytics tools that will allow them to effectively silence
nudniks.126 The equilibrium is changing.
We used to think of market discipline as a process whereby
buyers choose the firm they want to buy from. Yet in today’s world,
sellers can increasingly choose the customers they want to sell to. Put
differently, economic analysis has traditionally assumed that only
sellers have a reputation to protect; but in today’s environment, buyers
have reputations too. As this Part details, firms evaluate potential
buyers in multiple ways, including their propensities to complain and
publicly confront the underperforming seller.
Companies now store troves of data on consumer behavior at the
individual level. Using widely available consumer scores, predictive
analytics, and machine learning, sellers can make sense of all the data
and predict future consumer behavior. Critically, these algorithms can
predict certain personality traits in each consumer, including the traits
that make a consumer a nudnik.127 Section A details how sellers can use
these tools to identify nudniks before they walk into their stores. These
sellers can then either avoid selling to nudniks or silence them before
they draw public attention to seller misconduct. Section B explains why
the new technological ability to locate and silence a nudnik early, before
she even forms her claim, is a game-changer. Timing matters: the
earlier a seller can identify and silence a nudnik, the more likely it is
that the seller reduces the risk of legal and reputational sanctions, and
the less likely other consumers are to enjoy the positive spillovers from
nudnik behavior.
A. Targeting Nudniks
Nudniks pose a reputational and legal threat to sellers, and so
sellers have strong incentives to separate nudniks from non-nudniks
and then placate nudniks before they publicly air their grievances. The
question, then, is not whether sellers have the will but whether they
have the way to target nudniks. In recent years, firms have increasingly
125. See, e.g., Barnes, supra note 86, at 554–55 (noting that firms attempt to include
nondisparagement clauses in consumer contracts).
126. Predictive analytics refers here to models that allow businesses to make sense of big data
and use it to their advantage. See generally Dennis Hirsch, Predictive Analytics Law and Policy: A
New Field Emerges, 14 I/S: J.L. & POL’Y FOR INFO. SOC’Y 1, 1 (2017).
127. See Ariel Porat & Lior Jacob Strahilevitz, Personalizing Default Rules and Disclosure
with Big Data, 112 MICH. L. REV. 1417, 1434–38 (2014) (explaining that firms throughout different
industries are collecting data to better classify the behaviors and personalities of their consumers).
Electronic copy available at: https://ssrn.com/abstract=3501175

<<PAGE_BREAK>>

1_Arbel Shapira (Do Not Delete) 5/12/2020 5:51 PM
2020] THEORY OF THE NUDNIK 961
gained access to new forms of big data—information on each consumer’s
past interactions with one’s own company as well as with other sellers—
and to predictive analytics tools: models that predict each consumer’s
proclivity to act publicly when dissatisfied.128 Connecting the dots is
straightforward: we have ample reason to believe that sellers will use
the newfound technological capabilities to reduce and contain the
nudnik-based risks.
To be sure, finding smoking-gun evidence on such nudnik-
targeting practices is difficult. This is probably by design: firms do not
shout from the rooftops that they can identify and disarm nudniks, but
rather treat their use of big data as proprietary information and shield
it with trade secret protections.129 As a result, targeting practices
“remain a mystery to consumers”130 and are understudied by
researchers.131 In this Section, we nevertheless document various
indications that piece together a picture of sellers gradually improving
their nudnik-circumventing abilities: identifying who is a nudnik and
who is not (Section II.A.1) and then disarming them (Section II.A.2). We
should be careful not to overstate our claim; it is hard to evaluate the
scope of these practices given their secretive nature. What we can offer
are suggestive indications of emerging trends. At the same time, we
should not discount these indications: at a minimum, they suggest an
early trend and a near-future trajectory. After all, firms’ usage of
consumer scores, big data, and predictive analytics to target nudniks is
only likely to increase in the coming years.132
128. Id.
129. See id. at 1435; Brenda Reddix-Smalls, Credit Scoring and Trade Secrecy: An Algorithmic
Quagmire or How the Lack of Transparency in Complex Financial Models Scuttled the Finance
Market, 12 U.C. DAVIS BUS. L.J. 87, 117–18 (2011) (explaining that, with credit score
computations, companies can often protect their algorithmic practices through trade secret
theory); Van Loo, supra note 78, at 601 (“[B]ehind a veil of trade secrecy corporations’ dispute
systems exploit market failures and use unequal rules of procedure.”).
130. Amy J. Schmitz, Secret Consumer Scores and Segmentations: Separating “Haves” from
“Have-Nots,” 2014 MICH. ST. L. REV. 1411, 1427; see Max N. Helveston, Consumer Protection in the
Age of Big Data, 93 WASH. U. L. REV. 859, 864 (2016) (“For the vast majority of lines of insurance,
there is essentially nothing limiting the amount of data that insurers can collect about individuals
and very little controlling their use of consumers’ personal information.”).
131. See Moshe Davidow, Organizational Responses to Customer Complaints: What Works and
What Doesn’t, 5 J. SERV. RES. 225, 225 (2003) (“Unfortunately, with all of that complaining, the
implications of customer complaint behavior for organizations have been examined far less often.”);
Torben Hansen et al., How Retailers Handle Complaint Management, 22 J. CONSUMER
SATISFACTION, DISSATISFACTION & COMPLAINING BEHAV. 1, 1 (2009) (“While many studies have
investigated the complaint process from the consumer side, those from the side of business are few
and far between.”).
132. See Helveston, supra note 130, at 880 (noting that, in the insurance industry, use of
evolving technologies will continue to increase, along with the list of potentially concerning
implications).
Electronic copy available at: https://ssrn.com/abstract=3501175

<<PAGE_BREAK>>

1_Arbel Shapira (Do Not Delete) 5/12/2020 5:51 PM
962 VANDERBILT LAW REVIEW [Vol. 74:4:929
1. Identifying Nudniks
Sellers nowadays have highly specific data on each consumer’s
past dealings and her personality traits, which they can turn into
predictions about future behavior. Specifically, sellers can identify each
consumer’s tendency to be a nudnik. This is hardly trivial. Prior to
recent advances in information technologies, recoding each consumer’s
past interactions with one’s own firm was costly, and the data was not
readily available (because it was stored in hard-to-search paper
records). Nowadays, firms can easily purchase from data brokers all the
information they want about consumers’ past interactions with other
sellers.133 Using this data, firms can predict whether a given consumer
is a nudnik before that consumer even sets foot in their store. Sellers
are already tracking consumers along three nudnik-relevant
dimensions: their past complaining behavior, their likelihood to
complain in the future, and the impact that their complaint is likely to
have on others.
First, customer relation management (“CRM”) software allows
sellers to log information on each interaction with each customer,
including the volume and valence of past complaints:134 How many
complaints did the customer file? How detailed or negative were the
complaints? How many items did the customer return to the store? The
minute a customer contacts them, sellers therefore know all relevant
information on the customer’s tendencies, including how “serial” of a
complainer she is.135 As one report puts it, firms use such data to decide
“whether a customer is routed promptly to an attentive service agent or
relegated to an overflow call center.”136 It is hard to overstate how
advanced CRM tools have revolutionized the way that sellers handle
buyers; it suffices to note that it is a $30 billion industry.137
133. See discussion infra notes 141–145 and accompanying text.
134. See Bang Nguyen, The Dark Side of Customer Relationship Management: Exploring the
Underlying Reasons for Pitfalls, Exploitation and Unfairness, 19 J. DATABASE MARKETING &
CUSTOMER STRATEGY MGMT. 56, 58 (2012) (“[B]y adopting new technologies and the Internet, firms
have enabled CRM schemes to flourish. Using emails, social media, for example, Facebook pages,
YouTube and Twitter, and blogs, the communication directed towards potential customers can now
be customised at an individual level.”); Van Loo, supra note 78, at 564 (“When a consumer reaches
out about a dispute, computer algorithms typically analyze all relevant internal and external
information available to estimate two main variables: behavior and net worth.”).
135. Van Loo, supra note 78, at 564–65.
136. Natasha Singer, Secret E-Scores Chart Consumers’ Buying Power, N.Y. TIMES (Aug. 18,
2012), https://www.nytimes.com/2012/08/19/business/electronic-scores-rank-consumers-by-
potential-value.html [https://perma.cc/N5UM-4U4R].
137. See Shanhong Liu, Customer Relationship Management Software Market Revenues
Worldwide from 2015 to 2022 (In Millions of U.S. Dollars), STATISTA (Jan. 14, 2020),
https://www.statista.com/statistics/605933/worldwide-customer-relationship-management-
market-forecast/ [https://perma.cc/Q2JU-JNHH].
Electronic copy available at: https://ssrn.com/abstract=3501175

<<PAGE_BREAK>>

1_Arbel Shapira (Do Not Delete) 5/12/2020 5:51 PM
2020] THEORY OF THE NUDNIK 963
Importantly, consumer data increasingly encompass more than
just the consumer’s interactions with the specific seller in question.
“Data brokers” now collect and trade consumer data between sellers.138
As the FTC has reported, these brokers collect thousands of different
types of information per consumer—not just purchase history, but also
“intimate details of consumers’ financial, social, and personal lives.”139
It is a small step from here to identifying nudniks: if you know who is
likely to post glowing reviews, you also know who is likely to post
scathing ones.140
Historically, sophisticated targeting techniques were available
only to the largest retailers (because costs were prohibitive). Now, the
increased availability of (and competition among) third-party data
brokers reduces the costs of consumer targeting so that more and more
sellers are likely to use it.
Second, beyond having access to better information about each
consumer’s past behavior, sellers now have access to better predictions
about each consumer’s future behavior. Today, America’s consumers
are being scored on a variety of metrics—well beyond the famous credit
score—by a multitude of firms that analyze data from a great variety of
sources.141 Sellers can use these scores to customize their treatment of
individual customers. “Customer churn models” accurately predict the
probability that a given customer would be dissatisfied and abandon
the business.142 Customer lifetime value (“CLV”) scores predict not just
the probability that a given customer will make a purchase, but also
“the likelihood a person will . . . bad-mouth a company.”143 Other
138. See generally Schmitz, supra note 130, at 1419–33 (explaining the growth in the data
broker industry and how these brokers utilize consumer data).
139. Id. at 1413; see EDITH RAMIREZ ET AL., FED. TRADE COMM’N, DATA BROKERS: A CALL FOR
TRANSPARENCY AND ACCOUNTABILITY I-Ix (2014), http://www.ftc.gov/system/files/documents/
reports/data-brokers-call-transparency-accountability-report-federal-trade-commission-may-
014/140527databrokerreport.pdf [https://perma.cc/R6R9-GEW9].
140. See Helveston, supra note 130, at 878 (showing that the insurance industry uses big data
and predictive analytics not just in marketing, but also in claim management).
141. See PAM DIXON & ROBERT GELLMAN, THE SCORING OF AMERICA: HOW SECRET CONSUMER
SCORES THREATEN YOUR PRIVACY AND YOUR FUTURE 6–10 (2014),
http://www.worldprivacyforum.org/wp-content/uploads/2014/04/WPF_Scoring_of_America_
April2014_fs.pdf [https://perma.cc/KK5H-4DHF].
142. See Abdelrahim Kasem Ahmad et al., Customer Churn Prediction in Telecom Using
Machine Learning in Big Data Platform, 6 J. BIG DATA 28, 34 (2019); Anupam Kundu, Machine
Learning Powered Churn Analysis for Modern Day Business Leaders, TOWARDS DATA SCI. (Oct. 24,
2018), https://towardsdatascience.com/machine-learning-powered-churn-analysis-for-modern-
day-business-leaders-ad2177e1cb0d [https://perma.cc/TGB2-UGYR] (explaining churn and its
effect on business management).
143. Khadeeja Safdar, On Hold for 45 Minutes? It Might Be Your Secret Customer Score, WALL
ST. J. (Nov. 1, 2018, 11:04 AM), https://www.wsj.com/articles/on-hold-for-45-minutes-it-might-be-
your-secret-customer-score-1541084656 [https://perma.cc/NUS6-NF4L]; see also Kundu, supra
note 142 (describing how a predictive churn model can impact CLV).
Electronic copy available at: https://ssrn.com/abstract=3501175

<<PAGE_BREAK>>

1_Arbel Shapira (Do Not Delete) 5/12/2020 5:51 PM
964 VANDERBILT LAW REVIEW [Vol. 74:4:929
metrics predict the likelihood that a given consumer will return
items.144 The proliferation and growing sophistication of these scores
allows firms to target nudniks more accurately than ever before.
Finally, beyond assessing how likely a given consumer is to
publicly voice her frustration, sellers nowadays can also predict how
strong and far the nudnik’s cry will echo. The FTC found that
companies today track each consumer’s social influence scores, based
on the number of followers on social media and other metrics.145 Cross-
referencing this information with information collected from online
review platforms such as Yelp and Airbnb allows data collectors to
obtain a rich profile of each consumer and their propensity to
complain.146 Data-analysis providers then openly sell their proprietary
technology to use the data to identify who is a “fan” of a given seller or
service,147 who is likely to complain, and how influential the complaint
is going to be.148 Sellers can use these scores to assess the reputational
risk posed by each consumer. In other words, sellers can not only
identify which consumers are likely to make waves about company
failures but also predict how tall those waves will be.
144. Khadeeja Safdar, How Your Returns Are Used Against You at Best Buy, Other Retailers,
WALL STREET J. (Mar. 13, 2018, 5:30 AM), https://www.wsj.com/articles/how-your-returns-are-
used-against-you-at-best-buy-other-retailers-1520933400 [https://perma.cc/3PN5-NJG7].
145. See What Information Do Data Brokers Have on Consumers, and How Do They Use It?:
Hearing Before the S. Comm. on Commerce, Sci., & Transp., 113th Cong. 66–72 (2013) (statement
of Jessica Rich, Director, Bureau of Consumer Protection, Federal Trade Commission); RAMIREZ,
supra note 139, at 31 (explaining how data brokers convert analyses into various marketing scores
for consumers).
146. See, e.g., Jure Leskovec, Web Data: Amazon Reviews, STAN. NETWORK ANALYSIS PROJECT,
https://snap.stanford.edu/data/web-Amazon.html (last visited May 7, 2020) [https://perma.cc/
WZ56-7NFS] (compiling a dataset that tracks Amazon reviews over a period of eighteen years). It
is telling that, on more than one occasion, academic researchers managed to use such open
databases to build software that identifies negative reviews and engages with them. See, e.g., Yu-
Han Chen & John Merrick, Real Time Yelp Reviews Analysis and Response Solutions for
Restaurant Owners, DATA SCI. ACAD. BLOG (Sep. 29, 2017), https://nycdatascience.com/
blog/student-works/real-time-yelp-reviews-analysis-response-solutions-restaurant-owners/
[https://perma.cc/L6SV-FEB6] (building a bot that identifies negative reviews in Yelp and
responds to them); see also Karen Robson et al., Making Sense of Online Consumer Reviews: A
Methodology, 55 INT’L J. MKT. RES. 521 (2013) (doing the same for negative reviews in Apple’s App
Store).
147. See, e.g., Sys. & Method for Managing Advertising Intelligence and Customer Relations
Management Data, U.S. Patent Application No. 20130218640 (filed Aug. 22, 2013).
148. Schmitz, supra note 130, at 1430–32. For an early account, see ED KELLER & JON BERRY,
THE INFLUENTIALS (2003) (explaining how a small group of influential Americans affect the
decisions of others). For a real-world example, see How to Find and Source the Best Influencers for
Your Brand, OBVIOUSLY, https://www.obvious.ly/en/platform-identification (last visited May 7,
2020) [https://perma.cc/2QLP-LZAB] (assisting firms in identifying social media “micro-
influencers”).
Electronic copy available at: https://ssrn.com/abstract=3501175

<<PAGE_BREAK>>

1_Arbel Shapira (Do Not Delete) 5/12/2020 5:51 PM
2020] THEORY OF THE NUDNIK 965
These emerging technological capabilities allow firms not just to
identify nudniks early but also to disarm them effectively, an issue that
we turn to now.
2. Disarming Nudniks
A seller who identifies a nudnik would want to minimize the
nudnik’s impact as quickly as possible.149 Sellers have always employed
a wide array of disarming tactics, such as settling outside the
courthouse, delivering private apologies,150 or offering complimentary
services.151 But here as well, big data and predictive analytics are
transforming nudnik-disarming tactics. They are doing so along three
key dimensions: selective remedies, muffling, and avoiding selling to (or
gagging) nudniks to begin with.
Offering selective remedies to dissatisfied consumers is hardly a
new practice, but technological tools make the practice much more
granular and effective. In a sense, selective remedies are a form of ex
post discrimination: if two buyers were wronged, and one of them is
identified as assertive while the other is not, then sellers will go to
greater lengths to appease the former.152 New technologies allow sellers
not only to better identify whom to appease, but also how to appease
them. Predictive analytics and CRM software tell sellers whether the
dissatisfied consumer who has a propensity to fight is after money,
validation, replacement, or an apology. Sellers can then tailor the
remedy to this specific consumer, without changing their practices
toward other consumers. It is telling that firms today spend more effort
on resolving social media complaints than they do on offline complaints;
149. See Sébastien Mena et al., On the Forgetting of Corporate Irresponsibility, 41 ACAD.
MGMT. REV. 720, 725 (2016) (noting that following failures, firms engage in “forgetting” tactics,
trying to make their stakeholders discount what happened, including by silencing those who keep
reminding others of the failure).
150. See Yonathan A. Arbel & Yotam Kaplan, Tort Reform Through the Backdoor: A Critique
of Law and Apologies, 90 S. CAL. L. REV. 1199 (2017) (explaining how privileged apologies have
been used to limit victims’ recovery and shield injurers from liability).
151. See Schmitz, supra note 6, at 280–82 (describing the industry practice of offering
complainers preferential treatment in “debt, insurance, and other business-to-consumer”
contexts). Sellers can also respond to troublesome consumers by playing hardball, as in denying
service and charging higher rates.
152. See, e.g., Becher & Zarsky, supra note 97, at 90–91; Johnston, supra note 96 (providing
an economic theory for how standard-form contracts enable cooperative negotiation). In Becher &
Zarsky’s account, sellers offer selective remedies to retain the complaining customer and project a
good image toward noncomplaining customers. In other words, they focus on how sellers earn
reputation credit points, while we focus on how sellers avoid reputational sanctions.
Electronic copy available at: https://ssrn.com/abstract=3501175

<<PAGE_BREAK>>

1_Arbel Shapira (Do Not Delete) 5/12/2020 5:51 PM
966 VANDERBILT LAW REVIEW [Vol. 74:4:929
the former comes with greater reputational risk.153 Further, in the past,
decisions on who and how to appease were crude: if a customer was a
known celebrity or an opinion leader, that customer would get special
treatment. Nowadays, firms can offer a more effective sliding scale,
tailoring their specific treatment to the type of influence the customer
might have based on various customer scores.154
We can see evidence of such tailored preferential treatment in
the work of third-party providers who offer firms an “influencer
strategy,” which means ranking consumers based on their influence on
others and prioritizing those with more influence.155 Recent
documentaries on the Fyre music festival showed how the organizers
offered ticket-buyers different housing options based on each buyer’s
social media scores: “influencers” were offered villas, while “followers”
were offered huts.156
A second channel for minimizing nudniks’ effects is drowning
out their voices. This, essentially, is the service that many reputation-
management firms sell: increasing the volume of irrelevant or positive
content in order to drown out negative content.157 By overwhelming
consumers with irrelevant information, reputation-management firms
reduce the chances that any valuable information produced by nudniks
will be seen or used. After all, for most users, page eight of Google
153. Mike Maughan, Why Angry Consumers Should Head to Instagram When It Is Time to
Make a Complaint, CNBC (Jan. 27, 2019, 9:00 AM), https://www.cnbc.com/2019/01/25/for-angry-
consumers-instagram-complaints-gets-the-quickest-results.html [https://perma.cc/QWJ8-7WBD].
154. COUNCIL OF ECON. ADVISORS, EXEC. OFFICE OF THE PRESIDENT, BIG DATA AND
DIFFERENTIAL PRICING, 8–13 (2015), https://obamawhitehouse.archives.gov/sites/default/files/
whitehouse_files/docs/Big_Data_Report_Nonembargo_v2.pdf [https://perma.cc/VPX3-VZUQ]
(noting that big data shifted price and terms differentiation from broad demographics proxies to
personal indicators).
155. The Scrunch company, for example, advises firms to:
[E]nsure that your influencer/s always receive the premium service. For example, if
you’re an airline you wouldn’t seat your influencers in economy or premium economy.
They should be seated up front in first class with all the bells and whistles. If their
experience is amazing, then the content they share with their community will be
amazing!
Georgia Mee, How to Give Influencers an A+ Experience and Why It’s Important, SCRUNCH,
https://www.scrunch.com/blog/give-influencers-a-great-experience# (last visited May 7, 2020)
[https://perma.cc/84G8-L4GC].
156. E.g., FYRE: THE GREATEST PARTY THAT NEVER HAPPENED (Netflix 2019).
157. See Phil Lockwood, Turn a Negative Into Positive—Online Ratings, Reviews, and Your
Business—Plus: 10 Common Questions Answered, DISTILL AGENCY (Oct. 23, 2017, 5:51 AM),
https://www.distillagency.com/blog/turn-negative-into-positive-online-ratings-reviews-business
[https://perma.cc/MGL2-Y5FY] (encouraging clients to “[g]et more positive [online] reviews to
drown out the negative”); see also Van Loo, supra note 78, at 583 (noting firms’ usage of “fake
review mills,” meant to overwhelm online review sites with positive reviews).
Electronic copy available at: https://ssrn.com/abstract=3501175

<<PAGE_BREAK>>

1_Arbel Shapira (Do Not Delete) 5/12/2020 5:51 PM
2020] THEORY OF THE NUDNIK 967
search results is where information goes to die.158 While the first
channel, selective remedies, is meant to convince nudniks not to
disseminate damning information in the first place, the second channel,
muffling of consumers’ voices, is meant as damage control once the
nudnik has already publicly voiced frustration.
Lastly, and perhaps most potently, sellers can now use
personalized contracts to either limit the consumer’s ability to purchase
from them or to complain after the purchase.159 Before the rise in
identification technologies, firms had to use blunt tools that applied to
all consumers. For example, firms could install a forced arbitration
clause in their form contracts to limit the reputational effects of public
dispute resolution.160 But adopting such provisions may, in itself, cause
a reputational backlash. A timely example comes from the legal sector,
where law students publicly battled law firms that adopted mandatory
arbitration provisions, getting the firms to reverse course.161 Another
timely example is gag clauses in form contracts, which limit every
consumer’s ability to post negative reviews about the business. Yet
these provisions, too, are salient and may cause a backlash. Indeed,
after one business installed a gag clause requiring that consumers who
post negative reviews pay $2,500, Congress intervened and enacted the
Consumer Review Fairness Act,162 which invalidates such clauses.163
It is therefore much better for firms to keep their nudnik-
avoidance tactics under the radar by using them on a case-by-case basis.
One strategy would be to avoid engaging with nudniks to begin with.
To illustrate the dynamics, consider how on Airbnb, the online vacation
rentals marketplace, some hosts apparently refuse to rent their houses
to certain guests based on these guests’ propensity to write negative
158. This practice goes hand in hand with firms’ efforts to push right-to-be-forgotten laws,
which would allow them to remove unfavorable records entirely. See Gesenhues, supra note 110
(explaining the business model of addressing consumer removal requests).
159. It is beyond the scope of this Article to analyze, in full, the reasons why consumers would
not try to masquerade as nudniks. In short, we note that sellers can disarm nudniks by treating
them negatively, as in refusing service or charging a higher price.
160. See Beth Davis, Mandatory Arbitration Agreements in Long-Term Care Contracts: How
to Protect the Rights of Seniors in Washington, 35 SEATTLE U. L. REV. 213, 214 (2011) (explaining
the impact of arbitration agreements on stifling public outrage); Roy Shapira, Mandatory
Arbitration and the Market for Reputation, 99 B.U. L. REV. 873 (2019) (outlining the debate
surrounding mandatory arbitration and reputation).
161. See ROY SHAPIRA, LAW AND REPUTATION: HOW THE LEGAL SYSTEM SHAPES BEHAVIOR BY
PRODUCING INFORMATION (forthcoming 2020).
162. H.R. REP. NO. 114-731, at 5–6 (2016).
163. Consumer Review Fairness Act of 2016, Pub. L. No. 114-258, 130 Stat. 1355 (to be codified
at 15 U.S.C. § 45b). We come back to the Act, and point out an important loophole in it, infra Part
III.
Electronic copy available at: https://ssrn.com/abstract=3501175

<<PAGE_BREAK>>

1_Arbel Shapira (Do Not Delete) 5/12/2020 5:51 PM
968 VANDERBILT LAW REVIEW [Vol. 74:4:929
reviews.164 A Forbes commentator summed it up nicely: “I, like many
other in-the-know hosts, tend to dig into Airbnb to see a guest’s past
posted reviews. If I see nothing but bitterness and complaining, they’re
a hard pass.”165 Given that the overwhelming majority of Airbnb guests
refrain from writing a detailed negative review (even when one is
merited),166 the ability of hosts to avoid the few that do post reviews
decreases the informativeness of reviews. Similar dynamics have been
in play in offline contexts, such as doctors avoiding litigious patients167
or landlords avoiding litigious tenants.168
B. The Implications of Targeting Nudniks
There is nothing new about sellers exerting effort to silence
buyers who could publicly challenge them. Think, for example, about
the prevalence of confidential settlements, which some view as
defendant firms bribing plaintiffs to not warn others. Why does it
matter, then, that sellers have recently gotten better at targeting
nudniks? If sellers would have eventually paid nudniks off even without
big data tools, why does it matter that they can now identify and pay
them off much earlier? This Section shows that timing matters. The
earlier sellers can identify and disarm nudniks, the fewer positive
spillovers nudniks generate. Earlier interventions limit not only the
effectiveness of legal deterrence but also the effectiveness of
reputational deterrence.
164. AirReview, CHROME WEB STORE, https://chrome.google.com/webstore/detail/airreview/
plkdnpjpnhhnmigmekaocdfokkmebdnm?hl=en-US (last visited May 7, 2020) [https://perma.cc/
ZU4J-54UZ]; see, e.g., Annet3176, Airreview - a Little Helpful Extension to Screen Guests,
AIRHOSTS F., https://airhostsforum.com/t/airreview-a-little-helpful-extension-to-screen-guests/
30341 (last visited May 7, 2020) [https://perma.cc/X3JN-69YQ] (“I use it and find it helpful.”)
165. Seth Porges, All Airbnb Hosts Should Use This Chrome Extension for Screening Guests,
FORBES (July 27, 2017, 12:50 PM), https://www.forbes.com/sites/sethporges/2017/07/27/all-airbnb-
hosts-should-use-this-chrome-extension-for-screening-guests/#4c4c9a5d4081 [https://perma.cc/
FA9V-PKLB]; see also u/IamWoe, Best Hosts, What Would You Love to See in a Message?, REDDIT
(Mar. 30, 2019), https://www.reddit.com/r/AirBnB/comments/b7e37i/best_hosts_what_would_you_
love_to_see_in_a_message/ejr6p1l/ [https://perma.cc/8V2E-TKPY] (discussing how owners use
AirReview to screen potential tenants).
166. See Georgios Zervas et al., A First Look at Online Reputation on Airbnb, Where Every
Stay is Above Average (Apr. 12, 2015) (unpublished manuscript), https://papers.ssrn.com/
sol3/papers.cfm?abstract_id=2554500 [https://perma.cc/F7SS-VTJ4] (finding that the majority of
reviews are positive, even for properties that are of lower quality, as judged by their reviews on
another platform).
167. See Rachel Emma Silverman, Database for Doctors Tracks Litigious Patients, WALL ST.
J. (Mar. 5, 2004, 12:01 AM), https://www.wsj.com/articles/SB107844497811447118 [https://
perma.cc/B9M7-KQN8]. This particular database has since been shut down.
168. See Esme Caramello & Nora Mahlberg, Combating Tenant Blacklisting Based on Housing
Court Records: A Survey of Approaches, 2017 CLEARINGHOUSE REV. 1 (detailing the practice of
tenant-screening bureaus, which collect housing court data and sell them to landlords).
Electronic copy available at: https://ssrn.com/abstract=3501175

<<PAGE_BREAK>>

1_Arbel Shapira (Do Not Delete) 5/12/2020 5:51 PM
2020] THEORY OF THE NUDNIK 969
1. Diluting Legal Deterrence
By using technology to identify and disarm nudniks early,
sellers can significantly dilute legal deterrence.
To see why, let us first consider the benchmark: namely, legal
deterrence before big data. Firms have always had incentives to pay
handsomely to settle a nudnik’s claim in exchange for the nudnik’s
commitment to confidentiality. Indeed, most cases settle secretly, with
the parties stipulating to keep the details of their dispute private.169
Legal scholars were quick to note the divergence of private and public
interests here: both parties have incentives to handle their disputes in
ways that limit public access to information.170 Defendants are willing
to pay more for a confidentiality provision to save themselves the risk
of adverse publicity and exposure to subsequent class actions.
Consumer plaintiffs anticipate defendants’ willingness to pay for
secrecy and use it as a bargaining chip. A plaintiff who receives a
generous offer may be inclined to accept it because she does not factor
in the loss of positive spillovers. That is, at this point she may not care
whether relevant information becomes available to third parties.171
Yet, in a world without big data, confidential settlements could
still generate deterrence.172 One reason is that the plaintiff who
complains first, and exposes a certain defect, may be able to extract a
hefty settlement amount from the defendant company. Say a nudnik-
plaintiff has exposed a practice of overcharging takeaway purchases by
$4 each. The plaintiff anticipates that the overcharge has been
occurring over one month and that each day the restaurant services one
hundred takeaway orders. The plaintiff therefore anticipates that the
defendant restaurant had been overcharging other customers to the
tune of $12,000 collectively. The other customers are currently not
aware that they were overcharged, and the restaurant would like to
keep it that way. If the nudnik drives a hard bargain, she should be able
to reach a large settlement, well beyond the harm of $4 and up to
169. See Jon Bauer, Buying Witness Silence: Evidence-Suppressing Settlements and Lawyers’
Ethics, 87 OR. L. REV. 481, 491 nn.16–19 (2008) (compiling references); Erik S. Knutsen, Keeping
Settlements Secret, 37 FLA. ST. U. L. REV. 945, 946 n.1 (2010) (same).
170. See Steven Shavell, The Fundamental Divergence Between the Private and the Social
Motive to Use the Legal System, 26 J. LEGAL STUD. 575, 605 (1997) (describing settlement as a
means of securing privacy and maintaining secrecy at the expense of social goals); Wendy Wagner,
When All Else Fails: Regulating Risky Products Through Tort Litigation, 95 GEO. L.J. 693, 709–
10 nn.71–74 (2007) (compiling references that address privacy through settlement).
171. See Shapira, Law as Source, supra note 73, at 204 (outlining the conflicting interests
when looking at settlement as a remedy).
172. See generally Saul Levmore & Frank Fagan, Semi-Confidential Settlements in Civil,
Criminal, and Sexual Assault Cases, 103 CORNELL L. REV. 311 (2018) (exploring how, under
certain conditions, even confidential (or semi-confidential) settlements can generate deterrence).
Electronic copy available at: https://ssrn.com/abstract=3501175

<<PAGE_BREAK>>

1_Arbel Shapira (Do Not Delete) 5/12/2020 5:51 PM
970 VANDERBILT LAW REVIEW [Vol. 74:4:929
$12,000. That settlement, in itself, approaches a sanction that is
sufficiently large to deter overcharging. As a result, even though the
other customers were not informed, such settlements save them from
additional overcharging in the future.173
The ability of plaintiffs to extract rents depends, however, on
when they settle. Deterrence through confidential settlements happens
only when the nudnik-plaintiff can assess defendants’ exposure to
liability for other plaintiffs (and thus know how hard a bargain to
drive). When firms target nudniks early, they reduce the likelihood that
the first plaintiff accurately perceives the number of other victims or
the extent of harms done to them.174 The seller can avoid selling to the
nudnik altogether. The seller can sell to the nudnik but offer
preferential treatment ex ante, so that the nudnik is not dissatisfied
with her purchase. If a nudnik is dissatisfied, the seller can offer a
quick, full refund and better treatment ex post, before the nudnik
escalates her complaint into a lawsuit. And even if a nudnik files a
lawsuit, the seller can settle early, before the lawsuit reaches the
discovery stage. Although the nudnik does not need discovery to tell her
she was wronged, she often needs discovery to tell her how many others
were wronged and whether the misbehavior in question was an isolated
mistake or an ongoing practice. Further, because sellers often keep
early targeting practices secret,175 the nudnik does not know why or
when in the process she was targeted and does not know whether she
is the lone complainer or just the first. As a result, the nudnik is less
likely to extract rents from sellers and produce deterrence.176
There is a broader point here. Legal scholars and policymakers
are constantly engaged in the policy debate of private versus public
resolution of disputes: settlement versus trial, confidentiality versus
openness, mandatory arbitration versus litigation, and so on.177 But all
these debates may become moot if potential defendants can silence
potential plaintiffs early. To use the classic naming-blaming-claiming
typology,178 the extant literature focuses on what happens after
grievances evolve into lawsuits in the post-claiming stages. In contrast,
we highlight the ability of companies to interject earlier, before the
173. Id.
174. Id. at 353.
175. See Porat & Strahilevitz, supra note 127, at 1434–38 (noting the secrecy around big data
practices).
176. It also helps that the seller is able to tell the complaining buyer: “You are the only one
who has experienced problems with the product! You must have done something wrong.”
177. See, e.g., Bauer, supra note 169, at 493–94 nn.27–31 (compiling references); Jack H.
Friedenthal, Secrecy in Civil Litigation: Discovery and Party Agreements, 9 J.L. & POL’Y 67, 67–68
n.1 (2000) (same).
178. See Felstiner et al., supra note 11.
Electronic copy available at: https://ssrn.com/abstract=3501175

<<PAGE_BREAK>>

1_Arbel Shapira (Do Not Delete) 5/12/2020 5:51 PM
2020] THEORY OF THE NUDNIK 971
aggrieved party files a lawsuit, in the pre-claiming—and sometimes
even pre-blaming—stages. Scholars have warned that when claims are
funneled into private and confidential channels of resolution, we lose
some of the deterrent effect179 as well as the development of a vibrant
body of law to guide future behavior.180 The same logic applies when the
injured parties have not even formed their claims to begin with. In fact,
the logic applies more forcefully, if only because settling before claiming
reduces not just legal deterrence but also reputational deterrence.
2. Diluting Reputational Deterrence
One way to build a good reputation is by investing in offering
higher quality products and better customer service. Another
(nonexclusive) way is to invest in appearance management.181 When
technological changes make investing in appearances more effective,
they crowd out incentives to invest in the actual product and service.
Drowning out bad reviews has roughly the same effect as not having
bad reviews written about you at all.182
The ability to silence nudniks early in the process significantly
reduces a firm’s exposure to reputational risk through two key conduits:
online reviews and litigation.
Consider online reviews first. Only a small subset of consumers
bother to write detailed reviews that spotlight the negative aspects of a
product or service.183 If—as in the Airbnb example—sellers can avoid
selling to these detailed-review-writing buyers (or sell them a better
product or service), then seller failures become invisible to the market.
Next, consider the much less intuitive channel of litigation. If
sellers can target nudniks early and settle any claims these nudniks
might have before they file lawsuits, sellers will significantly reduce not
just legal risk but also reputational risk. This is because litigation and
179. See, e.g., David Luban, Settlements and the Erosion of the Public Realm, 83 GEO. L. REV.
2619, 2649–50 (1995) (outlining this particular problem through a discussion of product liability
claims); Jillian Smith, Secret Settlements: What You Don’t Know Can Kill You!, 2004 MICH. ST. L.
REV. 237.
180. See, e.g., Elizabeth Chamblee Burch, Securities Class Actions as Pragmatic Ex Post
Regulation, 43 GA. L. REV. 63, 117–18 (2008) (exploring deterrence-based critiques to arbitration);
Lynn M. LoPucki, Delaware’s Fall: The Arbitration Bylaws Scenario, in CAN DELAWARE BE
DETHRONED?: EVALUATING DELAWARE’S DOMINANCE IN CORPORATE LAW 35, 51 (Stephen M.
Bainbridge et al. eds., 2018) (articulating the state of arbitration bylaws in Delaware law).
181. See generally Benjamin Klein & Keith Leffler, The Role of Market Forces in Assuring
Contractual Performance, 89 J. POL. ECON. 615 (1981) (describing how reputational considerations
can ensure contractual performance).
182. Note that competitive pressures would not necessarily push firms toward investing in
actual quality and away from appearance management. In fact, the opposite is more likely to
happen. See GEORGE A. AKERLOF & ROBERT J. SHILLER, PHISHING FOR PHOOLS (2015).
183. See Woolf, supra note 86.
Electronic copy available at: https://ssrn.com/abstract=3501175

<<PAGE_BREAK>>

1_Arbel Shapira (Do Not Delete) 5/12/2020 5:51 PM
972 VANDERBILT LAW REVIEW [Vol. 74:4:929
reputation are interconnected. What happens in the courtroom trickles
out and affects the court of public opinion.184
A short primer on reputation through litigation is in order.
Litigation affects sellers’ behavior not just directly, by forcing them to
compensate aggrieved customers, but also indirectly, by producing
information on how the sellers behaved.185 To the extent that
information produced during litigation becomes public, it affects the
way that outside observers treat the defendant seller. Litigation affects
the seller’s reputation through various channels: revelation, diffusion,
certification, and attribution of information.186 A firm’s ability to target
potential plaintiffs early, before they even become plaintiffs, distorts
the operation of all those channels.187
Take revelation, for example. Litigation can affect reputations
by extracting damning information about the sellers that market
players were not privy to.188 The classic example here is internal email
communications exposed during discovery that show the seller
knowingly skirted safety concerns and later engaged in a cover-up. Yet
if a firm manages to settle the nudnik’s claim earlier, chances are it will
escape discovery and will not be forced to disclose electronic
communications.
Another common effect of litigation concerns the diffusion of
damning information. For reputational sanctions to be meaningful, the
revealed information has to be widely diffused, so as to reach a critical
mass of stakeholders that will take their business elsewhere.189 This is
usually achieved via media coverage. In a separate project, one of us
showed that litigation shapes the frequency and tenor of media
coverage.190 For example, content analysis of the Pulitzer Prize–
winning investigative projects over the past twenty years reveals that
over half relied heavily on “legal sources” such as regulatory
investigation reports and court documents.191
184. See Shapira, supra note 160, at 887–89 (describing four ways in which litigation affects
reputation).
185. See Shapira, Reputation through Litigation, supra note 73; Roy Shapira, A Reputational
Theory of Corporate Law, 26 STAN. L. & POL’Y REV. 1, 7 (2015).
186. See Shapira, supra note 160, at 885–88.
187. Id. We elaborate here only on two channels (revelation and diffusion) for considerations
of brevity and scope. For the other two channels (attribution and certification), see id.
188. Shapira, supra note 185, at 13.
189. Shapira, supra note 160, at 886.
190. See Shapira, Law as Source, supra note 73, at 173–76.
191. Id. at 186–92. There exist multiple reasons for investigative reporters’ reliance on legal
sources. Litigation feeds journalists so-called “information subsidies”: court documents reduce the
costs to journalists of covering a story about product defects or bad customer service. Id. at 166–
67. They provide information that is well-documented and detailed, contains good quotes from
internal company documents, and is libel-proof. Id. at 173–75.
Electronic copy available at: https://ssrn.com/abstract=3501175

<<PAGE_BREAK>>

1_Arbel Shapira (Do Not Delete) 5/12/2020 5:51 PM
2020] THEORY OF THE NUDNIK 973
Thus, if sellers are able to disarm nudniks before they form their
claims and file them in court (or complain to a regulator), they greatly
reduce the risk of media scrutiny. Interviews with reporters reveal a
common practice of what they call “pattern-identifying”: searching legal
databases to discover how many claims were filed with respect to the
issue they are investigating.192 Identifying such patterns has spurred
many investigative reports; yet in a world where no paper trail is
created—because no claim was filed—the ability of reporters to locate
and uncover stories of seller misconduct is significantly hampered. Put
differently, litigation is an important source of media stories on seller
misconduct. Without litigation, the ability of the media to hold sellers
accountable falters.
* * *
In recent years, legal scholars have started exploring the
negative aspects of big data tools that are used to segment buyers. Yet
the existing accounts focus on privacy, fairness, equality, and due
process in the context of effects on specific customers.193 This Part has
shifted the focus from how personalization affects justice and efficiency
toward targeted consumers to how personalization affects market forces
overall.
To illustrate some of the implications of nudnik-circumventing
technologies, we can simply recast the informed minority model.
Schwartz and Wilde explicitly stipulated that their model of market
discipline rests on the assumption that firms cannot distinguish
between searching and nonsearching consumers (what is known as a
“pooling” equilibrium).194 But while pooling may have been a realistic
equilibrium forty years ago when Schwartz and Wilde penned their
model, nowadays, when each consumer carries her own reputation
score, sellers can and increasingly do treat consumers differently. As a
result, the rest of us passive consumers, who do not search in advance
192. Id. at 210.
193. See Schmitz, supra note 130, at 1415–18 (suggesting that big data tools allow firms to
discriminate in ways that perpetuate stereotypes and aggravate the rift between haves and have-
nots); Van Loo, supra note 78, at 577 (warning about unfair process and inequalities in firms’
internal dispute resolution practices); see, e.g., Kate Crawford & Jason Schultz, Big Data and Due
Process: Toward a Framework to Redress Predictive Privacy Harms, 55 B.C. L. REV. 93, 96–109
(2014) (voicing privacy concerns over predictive analytics).
194. See Schwartz & Wilde, supra note 9, at 663 (noting that if firms would be able to separate
searchers and nonsearchers, they would “exploit nonsearchers by charging them higher prices or
providing them with lower quality products and services than would be offered to comparison
shoppers”).
Electronic copy available at: https://ssrn.com/abstract=3501175

<<PAGE_BREAK>>

1_Arbel Shapira (Do Not Delete) 5/12/2020 5:51 PM
974 VANDERBILT LAW REVIEW [Vol. 74:4:929
or enforce after the fact, are worse off. Is there a way to stop this
development?
III. HOW TO STOP THE FUTURE
Part I highlighted the important role that a small minority of
crusading consumers can play in holding sellers accountable. Yet Part
II provided reasons for pessimism: technological advancements in the
collection and analysis of consumer behavior data could eventually
allow sellers to curtail the role that nudniks play. Even if one
recognizes, as we do, that nudnik behavior is not always socially
beneficial, one should still be concerned with the prospect of sellers
avoiding or silencing nudniks wholesale. Sellers have incentives to
block not just the “bad” nudniks but also—indeed even more so—the
“good” ones, those who bring real issues with seller behavior to light. In
other words, there is reason to worry about the future of consumer
activism.195 It is time to turn our attention to whether it is possible to
forestall the nudniks’ extinction.
Section A explains why some intervention is needed, despite
what other accounts of market discipline advocate. While previous
accounts view reputation as a justification to scale back legal
intervention, we focus on how legal intervention is needed to facilitate
a well-functioning market for reputation.196 Section B argues that
existing proposals to regulate big data tools are ill-equipped to deal with
the unique problems that nudnik targeting generates. Section C
sketches potential legislative, regulatory, and judicial solutions. The
solutions fall into one of two categories: (1) buck the trend of nudnik
targeting to preserve nudnik-based market discipline; or (2) ramp up
legal channels of consumer protection to compensate for sellers’
takeover of this channel of market discipline. Section D clarifies that,
across all these solutions, our aim is not to maximize nudnik activity
but rather to optimize it. Not all nudnik-based activism generates social
benefits. Accordingly, our aim should be to facilitate value-creating
nudnik actions while minimizing value-destroying nudnik actions.
195. The only reason not to worry about the trend of sellers gaining proficiency in identifying
and disarming nudniks is if you believe that the market currently systematically overdeters
sellers. If this is the case, letting sellers curtail market discipline would merely bring us back to
normal.
196. See Arbel, supra note 82, at 1287–1303 (offering reputation-by-regulation as a systematic
way to use legal institutions to foster the creation and creation of reputational information);
Shapira, Law as Source, supra note 73, at 200; Shapira, Reputation Through Litigation, supra note
73, at 1238.
Electronic copy available at: https://ssrn.com/abstract=3501175

<<PAGE_BREAK>>

1_Arbel Shapira (Do Not Delete) 5/12/2020 5:51 PM
2020] THEORY OF THE NUDNIK 975
A. Why Legal Intervention Is Needed
Legal scholars have long recognized that reputation matters in
consumer markets. Yet existing accounts usually invoke reputation as
a justification for scaling back legal intervention. A classic example is
the Lucian Bebchuk and Richard Posner model, which states that
sellers mindful of their reputations will treat buyers fairly, often going
beyond what is legally required.197 Many scholars have suggested that
the argument applies even more forcefully to the sharing economy, in
which reputational information is readily available, and, therefore, top-
down regulation is often superfluous.198 Under these assumptions, the
need for legal intervention is minimal, as reputational concerns
supposedly carry the burden of deterrence on their own.
In contrast, we argue that legal intervention is needed to protect
the market for reputation. The creation of reputational information
hinges on buyers noticing seller misconduct and diffusing that
information to other buyers. If sellers can intercept the production of
reputational information, they will be able to evade reputational
discipline.
One basic difference in the underlying assumptions drives these
stark differences between our model’s legal implications and existing
models’ legal implications. In existing accounts, only sellers have a
reputation to protect; in our account, buyers have reputations too.
Existing accounts did not—and could not, given the time when they
were written—factor in the technological developments that allow
sellers to track buyers’ behavior and assign a score to each of us. Yet in
today’s world, sellers can readily purchase information telling them
which consumer is likely to go on a crusade, share embarrassing
information, and complain to the regulator.
The ability to assign a reputation score to each consumer
changes the equilibrium. In the old models, buyers are the ones deciding
from whom to purchase; in our model, sellers decide to whom they want
to sell. As a result, sellers that care about their reputation do not have
197. Bebchuk & Posner, supra note 96, at 831–33.
198. See, e.g., ARUN SUNDARARAJAN, THE SHARING ECONOMY: THE END OF EMPLOYMENT AND
THE RISE OF CROWD-BASED CAPITALISM 138 (2016) (“Eventually, peer-to-peer platforms may
provide a basis upon which society can develop more rational, ethical, and participatory models of
regulation.”); Benjamin G. Edelman & Damien Geradin, Efficiencies and Regulatory Shortcuts:
How Should We Regulate Companies Like Airbnb and Uber?, 19 STAN. TECH. L. REV. 293, 300
(2016) (describing how service providers can better assess customers when reputational evidence
is readily available); Adam Thierer et al., How the Internet, the Sharing Economy, and
Reputational Feedback Mechanisms Solve the “Lemons Problem,” 70 U. MIAMI L. REV. 830 (2015).
For the economists’ perspective, see, for example, Alex Tabarrok & Tyler Cowen, The End of
Asymmetric Information, CATO UNBOUND (Apr. 6, 2015), https://www.cato-unbound.org/2015/04/
06/alex-tabarrok-tyler-cowen/end-asymmetric-information [https://perma.cc/MHZ2-X26Z].
Electronic copy available at: https://ssrn.com/abstract=3501175

<<PAGE_BREAK>>

1_Arbel Shapira (Do Not Delete) 5/12/2020 5:51 PM
976 VANDERBILT LAW REVIEW [Vol. 74:4:929
to invest as much in treating all consumers nicely; they can instead
invest in treating a small subset of consumers nicely (or, worse, avoiding
them altogether). The upshot is straightforward: recognizing the
importance of reputation does not justify scaling back legal intervention
across the board. In fact, it may justify adding new forms of legal
intervention.199
B. Why Existing Modes of Intervention Are Less Likely to Work
Legal scholars and policymakers have recently started turning
their attention to big data and predictive algorithms, proposing
solutions for potential dangers. Yet neither the proposed changes nor
the existing legal tools are well equipped to deal with the specific
nudnik-targeting problem we highlight here. This is because existing
accounts focus on the dangers of opaque, unequal, and unfair treatment
of the targeted consumers.200 We, by contrast, highlight the
fundamentally different problem of third-party effects on nontargeted
consumers.
A recent White House report exemplifies the conventional
worries: big data and predictive analytics, the report notes, “may
facilitate discrimination against protected groups,” thus taking
“advantage of unwary consumers.”201 Accordingly, the report proposes
(1) using existing antidiscrimination laws to tackle the unfair
treatment of historically disadvantaged groups, and (2) increasing
transparency to inform consumers of how sellers are treating them
differently.202
But nudniks are not a protected class. The existing
antidiscrimination laws ban discrimination based on factors such as
race, gender, or sexual orientation.203 These laws do not ban
discrimination based on proclivity to complain. Relying on existing
antidiscrimination laws will therefore not solve the nudnik-targeting
199. See Arbel, supra note 82, at 1287–1303 (advocating “Reputation-by-Regulation”—the use
of law to preserve and harness the power of reputation); Shapira, Law as Source, supra note 73,
at 200–01 (arguing for a more cautious approach to scaling back legal intervention). To be clear,
not all of our proposals involve greater regulatory interventions. We focus on the type of
intervention (pro- or anti-reputation creation) rather than the size of intervention (more or less
regulation).
200. See, e.g., CATHY O’NEIL, WEAPONS OF MATH DESTRUCTION: HOW BIG DATA INCREASES
INEQUALITY AND THREATENS DEMOCRACY 8 (2016) (on the inequality problem); FRANK PASQUALE,
THE BLACK BOX SOCIETY: THE SECRET ALGORITHMS THAT CONTROL MONEY AND INFORMATION 9
(2015) (on the opacity problem). But see Arbel, supra note 71, at 174 (noting that opaqueness can
be a virtue as it allows agencies to design gaming-proof interventions).
201. COUNCIL OF ECON. ADVISORS, supra note 154, at 16.
202. Id.
203. Helveston, supra note 130, at 875.
Electronic copy available at: https://ssrn.com/abstract=3501175

<<PAGE_BREAK>>

1_Arbel Shapira (Do Not Delete) 5/12/2020 5:51 PM
2020] THEORY OF THE NUDNIK 977
problem. Nor are nudniks “unwary consumers.” More sunlight will not
necessarily disinfect nudnik-targeting practices because the problem is
not one of information. The assumption behind disclosure solutions is
that the target audience would resist the disclosed practice once they
become aware of it. But if sellers disarm nudniks by offering them better
treatment, nudniks have no reason to flag such behavior. Disclosure
would not work either.
Addressing the nudnik-targeting problem will therefore require
some creative thinking on the part of legislators, regulators, and
judges.204 The next Section proposes some initial counterintuitive
strategies.
C. Proposed Solutions
Banning outright the use of big data and predictive analytics is
infeasible and makes little sense, as these tools can offer benefits not
just to sellers but also to consumers.205 The goal is to find a way to limit
the use of nudnik-targeting technologies that limit the production and
propagation of useful information. Section III.C.1 highlights the legal
tools that regulators can employ, while Section III.C.2 focuses on how
judges can reinterpret longstanding doctrines to mitigate the effects of
nudnik targeting. The choice between the different methods we offer
should depend on one’s assessment of the severity of nudnik targeting
at a given point in time and in a given market. After all, the nudnik-
targeting trend is in its early stages, so we are aiming at a moving
target. This is where Section III.C.3 comes in, which is directed at
scholars and sketches ways in which the nudnik perspective can inform
future research.
1. Lessons for Regulators
On paper, regulators already have the tools to deal with the
dangers of nudnik targeting. Section 5(a) of the Federal Trade
Commission Act prohibits unfair, deceptive, or abusive practices
(“UDAP”). The section and its equivalents at the state level grant wide
authority to numerous regulators (trade commissioners, consumer
protection agencies, and so on) to pursue big data practices that they
204. See Becher & Zarsky, supra note 97, at 75 (“[C]ounter-intuitively, policy makers should
add firms’ lenient conduct to the growing list of firms’ suspicious behaviors.”).
205. See Helveston, supra note 130, at 864–65.
Electronic copy available at: https://ssrn.com/abstract=3501175

<<PAGE_BREAK>>

1_Arbel Shapira (Do Not Delete) 5/12/2020 5:51 PM
978 VANDERBILT LAW REVIEW [Vol. 74:4:929
perceive as harming consumers.206 Yet applying the UDAP standard to
nudnik-targeting practices is far from straightforward.207
To find nudnik-targeting practices unfair, regulators will have
to show that the targeting is “likely to cause substantial injury to
consumers,” which cannot be avoided or is not offset by other benefits.208
Yet sellers could readily find commercial justifications for their
targeting practices. If sellers charge nudniks a higher price, they can
rationalize it based on the nudnik’s propensity to consume more
customer service resources. If sellers offer nudniks preferential
treatment, they can present it as catering to the nudnik’s special
needs.209 And when sellers avoid nudniks to begin with, their practices
may be too opaque for someone on the outside to notice.
It is perhaps better to think of nudnik targeting as “deceptive”
toward other consumers: when sellers target buyers who are likely to
notice and share damning information about them, they maintain a
factually inaccurate brand image by silencing justified criticisms.210 To
reiterate, the problem here is not between the contractual parties, but
rather with third parties: the broad societal interest in having a well-
functioning market for seller reputation. Recognizing nudnik targeting
as “deceptive” would therefore require creative interpretation.
Fortunately, Congress has recently provided a blueprint for the
proper balance between protecting the information flow and preserving
freedom of contract: the Consumer Review Fairness Act of 2016
(“CRFA”).211 The CRFA voids provisions in form contracts that restrict
206. See Dee Pridgen, The Dynamic Duo of Consumer Protection: State and Private
Enforcement of Unfair and Deceptive Trade Practices Laws, 81 ANTITRUST L.J. 911, 914 (2017)
(reviewing equivalents at the state level).
207. Compare Matthew A. Bruckner, The Promise and Perils of Algorithmic Lenders’ Use of
Big Data, 93 CHI.-KENT L. REV. 3, 43–47 (2018) (discussing difficulties with regulating big data
under the ‘unfairness’ standard), with Dennis D. Hirsch, That’s Unfair! Or Is it? Big Data,
Discrimination and the FTC’s Unfairness Authority, 103 KY. L.J. 345, 347–48 (2014) (calling for
the regulation of big data on the basis of UDAP legislation).
208. 12 U.S.C. § 5531(c)(1)(a) (2012); see also NAT’L CONSUMER LAW CENTER, UNFAIR AND
DECEPTIVE ACTS AND PRACTICES § 4.3.2.2 (9th ed. 2016) (“[A]n act or practice must cause or be
‘likely to cause’ substantial injury to consumers.”).
209. The nudniks themselves may believe that they deserve the preferential treatment for
being more active than other consumers.
210. Note, for example, how the law deals carefully with advertising that rests on consumer
endorsements. 16 C.F.R. § 255.2 (2019).
211. Consumer Review Fairness Act of 2016, Pub. L. No. 114-258, 130 Stat. 1355 (to be codified
at 15 U.S.C. § 45b). As of now, three states have enacted similar laws: CAL. CIV. CODE § 1670.8
(West 2020); 815 ILL. COMP. STAT. 505/2UUU (2019); MD. CODE ANN., COM. LAW § 14-1325
(LexisNexis 2020). A similar bill is also pending: New York A5718, TRACKBILL,
https://trackbill.com/bill/new-york-assembly-bill-5718-prohibits-the-use-of-non-disparagement-
clauses-in-consumer-contracts/1391172/ (last visited May 7, 2020) [https://perma.cc/K3AE-MPT8].
On CRFA and its limitations, see generally Eric Goldman, Understanding the Consumer Review
Fairness Act of 2016, 24 MICH. TELECOMM. & TECH. L. REV. 1 (2017).
Electronic copy available at: https://ssrn.com/abstract=3501175

<<PAGE_BREAK>>

1_Arbel Shapira (Do Not Delete) 5/12/2020 5:51 PM
2020] THEORY OF THE NUDNIK 979
the consumer’s ability to review the seller’s services.212 Congress
declared the use of such provisions an unfair and deceptive act,213 and
the FTC recently showed a willingness to enforce the CRFA
vigorously.214
The stated rationale behind the CRFA is protecting information
flow.215 Congress noted: “The consequences of these non-disparagement
clauses are far ranging. . . . [They] distort public reviews of a
business . . . thus harming consumers who rely on such reviews.”216 The
same rationale, we argue, should apply to nudnik-targeting practices.
When a seller avoids interacting with a consumer based on the
consumer’s propensity to complain, or when a seller “bribes” consumers
who are more inclined to post negative reviews before they do so (or
shortly after, in an attempt to have the review removed), the seller is
clearly distorting information flow. From our vantage point, the CRFA
reflects Congress’s view on the proper balance between freedom of
contract and the market for reputation, and regulators at the state and
federal levels should view the act as a rallying call to start more strictly
regulating practices that impede the information flow.
There is a counterintuitive point at play when discussing the
effectiveness of CRFA-like interventions. The CRFA as currently
construed contains a loophole. It prohibits gag orders only in form
contracts.217 This reflects the traditional thinking that consumers fare
worse in standard form contracts and better in personal contracts.218
Yet, as we noted in this Article, the personal, algorithmic tailoring of
contracts can actually make things worse for consumers as a group. If a
212. § 2, 130 Stat. at 1355 (to be codified at 15 U.S.C. § 45b(b)(1)).
213. § 2, 130 Stat. at 1357 (to be codified at 15 U.S.C. § 45b(d)(1)).
214. In 2018, for instance, the FTC acted against a seller that sold workshops and asked
buyers to sign an agreement limiting their ability to post negative reviews on the workshop.
Complaint for Permanent Injunction and Other Equitable Relief, FTC v. Sellers Playbook, Inc.,
No. 0:18-cv-02207-DWF-TNL (D. Minn. July 7, 2018) https://www.ftc.gov/system/files/documents/
cases/sellers_playbook_complaint.pdf [https://perma.cc/W572-3P2P]. The case was later settled,
with the company required to pay $20.8 million and suspend the sales of business coaching. Press
Release, Fed. Trade Comm’n, Defendants in Sellers Playbook Get-Rich Scheme Settle with FTC
and Minnesota (Dec. 3, 2018), https://www.ftc.gov/news-events/press-releases/2018/12/defendants-
sellers-playbook-get-rich-scheme-settle-ftc-minnesota [https://perma.cc/338Z-Z3VW].
215. H.R. REP. NO. 114-731, at 5 (2016); see also Eric Goldman, An Assessment of the Consumer
Review Freedom Act of 2015 (Santa Clara Univ. Sch. of Law Legal Studies Research Paper Series,
Working Paper No. 2-15, 2015), https://ssrn.com/abstract=2686021 [https://perma.cc/6X88-DQFG]
(discussing the reason for and likely impact of the Consumer Review Freedom Act).
216. S. REP. NO. 114-175, at 2 (2015).
217. Section (a)(3)(A) to the Act defines “form contract” as “a contract with standardized
terms.” § 2, 130 Stat. at 1355 (to be codified at 15 U.S.C. § 45b(a)(3)(A)). The legislation in the
three states that adopted similar legislation does not contain this restriction. See laws cited supra
note 211; see also Goldman, supra note 211, at 10–15 (discussing the gaps left in the CRFA).
218. See, e.g., KARL N. LLEWELLYN, THE COMMON LAW TRADITION: DECIDING APPEALS 370–71
(1960) (discussing the lack of any real specific assent to boiler-plate form contracts).
Electronic copy available at: https://ssrn.com/abstract=3501175

<<PAGE_BREAK>>

1_Arbel Shapira (Do Not Delete) 5/12/2020 5:51 PM
980 VANDERBILT LAW REVIEW [Vol. 74:4:929
seller personalizes its contracts to include gag clauses only when selling
to nudniks, such personalization may meet the letter of the law, but
doing so will manipulate the integrity of information flow and thus
violate the spirit of CRFA.
Beyond assuring that sellers do not block consumers from
sharing information, regulators can also generate information that
would contribute to the development of seller reputation, which will
allow the market discipline itself.219 The CFPB may have provided a
blueprint for such regulation through reputation when it assembled a
database that provides relatively fine-grained data, including
individual complaints about banks and the consumer’s narrative about
their negative experiences with the bank.220 Another step that
regulators could take is to investigate consumer complaints more
frequently and seriously.221 If sellers can block the most persistent
complainers, regulators should compensate by making it easier for less
persistent complainers to be heard.
Regulators could also opt to enhance the legal channels of
consumer activism to compensate for sellers’ growing ability to distort
the reputational channels. For example, several state laws employ
consumers as private attorneys general, allowing them to bring action
against sellers’ violations222 or awarding treble damages and attorney
fees to successful plaintiffs.223
219. Some private initiatives, such as consumer reports, also create and disseminate
reputational information. But they are subject to potential conflicts of interest with advertisers
and reviewed firms. See David Adam Friedman, Do We Need Help Using Yelp? Regulating
Advertising on Mediated Reputation Systems, 51 U. MICH. J.L. REFORM 97 (2017); Van Loo, supra
note 78, at 583–84 (describing the shortcomings of privately run websites for consumer reporting).
220. Consumer Complaint Database, CONSUMER FIN. PROTECTION BUREAU,
https://www.consumerfinance.gov/data-research/consumer-complaints/ (last visited May 7, 2020)
[https://perma.cc/QN29-A87D]. For criticism of this database, see Patrick Lunsford, Allegations
Ain’t Facts: CFPB Unleashes Credit Card Complaint Database, FORBES (Jun. 19, 2012, 11:51 AM),
https://www.forbes.com/sites/insidearm/2012/06/19/allegations-aint-facts-cfpb-unleashes-credit-
card-complaint-database/#2436143d461d [https://perma.cc/7SW3-UJZH]. Other examples come
from the FTC, Consumer Sentinel Network Data Book, FED. TRADE COMMISSION (2019),
https://www.ftc.gov/system/files/documents/reports/consumer-sentinel-network-data-book-
2019/consumer_sentinel_network_data_book_2019.pdf [https://perma.cc/89N2-AQT3], and the
Department of Transportation, Air Travel Consumer Reports for 2019, U.S. DEP’T TRANSP. (2019),
https://cms8.dot.gov/airconsumer/air-travel-consumer-reports-2019 [https://perma.cc/V658-4479].
221. See Van Loo, supra note 78, at 597–98 (proposing two different ways for regulators to
improve their investigations—integrating data from various reporting sources to create more
comprehensive software and improving methods for investigating complaints submitted to them
directly).
222. See, e.g., MICH. COMP. LAWS § 445.911(2) (2019); N.J. STAT. ANN. § 56:8-2.12 (West 2020);
OR. REV. STAT. § 646.150 (2019); Henry N. Butler & Joshua D. Wright, Are State Consumer
Protection Acts Really Little-FTC Acts?, 63 FLA. L. REV. 163 (2011).
223. See Victor E. Schwartz & Cary Silverman, Common-Sense Construction of Consumer
Protection Acts, 54 U. KAN. L. REV. 1, 23–27 (2005) (outlining the different approaches states have
taken for awarding treble damages or attorney fees).
Electronic copy available at: https://ssrn.com/abstract=3501175

<<PAGE_BREAK>>

1_Arbel Shapira (Do Not Delete) 5/12/2020 5:51 PM
2020] THEORY OF THE NUDNIK 981
2. Lessons for Courts
Judges aware of the dangers of nudnik targeting can reinterpret
statutes and doctrines in ways that forestall nudniks’ extinction. Our
discussion of how regulators’ might interpret FTCA or CRFA applies to
judges as well. Judges can also strike out gag clauses and other limits
on sharing reviews through open-ended doctrines such as
unconscionability and public policy.224 Indeed, Eric Goldman has
claimed that the CRFA merely mirrors an organic development that
was already underway in state courts, which were using existing
doctrinal tools to protect information flows.225
Armed with a better understanding of serial complainers and
their role in the market, courts can also reevaluate longstanding
doctrines such as standing and de minimis. To understand how the
theory of the nudnik relates to standing, think about the 2016 Supreme
Court case of Spokeo, Inc. v. Robins.226 There, Robins discovered that an
online database described him as employed, wealthy, and married,
whereas he was actually unemployed, not well-off, and single.227 Robins
sued under the Fair Credit Reporting Act (“FCRA”), on the ground that
the website presented a consumer report without following “reasonable
procedures to assure maximum possible accuracy.”228 The Supreme
Court reversed the decision of the U.S. Court of Appeals for the Ninth
Circuit, noting that the “bare” procedural violation was not concrete
enough to provide Robins with standing.229 Other courts quickly
followed the Spokeo ruling, rejecting numerous consumer actions in the
process.230
The analysis presented in this Article suggests that the broad
application of the Spokeo standard to nudniks may be problematic, if
only for these two reasons.231 First, for nudniks, being falsely presented
224. Lucille M. Ponte, Protecting Brand Image or Gaming the System? Consumer “Gag”
Contracts in an Age of Crowdsourced Ratings and Reviews, 7 WM. & MARY BUS. L. REV. 59, 101–
40 (2016).
225. Goldman, supra note 211, at 8–9.
226. 136 S. Ct. 1540 (2016).
227. Id. at 1546.
228. 15 U.S.C. § 1681e(b) (2012); Spokeo, 136 S. Ct. at 1545–46.
229. Spokeo, 136 S. Ct. at 1549. Spokeo applies to federal courts, while many consumer law
disputes arise in state courts. Still, we use it here to illustrate the dynamics in place when courts
evaluate nudnik-type litigation.
230. See Attias v. CareFirst, Inc., 199 F. Supp. 3d 193, 197 (D.D.C. 2016), rev’d, 865 F.3d 620
(D.C. Cir. 2017) (denying a privacy claim for lack of particular harm in a breach of an insurance
company’s database which exposed the records of over one million consumers).
231. Beyond the two specific reasons provided above the line, we note a general flaw in the
Spokeo reasoning: to the extent that the treatment a consumer receives depends on the data
available about this consumer online, wrong information on the consumer (even if supposedly
Electronic copy available at: https://ssrn.com/abstract=3501175

<<PAGE_BREAK>>

1_Arbel Shapira (Do Not Delete) 5/12/2020 5:51 PM
982 VANDERBILT LAW REVIEW [Vol. 74:4:929
as affluent, or being overcharged by $4, is a concrete injury. In that
sense, nudniks are eggshell consumers.232 Second, applying Spokeo
broadly also blocks an important channel (litigation) through which
nudniks effectively warn other consumers about seller misbehavior. By
going through the trouble of litigating a $4 overcharge or a false
representation as wealthy, nudniks generate positive externalities:
creating a public record of past misconduct and deterring future
misconduct (the reputation-through-litigation argument).
One could counter by arguing that denying standing for the
“petty claims” of nudniks is necessary to clear the docket for more
meaningful, meritorious claims by others. Yet such reasoning
misjudges how consumer dynamics work. Most of us would not go
through the trouble of comparing prices on the delivery receipt to those
on the website and therefore would not even notice the overcharge.
Without nudniks voicing their concerns publicly, other consumers
would not reach the blaming stage (i.e., they would not notice something
amiss with the seller), or they would not reach the claiming stage (i.e.,
they would notice but not pursue it).
We do not call for a radical departure from standing doctrine.
Our proposal is more modest: when assessing the question of standing,
courts should be aware of the nudnik’s special psychological makeup
and the potential for broad market improvements that their seemingly
petty claims can generate.233 These underappreciated benefits are
relevant especially in cases in which the plaintiff fights a seller’s
practice that affects many other (silent) consumers.
Similar reasoning applies to judicial interpretation of the de
minimis doctrine. Again, it is best illustrated by a concrete case of a
nudnik in action: Troester v. Starbucks.234 There, a barista sued
favorable) may distort the quality of treatment she receives in opaque ways. Robins v. Spokeo,
Inc., 867 F.3d 1108, 1117 (9th Cir. 2017).
232. The facts in Spokeo vividly illustrate the point: for many of us, being described as affluent
and married is not particularly harmful. Id. Yet to the specific nudnik in question, these wrongful
misstatements may have actually been harmful.
233. Some courts have already found creative ways to avoid the Spokeo ruling. In one case, a
consumer complained about robo-calling, in violation of the Telephone Consumer Protection Act,
which regulates unwanted calls to consumers. Mey v. Got Warranty, Inc., 193 F. Supp. 3d 641, 643
(N.D.W. Va. 2016); see 47 U.S.C. § 227(b)(1)(A) (2012). The court found that the consumer did
suffer a concrete injury, because—beyond any harm to privacy—the calls intruded on his phone
“capacity,” draining it of electricity and consuming its prepaid minutes. Mey, 193 F. Supp. 3d at
644–46.
234. Troester v. Starbucks Corp., 421 P.3d 1114 (2018). Note that this case involves activism
in the employment contract context, rather than the consumer context. For similar examples from
the consumer context, see, for example, Skaff v. Meridien North America Beverly Hills, LLC, 506
F.3d 832 (9th Cir. 2007), ruling that a misleading promise of a usable shower for disabled person
staying in a hotel was de minimis, and Harris v. Time, Inc., 237 Cal. Rptr. 584 (Cal. Ct. App. 1987),
ruling that a misleading promise of a free watch in return for opening an envelope was de minimis.
Electronic copy available at: https://ssrn.com/abstract=3501175

<<PAGE_BREAK>>

1_Arbel Shapira (Do Not Delete) 5/12/2020 5:51 PM
2020] THEORY OF THE NUDNIK 983
Starbucks under the federal Fair Labor Standards Act for failing to
count the roughly four minutes it took him to clock out and finish
locking up the store.235 The district court rejected the lawsuit, reasoning
that four minutes is a trifling matter that fails to pass the de minimis
threshold.236
Here as well, recognizing the social benefits of nudnik activism
highlights two problems: (1) for nudniks, being systematically
underpaid by four minutes is hardly a trifling matter (the “eggshell”
point); (2) more importantly, the issue is not the harm done to this
particular employee (the nudnik), but the much more consequential
harm done to all other (passive) employees. A simple, back-of-the-
envelope calculation helps demonstrate this harm: Starbucks employs
roughly 209,000 employees in the United States.237 Say that only one in
ten closes the store. This translates to four minutes per night for 20,900
employees, or 508,566 hours annually. Even if all these employees earn
minimum wage ($7.25 hourly), the overall amount implicated in four-
minute overcharging would be, conservatively, $3,687,108 annually. In
that sense, a nudnik plaintiff operates similarly to a class action, that
is, it draws attention to the harm done to a collective body of similarly
injured passivists.238 By denying nudniks the possibility of publicly
fighting firms over four minutes, we reduce the likelihood that others
will learn about such corporate misbehavior. Courts should recognize
There is a broader point in play here: the phenomenon of nudniks is not limited to the consumer
markets context. It appears in labor markets, as we just saw. Counterintuitively, it also appears
in financial markets, as Kastiel and Nili document. Yaron Nili & Kobi Kastiel, The Giant Shadow
of Corporate Gadflies (Univ. of Wis. Legal Studies Research Paper No. 1523, 2020),
https://papers.ssrn.com/sol3/papers.cfm?abstract_id=3520214 [https://perma.cc/784S-XC4W].
235. Troester, 421 P.3d at 1116–17.
236. Id. at 1117. On appeal, the Ninth Circuit referred the issue to the California Supreme
Court. Id. The California court ultimately found for Troester but based its decision on a state-
specific legal issue, namely, that California does not incorporate the de minimis doctrine. Id. at
1125.
237. Starbucks, Annual Report (Form 10-K) (Nov. 15, 2019), https://s22.q4cdn.com/
869488222/files/doc_financials/2019/2019-Annual-Report.pdf [https://perma.cc/23KF-39NF]
(stating that in the United States, Starbucks employs approximately 218,000 people, with 209,000
of them working in company-owned stores).
238. One could claim that we do not need nudnik-driven litigation in such cases, as the class
action mechanism will be enough to deter firm misbehavior. There are, however, many gaps left
by the limitations of class actions. See J. Maria Glover, Disappearing Claims and the Erosion of
Substantive Law, 124 YALE L.J. 3052, 3066 (2015) (explaining the inability of arbitration to
address class actions); Linda S. Mullenix, Ending Class Actions as We Know Them: Rethinking the
American Class Action, 64 EMORY L.J. 399, 413–17 (2014) (discussing the general shortcomings of
class action lawsuits). In particular, the wave of mandatory arbitration clauses that ban class
actions severely limits the effectiveness of class actions, rendering nudnik-based individual
litigation even more important in drawing others’ attention to seller misbehavior. Shapira, supra
note 160.
Electronic copy available at: https://ssrn.com/abstract=3501175

<<PAGE_BREAK>>

1_Arbel Shapira (Do Not Delete) 5/12/2020 5:51 PM
984 VANDERBILT LAW REVIEW [Vol. 74:4:929
these dynamics and apply the de minimis doctrine cautiously when the
issue in question involves a practice that is relevant to many others.239
Finally, and perhaps most contentiously, judges who are aware
of the dangers of nudnik targeting should interpret defamation law
narrowly. If a small subset of consumers drives the diffusion of damning
information on seller behavior, then sellers have incentives and
resources to target this small subset by bringing defamation lawsuits.240
In a separate paper, one of us advocated for consumer reviews to enjoy
a safe haven from defamation law.241 The argument is that even if some
reviewers exaggerate or outright lie, the intended audience can account
for this possibility when reading reviews.242 In contrast, if a review is
never even written (because of the chilling effect of being sued in
defamation), audiences cannot evaluate it on the merits.243 When we
add on top of that argument the notions developed here—about how
consumers that write detailed negative reviews typically belong to a
small group of “serial” complainers, who have personality traits that
make them identifiable in advance by companies—the case for
protecting reviewers is augmented. Judges should look at consumer
reviews as “issues of public interest” worthy of stronger protection
under the evolving standard of New York Times Co. v. Sullivan.244
3. Lessons for Scholars
This Article highlights the need to shift focus from studying
consumer reading behavior to studying consumer complaining
behavior. Consumer law scholars have traditionally ignored the
insights of the CCB literature and dismissed (or sometimes treated with
hostility) the phenomenon of serial complainers. Yet in today’s world,
serial complainers are much more relevant and impactful than serial
readers. The first lesson for scholars therefore concerns the need to
239. For a treatment of the potential concern with opening the “floodgates of litigation,” see
Marin K. Levy, Judging the Flood of Litigation, 80 U. CHI. L. REV. 1007 (2013).
240. See Eric Goldman, The Regulation of Reputational Information, in THE NEXT DIGITAL
DECADE: ESSAYS ON THE FUTURE OF THE INTERNET 293, 298 (Berin Szoka & Adam Marcus eds.,
2010) (“[N]umerous individuals have been sued for posting negative online reviews.”).
241. See Arbel, supra note 82, at 1299–1301.
242. For arguments from the other side, namely, on how businesses should be protected from
irate consumers who write negative reviews, see Barnes, supra note 86, and Lori A. Roberts,
Brawling with the Consumer Review Site Bully, 84 U. CIN. L. REV. 633 (2016).
243. See Yonathan A. Arbel & Murat Mungan, The Case Against Expanding Defamation Law,
71 ALA. L. REV. 453 (2019) (studying the audience effects of defamation law); see also Daniel Hemel
& Ariel Porat, Free Speech and Cheap Talk, 11 J. LEGAL ANALYSIS 46, 61–65 (2019) (analyzing the
deterrence effect of defamation law on “speakers who choose not to make true statements because
of the extant liability regime”).
244. 376 U.S. 254 (1964).
Electronic copy available at: https://ssrn.com/abstract=3501175

<<PAGE_BREAK>>

1_Arbel Shapira (Do Not Delete) 5/12/2020 5:51 PM
2020] THEORY OF THE NUDNIK 985
study the effects of nudnik behavior: Under what conditions do nudniks
generate positive or negative effects on seller behavior? Once we
identify the areas where nudniks hold sellers to account (and those
where they do not), we can rethink the scope and design of legal
intervention.
The second lesson for scholars concerns the promise and perils
of personalized contracts. Consumer law scholars have traditionally
viewed standard form contracts unfavorably and personalized contracts
favorably: the former rest on compulsion with thin consumer consent,
while the latter come from mutual negotiations, or so the story goes.245
Against this background, it was intuitive for scholars to view the
increasing trend of personalizing contracts favorably.246 Yet our
analysis suggests that personalized does not necessarily mean better.
Sellers can algorithmically match each consumer with a bespoke
combination of price and terms, based not just on the consumer’s
willingness to pay but also on the consumer’s willingness to share
damning information about the seller. Such personalized contracts may
not feature much negotiation and comprehension, and, critically, may
hinder the effectiveness of reputational discipline. In other words, the
high levels of tailoring may not lead to better contract terms ex ante
and may actually lead to worse enforcement of seller underperformance
ex post. Personalization comes with underappreciated risks.
D. On Optimizing (Rather than Maximizing) Nudnik Behavior
The theory of the nudnik also suggests the limits of nudnik-
based activism. Some nudniks clearly champion issues of little public
interest or merit. When firms respond to such claims, they incur costs
(and pass these costs on to other consumers). Dedicating scarce judicial
or regulatory resources to frivolous nudnik actions similarly wastes
social resources.
Our proposals in this Section should be read with this limitation
in mind. Our purpose is not to maximize nudnik action, but rather to
optimize it. Some forms of nudnik-based activism are important and
critical to market discipline, while others are unhelpful at best. But
245. See LLEWELLYN, supra note 218, at 362–71 (comparing the act of signing a form contract
to “lay[ing] [one’s] head into the mouth of a lion”).
246. See, e.g., Omri Ben-Shahar & Ariel Porat, Personalizing Mandatory Rules in Contract
Law, 86 U. CHI. L. REV. 255, 256–57 (2019) (arguing that personalized protections in consumer
contracts can be efficient); Christoph Busch, Implementing Personalized Law: Personalized
Disclosures in Consumer Law and Data Privacy Law, 86 U. CHI. L. REV. 309 (2019) (highlighting
the promise of personalized disclosures in consumer contracts); Porat & Strahilevitz, supra note
127, at 1453–54 (proposing personalized default rules and confronting potential objections to such
proposals).
Electronic copy available at: https://ssrn.com/abstract=3501175

<<PAGE_BREAK>>

1_Arbel Shapira (Do Not Delete) 5/12/2020 5:51 PM
986 VANDERBILT LAW REVIEW [Vol. 74:4:929
until future research deciphers which is which, allowing sellers to
disarm nudnik-based activism wholesale is a bad idea. Regardless of
what one thinks about the optimal level of nudnik-based activism, one
should not allow sellers to be the judge.
Take for example our discussion of lessons to judges. Our claim
here is not that all nudnik-based lawsuits should be welcome; rather it
is that judges should resist the natural tendency to look at nudnik-
based lawsuits as vexatious. We claim that the current formulations of
doctrines such as standing or de minimis make them too crude of a tool
to distinguish between positive- and negative-value nudnik actions. As
long as the lawsuit implicates a seller behavior that is applicable to
many other consumers, courts should be more open to the possibility of
letting the lawsuit proceed and screen for frivolous lawsuits in later
stages, perhaps with the benefit of discovery. It is instinctive for judges,
like the rest of us, to view nudniks as petty and vindictive. It is much
less instinctive to consider the positive externalities they provide and
the link between nudnik behavior and market discipline. If nudniks
disappear, market discipline will suffer, and the vacuum will force
courts to delve more deeply into the terms of contracts—a mission many
courts and judges have been avoiding. Allowing nudnik lawsuits to
proceed would not necessarily increase court congestion; it may actually
alleviate it ex ante.
CONCLUSION
Nudniks are an important yet overlooked part of the market
ecosystem. They have unique personality traits that make them pursue
action whenever sellers underperform. Nudniks notice seller
misbehavior that most consumers would not notice. Nudniks publicly
confront sellers who underperform when most consumers would not
bother. Under certain circumstances, nudniks become the engine of
market discipline, solving the consumer collective action problem.
This Article’s first contribution is in drawing our attention to the
understudied phenomenon of nudniks. Understanding the
phenomenon—how nudniks operate and when their actions are more or
less likely to generate positive spillovers—is key for understanding
consumer governance, especially in a world where consumers do not
read or understand contracts.
Yet this form of consumer activism via nudniks is under
increasing threat. The Article’s second contribution is exploring the
trend of sellers increasingly obtaining data and technologies that will
eventually allow them to identify nudniks and silence them before they
Electronic copy available at: https://ssrn.com/abstract=3501175

<<PAGE_BREAK>>

1_Arbel Shapira (Do Not Delete) 5/12/2020 5:51 PM
2020] THEORY OF THE NUDNIK 987
voice their concerns publicly. Such a development can radically change
the balance of power between sellers and buyers.
While more empirical work is needed, particularly on the
conditions that make nudnik activity most valuable, “leaving things to
the market” is a very deliberate policy choice with important
consequences. One does not have to believe that all (or even most)
nudnik activity is beneficial to see that letting sellers silence nudniks
wholesale may result in worse seller performance. One way of making
sure that you are not called out for underperforming is investing in the
quality of your product; another way is investing in silencing those who
may call you out. When sellers find it easier to invest in appearance
management than in quality controls, consumers are worse off.
This is where the Article’s third contribution comes in: outlining
strategies to counter the attack on nudniks and facilitate well-
functioning reputation markets. In the process, we get to reevaluate
longstanding debates; for example, we discuss why personalized
contracts may actually leave consumers worse off than form contracts.
Nudniks also generate costs and big data technologies also come
with benefits, but we highlight here the more understudied sides: the
benefits that nudniks generate and the costs of big data. Without
nudniks, market discipline suffers.
Electronic copy available at: https://ssrn.com/abstract=3501175

---

## ssrn-3519630: ALL-CAPS
Year: 2020
Authors: Yonathan Arbel
Source: papers/ssrn-3519630/paper.txt

ALL-CAPS
ALL-CAPS
YONATHAN A. ARBEL & ANDREW TOLER*
Alabama Working Paper Series, 3519630
ABSTRACT
A hallmark of consumer contracts is long blocks of capitalized text.
Courts and legislators believe that such “all-caps” clauses improve the
quality of consumer consent and thus they will often require the
capitalization of certain key terms in consumer contracts. Some of the most
important terms in consumer contracts—warranty disclaimers, liability
releases, arbitration clauses, and automatic subscriptions—will be enforced
only because they appeared in all-caps in the contract.
This Article is the first to empirically examine the effectiveness of all-
caps with respect to the quality of consumer consent. Using an experimental
methodology, the Article finds that all-caps is significantly harmful to older
readers while failing to show any appreciable improvement over regular
print for others. We collect evidence from standard form agreements used by
America’s largest companies and find that, despite—and perhaps because—
all-caps is ineffective, it is widely used in nearly three-quarters of consumer
contracts. Based on these findings and other evidence reported here, this
Article lays out the dangers and risks of continued reliance on all-caps and
calls for abandoning all-caps.
Draft comments welcome at yarbel@law.ua.edu
Or anonymously through this link.
* Assistant Professor of Law, University of Alabama Culverhouse School of Law;
J.D. Candidate, University of Alabama Culverhouse School of Law. IRB Approval 18-OR-
408. We would like to thank Oren Bar-Gill, Hillel Bavli, Shawn Bayern, Omri Ben Shahar,
Uri Beonliel, Chris Bradley, Kevin Davis, Shahar Dillbary, Meirav Furth-Matzkin, Robert
Hillman, Dave Hoffman, Nancy Kim, Ben McMichael, Mike Pardo, and Steve Shavell for
helpful comments. We are also thankful to participants in the American Law & Economics
Conference, Conference on Empirical Legal Studies, and Contracts Conference XIV. For
research support, we thank Bret Linley, McGavin Brown, and Victoria Moffa.
1
Electronic copy available at: https://ssrn.com/abstract=3519630

<<PAGE_BREAK>>

2 ALL-CAPS [DRAFT] [VOL. ---
Table of Contents
INTRODUCTION ........................................................................................................ 3
I.CONSPICUOUS DISCLOSURE AND ASYMMETRIC INFORMATION ........... 11
A. THE PROBLEM OF UNINFORMED CONTRACTING ..................................... 11
II.ALL-CAPS IN ACTION: A STUDY OF INDUSTRY PRACTICES .................... 17
A. METHODOLOGY ..................................................................................... 17
B. FINDINGS ............................................................................................... 18
III.ALL-CAPS AND CONSUMER CONSENT: EXPERIMENTAL ANALYSIS ... 20
A. METHODOLOGY ..................................................................................... 22
B. FINDINGS ............................................................................................... 27
IV.EXPLORING ALTERNATIVE JUSTIFICATIONS AND INTERVENTIONS .. 32
A. ALL-CAPS UNDER TIME PRESSURE ......................................................... 32
1. Methodology ................................................................................. 32
2. Findings ......................................................................................... 34
B. SUBJECTIVE SENSE OF DIFFICULTY & READING SPEEDS ......................... 35
1. Methodology ................................................................................. 35
2. Findings ......................................................................................... 36
C. TAKING THE CON OUT OF CONSPICUOUS ................................................ 39
1. Methodology ................................................................................. 39
2. Findings ......................................................................................... 42
V.THE CASE AGAINST UPPERCASE ................................................................... 44
A. ABOLISHING ALL-CAPS ......................................................................... 45
B. STAIRWAY TO HAVEN ............................................................................ 50
C. THE FUTURE OF DISCLOSURE ................................................................. 52
VI.CONCLUSION ..................................................................................................... 56
Electronic copy available at: https://ssrn.com/abstract=3519630

<<PAGE_BREAK>>

2019] ALL-CAPS [DRAFT] 3
INTRODUCTION
All-caps—blocks of fully capitalized text—is a hallmark of modern
contracts.1 Why this is the case, however, is not well-understood. The
investigation presented here suggests that all-caps is a deeply misguided and
unreflective instance of what Robert Hillman called “contract lore,” a set of
ungrounded beliefs that are passed on through the generations of lawyers.2
One of the deepest problems in contract law is the “no-reading
problem.’3 While consumers are cognizant of certain contractual terms—
such as price and quantity—they are often ignorant of the less salient terms
found in the fine print of their contracts.4 As a result, firms can safely tuck
oppressive terms in the fine print—onerous charges, liability waivers for
wrongful harms, automatically renewing subscription periods, limitations of
representations, arbitration provisions, and damages caps. These practices
1 See e.g., Warranties and Online Sales, AMERICAN BAR ASSOCIATION
https://www.americanbar.org/groups/business_law/migrated/safeselling/warranties/ (Sept.
26, 2016), (noting the scope of the practice)).
2 See generally Robert A. Hillman, Contract Lore, 27 J. CORP. L. 505 (2002).
3 Ian Ayres & Alan Schwartz, The No-Reading Problem in Consumer Contract Law, 66
STAN. L. REV 545 (2014). See also Yanees Bakos, Florencia Marotta-Wurgler & David R.
Trossen, Does Anyone Read the Fine Print? Consumer Attention to Standard Form Contracts,
43 J. LEGAL STUD. 1 (2014) (providing empirical data that virtually no consumers read End
Users License Agreements); Shmuel I. Becher & Esther Unger-Aviram, The Law of Standard
Form Contracts: Misguided Intuitions and Suggestions for Reconstruction, 8 DEPAUL BUS.
& COM. L.J. 199, 206 (2010) (providing empirical data that most consumers are not likely to
read contracts ex ante); Clayton P. Gillette, Rolling Contracts as an Agency Problem, 2004
WIS. L. REV. 679, 680 (2004) (“[C]ommentators agree that buyers, or the vast majority of
them, do not read the terms presented to them by sellers.”); Lewis A. Kornhauser, Comment,
Unconscionability in Standard Forms, 64 CAL. L. REV. 1151, 1163 (1976) (“In general the
consumer will not have read any of the clauses, and most will be written in obscure legal
terms.”). For the formatting of conspicuous disclosures generally, see Mary Beth Beazley,
Hiding in Plain Sight: “Conspicuous Type” Standards in Mandated Communication Statutes,
40 J. LEGIS. 1, 1–2 (2014).
4 See Eyal Zamir, Contract Law and Theory: Three Views of the Cathedral, 81 U. CHI. L.
REV. 2077, 2102–03 (““outside of the law-and-economics community, most people would
quite confidently say . . . that hardly a soul reads standard-form contracts.”).
Electronic copy available at: https://ssrn.com/abstract=3519630

<<PAGE_BREAK>>

4 ALL-CAPS [DRAFT] [VOL. ---
are deeply problematic, as hidden terms pull the consent rug from under the
contracting parties’ feet.5
A common solution to the no-reading problem is to require the
conspicuous display of important terms. If consumers do not read the fine
print, the solution is to make the print less fine.6 Making text conspicuous is
believed to increase the quality of consumer consent by signaling the
importance of the underlying text,7 and by making it more accessible.8 Most
famously, the UCC requires that warranty waivers “must be by a writing and
conspicuous.”9 The UCC is joined by a legion of other statutes, which
incentivize the conspicuous display of information by declining to enforce
key terms that are not conspicuously displayed.10
5 Ayres & Schwartz supra note 3, 549-50 (discussing attempts to address the no-reading
problem).
6 See Richard A. Epstein, Contract, Not Regulation: UCITA and High-Tech Consumers
Meet Their Consumer Protection Critics, in CONSUMER PROTECTION IN THE AGE OF THE
‘INFORMATION ECONOMY’ 205, 227 (Jane K. Winn ed., 2006) (“It seems clear that most
consumers . . . never bother to read these terms anyhow: we . . . adopt a strategy of ‘rational
ignorance’ to economize on the use of our time.”); Alleecia M. McDonald & Lorrie F. Cranor,
The Cost of Reading Privacy Policies, 4 I/S 543, 563–64 (2008) (estimating the time required
to read privacy policies at 244 hours per year per consumer).
7 Bakos, supra note 3, at 2 (noting that the use of fine print “may seem unimportant”).
8 The conspicuousness strategy involves an implicit compromise, as highlighting one term
means that other terms would appear less important in comparison. See Sidney DeLong,
Jacques of All Trades: Derrida, Lacan, and the Commercial Lawyer, J. LEGAL EDUC. 131
(1995) (noting that conspicuousness is a relative quality of the text). See also Regulation Z,
12 C.F.R. § 226.1(b) (2011) (mandating conspicuous disclosure of terms and costs of credit,
at the expense of other contractual terms, in order to promote notice to these aspects of the
transaction).
9 U.C.C. § 2-316 (AM. LAW INST. & UNIF. LAW COMM’N AMENDED 2011).
10 See e.g., CAL. BUS. & PROF. CODE §22577(a)–(b) (West 2004) (A link to privacy policy
must appear “in capital letters equal to or greater in size than the surrounding text.”), FED.
TRADE COMM’N, .COM DISCLOSURES: HOW TO MAKE EFFECTIVE DISCLOSURES IN DIGITAL
ADVERTISING 6 (2013), https://www.ftc.gov/sites/default/files/attachments/press-releases/ftc-
staff-revises-online-advertising-disclosure-guidelines/130312dotcomdisclosures.pdf
[hereinafter FTC EFFECTIVE DISCLOSURES] (requiring conspicuous disclosure in
advertisements). See also infra notes 45-46.
Electronic copy available at: https://ssrn.com/abstract=3519630

<<PAGE_BREAK>>

2019] ALL-CAPS [DRAFT] 5
All-caps is a widely endorsed method of making a term conspicuous
and thus rendering it enforceable.11 Courts, legislators, and consumer
agencies take capitalized text to be strong evidence, often dispositive, that
the text was read and understood by the consumer. As a result, courts will
enforce some of the most onerous and demanding terms in consumer
contracts based on the sole fact that this term was written in all-caps.12
Illustration: All-Caps
11 Some statutes outright define conspicuous as “type in boldfaced capital letters”. LA. REV.
STAT. ANN. § 9:1131.2 See also FLA. STAT. ANN. § 718.103 . Sometimes, legislators set
language requirements that employ all-caps. See, e.g., 22 NYCRR 208.6, (“The summons
shall have prominently displayed at the top thereof the words CONSUMER CREDIT
TRANSACTION and the following additional legend or caveat printed in not less than 12-
point bold upper case type: IMPORTANT!! YOU ARE BEING SUED!! THIS IS A COURT
PAPER--A SUMMONS! DON'T THROW IT AWAY!! TALK TO A LAWYER RIGHT
AWAY!! PART OF YOUR PAY CAN BE TAKEN FROM YOU (GARNISHED). . . .IF
YOU CAN'T PAY FOR YOUR OWN LAWYER, BRING THESE PAPERS TO THIS
COURT RIGHT AWAY. THE CLERK (PERSONAL APPEARANCE) WILL HELP
YOU!!”). For enforcement in the courts. See also Bluewater Trading LLC v. Fountaine Pajot,
S.A., No. 07-61284-CIV, 2008 WL 895705, at 5 (S.D. Fla. Apr. 2, 2008); Brosville Cmty.
Fire Dep't, Inc. v. Navistar, Inc., 4:14–cv–9, 2014 WL 7180791, at 4–5 (W.D. Va. Dec. 16,
2014). Disclaimers have been considered conspicuous where “the excluding language [itself
was] in larger type” or capitalized. Armco, Inc. v. New Horizon Dev. Co. of Va., Inc., 229
Va. 561, 331 S.E.2d 456, 460 (1985) (citing Va. Code § 8.1–201(10)); Young, 1994 WL
506403, at 3 (relying on, albeit not citing, Va. Code § 8.1–201(10)). Hammond–Mitchell, Inc.
v. Constr. Materials Co., CL05000082–00, 2008 WL 8200731, at 5–6 (Va. Cir. Ct. Apr. 28,
2008) (“ConRock used the correct differentiating type-all capitals on the reverse side of the
delivery receipt which was referred to on the front of the ticket[.]”); Rorick v. Hardi N. Am.
Inc., No. 1:14-CV-204, 2016 WL 777575, at 2 (N.D. Ind. Feb. 29, 2016);Lease Acceptance
Corp. v. Adams (2006) 724 N.W.2d 724, at 732 272 Mich.App. 209 (enforcing a forum
selection clause, in part, because it was “printed entirely in conspicuous capital letters”).
12 See, e.g., Bruni v. Didion, 160 Cal. App. 4th 1272, 1293, 73 Cal. Rptr. 3d 395, 413
(2008), as modified (Mar. 24, 2008) (finding that an arbitration clause was surprising because
it was not capitalized).
Electronic copy available at: https://ssrn.com/abstract=3519630

<<PAGE_BREAK>>

6 ALL-CAPS [DRAFT] [VOL. ---
A natural question is whether all-caps is effective—is it truly the case
that capitalization of text improves the quality of consumer consent? All-
caps is, after all, a vestige of the days of the typewriter where other forms of
highlighting text were unavailable.13 Surprisingly, despite the venerable
legacy of this contract lore, this question was never really studied. Instead,
courts and legislators have relied on speculation and intuition.
Admittedly, this question may seem too pedestrian, almost technical;
but as Duncan Kennedy argued, the stakes of “merely technical” questions
in contract law can be very significant.14 Consider then a wrongful death case
where the court will deprive the family compensation only because the
contractual waiver appeared in all-caps.15 If all-caps does not have the effects
attributed to it by courts, this would mean that courts have been erroneously
assuming consent where there was none, enforcing onerous terms in myriad
cases, and depriving consumers of recourse based illusory consent.16 The
terms that need to be conspicuous are those that contracts and legislatures
view as especially important, so enforcing them has particularly acute
consequences for consumer welfare. Worse, if it turns out that all-caps is
effective in hiding meaning, then this would suggest that courts have given
their blessing to one of the most common anti-consumer practices.17
Part I of this Article offers the necessary background regarding the
practice of all-caps. One key finding is that the all-caps practice, despite its
reach and significance, is not based on any evidence. Courts and legislators
adopted this policy because they believe it prevents surprise and improves
13 See Mark Sableman, Typographic Legibility: Delivering Your Message Effectively, 17
SCRIBES J. LEG. WRIT. 9, 9-10 (2017).
14 Duncan Kennedy, The Political Stakes in “Merely Technical” Issues of Contract Law,
19 EUROPEAN REV. PRIVATE L. 7 (2001)
15 See e.g., Enserch Corp. v. Parker, 794 S.W.2d 2 (Tex. 1990) (requiring conspicuous
indemnity language)
16 On the goals of conspicuousness, see infra notes 45-47 and the accompanying text. It is
well understood that actual assent to all terms of the contract may be unwieldy, but many
believe that contract law should demand an affirmative showing of consent to material terms.
See Nancy Kim, Clicking and Cringing, 86 OR. L. REV. 797, 800-05 (2008).
17 See also Beazley, supra note 3, at 2 (arguing that firms intentionally obfuscate
disclaimers); Lauren E. Willis, Performance-Based Consumer Law, 82 U. CHI. L. REV. 1309,
1311 (2015) (arguing that firms hamstring the disclosure project through the framing of
disclosures).
Electronic copy available at: https://ssrn.com/abstract=3519630

<<PAGE_BREAK>>

2019] ALL-CAPS [DRAFT] 7
consent, but this belief is not based on any hard evidence. In fact, the limited
evidence that existed when this practice adopted was mostly negative. In
particular, psychologists started investigating the effects of different
typefaces in the 1930s, and found in a series of studies that it impedes reading
speed.18 Admittedly, these studies are limited; partly because they are dated
and did not explore legal texts. And partly because the focus on reading
speed may have some positive effects, as it may theoretically invite more
careful deliberation. Still, that was the best empirical evidence in existence,
and legal doctrine overlooked it. The doctrine also proved robust to growing
expressions of skepticism of this practice among some practitioners, judges,
officials,19 and a few scholars.20
Part II moves to present evidence on the pervasiveness of all-caps “in
the wild.” To this end, we collected the standard form contracts of 500 of the
most popular consumer companies in the US—companies like Amazon and
Uber—and analyzed them. These forms are the basis of hundreds of millions
of individual contracts between consumers and these large companies. We
use this database to generate the first-ever evidence of the pervasiveness of
long blocks of text in consumer contracts; we find that over three-quarters of
these contracts (77%) contain at least one all-caps clause.
18 Miles A. Tinker & Donald G. Paterson, Influence of Type Form on Speed of Reading, 12
J. APPLIED PSYCHOL. 359 (1928). See also Miles A. Tinker & Donald G. Paterson, The Effect
of Typographical Variations Upon Eye Movement in Reading, 49 J. EDUC. RES. 171, 181
(1955); Miles A. Tinker, Prolonged Reading Tasks in Visual Research, 39 J. APPLIED
PSYCHOL. 444 (1955). Some work has also studied the visibility of capital letters from a
distance, from a distance, see MILES A. TINKER, LEGIBILITY OF PRINT, 33-35, 58-59, but such
an investigation is tangential to our purposes here.
19 See e.g., In re Bassett, 285 F.3d 882, 886 (9th Cir. 2002); OFFICE OF INV. EDUC. &
ASSISTANCE, U.S. SEC. & EXCH. COMM'N, A PLAIN ENGLISH HANDBOOK: HOW TO CREATE
CLEAR SEC DISCLOSURE DOCUMENTS 72 (1998) (proposing that text will not be written in all-
caps).
20 See e.g., Beazley, supra note 3, at 2; Ruth Anne Robbins, Painting with Print:
Incorporating Concepts of Typographic and Layout Design into the Text of Legal Writing
Documents, 2 J. ASS'N LEGAL WRITING DIRECTORS 108, 127 (2004).
Electronic copy available at: https://ssrn.com/abstract=3519630

<<PAGE_BREAK>>

8 ALL-CAPS [DRAFT] [VOL. ---
Part III moves to test the effectiveness of these omnipresent all-caps
clauses in lab settings which include approximately 570 participants.21 In our
primary experiment, we test the effect of all-caps on the quality of consent.
If all-caps clauses have any behavioral effect, then respondents should be
able to recall terms better when they are presented in all-caps than when the
same terms are presented in normal print.22 To test this hypothesis, we
presented subjects with a detailed contract with multiple paragraphs, adapted
from a common consumer contract for online music services. In the control
group, the entire contract was written in normal print, which we dub here as
“low-caps.”23 The treatment group saw the same contract, with one
difference: a single paragraph was in all-caps. We then asked subjects about
their obligations under the contract and evaluated the accuracy of their
responses.
The evidence shows that all-caps fails to improve consumer consent in
any appreciable manner.24 Indeed, we find statistically significant evidence
that all-caps strongly undermines the quality of consent for older readers.
For illustration, respondents over 55 were 29 percentage points more likely
to misunderstand their obligations when the paragraph was capitalized than
their age peers who read the paragraph in low-caps. These findings suggest
that all-caps may be harmful to older readers and likely fails to improve
consent for all other readers.
We then conduct several exploratory studies in Part IV. We find some
evidence that all-caps is not helpful even under time pressure; that consumers
21 Overall, for all of our studies we recruited almost 1,000 respondents; our sample size
follows the standard in similar studies. Cf., Meirav Furth-Matzkin and Roseanna
Sommers, Consumer Psychology and the Problem of Fine Print Fraud, (Forthcoming, STAN.
L. REV.) (N=300 in largest study and N=100 in smallest); Tess Wilkinson-Ryan, Do
Liquidated Damages Encourage Breach?, 108 MICH. L. REV. 633 (2010) (N=100);
Wilkinson-Ryan, infra note 83, (N=208).
22 We also consider, and reject, the possibility that all-caps is a signal of worse contract
quality.
23 We use the term low-caps to highlight that we are using standard English grammatical
rules which include some capitalization; e.g., in names and the beginning of sentences. The
appendix provides the different contracts presented to the parties.
24 As will be explained, this conclusion is not based on failure to reject the null hypothesis,
rather, on a non-inferiority test of statistical significance. See infra notes 99-101.
Electronic copy available at: https://ssrn.com/abstract=3519630

<<PAGE_BREAK>>

2019] ALL-CAPS [DRAFT] 9
consider all-caps more difficult to read; and that all-caps may take longer to
read. The potentially negative effect on reading times is consistent with
earlier work in psychology that found that reading capitalized blocks of text
takes roughly 13% longer than non-capitalized text.25
We also tested whether it is possible to improve consumer consent using
alternative means. To this end, we tested the effects of three forms of
highlighting text relative to low-caps. We found strong evidence that the
highlighting of a single line of text using boldface has a considerable positive
effect on outcomes. We interpret this finding as suggesting that some forms
of disclosure can be highly effective if they are properly designed. The
proper design, however, requires close consideration and further
experimentation is necessary.
In interpreting these findings and considering their policy implications,
a few caveats are important. First, we do not find—nor do we argue—that
capitalization is always ineffective. We readily admit that a sufficiently
motivated firm or actor might be able to find a combination of capitalization
and formatting that would be effective.26 Our findings and conclusions
should be interpreted as suggesting that standard usage of blocks of all-caps
text is ineffective and may, indeed, be harmful.
Second, lab experiments are subject to some known limitations. To
minimize these concerns, we took special steps to ensure that we only
recruited subjects from the US and that subjects were actually engaging with
our experiments. To that end, we used a special service that collects the
‘digital fingerprints’ of participants and uses geolocation; we implemented a
number of attention checks; and collected a sample that, with a few
differences, represents the general US population.27 Still, external validity is
always a concern, and it should be emphasized that we are not proposing
here any specific intervention. We seek to discover whether all-caps has its
25 See Miles A. Tinker & Donald G. Paterson, Influence of Type Form on Speed of Reading,
12 J. APPLIED PSYCHOL. 359 (1928).
26 While capitalization is rare in the marketing context, a point we emphasis throughout,
one sometimes finds capitalization in the context of brand logos, such as Pepsi’s. See Tony
Stark, Pepsi Logo, LOGASTER (Dec. 16, 2011), https://www.logaster.com/blog/pepsi-logo//.
27 On MTurk, its benefits, and its limitations, see infra notes 82-83 and 95-98 and
accompanying text.
Electronic copy available at: https://ssrn.com/abstract=3519630

<<PAGE_BREAK>>

10 ALL-CAPS [DRAFT] [VOL. ---
advertised effects, despite the lack of any previous supporting evidence.
Even if lab experiments are limited, however, it is important to remember
the claim that all-caps supporters endorse. They implicitly claim that all-caps
has such strong behavioral effects that it would be justified to disclaim
liability for a crippling accident based on capitalization. Strong claims
require strong evidence; the limits of the lab notwithstanding.
Third, as we test recall, reading speed, and subjective feeling of
difficulty, we do not measure other potential justifications for all-caps.28
Fuller famously argued that formal requirements could be helpful in
providing evidentiary, cautionary, and channeling functions,29 and one might
seek to justify all-caps on the basis of such and other non-behavioral
effects.30 Now, these reasons were never carefully articulated, so it is
uncertain that these reasons are coherent or persuasive. It is not even clear
how one might test these presumed effects and if so, in what direction they
might work. But most significantly, there is a strong normative case against
non-behavioral justifications in this context. All-caps is used to show
meaningful consent to especially onerous terms that would not be enforced
but-for the use of all-caps. If one wants to enforce a disclaimer that prevents
the victim of a medical accident coverage only because the term appeared in
all-caps, this reason must be especially compelling. We are hard-pressed to
find such a compelling reason that is divorced from any behavioral effect.
The results of this study, explored in Part V, carry implications for both
current legal policies and the future of disclosure. In terms of current
policies, we believe that there is enough evidence to abandon the reliance on
all-caps. We base our recommendation in part on the force of the positive
28 Consistent with these metrics, the FTC, for example, emphasizes that the goal of
conspicuous disclosure in online advertising is consumer behavior, not formal notice. FTC
EFFECTIVE DISCLOSURES, supra note 10, at 6 (“Whether a disclosure [is clear and
conspicuous] is measured by its performance–that is, how consumers actually perceive and
understand the disclosure within the context of the entire ad”). The UCC emphasizes the
prevention of surprise to the consumer and requires special clear language to be used. UCC
§ 2-316, cmt 1.
29 Lon L. Fuller, Consideration and Form, 41 COLUM. L. REV. 799, 800-801 (1941)
30 In the UCC, context, courts have taken a more formalistic approach. Stephen E.
Friedman, Text and Circumstance: Warranty Disclaimers in A World of Rolling Contracts,
46 ARIZ. L. REV. 677, 688 (2004)
Electronic copy available at: https://ssrn.com/abstract=3519630

<<PAGE_BREAK>>

2019] ALL-CAPS [DRAFT] 11
evidence presented here, which shows that all-caps is harmful to older
readers while not appreciably improving outcomes over normal print. We
also base our recommendation on the negative evidence we uncover in our
analysis of the case law—showing that there was never any contrary
evidence for this longstanding legal practice.31 Most damning is the
observation that in designing marketing materials, where firms have an
interest in persuading consumers, the use of all-caps is effectively absent.32
Similarly, some evidence shows that when firms use their contracts as part
of their branding, they shy away from all-caps, suggesting that firms
themselves do not consider this method effective.33
Future discussions in disclosure law should focus on better alternatives
to all-caps. Here, there is cause for optimism—we find that certain
interventions can have a large impact on consumer consent. However, we do
not advocate any specific policy, and our findings should only be interpreted
as undermining the theory of all-caps.
I. CONSPICUOUS DISCLOSURE AND ASYMMETRIC INFORMATION
A.The Problem of Uninformed Contracting
Contracts are based on consent.34 A recalcitrant problem in contract
law, however, is that few consumers actually read the fine print, thus
compromising their consent.35 Inattention to the fine print encourages firms
to offer inferior terms because these terms will cut costs while not impacting
31 See infra Part I.
32 See e.g., ALEXANDER HIAM, MARKETING FOR DUMMIES, at 133 (4th ed, 2014) (“[A]void
long stretches of copy set in all caps.”)
33 David A Hoffman, Relational Contracts of Adhesion, U. CHI. L. REV. 1395 (2018).
34 See Omri Ben-Shahar, CONTRACTS WITHOUT CONSENT: EXPLORING A NEW BASIS FOR
CONTRACTUAL LIABILITY, 152 U. PA. L. REV. 1829 (2004)
35 Ayres & Schwartz supra note 3.
Electronic copy available at: https://ssrn.com/abstract=3519630

<<PAGE_BREAK>>

12 ALL-CAPS [DRAFT] [VOL. ---
demand.36 Worse, firms will have an incentive to actively make terms harder
to read—i.e., “shroud” them—even in competitive markets..37
To deal with consumer mistakes concerning the terms of their
transactions, scholars advance several strategies. The dominant approach is
the promotion of mandatory disclosures.38 As Professor Bar-Gill, one of the
drafters of the new Restatement of Consumer Contracts, argued: “disclosure
mandates should be one of the main regulatory responses to the problem of
consumer misperception.”39 Similarly, Professor Sunstein argues that
“[p]roperly designed disclosure requirements can significantly improve the
operation of markets, leading consumers to make more informed
decisions.”40 Proponents of disclosure often use the Truth in Lending Act
(TILA) as an exemplar of successful smart disclosure.41 On the other hand,
there is a growing movement that is disillusioned with the disclosure project.
Ben-Shahar and Schneider, two of the leaders of this camp, argue that
“Mandatory disclosure may be the most common and least successful
regulatory technique in American law.”42 They consider TILA to be a “sour
36 See, e.g., Ayres & Schwartz, supra note 3, at 563 (If consumers are uninformed, “the
seller has too little incentive to offer good contracts.”). Oren Bar-Gill, The Behavioral
Economics of Consumer Contracts, 92 MINN. L. REV. 749, 774 (2008); Ryan Bubb & Richard
H. Pildes, How Behavioral Economics Trims its Sails and Why, 127 HARV. L. REV. 1593,
1644 (2014). There is also some evidence that firms intentionally sabotage disclosure, to
exacerbate the problem. Willis, supra note 17, at 1322-1326.
37 Bar-Gill supra note 36, at 744; Xavier Gabaix and David Laibson, Shrouded Attributes,
Consumer Myopia, and Information Suppression in Competitive Markets, 121Q. J. Econ. 505,
510 (2006); OREN BAR-GILL, SEDUCTION BY CONTRACT: LAW, ECONOMICS, AND PSYCHOLOGY
IN CONSUMER MARKETS, 19 (2012).
38 See e.g., Alan Schwartz & Louis Wilde, Intervening in Markets on the Basis of Imperfect
Information: A Legal and Economic Analysis, 127 U. PA. L. REV. 630, at 673 (1978) (arguing
that the chief remedy for market failures due to asymmetric information should be: “to provide
consumers with comparative price and term information”)
39 Id.
40 Cass Sunstein, Empirically Informed Regulation, 78 U. CHI. L. REV. 1349, at 1356 (2011)
41 Epstein, supra note 6, at 125, 128.
42 Omri Ben-Shahar & Carl E. Schneider, MORE THAN YOU WANTED TO KNOW, 3 (2014)
Electronic copy available at: https://ssrn.com/abstract=3519630

<<PAGE_BREAK>>

2019] ALL-CAPS [DRAFT] 13
accomplishment.”43 What should come instead is a matter of on-going
debate.44
While scholars are debating the desirability of disclosure, courts and
legislators have adopted what can be called a “conspicuousness policy.” The
idea is simple: make key parts of the contract salient. This way, one could
reduce the cognitive strain, reading time, and cost-ineffectiveness of reading
the fine print. To encourage firms to use conspicuous disclosure, courts
condition the enforcement of certain key terms on their proper formatting.
So, for example, a disclaimer of the implied warranty under the UCC “must
be conspicuous” to be enforced.45 Similar requirements apply to disclaimers
of warranties under the Magnuson Moss Act, trial periods in consumer
contracts, disclosures of loans, and a variety of other contracts.46 Courts
also sometimes employ open-ended contractual doctrines, such as
unconscionability, unilateral mistake, and misrepresentation, to promote the
inclusion of conspicuous terms in the fine print.47
43 Omri Ben-Shahar & Carl E. Schneider, The Failure of Mandated Disclosure, 1
JERUSALEM REV. LEG. STUD. 83, at 86 (2015).
44 See e.g., Oren Bar-Gill, Defending (Smart) Disclosure: A Comment on More Than You
Wanted to Know, 11 JERUSALEM REV. LEG. STUD. 75–82 (2014) (arguing for simplified
disclosures); Willis (performance-based standards); Omri Ben-Shahar & Carl E. Schneider,
The Failure of Mandated Disclosure, 1 JERUSALEM REV. LEG. STUD. 83, 85 (2015) (reviewing
alternatives).
45 U.C.C. § 2-316(2); Melvin A Eisenberg, Disclosure in Contract Law, 91 CAL. L. REV.
1645, 1679 (2003).
46 15 U.S.C. § 2303 and 16 CFR 700.; CAL. BUS. & PROF. CODE § 17602(a); 15 U.S.C.
§ 1632 (Truth in Lending Act’s requirement that disclosure must be made “clearly and
conspicuously”). See also ALA. CODE § 8-19D-2(a) (“it shall be unlawful . . . [to imply in mail
solicitation] that the person being solicited has won . . . a prize or purported prize unless the
qualifying language appears in print that is clear, easily read, and conspicuous.”); K.S.A. 50-
903 (liability for failure to hold a sufficient quantity of a produce that is advertised as being
on sale, “unless the available amount is disclosed fully and conspicuously”); V.T.C.A., BUS.
& C. § 8.204; Dias v. Nationwide Life Ins. Co., 700 F. Supp. 2d 1204, 1216 (E.D. Cal. 2010);
Spray, Gould & Bowers v. Associated Internat. Ins. Co., 71 Cal.App.4th 1260, 1272, 84
Cal.Rptr.2d 552 (1999); Hadland v. NN Investors Life Ins. Co., 24 Cal.App.4th 1578, 1586,
30 Cal.Rptr.2d 88 (1994).
47 E. ALLAN FARNSWORTH, CONTRACTS, 248-49 (2004). § 211 R2K (“Where the other party
has reason to believe that the party manifesting such assent would not do so if he knew that
the writing contained a particular term, the term is not part of the agreement”).
Electronic copy available at: https://ssrn.com/abstract=3519630

<<PAGE_BREAK>>

14 ALL-CAPS [DRAFT] [VOL. ---
While there is no general theory of what amounts to a conspicuous
display of information, all-caps play a dominant, and often dispositive, role
among both legislatures and courts.48 Various state laws explicitly mandate
that certain disclosures appear in all-caps.49 Other types of legislation simply
declare all-caps as an acceptable method of making text conspicuous.50
Courts, similarly, enforce terms only because they appear in all-caps.51 In
Rottner v. AVG, a consumer argued that software defect led to the loss of
information on his hard drive.52 The defendant argued that implied
warranties were disclaimed. The judge summarily noted that “Here, the
[contract] presents the disclaimer in capital letters in section 5c. . . . .
Consequently, Rottner's claim for any breach of the implied warranty will be
dismissed.”53
48 See e.g., FLA. ADMIN. CODE r. 2-18.002 (1996), MINN. STAT. ANN. § 559.21(3),
N.Y. GEN. BUS. LAW § 653(1), OHIO REV. CODE ANN. §3121.29 (mandating a block of 3
paragraphs of all-caps in child support orders); 18 DEL. ADMIN. CODE 1405-10.0 (2018); ALA.
CODE § 8-26B-10(c).
49 See, e.g., ALA. CODE § 8-26B-10(c). As noted, there is no generally accepted theory, and
some codes use forms without all-caps. See e.g., ALA. CODE § 8-25-2.
50 U.C.C. § 1-201(b)(10). Note that capitalization is not explicitly mentioned by the UCC
for the body of the text.
51 Sableman, supra note 13, at 24 (“courts have generally approved all-uppercase
treatments”); Beazley, supra note 3, at 8 (noting that “…all caps continues to be interpreted
as meeting the standard for ‘conspicuous type.’”); Willis, supra note 17, at 1349. Some
examples include Davis v. LaFontaine Motors, Inc., 719 N.W.2d 890, 895–96 (Mich. App.
2006); Doe v. SexSearch.com, 502 F. Supp. 2d 719 (N.D. Ohio 2007), aff'd on other
grounds, 551 F.3d 412 (6th Cir. 2008); Fleming Farms v. Dixie Ag Supply 631 So. 2d 922
(Ala. 1994); Karr-Bick Kitchens & Bath, Inc. v. Genini Coatings, Inc., 932 S.W.2d 877, 879
(Mo. Ct. App. 1996) (“The language excluding the warranties was written in capitalized
letters and was more prominent than the other type on the label. . . . The language thus
conformed with the definition of “‘conspicuous’”). Perlman 2012 WL 12854876, at *2 (S.D.
Fla. Apr. 3, 2012); Walnut Equip. Leasing Co. v Moreno (1994, La App 2d Cir) 643 So 2d
327; Boston Helicopter Charter, Inc. v Agusta Aviation Corp. (1991, DC Mass) 767 F Supp
363.; Potomac Plaza Terraces v QSC Prods., (1994, DC Dist Col) 868 F Supp 346, 26
UCCRS2d 1069.
52 Rottner v. AVG Techs. USA, Inc., 943 F. Supp. 2d 222 (D. Mass. 2013).
53 id at 232.
Electronic copy available at: https://ssrn.com/abstract=3519630

<<PAGE_BREAK>>

2019] ALL-CAPS [DRAFT] 15
There are certain exceptions, but these mostly go to prove the rule.54 In
Herrera v. First Northern Savings and Loan Association,55 the tenth circuit
needed to decide whether an interest rate disclosure was “more conspicuous”
than other disclosures, as required by the Truth in Lending Act.56 The court
did not find that the APR disclosure met the standard, despite being in all-
caps, because more than thirty other disclosures in the contract were also in
all-caps.57 Even in this decision and others like it, the court agreed that in
principle, all-caps is a mode of making text conspicuous.
Given the centrality of all-caps in legal practice and its social
importance, one would expect a large body of supporting evidence.
Strikingly, we could not locate any empirical support of this policy and only
scant theoretical justification.58 Instead, the evidence is mostly negative. In
a series of studies that started in 1928, psychologists generally found
negative effects of all-caps on reading speeds, slowing reading by as much
as 13%.59 One reason is that people are less experienced reading all-caps;
54 Bowdoin v. Showell Growers, Inc., 817 F.2d 1543 (11th Cir. 1987) (“By definition, a
post-sale disclaimer is not conspicuous in the full sense of that term because the reasonable
person against whom it is intended to operate could not have noticed it before consummation
of the transaction.”); but see Rinaldi v. Iomega Corp., No. 98C-09-064-RRC, 1999 WL
1442014, at *1 (Del. Super. Ct. Sept. 3, 1999) (finding that language was conspicuous even
though the terms were sent along with the packaged item) – or where the all-caps was on the
back of the page, see, e.g., Hunt v. Perkins Mach. Co., 352 Mass. 535, 541, 226 N.E.2d 228,
232 (1967) (“[T]he provisions on the back of the order cannot be said to be conspicuous
although printed in an adequate size and style of type.”); Sierra Diesel, 890 F.2d at 114
(finding capitalization on the back of the page was inconspicuous). But see Roger's Fence,
Inc. v. Abele Tractor and Equipment Co., Inc., 26 A.D.3d 788, 809 N.Y.S.2d 712 (4th Dep't
2006) (A clause may still be conspicuous even if on the back of the page and after the
transaction if there is a conspicuous notation on the front of the page directing attention to the
disclaimer on the back).
55 805 F.2d 896 (1986).
56 Id. at 898.
57 Id. at 900.
58 For a recent review, see Maria Lonsdale, Typographic Features of Text: Outcomes From
Research and Practice, 48 VISIBLE LANG. 29, 37-40 (2014). See also Willis, supra note 17,
at 1349 (noting the lack of supportive evidence).
59 See Miles A. Tinker & Donald G. Paterson, Influence of Type Form on Speed of Reading,
12 J. APPLIED PSYCHOL. 359 (1928). But see Jeremy J. Foster & Margaret Bruce, Reading
Upper and Lower Case on Viewdata, 13 APPL. ERGON. 145 (1982) (reviewing the evidence
and finding no negative effect of all-caps on reading speeds).
Electronic copy available at: https://ssrn.com/abstract=3519630

<<PAGE_BREAK>>

16 ALL-CAPS [DRAFT] [VOL. ---
another is that all-caps letters lack ascenders and descenders,60 so that the
letters appear more homogenous.61 While instructive, this body of research
leaves much to be desired, as it is focused on non-legal texts and its main
finding—slower reading speeds—has ambiguous implications for consumer
law. In theory, slower reading could actually improve consumer consent, by
giving the consumer more time to reflect on the relevant term.
Among lawyers, all-caps is not commonly discussed—perhaps seeing
it as a mere technicality—but those who do, rarely endorse it. A leading
textbook on typography for lawyers counsels against the excessive use of all-
caps.62 In a rare decision that adversely remarked on all-caps, Judge Kozinski
voiced a strong opposition: “there is nothing magical about capitals,” he said;
“Lawyers who think their caps lock keys are instant make conspicuous
buttons are deluded.”63
*
Courts and legislatures widely believe that all-caps makes a term
conspicuous, thus improving consumer consent. The literature review
reveals, however, that this belief has no empirical support. Although all-caps
exacts a heavy price from uninformed consumers by enforcing against them
especially onerous terms, it rests on speculation alone. We now set out to
present the first empirical evidence on all-caps in consumer contracts and
their effects on consumer consent.
60 Robbins, supra note 20, at 118-119.
61 See MATTHEW BUTTERICK, TYPOGRAPHY FOR LAWYERS, 202 (2012); Robbins, supra note
20.
62 See BUTTERICK, supra note 61. See also Robbins, supra note 20, at 116; Sableman, supra
note 13, at 9; Bryan A. Garner, Pay Attention to the Aesthetics of Your Pages, MICH. B. J.
(Mar. 2010), https://www.michbar.org/file/barjournal/article/documents/pdf4article1664.pdf.
Cheryl B. Preston, "Please Note: You Have Waived Everything": Can Notice Redeem Online
Contracts?, 64 AM. U. L. REV. 535, 553 (2015) (“Key sections in wrap contracts are
frequently presented in all capital letters, but that does not help.”); Beazley, supra note 3, at
2.
63 In re Bassett, 285 F.3d 882, 886 (9th Cir. 2002); OFFICE OF INV. EDUC. & ASSISTANCE,
U.S. SEC. & EXCH. COMM'N, A PLAIN ENGLISH HANDBOOK: HOW TO CREATE CLEAR SEC
DISCLOSURE DOCUMENTS 72 (1998) (proposing that text will not be written in all-caps).
Electronic copy available at: https://ssrn.com/abstract=3519630

<<PAGE_BREAK>>

2019] ALL-CAPS [DRAFT] 17
II. ALL-CAPS IN ACTION: A STUDY OF INDUSTRY PRACTICES
Both casual observation and the caselaw suggest that all-caps
provisions are very common in consumer transactions.64 But how common
is very common? While we know that many consumer contracts are liberal
with their use of polysyllabic words and difficult, tortured grammatical
constructions, we know very little about their formatting.65 As
conspicuousness is ultimately a question of formatting, this gap in our
knowledge is troubling. Evaluating the practical importance of all-caps also
bears on our standard of proof for their effectiveness; all else equal, the more
prevalent they are, the more important it is to verify that they indeed achieve
their intended goals.
A.Methodology
To estimate the prevalence of all-caps in practice, we sought to examine
various types of common consumer contracts. We report here novel evidence
based on the analysis of the standard forms used by 500 of the most popular
websites.66 These forms serve the basis of hundreds of millions of individual
consumer contracts, as most US consumers have contractual relationships
with at least a few of these large firms.
64 See, e.g., Kelker v. Geneva-Roth Ventures, Inc., 303 P.3d 777, 783 (Mont. 2013) (finding
the arbitration clause in a payday loan agreement unconscionable because, inter alia, “no bold
or capital letters highlight[ed] the arbitration clause”); Mitsch v. General Motors Corp., 833
N.E.2d. 936, 940 (Ill. 2005) (finding the warranty of merchantability disclaimer required
under Magnuson-Moss act for the sale of used car conspicuous, even though it did not mention
merchantability, because it was “in all capital letters,” among other things).
65 Uri Benoliel & Shmuel I. Becher, The Duty to Read the Unreadable, 60 B.C. L. REV.
(forthcoming 2019); Michael Rustad & Thomas Koenig, Wolves of the World Wide Web:
Reforming Social Networks’ Contracting Practices, 49 WAKE FOREST L. REV. 1431, 1437
(2014).
66 The data was collected and generously shared by Uri Benoliel and Shmuel Becher and
forms the basis of their article Uri Benoliel & Shmuel I. Becher, The Duty to Read the
Unreadable 60 BOS. COLL. L. REV. (Forthcoming, 2019). The collection procedure is detailed
there.
Electronic copy available at: https://ssrn.com/abstract=3519630

<<PAGE_BREAK>>

18 ALL-CAPS [DRAFT] [VOL. ---
The selection of the firms was made on the basis of the Alexa Top Sites
web service, which collects data on the most visited websites67 and is widely
considered to be a reliable measure.68 The sites in the sample include
household names such as Google, Facebook, Uber, and Amazon. The
contracts themselves are wrap contracts, which structure the relationship
between the firm and the consumer in relation to the usage of the website.
To analyze these contracts, we developed a script that algorithmically
detected the case of words, sentences, paragraphs, and headers.69 The script
counted all instances of a letter being capitalized, and attempted to classify
capitalization at the word, sentence, paragraph, and header level. One
challenge in this respect is that there is no unique way to identify headers–or
even paragraphs. The script defines a header as a sentence lacking a period.
Capitalization of a paragraph was defined as a paragraph containing over
80% of its content in uppercase.
B. Findings
Table 1 summarizes the main findings from the case analysis of the
contracts:
67 See Alexa Top Sites, AMAZON, https://aws.amazon.com/alexa-top-sites/ (last visited Mar.
1, 2019). The ranking itself is based on a combination of unique visitors and the number of
pageviews, per visitor. See How are Alexa’s traffic rankings determined?, AMAZON,
https://support.alexa.com/hc/en-us/articles/200449744 (last visited Mar. 9, 2019).
68 Joel R. Reidenberg et al., Disagreeable Privacy Policies: Mismatches Between Meaning
and Users' Understanding, 30 BERKELEY TECH. L.J. 39, 54 (2015) ("Alexa.com [is] the most
prominent measurement company for web traffic data."); Arjun Thakur et al., Quantitative
Measurement and Comparison of Effects of Various Search Engine Optimization Parameters
on Alexa Traffic Rank, 26 INT’L J. COMPUTER APPLICATIONS 15, 15 (2011);
("Alexa Traffic Rank is the most popular website traffic measurement unit").
69 The script uses Python’s library “Docx” which allows interaction with Word documents
and classifies words, sentences, and paragraphs.
Electronic copy available at: https://ssrn.com/abstract=3519630

<<PAGE_BREAK>>

2019] ALL-CAPS [DRAFT] 19
Table 1: Analysis of Capitalization in the Standard Form
Contracts
As Table 1 shows, the great majority (~77%) of these contracts have at
least one paragraph that is fully capitalized. The use of capitalized headers is
also quite frequent, with 17.4% of all the headers formatted in all-caps.70
Contract drafters will also capitalize certain key terms and names, so we find
that roughly 9% of the words in these contracts are capitalized.
Overall, these findings demonstrate that capitalization is very common
in practice. In interpreting these results, it is important to bear in mind that
most American adults are a party to many of these contracts, which include
the contracts of firms such as Facebook, Amazon, Dell, and Uber. During
the collection of the contracts, these websites had 10 million unique
visitors.71 Hence, these 500 form contracts represent hundreds of millions of
individual contracts affecting the lives of most American adults.
Additionally, the use of capitalization in EULAs is not likely to be unique to
online contracts; if anything, the online format permits more formatting
opportunities than print contracts.72 Finally, it is remarkable how pervasive
all-caps are in legal texts relative to any other type of text. In marketing
70 Note, however, that there is no unique way to define headers and paragraphs, so this
estimate may be both under- and over-inclusive. We ran a verification analysis by hand and
found the script to be generally accurate.
71 See Benoliel & Becher, supra note 66.
72 See Sableman, supra note 13, at 9-10.
Electronic copy available at: https://ssrn.com/abstract=3519630

<<PAGE_BREAK>>

20 ALL-CAPS [DRAFT] [VOL. ---
materials—where firms have a monetary incentive to increase
comprehension of their messaging—all-caps are rarely used.73
III. ALL-CAPS AND CONSUMER CONSENT: EXPERIMENTAL ANALYSIS
Considering the legal and practical importance of all-caps, it becomes
critical to know whether this mode of intervention in consumer contracts
succeeds in its stated goal of improving consumer consent. Testing the
effectiveness of the all-caps theory requires both a clear grasp of how
conspicuousness might improve the quality of consent and a clear
methodology that controls for the many potential confounders.
Courts have not expounded on why they believe all-caps improves
consent; instead, they summarily link all-caps to the prevention of surprise.74
Trying to trace the link opens a few possibilities. First, it is possible that
conspicuous language helps the consumer to economize attention. The
conspicuous formatting would indicate to the consumer where she should
spend most of her “attention budget,” because the terms are most important.
This possibility depends on contrast, so that conspicuousness is the quality
of the term’s visible difference from other parts of the text. Another
possibility is that conspicuous formatting improves the readability of the
text; a larger font type reduces eye strain and highlights letter structure or
simply draws attention more effectively.75 A third possibility is that all-caps
acts as a “fire siren”—it doesn’t make it easier to read or understand, but its
very existence alerts the consumer to the possibility that the contract is
especially onerous. A final possibility—and a counterintuitive one—is that
conspicuous language is helpful because it slows down reading speeds.76
This is potentially so because capitalized letters are homogenous and lack
what typographers call “ascenders” and “descenders,” or the parts of letters
73 See HIAM, supra note 32 (recommending that all-caps should not be used in marketing
materials)
74 Gatton v. T-Mobile USA, Inc., 152 Cal. App. 4th 571, 581, 61 Cal. Rptr. 3d 344, 352
(2007)
75 If this is what courts believe, one would expect them to require the capitalization of the
entire contract.
76 See supra note 25.
Electronic copy available at: https://ssrn.com/abstract=3519630

<<PAGE_BREAK>>

2019] ALL-CAPS [DRAFT] 21
that go above (such as in “b”) and below (such as in “p”) the line of type.77
This homogeneity would tend to make reading slower, but also might have
the salutary effect of increasing the time consumers reflect on these terms.
Whichever of these possibilities is correct, they all point in the way of
a similar testable hypothesis: other things being equal, the consumer would
have better recall of the conspicuous term than if the term was
inconspicuous. As we have already noted the absence of any supporting
evidence, we should also note that there is a reason to suspect the
effectiveness of all-caps. As noted, all-caps letters are homogenous and lack
what typographers call “ascenders” and “descenders,” or the parts of letters
that go above (such as in “b”) and below (such as in “p”) the line of type.78
In addition, the capitalization of entire blocks of text makes the key terms
less conspicuous, as the conspicuousness of text may consist of contrast.79
Admittedly, one might hold a non-functional view of conspicuous
language. It is possible that courts think that posting a conspicuous sign is
enough to shift the burden to the consumer, or that they view all-caps as a
formality that serves other, non-consumer-oriented ends.80 Such theories,
however, have little in the way of support. Why should the mere act of
capitalization suddenly overcome the difficulty posed by consumers not
reading the fine print? If all-caps have no empirically discernible impact on
consumer consent, what normative force do they carry? And because we
could find no one making these arguments, much less justifying them, we
can restrict attention to the possibilities explored above, which relate
conspicuousness to informed consent.
Our position is that unless one can show that all-caps has a meaningful
impact on the quality of consent, all-caps should not be held to satisfy the
conspicuousness requirement at all. This is because the error cost of this
intervention—the enforcement of onerous but unknown terms on
consumers—can be very high. To bar a wrongful death lawsuit simply
because a clause in a contract was capitalized, one must have significant
77 See BUTTERICK, supra note 61, Robbins, supra note 20.
78 See BUTTERICK, supra note 61, Robbins, supra note 20.
79 On this view, low-caps would be conspicuous in a sea of all-caps text.
80 See generally Fuller, supra note Lon L. Fuller, Consideration and Form, 41 COLUM. L.
REV. 799, 800-801 (1941).
Electronic copy available at: https://ssrn.com/abstract=3519630

<<PAGE_BREAK>>

22 ALL-CAPS [DRAFT] [VOL. ---
confidence that this method is indeed effective at improving consumer
consent.
A.Methodology
We are interested in seeing whether all-caps has any measurable impact
on consumer consent. The most direct measure would be the quality of
consumer consent “in the field,” but regrettably such an investigation
presents many difficulties and is fraught with a host of potential confounders.
To see whether the consumer read the contract at all one would have to
monitor the consumer closely from the early stages to the consummation of
the transaction. To evaluate whether the consumer’s understanding is due to
the contract or some other factor, one would also need to monitor the
consumer’s interactions with other consumers, the salespeople, or online
materials. There are also considerable variations in the way salespeople
communicate and treat different consumers,81 which could further confound
the analysis. These challenges make field research exceedingly difficult and
uncertain.
Randomized control trials, and in particular, lab experiments present a
rigorous method of evaluating the relevant factors. In the lab, it is possible
to control for all variation between the contracts, negotiations, and products.
Thus, when the researcher finds a variation in outcomes, he can attribute it
more directly to the treatment rather than some external factor.
We recruited American respondents through the popular online
platform Amazon’s Mechanical Turk (MTurk), a common staple of similar
work.82 This platform “has been studied extensively at this point. Its
advantages are that populations recruited via [MTurk] are more
representative of the national population than convenience samples (e.g.,
undergraduates) and that a variety of experimental findings have been
replicated using MTurk.”83 While not perfect, MTurk is a standard way of
81 See e.g., Ian Ayres, Fair Driving: Gender and Race Discrimination in Retail Car
Negotiations, 104 HARV. L. REV. 817 (1991) (finding, in a field experiment, that salespeople
offered worse terms to minorities)
82 See e.g., Furth-Matzkin & Sommers, supra note 21.
83 Tess Wilkinson-Ryan, The Perverse Behavioral Economics of Disclosing Standard
Terms, 103 CORNELL L. REV. 117, 150 n. 162 (2017) (internal citations omitted).
Electronic copy available at: https://ssrn.com/abstract=3519630

<<PAGE_BREAK>>

2019] ALL-CAPS [DRAFT] 23
ensuring greater subject variability than the leading alternative of recruiting
undergraduates.84
We recruited, overall, 570 respondents. This sample size is larger than
comparable studies and power analysis shows that it is sufficiently large to
capture meaningful differences.85 The demographics of the sample, relative
to the general US population (in parentheses), are: 44.6% female (50.8%),
median age 38 (38), 75% white (60.4%), a median household income of
$52,000 ($57,652), and college degree or higher education 62.8% (30.9%).86
Relative to the general population, we find a general match, with the sample
skewing slightly male, white, and less wealthy. A robustness check did not
show any statistical differences along these dimensions. Nor did we have any
theoretical reason to expect that the race of participants will affect results in
any particular direction. A larger relevant skew is with respect to education,
although even here two points are worth remembering. First, this skew is
actually much smaller than that of common alternative recruitment methods,
most clearly, in undergraduate students.87 Moreover, some of this skew
would likely bias results in favor of all-caps, as more educated readers might
be, on average, more informed of the legal requirement to highlight key
terms in contracts using conspicuous language. Again, we did not find any
meaningful differences based on these factors.
Before delving into the description of the experimental design itself, it
is worth highlighting the basic challenge posed by testing the quality of
consent and our approach to overcoming it. Testing consent is not an easy
84 See generally Hillel J Bavli & Reagan Mozer, The Effects of Comparable Case Guidance
on Awards for Pain and Suffering and Punitive Damages: Evidence from a Randomized
Controlled Trial, 37 YALE L. POL’Y REV. 405, 453 (Citing “numerous studies” that show tht
“MTurk worker population is relatively representative of the general population—and
certainly more representative than traditional pools for surveys and experimentation”).
85 See supra note 21. The power analysis is based on the non-inferiority testing, as described
in Shein-Chung Chow et al., SAMPLE SIZE CALCULATIONS IN CLINICAL RESEARCH, 76-82 (3d
ed., 2018). Assuming proportions of 50% correct in both groups, a non-inferiority margin (𝛿)
of -0.1 and a sampling ratio of 1, the sample size for 𝛼=0.05,1−𝛽=0.95 is 538.
86 United States Census, https://www.census.gov/quickfacts/fact/table/US/LFE046217
(last visited July 31, 2019)
87 Joseph Henrich et al., The Weirdest People in the World?, 33 BEHAV. & BRAIN SCI. 61,at
63 (2010) (Finding that 67 percent of American subjects in psychology studies rely on college
students and that this population is often “at the extreme end of the distribution.”).
Electronic copy available at: https://ssrn.com/abstract=3519630

<<PAGE_BREAK>>

24 ALL-CAPS [DRAFT] [VOL. ---
task, which may be the reason behind the paucity of research in this area.88
The key parameter of interest, in our estimation, is whether the consumer can
respond correctly to a question regarding the obligations they just incurred.89
However, in testing this, one runs into the problem that consumers may guess
based on background information they have from past exposure—rather than
engagement with the actual contract. Consequently, even if there is a
difference in the effect of different designs, it may be obscured by consumers
relying on past experience to respond rather than the contract itself. Our
novel solution to these problems, as developed below, was to draft an
arrangement that defies past expectations, presents multiple plausible
options, and is also sufficiently complex.
The design for this study uses a contract inspired by Spotify’s end
user license agreement.90 Such agreements are common among providers of
both online and offline services, who offer a free trial period that converts
automatically into a subscription-based service after the trial period lapses.91
Consumer agencies consider such agreements to have potential pernicious
effects due to their stickiness, as the consumer may unwittingly pay for an
unwanted subscription.92 Most courts and legislatures, however, are willing
to enforce such charges—so long as they are made in all-caps in the
consumer agreement—under the theory that such disclosure is
conspicuous.93 This study is a test, then, of whether the inclusion of such
clauses indeed improves the quality of consumer consent.
88 See supra notes 58-61 and accompanying text.
89 See discussion of this point see supra Introduction.
90 Spotify Terms and Conditions of Use, SPOTIFY, https://www.spotify.com/us/legal/end-
user-agreement/ (last modified Feb. 7, 2019) (For an example of an automatic billing
disclosure, see § 3.3 of the Terms and Conditions of Use).
91 “Free” Trial Offers? FED. TRADE. COMM’N,
https://www.consumer.ftc.gov/articles/0101-free-trial-offers (last visited Feb. 9, 2019).
92 Koren Grinshpoon, License to Bill: The Validity of Coupling Automatic Subscription
Renewals with Free Trial Offers by Online Services, 28 FORDHAM INTELL. PROP. MEDIA &
ENT. L.J. 301, 303 (2018); “Free” Trial Offers?, supra note 91.
93 Grinshpoon, supra note 92, at 320–28 (Explaining that under California’s Automatic
Purchase Renewals Statute, for example, automatic billing terms must be disclosed “clearly
and conspicuously,” which is defined as, inter alia, “in larger type than the surrounding
text;”); 322 n.106 (listing many states that have adopted this requirement and definition). See
also Laura Koweler Marion and Leita Walker, Automatic Renewal Laws in all 50 States,
Electronic copy available at: https://ssrn.com/abstract=3519630

<<PAGE_BREAK>>

2019] ALL-CAPS [DRAFT] 25
The respondents were told that they were simulating a free-trial sign up
for a new music streaming service called “TideTunes.” They were then given
and asked to read a two-page contract for the service, which consisted of 15
paragraphs. Respondents were asked to spend as much time reading this
contract as they would read any similar contract outside the experiment.
Subjects were randomly split among two groups, control and
treatment.94 In the former group, the entire contract appeared in low-caps,
i.e., normal formatting. In the treatment group, a test paragraph appeared in
all caps. The test paragraph for this study is as follows:
TERMS OF FREE TRIAL.
BY SIGNING UP FOR THIS FREE TRIAL, YOU ARE SIGNING UP FOR
MEMBERSHIP WITH TIDETUNES. YOUR MEMBERSHIP WILL CONTINUE
UNTIL YOU MANUALLY CANCEL IT. MEMBERSHIP INCLUDES AUTOMATIC
BILLING OF THE CARD WE HAVE ON FILE AT THE END OF THE MONTH FOR
THAT PERIOD. THE TERMS OF MEMBERSHIP APPLY TO THE FREE TRIAL. BY
PROVIDING YOUR PAYMENT DETAILS, YOU AGREE TO THE TERMS OF
AUTOMATIC BILLING. THE FREE TRIAL CANNOT BE TERMINATED PRIOR TO
THE END OF THE TRIAL. IF YOU DO NOT WISH TO BE CHARGED ON A
RECURRING MONTHLY BASIS, YOU MUST TERMINATE YOUR PAID
SUBSCRIPTION THROUGH YOUR USER ACCOUNT OR TERMINATE YOUR
ACCOUNT BEFORE THE END OF THE RECURRING MONTHLY PERIOD.
After being presented with the contract, respondents were moved to
a new page, from which they could not go back, and were asked: “Imagine
that you have signed up for a trial with TideTunes. When can you cancel
your trial?”. The options (presented in random order) were: (1) At any time;
(2) After the trial period (3) After seven days (4) After three months (5) After
fourteen days. The correct answer is number (2).
Before analyzing the responses, we should highlight that many studies
run the risk that respondents may use guesswork to respond to questions,
meaning that the responses are not affected by the stimuli presented to the
subject by the researcher. We used several measures to safeguard against this
risk.
Faegre, Baker, Daniels, available online at
https://www.faeghttps//www.faegrebd.com/webfiles/50-
State%20Survey%20Automatic%20Renewal%20Laws.pdfrebd.com/webfiles/50-
State%20Survey%20Automatic%20Renewal%20Laws.pdf
94 The covariates are well balanced between the two groups.
Electronic copy available at: https://ssrn.com/abstract=3519630

<<PAGE_BREAK>>

26 ALL-CAPS [DRAFT] [VOL. ---
First, respondents on MTurk are incentivized to be attentive and
“[t]here is also evidence, both systematic and anecdotal, that Turk subjects
are particularly attentive, perhaps due to the formal mechanisms available
for giving them feedback that affect reputation ratings”.95 As a result, many
view this as a reliable tool of measurement.96
To enhance the quality of MTurk responses, we used a new special
service, called Positly, which adds a screening layer to MTurk.97 This service
allowed us to verify that all respondents were unique (i.e., that there was no
overlap between subjects in the studies), came from the US, and were within
the relevant age range. Importantly, the website uses several quality metrics
and attention and quality checks to screen out non-engaged users. Quite
tellingly, users on Positly are given an opportunity to respond to the survey,
and many complained that the content was boring and that it took them a
long time to slog through the entire contract.98
Third, we measured—behind the scenes—how long subjects spent on
reading the contracts. The average time to read (102 seconds) showed a non-
trivial level of engagement with the text. Fourth, we presented subjects with
as many as five possibilities to choose from, in order to reduce the effect of
guesses. Finally, the fact that other experiments, reported below, produced
large differences also suggested that respondents were reacting to the stimuli.
95 Wilkinson-Ryan, supra note 83, at 150 n. 162.
96 On the reliability of MTurk, see Kristin Firth, David A. Hoffman, & Tess Wilkinson-
Ryan, Law and Psychology Grows Up, Goes Online, and Replicates, J. EMPIRICAL LEG.
STUDIES (2017) (concluding that MTurk samples replicate well across testing platforms).
97 https://www.positly.com/participants/. Positly enhances the quality of respondents along
several dimensions: It aggregates data from independent researchers to screen out low-quality
participants; it conducts attentions checks; it screens duplicate responses by the same
individual; it uses a digital fingerprint technology to uniquely identify participants; and, it
uses IP addresses for geolocation. While none of these methods is perfect, it increases the
reliability of the baseline MTurk service and avoids some of its shortcomings.
98 Some complaints include: “[the contract] was a bit long and not that easy to answer the
main question without the agreement in front of me.”; “I was afraid I would have to return
this survey without pay since I couldn't remember certain verbiage from the contact.” “The
contract was difficult to understand”; “a lot of reading and it does not explain whether I was
right or wrong;” “[n]one of the contracts gave me enough time to read “ (with respect to Study
5). These complaints suggest that subjects were attentive and their complaints suggest that
they seriously attempted to respond to the questions at hand.
Electronic copy available at: https://ssrn.com/abstract=3519630

<<PAGE_BREAK>>

2019] ALL-CAPS [DRAFT] 27
B. Findings
The main question of interest was how well consumers understand that
they can only cancel their trial after the end of the trial period. As noted, the
contract only permits the consumer to opt-out at the end of the trial period
(“THE FREE TRIAL CANNOT BE TERMINATED PRIOR TO THE END OF
THE TRIAL.”)
If all-caps improves noticeability and recall of hidden terms, we would
expect consumers in the all-caps group to answer this question correctly
more often than consumers in the low-caps group. Figure 1 summarizes the
findings.
Figure 1 Accuracy in All-Caps vs. Low-Caps
The key finding here is that respondents in the all-caps treatment failed
to show any improvement relative to the control. In fact, there were no
differences at all between the groups, and respondents in the all-caps group
were precisely as likely to respond correctly (or incorrectly) as respondents
in the low-caps group.
These findings allow us to reject, with high statistical significance, the
possibility that all-caps improves outcomes in a contractually meaningful
Electronic copy available at: https://ssrn.com/abstract=3519630

<<PAGE_BREAK>>

28 ALL-CAPS [DRAFT] [VOL. ---
way.99 A non-inferiority test is a common method used to evaluate whether
one form of treatment is not worse than another. This is often applied in drug
trials, where the question is whether a new drug is at least as good as the drug
that is currently in use.100 By defining clinical significance, the researcher
can thus statistically evaluate whether the effects of the new drug are not
inferior to the current drug that is in use. Based on this method, we can test
whether low-caps is non-inferior to all-caps. Admittedly, there is no neutral
way to define contractual significance, but given the high error costs that we
noted—i.e., enforcement of especially onerous terms on the basis of the false
belief in their effectiveness—we believe that all-caps should be able to show
a meaningful improvement over low-caps before they should be approved.
If we adopt a ten percentage-point improvement benchmark (which indeed
may be too low for some), the data allows us to reject the hypothesis that
low-caps is worse than all-caps.101
It is important to observe that while we do not test for noticeability
directly, these findings bear on this issue. The test contract includes 15
paragraphs and remembering all of its content is not easy. If all-caps makes
text conspicuous, it should draw attention to its existence. Psychological
studies show that people tend to overly focus on salient features.102 We
would expect, then, that salience would reflect itself in better recall. The
failure of all-caps to improve on low-caps undermines the existence of a
positive notice effect.
The “fire siren” theory suggests that, even without reading, the
existence of all-caps would suggest to the consumer that the contract is
especially onerous. The data, however, allows us to reject this hypothesis.
99 To be clear, we do not conclude lack of effect on the basis of rejection of the null
hypothesis, but rather we test here the non-inferiority of the low-caps treatment.
100 See Chow et al., supra note 85, at 8. Gisela Tunes de Dilva et al., Methods for
Equibalence and Noninferiority Testing, 15 BIOLOGY OF BLOOD AND MARROW
TRANSPLANTATION 120 (2009).
101 With 𝛿=0.1, we can reject the hypothesis that 𝐻 :𝑝 −𝑝 <−𝛿 (where 𝑝 is the %
0 𝐿𝐶 𝐴𝐶
correct for each subscript category): 𝑧=2.85,𝑝<0.01. For proportion, this 𝛿 is equivalent
to having 138 instead of 125 correct responses in the all caps group, out of 283 participants.
For a lower 𝛿=0.05 we can reject the inferiority hypothesis with 𝑝=0.1.
102 See e.g., Joseph W. Alba & Amitava Chattopadhyay, Salience Effects in Brand Recall,
23 J. MKT. RES. 363 (1986)
Electronic copy available at: https://ssrn.com/abstract=3519630

<<PAGE_BREAK>>

2019] ALL-CAPS [DRAFT] 29
The subjects were asked to answer a question with four potential answers.
The answers can be roughly ranked as being most lenient to the most
stringent, from cancellation at any time to cancellation after three months. If
the fire siren hypothesis were true, it would make subjects to opt for the
stricter options. But in fact, there were very few people—in each group—
who opted for either of the stricter options, and the great majority of people
chose one of the two more lax options. And in-between these two options,
all-caps respondents were less likely to choose the strictest one. Overall,
then, we do not find a fire-siren effect.
We then examine how age and all-caps interact. It is possible that the
all-caps intervention would provide value to certain age groups or that it
might harm others, as differences in generational norms, attention span,
eyesight, and so on might lead to different effects among age groups. To test
the age hypothesis, we estimated a logistic regression model where the
dependent variable was accuracy and the independent variable was age. We
controlled for race, education, and income.103 The following Figure reports
the results of the regression:
103 The results are unchanged even without the controls.
Electronic copy available at: https://ssrn.com/abstract=3519630

<<PAGE_BREAK>>

30 ALL-CAPS [DRAFT] [VOL. ---
Figure 2 Average Marginal Effects of All-Caps with 99%
Confidence Intervals
The horizontal line is the benchmark, i.e., low-caps. The points show
changes in accuracy as a result of the all-caps treatment across different age
groups, ranging from 20 to 70. The bars around the points are the 99%
confidence intervals. As the figure shows, all-caps has a strong negative
effect on older readers.104 The older the reader, the more harmful the effect
all-caps has on their ability to answer the test question correctly. This is
notwithstanding a general trend in the data where older readers tended to be
significantly more likely to answer the questions accurately. To provide a
sense of the strength of this effect, the next figure splits the respondents into
two age groups:
104 𝑝<0.01. Note that for younger readers the apparent positive effect of all-caps lacks
statistical significance.
Electronic copy available at: https://ssrn.com/abstract=3519630

<<PAGE_BREAK>>

2019] ALL-CAPS [DRAFT] 31
Figure 3 Percentage of Accuracy in Different Age Groups
80%
69%
70%
60%
50% 44%
42%
40%
40%
30%
20%
10%
0%
Below 55 Over 55
All Caps Low Caps
As Figure 3 illustrates, the difference in accuracy among younger
respondents is negligible. But for older audiences, the difference can be quite
stark. In respondents over 55, 60% were wrong in the all-caps group, relative
to only 31% in the low-caps group. This is a very large effect, effectively
doubling the error rate, and it is practically important given the stakes of
mistakes regarding all-caps clauses.
What might explain the tendency of older respondents to commit more
mistakes in the all-caps group than in the low-caps group? Impatience, lack
of motivation, and differential stakes of charges are all possibilities. An
additional explanation is that the use of all-caps is the formatting equivalent
of yelling or otherwise communicating anger.105 Thus, reading all-caps
would be an emotionally negative experience, which may lead older
respondents to avoid it more than younger respondents. What we find most
plausible is the explanation that all-caps impede reading because they
105 See Alice Robb, How Capital Letters Became Internet Code for Yelling, THE NEW
REPUBLIC (Apr. 17, 2014) https://newrepublic.com/article/117390/netiquette-capitalization-
how-caps-became-code-yelling; All Caps, PRACTICAL TYPOGRAPHY
https://practicaltypography.com/all-caps.html (last visited Feb. 9, 2019).
Electronic copy available at: https://ssrn.com/abstract=3519630

<<PAGE_BREAK>>

32 ALL-CAPS [DRAFT] [VOL. ---
homogenize letter size, making it harder to distinguish between letters on the
basis of their ascenders and descenders.106
*
This study shows that the common practice of formatting certain
contractual terms in all-caps fails to improve outcomes for participants in a
meaningful way and that the practice in fact harms older readers. As we
emphasize throughout, the stakes of errors with the enforcement of all-caps
are high; these are some of the most consequential terms in consumer
contracts. Enforcing these clauses without evidence of their effectiveness
was always questionable; now we show positive evidence that this practice
is actually harmful. While caution is always prudent with lab experiments,
we believe that these findings are sufficiently clear to—at the very least—
shift the burden of proof. We will return to discuss these findings after
exploring some other aspects of all-caps.
IV. EXPLORING ALTERNATIVE JUSTIFICATIONS AND INTERVENTIONS
Our analysis so far has established that all-caps are very common in
practice, but that they lack any empirical support. Further, the evidence
presented here suggests that they fail to bear the burden of showing any
significant improvement over standard formatting. We now turn to a series
of exploratory studies that extend these results and test them under various
settings. We first check to see how all-caps performs under time pressure,
then we evaluate whether consumers may nonetheless show a preference for
all-caps, and finally, we look at whether some other modes of highlighting
text can be more helpful.
A.All-Caps under Time Pressure
1. Methodology
We have just seen that all-caps does not improve the quality of consent
in any meaningful way and impedes it among older readers. One limitation
of the primary experiment is the lack of any time limit. Subjects could spend
as much time as they saw fit on reading and reading the contract very closely
might diminish the usefulness of all-caps. In practice, however, time
106 BUTTERICK, supra note 61; Robbins, supra note 20.
Electronic copy available at: https://ssrn.com/abstract=3519630

<<PAGE_BREAK>>

2019] ALL-CAPS [DRAFT] 33
pressures are ubiquitous, and one study found that as many as 65% of
respondents reported not reading the fine print because they were “in a
hurry.”107
Recall that under one theory, all-caps is useful in that it helps consumers
direct attention to the most important aspects of the transaction. Under this
theory, the positive effects of capitalization would be most noticeable under
time pressure, for then the consumer has to make an active choice where to
focus her attention. On the other hand, one might worry that if capitalization
results in text that is harder to read—a point we explore in the next study—
consumers may spend less time on this activity.
To test the effect of all-caps under time pressure, we designed an
exploratory series of three shorter contracts that were presented to readers
under a strict time limit. When reading the contract, the subject saw a timer
moving, noting the number of remaining seconds; once the time lapsed, the
subject was moved to the next page with the test questions. Each short
contract—described in the appendix—was followed by a multiple-choice
question that measured the reader’s recall of a specific term in the contract.
The term appeared in the test paragraph, which was either ordinary low-caps
(control) or all-caps (treatment). That is, the control group had no way of
knowing which paragraph contains the term paragraph, but the treatment
group could infer this on this basis of the use of all-caps used in this specific
paragraph alone.
We administered the test to 81 respondents, receiving 240 responses
overall (as there were three tests per respondents). The demographics of the
sample, (relative to the demographics of the general US population, in
brackets), are: 46% female (50.8%), median age 34 (38), 65% white (60.4%),
college degree or higher education 47% (30.9%), median household income
$50,000 ($57,652).108 The sample skews somewhat male, younger, white,
and poor, and significantly more educated. We do not have any theoretical
107 Robert Hillman, Online Consumer Standard Form Contracting Practices: A Survey and
Discussion of Legal Implications, in IS CONSUMER PROTECTION AN ANACHRONISM IN THE
INFORMATION ECONOMY?, 293 (2006) .
108 United States Census, https://www.census.gov/quickfacts/fact/table/US/LFE046217
(last visited July 31, 2019)
Electronic copy available at: https://ssrn.com/abstract=3519630

<<PAGE_BREAK>>

34 ALL-CAPS [DRAFT] [VOL. ---
reason to expect this skew to point in any specific direction, but, coupled
with the small sample size, these findings should be interpreted with caution.
To determine what time limit to use, we first administered the test to a
small pilot group without a time limit. We measured the average time to read
for the test group and imposed an increasingly lower limit for each test.
Subjects were given 23 seconds to read test 1, 20 seconds to read test 2, and
only 15 seconds to read test 3. As can be seen by reviewing the contracts in
the appendix, these time limits are fairly challenging. The responses of the
pilot group were not included in the analysis.
2. Findings
Figure 3 summarizes our findings regarding the inaccuracy of responses
with the inclusion of the timer:
Figure 4 % of Mistakes under Time Pressure
75% 76% 74% 73%
63%
55%
As can be seen, subjects in the all-caps group failed to show any
improvement under time pressure. In fact, as we increased the time pressure
in tests 2 and 3, we see the low-caps group performing better, with slightly
higher accuracy rates, although only the second result approached statistical
Electronic copy available at: https://ssrn.com/abstract=3519630

<<PAGE_BREAK>>

2019] ALL-CAPS [DRAFT] 35
significance.109 In Tests 1 and 3, respondents were also presented with the
option to respond “I don’t remember”. In both tests, the rates of failure to
remember were very similar—43.9% (low caps) vs 40% (all caps) in test 1
and 43% (low caps) and 43% (all caps) in test 3.
We see here, as in our primary experiment, that all-caps fails to improve
reader recall. The important feature of this variation was the use of a timer
with a strict deadline. The timer added both a physical and a psychological
constraint—reading long and complex texts within a short time is difficult
and the existence of a countdown timer can also impose stress. This is
arguably similar to a situation where the customer is reading a contract in the
dealership or at mortgage closing with the agent looking at them, expecting
them to sign the agreement. While lacking statistical significance, the results
are indicative that even under these fairly realistic constraints, all-caps does
not seem to improve outcomes.
The results of this study are noteworthy for those who believe all-caps
increases salience. If the use of all-caps is increasing the salience of the
text—indicating to the reader that this part of the text is not standard
boilerplate but rather an important part of the agreement—we would expect
readers to focus more attention on these clauses under time pressure. The
large text would indicate to them that this term, rather than any other, is
worth focusing one’s attention on. These initial findings, however, weigh
against the plausibility of the salience theory.
B. Subjective Sense of Difficulty & Reading Speeds
1. Methodology
What is the effect of all-caps on the consumer experience? Under one
theory noted above, capitalization helps consumers by increasing the font
size and, arguably, by using a typeface that is more cognitively efficient.
Unlike the theory of salience by contrast, this theory holds that capitalization
is important for making the text more accessible. If this theory is true, we
would expect at least one of the following hypotheses to be true. One,
consumers would tend to rate all-caps as easier to read and understand; two,
109 Based on noninferiority test, with 𝛿=0.1, the results of the hypothesis testing for the
three tests are, respectively, 𝑝 =0.25,𝑝 =0.1,𝑝 =0.2. Note that these results may be
1 2 3
related to the small sample size.
Electronic copy available at: https://ssrn.com/abstract=3519630

<<PAGE_BREAK>>

36 ALL-CAPS [DRAFT] [VOL. ---
consumers would tend to spend less time reading a contract where the key
parts are effectively highlighted.
In the following exploratory variant of the study, we present 102
subjects with a version of the contract used for the primary study. The
demographics of the sample (relative to the demographics of the general US
population, in brackets), are: 45% female (50.8%), median age 36 (38), 84%
white (60.4%), median household income $56,277 ($57,652).110 This sample
skews considerably white, but otherwise has low skew. Again, this is an
exploratory study and it should be interpreted in this context.
Subjects were split among two groups, control and treatment. In the
control group, the entire contract appeared in low-caps. In the treatment
group, the contract was fully capitalized. Invisible to the participants, we set
a clock to measure the time from the moment the participant first saw the
contract until they clicked to the next page. Reading times were sufficiently
long to indicate engagement and we used attention checks and other quality
controls to verify engagement. 111 We also asked subjects to rate their own
sense of the difficulty of understanding the contract they read on a sliding
scale of 1-100, where 100 indicates the greatest difficulty.
2.Findings
The following Figure details the average ranking of the difficulty of
reading and understanding the text for subjects in both groups.
110 United States Census, https://www.census.gov/quickfacts/fact/table/US/LFE046217
(last visited July 31, 2019).
111 As a reminder, by low-caps we mean the standard English convention, with letters
opening a sentence and names being capitalized.
Electronic copy available at: https://ssrn.com/abstract=3519630

<<PAGE_BREAK>>

2019] ALL-CAPS [DRAFT] 37
Figure 5 Self-Reported Difficulty of Reading &
Understanding the Contract
Panel A Panel B
Difficulty of Reading Difficulity of Understanding
70 70
59.8
54.6
60 60
49.2
48.2
50 50
40 40
30 30
20 20
10 10
0 0
All-Caps Low-Caps All-Caps Low-Caps
As the Figure shows, respondents rated reading and understanding the
capitalized contract as being considerably harder than respondents rated
reading and understanding of the low-caps contract. In terms of difficulty of
reading (Panel A), the capitalization treatment resulted in a rating of
difficulty that was roughly 22% harder. Understanding was also rated as
harder (Panel B), roughly 13% more in the capitalization group. The
difference in the difficulty of reading was statistically significant, suggesting
that all-caps did not make reading easier.112 The difference in the difficulty
112 𝑡(99)=2.088,𝑝<0.05
Electronic copy available at: https://ssrn.com/abstract=3519630

<<PAGE_BREAK>>

38 ALL-CAPS [DRAFT] [VOL. ---
of understanding was not statistically significant (although it also was in the
same direction).113
This finding indicates that capitalization may result in a greater sense
of difficulty in reading the text and, to a lesser extent, understanding it. This
finding puts pressure on the theory that capitalization increases the
accessibility of legal texts, at least inasmuch as consumer preferences are
indicative of accessibility.
Some may doubt the validity of self-reported subjective rankings of
difficulty, but one should be cautious about dismissing this metric out of
hand; the negative valence of the experience of reading capitalized text—
whether or not it affects other metrics—may well dissuade consumers further
from reading contracts. It is also worth noting that consumers were not
ranking the contracts comparatively, i.e. not comparing the same contract to
another that is capitalized. Instead, the respondents reported their own sense
of difficulty regarding the single contract they saw. This suggests, in our
view, greater validity to the relative sense of confidence among the two
groups.
In terms of reading speeds, we found that members of the all-caps group
took longer to read the contract. The all-caps group averaged 94.7 seconds
relative to 83.4 seconds in the low-caps group. This difference (13%) was
not statistically significant, presumably due to the large variance in reading
times between members in each group or the smaller sample size.114 An
additional confounding factor is that members of the all-caps group, who
found the text more difficult to read, may have made less effort to read the
contract carefully.115 Still, it is remarkable that this is the exact same effect
size as previous work identified in non-legal contexts.116
We summarize this study as presenting early evidence against the
capitalization-as-accessibility theory. The capitalization of text resulted in a
113 𝑡(99)=1.21,𝑝=0.11
114 𝑡(99)= 0.78.𝑝=0.22
115 We note that in both groups, recall rates were similar, meaning that the increased reading
time did not result in higher likelihood to remember the content.
116 See Miles A. Tinker & Donald G. Paterson, Influence of Type Form on Speed of Reading,
12 J. APPLIED PSYCHOL. 359 (1928).
Electronic copy available at: https://ssrn.com/abstract=3519630

<<PAGE_BREAK>>

2019] ALL-CAPS [DRAFT] 39
greater sense of difficulty reading the text and failed to improve the sense of
improved understanding of the text. Moreover, capitalization resulted in a
negative effect on reading times: not statistically significant, but potentially
large in practice. . The caveats presented above also apply here: Different
contracts may elicit different consumer responses, and it may be possible
that in other settings, consumers will not prefer a low-cap contracts, or that
some combination of formatting and content would make all-caps easier to
read. Still, our findings present the first empirical evidence on this issue and
they suggest the ineffectiveness of all-caps.
C.Taking the Con out of Conspicuous
1.Methodology
Our findings so far cast doubt on the idea that all-caps improves the
quality of consumer consent and suggest that, in some cases, all-caps
undermine it. In this study, we examine whether it is possible to improve the
quality of consumer consent through other means. Before we proceed to
describe this exploratory study, a preliminary comment is in order.
Designing communications is a difficult undertaking, conducted by
professionals who devote their careers to text design, marketing, and
copywriting. Our goal is not to argue that a single mode of communication
is always superior. Nor are we particularly interested here in discovering a
single mode of improving consent. Instead, we are interested in what
mathematicians sometimes call an “existence theorem;” i.e., discovering
whether it is possible, in principle, to improve contractual communications.
Such an inquiry is very timely, as many today are starting to abandon the
hope that consumers can read and understand contracts.117 If it is possible to
improve readability, perhaps not all hope is lost.
Overall, we recruited 241 respondents. The demographics of the sample
(relative to the demographics of the general US population, in brackets) are:
40% female (50.8%), median age 34 (38), 76% white (60.4%), median
117 See e.g., Omri Ben-Shahar & Carl E. Schneider, The Failure of Mandated Disclosure,
83 JERUSALEM REV. LEG. STUD. (2015); Ian Ayres & Alan Schwartz, The No-Reading
Problem in Consumer Contract Law, 66 STAN. L. REV 545 (2014).
Electronic copy available at: https://ssrn.com/abstract=3519630

<<PAGE_BREAK>>

40 ALL-CAPS [DRAFT] [VOL. ---
household income $47,500 ($57,652).118 The sample skews somewhat male,
younger, and poorer, and significantly more white. We do not have any
theoretical reason to expect this skew to point in any specific direction, but
it is advisable to bear this in mind when interpreting our findings.
In this study, we presented respondents with a contract for the sale of
an RV, which included a liability disclaimer. The key paragraph, reproduced
below, was a disclaimer clause. The disclaimer waived liability for almost
all uses of the RV, but the seller assumed liability when the RV is driven on
the road. Respondents were allocated, randomly, to one of four groups,
illustrated in Figure 6 below. The control, as always, was the group where
the key paragraph was in low-caps. One treatment was all-caps. Another
treatment involved the use of a box, as suggested by some courts and
legislators, such as in the context of TILA.119 The last treatment was
“bold”—where we presented the contract in low-caps, but used boldface
formatting in a single key sentence. This treatment combines both boldface
and the selective highlighting of a single sentence.120 Note that given these
differences, this study is not a “horse-race” between boldface and
capitalization, because our concern is not with capitalization per-se, but with
blocks of capitalized text (i.e., all-caps).
118 United States Census, https://www.census.gov/quickfacts/fact/table/US/LFE046217
(last visited July 31, 2019).
119 Regulation Z, supra note 8. Bennett v. Matt Gay Chevrolet Oldsmobile, Inc., 408 S.E.2d
111, 114 (Ga. Ct. App. 1991).
120 As the last treatment involves changes—selective highlighting and boldface—it is not
possible to disentangle which of the two changes is more important. Our intention here,
however, is not to detect the best method of communication, but rather to see if any
interventions can be helpful. We leave the more nuanced analysis of design to future work.
Electronic copy available at: https://ssrn.com/abstract=3519630

<<PAGE_BREAK>>

ALL-CAPS
Figure 6 % Four Design Choices
41
Electronic copy available at: https://ssrn.com/abstract=3519630

<<PAGE_BREAK>>

ALL-CAPS
2. Findings
We measured the respondent’s answers to two test questions: whether
they can bring a lawsuit if the RV does not drive well off-road (the correct
answer is ‘No’), and whether they can bring a lawsuit if the RV does not
drive well on-road (the correct answer is ‘Yes’). The next figure describes
the error rates among the different interactions.
Figure 7 Error Rates, Four Treatment Groups
Low Caps
60%
57% All Caps
Box 52%
50% 48%
40%
All Caps
Bold 30%
30% 27% Box
Low Caps 24%
21%
20% Bold
13%
10%
0%
On-Road Off-Road
As these figures show, the bold treatment performed considerably better
than any other method of intervention. Focusing on the on-road question, the
use of bold text had a wrong answer rate of 27% relative to 57% (low-caps),
52% (all-caps), and 48% (box). In the off-road question, bold was again
associated with a low error rate (13%), followed again by low-caps (21%);
this time box did only marginally better (24%) and came ahead of all-caps
(30%).
To test the statistical significance of these differences, we estimated a
logistic regression model of the probability of accurately answering the
42
Electronic copy available at: https://ssrn.com/abstract=3519630

<<PAGE_BREAK>>

2019] ALL-CAPS [DRAFT] 43
question with controls for the four different treatments. The following Figure
summarizes our findings:
Figure 8 Coefficient Estimate of Treatment Differences
Panel A: Off-Road Panel B: On-Road
In these figures, the horizontal line represents the baseline—low-caps—
and the bars the effectiveness of these interventions relative to this baseline
with a 95% confidence interval. As can be seen in Panel A, the Bold
treatment had a large, positive, and statistically significant in the off-road
question and a large, positive, but statistically insignificant effect in the on-
road question (Panel B).121 The other treatments had a negative, but
statistically insignificant, effect relative to the baseline. The lack of a
statistically significant effect may well result from the absence of such a
difference, but also from the relatively small size of each of these groups.
These findings, first and foremost, support the possibility that some
methods of intervention can improve the ability of consumers to recall the
terms of their agreements. The success of the Bold approach suggests that
consumers readily react to communicative interventions, and their recall can
be significantly enhanced by designing interventions in a targeted manner.
This finding is consistent with early research done by psychologists who
121 Pr(𝑐𝑜𝑟𝑟𝑒𝑐𝑡)=𝐹(𝛽 +𝛽 𝐵𝑜𝑙𝑑+𝛽 𝐵𝑜𝑥+𝛽 𝐴𝐶+𝜖).𝑝<0.05.
0 1 2 3
Electronic copy available at: https://ssrn.com/abstract=3519630

<<PAGE_BREAK>>

44 ALL-CAPS [DRAFT] [VOL. ---
found that readers prefer boldface over other types of emphasis.122 Still, our
goal here is not to design effective interventions. It is possible that other
variations would have been even more effective (including, perhaps, using
capitalization for just the key sentence). All we show here is that it is possible
that some well-designed interventions will have a large positive effect.
Another implication of this finding is that it validates the idea that subjects
in our studies are not engaging in guesswork, as their responses are sensitive
to the type of intervention.
Any optimism regarding the methods of intervention should be
tempered with the observation that other plausible interventions (all-caps and
box) failed to improve upon the benchmark of low-caps. These negative
findings highlight the difficulty of designing effective disclosure. Note,
however, that we cannot definitely say whether this is because these
interventions have no positive effect or because the difference did not
register given the sample size.
We noted above the fire-siren effect of all-caps and it is worth revisiting
it now. In the off-road question, the correct response was lack of a right; in
the on-road action, the correct response was that a right did exist. If the fire-
siren effect is real, we would expect the all-caps participants to believe that
a right does not exist in both cases at much higher rates than participants in
the low-caps group. The findings, again, cast doubt on the fire-siren effect,
as the response rates were fairly similar in both groups.
V. THE CASE AGAINST UPPERCASE
This paper studies one of the distinguishing markers of the legal genre:
The use of blocks of capitalized text known as all-caps. Courts and
legislators advance a deeply misguided policy whereby all-caps improve
consumer consent. Here we lay out the case against this policy and consider
several implications.
122 TINKER, supra note 18, 62.
Electronic copy available at: https://ssrn.com/abstract=3519630

<<PAGE_BREAK>>

2019] ALL-CAPS [DRAFT] 45
A.Abolishing All-Caps
In the first part of the study, we showed the legal carte-blanche given to
all-caps. Courts are enforcing otherwise unenforceable terms because these
terms appear in all-caps. As such, consumers are locked into obligations in a
variety of contexts: wrongful death, liability for property damages,
arbitration agreements, waiver of implied warranties to name but a few.
Claire Donhau is a case in point.123 Her rock-climbing instructor gave her,
allegedly, wrongful instruction which led to her fall and the fracture of her
tibia in four different places. The Alaska Supreme Court upheld summary
judgment against her because the release form she signed “emphasized
language with simple words and capital letters.”124 As this case vividly
illustrates, courts will deny compensation from victims because of the all-
caps formatting of the consumer contract—linking all-caps and consent.
Similarly, in a recent case, the Court of Appeals for the Eleventh Circuit
heard an appeal filed by homeowners against a shingles manufacturer that
sold allegedly defective and low-quality shingles that resulted in the early
deterioration of the homeowners' roofs. The homeowners wanted to file a
class-action, against the objection that an arbitration agreement that was
printed on the wrapper of the shingles prevented them from doing so. The
homeowners protested that they did not notice this provision, but the court
found persuasive the fact that the clause was written in all-caps.125 Thus, the
court denied the appeal and the homeowners were sent back to individually
arbitrate their cases.
Legislators not only permit the use of all-caps, they often mandate it. In
various settings, legislators require that certain disclosures will appear in all-
caps; in others, legislators just list all-caps as a preferred mode of
disclosure.126 In either case, a firm that uses the statutory form immunizes
itself from later claims by consumers. Through this nexus of legislative and
123 Donahue v. Ledgends, Inc., 331 P.3d 342 (Alaska 2014)
124 Id.
125 Dye v. Tamko Bldg. Prod., Inc., 908 F.3d 675, 678 (11th Cir. 2018) (“[a]s particularly
relevant to this appeal, [the] limited warranty contains a mandatory-arbitration clause—
which, significantly, is also printed in its entirety, and in all caps, on the outside of every
shingle wrapper.”)
126 See supra Part I.B.
Electronic copy available at: https://ssrn.com/abstract=3519630

<<PAGE_BREAK>>

46 ALL-CAPS [DRAFT] [VOL. ---
judicial policies, consumers are locked into some of the most onerous terms
for no other reason but their capitalization: Caps-Lock.
Firms react to this permissive legal environment in predictable ways.
In our analysis of the standard forms of 500 leading firms—forms which are
the basis of hundreds of millions of consumer contracts—we found that over
77% include at least one all-caps paragraph. This finding naturally leads one
to question the firms’ motives. Are firms naïve? Do firms genuinely believe
that using all-caps would promote consumer understanding? Or—worse—
do firms take advantage of the naïve judicial policy to hide some of the most
offensive, onerous, and costly terms in plain sight by using all-caps? The
latter option suggests a vicious dynamic. Not only do courts not protect
consumer interest by favoring all-caps, they invite abuse.
Our data cannot speak directly on this point, but we do think there is
some highly suggestive evidence that sheds light on these questions. The
legal context is but one of many where firms communicate with consumers.
When firms want to sell to consumers, they have every incentive to design
effective communications; indeed, this is the service provided by the multi-
billion dollar advertising industry. When looking at marketing materials, one
finds a rich, creative mix of text sizes, colors, typefaces, and backgrounds.
What one never finds is blocks of capitalized text, i.e., all-caps. Sure enough,
some individual words, and maybe even the occasional sentence, will be
capitalized. But blocks of homogenous capitalized text are all but absent.
This harkens back to the observation made at the outset; all-caps is a
hallmark of legal texts precisely because there is little reason to use all-caps
elsewhere. Moreover, there is some evidence that firms try to affirmatively
sabotage disclosure, making it less readable.127 Whatever is one’s view of
firms’ motivations, it should be clear that the legal system is permitting,
encouraging, and often outright mandating the use of all-caps.
It is against this background that our findings should be interpreted. The
primary experiment analyzed the responses of 570 people and demonstrated
that all-caps fails to improve consent within a reasonable margin of
effectiveness. Worse, the findings show that all-caps is harmful to older
readers. Readers over 55 were shown to understand their agreements
127 Willis, supra note 17, at 1322-26.
Electronic copy available at: https://ssrn.com/abstract=3519630

<<PAGE_BREAK>>

2019] ALL-CAPS [DRAFT] 47
significantly worse when presented with all-caps text rather than standard
low-caps text. Importantly, our experimental design involved a simple
question—one that is relatively easy to answer correctly even on a quick
skim. Even with this simple metric, the older group answered incorrectly at
rates almost double than that of their same-age peers in the control group.
The findings also allow us to reject the “fire-siren” theory of all-caps.
Under this theory, all-caps is like a fire-siren in that one can easily hear it but
can hardly listen to it. As such, the very existence of all-caps would be a
signal of a contractually onerous term, even if the consumer does not
understand exactly what it might be. In fact, however, respondents did not
think however that the all-caps was more onerous than the low-caps one.
Even as a fire-siren, then, all-caps fails.
The interpretation of these findings can be informed by cognitive
research that suggests that the use of all-caps homogenizes the difference
between letter types, making it harder to read the fully capitalized text.128
The findings are also in line with common practical advice given by
lawyers.129 Another possibility is that the choice of typeface does more than
altering the form, but also changes the substance. Form, in language, is itself
a mode of communication. In the past, the usage of all-caps was meant to
designate “grandeur,” “pomposity,” or “aesthetic seriousness;” today, there
is a growing convention that all-caps is similar in effect to yelling.130 The
negative emotional valence associated with all-caps might make reading
more difficult or less appealing.
While exploratory in nature, this paper also tested the theory that all-
caps would prove more beneficial in the presence of time-pressure. When
one has limited time, prioritizing attention becomes critical. If all-caps does
anything, performance under time-pressure would be the time for all-caps to
shine. We again could not detect any advantage provided by all-caps, but our
128 BUTTERICK, supra note 61; Robbins, supra note 20.
129 See BUTTERICK, supra note 61.
130 See Alice Robb, How Capital Letters Became Internet Code for Yelling, THE NEW
REPUBLIC (Apr. 17, 2014), https://newrepublic.com/article/117390/netiquette-capitalization-
how-caps-became-code-yelling; All Caps, PRACTICAL TYPOGRAPHY
https://practicaltypography.com/all-caps.html (last visited Feb. 9, 2019).
Electronic copy available at: https://ssrn.com/abstract=3519630

<<PAGE_BREAK>>

48 ALL-CAPS [DRAFT] [VOL. ---
sample size in this specific experiment was fairly small and so our
conclusions are tentative.
It is also revealing that when people are asked to rate the difficulty of
reading, they rank all-caps as harder to read. Comparing the subjective
assessment of difficulty between individuals who read a contract containing
all-caps and those who read a contract in full low-caps, we found statistically
significant evidence that all-caps is harder to read. Individuals also rated the
all-caps contract as more difficult to understand, and although this finding
lacked statistical significance, it was in a similar direction—suggesting a
potential link between reading difficulty and understanding. Similarly, we
found evidence that reading times were longer under all-caps, but despite its
large magnitude (13%), this finding was not statistically significant. We
hypothesize that the longer reading times were counteracted by skimming,
as (presumably) subjects wanted to end the difficult experience faster.
Taken together, our empirical findings suggest the failure of caps-lock,
one of the most common and onerous consumer policies in the US.
*
We believe that there is a compelling reason to abolish judicial reliance
on caps-lock. Courts should no longer give any weight to the use of all-caps
in contracts. In fact, there may be a reason to treat all-caps with suspicion,
but we limit ourselves to calling for the renouncement of caps-lock.
In reaching this conclusion, we are well aware of the limitations of this,
or any other, lab study in terms of generalization, replicability, and external
validity. Our conclusion, however, rests on several mutually-enforcing
arguments that outweigh such concerns. First, our analysis of the literature
shows that the hypothesis that all-caps would improve consumer consent was
never validated; all-caps is instead an exercise in armchair theory. Courts
might have had a reason to think that all-caps could be effective, but resting
the full weight of such an onerous policy on an untested theory is deeply
misguided. Worse, the evidence in psychology that did exist at the time that
courts adopted this policy was negative: it showed that all-caps impeded
reading speeds.131 In evaluating all-caps, then, our starting position should
131 See Tinker & Paterson supra note 25.
Electronic copy available at: https://ssrn.com/abstract=3519630

<<PAGE_BREAK>>

2019] ALL-CAPS [DRAFT] 49
be the general skepticism about any intervention that is supposed to easily
and dramatically increase the level of consumer consent.
Second, our findings suggest the practical failure of all-caps in legal
texts. Not only is all-caps not improving consumer consent, it actively harms
older audiences who in some settings may be the most vulnerable.
Consumers could identify their obligations no better under all-caps than
under normal print—and older readers did much worse. In light of this, it is
not surprising to find a consumer dislike of all-caps. Our evaluation of
subjective sense of difficulty, shows that individuals rank reading as much
harder when presented with text in all-caps. All-caps thus seems to be
violating the basic Hippocratic precept: first do no harm.
None of these weaknesses would have mattered much if the stakes were
low. But the stakes of error in this context are especially high. If a court
decides to enforce a liability waiver in the event of wrongful death because
the judge believes that putting the waiver in all-caps truly informed the
consumer, then all-caps has a series of unwanted effects. The consumer is
deprived of redress and compensation, which the consumer believed were
available to them. Indeed, the consumer may have even paid more under this
misguided belief and enforcing the waiver would deprive them of the benefit
of the bargain. From the firm’s perspective, the enforcement of the release
would leave a deterrence shortfall. For these reasons, the costs of error in
this context can be very high. Given that, to prove that the all-caps
intervention indeed improves consent, the bar should be set high. Exactly
how high is a matter of debate, but at the very least, we can agree that
speculation is an insufficient ground.
Fourth, we think there is a good a priori reason to approach all-caps
with great suspicion. As we noted above, the world around us is replete with
text that is meant to persuade consumers to buy products, text which is
designed by ingenious copywriters and shrewd advertisers. Yet, when firms
have a personal stake in the success of consumer communications, they
almost never employ large blocks of capitalized text in their brochures,
advertisements, and flyers. When these firms want to make attractive
features conspicuous, they use myriad design choices that have no
resemblance to the texts they use to obligate and bind consumers. As
Electronic copy available at: https://ssrn.com/abstract=3519630

<<PAGE_BREAK>>

50 ALL-CAPS [DRAFT] [VOL. ---
Professor Hoffman showed, when firms have skin in the game, they can even
design fun and easy to read contracts.132
Taken together, then, we think the case against all-caps is compelling.
Of course, this study is not without limitations—the samples only
roughly represented the general US populations, we did not study many
possible formatting possibilities, did not test a large range of possible
contracts, and we were limited to responses in the lab. Still, we believe that
given the evidence presented here, courts and legislators should abandon the
preference given to all-caps. In the diverse contexts where conspicuousness
is required, courts should no longer accept all-caps as presumptively
conspicuous and thus retreat from a century-long jurisprudence in
disclaimers, waivers, arbitration clauses, choice of law provisions, and many
more. We are aware that legal traditions die hard. Yet, the stakes of this
specific legal tradition are extremely high and come at a severe cost to
consumers. If we care at all about informed consent, all-caps must be
abolished.
B.Stairway to Haven
Not all that is capitalized is conspicuous. Today, courts provide an
effective safe haven to firms that employ all-caps in their contracts. We
explained some of the dangers inherent in this practice, as consumers are
bound by terms they find hard to read and understand, and it encourages their
usage, irrespective of the effects of all-caps on consumers. Hence, the use of
a save-haven for all-caps appears ill-advised.
One might think that perhaps a different safe-haven is warranted, a
different mode of highlighting that firms can simply use to ensure
enforcement of the fine print. However, our central findings regarding the
failure of all-caps do not augur well for alternative safe-havens that are built
on mechanical, bright-line rules. It is not clear that it is possible to create
hard rules with broad applicability for human communications, which is a
subtle, complex, and context-dependent practice. This is especially
problematic, as sophisticated parties may learn to manipulate safe havens to
132 David A Hoffman, Relational Contracts of Adhesion, U. CHI. L. REV. 1395 (2018).
Electronic copy available at: https://ssrn.com/abstract=3519630

<<PAGE_BREAK>>

2019] ALL-CAPS [DRAFT] 51
their advantage and we already noted that some firms are strategically
making disclosures less readable .133
There is, however, a more optimistic lesson here. We studied four
potential interventions in consumer contracts, including all-caps, low-caps,
a box around the text, and the use of boldface to highlight a specific key
sentence. The effect of correctly designed interventions is quite striking.
Subjects in the boldface group gave responses that were highly accurate,
responding correctly to one of the questions 73% of the time, relative to only
48% in the all-caps group. The success of boldface matches the findings of
early research done by psychologists that demonstrates that readers prefer
boldface to other types of emphasis.134 A 73% accuracy on a question
involving a long legal text—especially one that employs legal concepts—is
quite remarkable. This finding suggests that interventions can be quite
impactful if they are targeted and well-designed.
Tempering this optimism is the difficulty of employing this intervention
on a large scale. It is sometimes very difficult to condense the key terms to a
single sentence, and repeated use of this technique may have quickly
diminishing returns. Most critically, it is not clear that firms will even have
an incentive to properly design their communications, a point we return to
soon. These considerations, in combination with the limitations of results
from any lab study, suggest caution.
Still, Congress, regulators, and the courts will sometimes sacrifice
accuracy in favor of the certainty of bright-line rules, so there may be
practical pressure to offer such rules.135 With this in mind, one possibility for
future save havens is that courts will clearly distinguish between salience of
the paragraph for purposes of notice and its formatting for purposes of
reading. To increase notice, parties may be able to use a variety of signals of
importance—and may even include capitalization of the heading (as the
UCC itself suggests).136 With respect to salience markers, courts should be
permissive. At the same time, these markers should not extend to the text
133 Willis, supra note 17, at 1322-26.
134 TINKER, supra note 18, 62.
135 See Willis, supra note 17, at 1348-49 (noting the preference for hard, mechanical rules
in consumer law)
136 UCC § 1-201(10).
Electronic copy available at: https://ssrn.com/abstract=3519630

<<PAGE_BREAK>>

52 ALL-CAPS [DRAFT] [VOL. ---
itself. Low-caps outperforms all-caps, at least among older readers, and if
the consumer’s attention is drawn effectively to the term there is no need to
alter the shape of the text. We recognize here, however, that setting a box
around the text written in low-caps did not prove itself effective in our study.
This again underscores the difficulty of setting hard rules, the importance of
experimentation, and the necessity to provide firms with an incentive to
improve communications. In the next subpart we describe an approach that
may, over time, coalesce into practices that might offer more robust safe
havens.
C.The Future of Disclosure
We are at a special moment in the life of consumer law. The new Draft
of the Restatement of Consumer Contracts has led to a heated debate among
scholars on whether courts should enforce terms in the fine print.137 One
group of scholars believes that market pressures, the existence of an
informed minority, and reputational pressures would lead firms to offer
efficient terms, and therefore courts should enforce the boilerplate.138
Another group believes that fine print terms should be presumptively
unenforceable absent a showing of informed consent.139 The Reporters of the
Restatement have taken the intermediate view that courts should be
permissive in questions relating to contract formation, but at the same time,
less permissive with enforcing these terms, seeing fine print terms as
potentially procedurally unconscionable.140
137 See Adi Robertson, A Contentious Legal Debate Over User Agreements Has Been
Delayed After Elizabeth Warren Called It ‘Dangerous’, The Verge (May 22, 2019).
138 Alan Schwartz and Louis L. Wilde, Imperfect Information in Markets for Contract
Terms: The Examples of Warranties and Security Interests, 69 VA. L. REV. 1387, 1462 (1983).
139 Dee Pridgen, ALI’s Proposed Restatement of Consumer Contracts – Perpetuating a
Legal Fiction, Consumer Law & Policy Blog (June 8th, 2016); Levitin et al., The Faulty
Foundation of the Draft Restatement of Consumer Contracts, 36 YALE J. REG. 447, 450 (2019)
(Noting the existence of disagreement on the “normative approach” of the new restatement).
See also Letter to ALI Council, Reject Council Draft No. 5 of the Restatement of Consumer
Contracts (Sept. 19, 2018) (calling for greater policing of contractual terms by the courts).
https://consumerfed.org/wp-content/uploads/2019/01/letter-opposing-council-draft-
consumer-contracts.pdf
140 RESTATEMENT OF CONSUMER CONTRACTS (Preliminary Draft No. 3, October 26, 2017),
77.
Electronic copy available at: https://ssrn.com/abstract=3519630

<<PAGE_BREAK>>

2019] ALL-CAPS [DRAFT] 53
The findings here are relevant to both sides of this debate. The failure
of all-caps, the most prominent form of smart disclosure, supports skepticism
about the meaning of consent to the fine print. The conspicuousness policy
is built on the idea that it is possible to avert or mitigate some of the no-
reading problem by highlighting key terms. The consumer would read more,
it is thought, if reading was made accessible. In practice, however, reading
of all-caps seemingly takes longer, the subjective feeling of understanding
falls, and recall does not improve over standard print and actually falls for
older readers. If a leading form of smart disclosure is ineffective, the
justification for the enforcement of fine print terms founders.
On the other hand, the success of some interventions is also quite
encouraging. In particular, we draw optimism from the finding that the
majority of consumers understood a legal disclaimer when it was presented
in an accessible form (the “bold” intervention).141 This suggests two distinct
avenues for future research and policymaking. First, it is possible to
effectively highlight information in a way that improves retention and recall.
Second, it is possible, at least in lab settings, to reach arguably satisfactory
levels of consumer understanding, even with jargon and text filled
paragraphs. To the extent such findings carry over to the world beyond the
lab, they should inspire some optimism about the possibility of designing
better forms of disclosure. Of course, whether consumers would read more
accessible disclosure is an open question; further, whether consumers should
read, especially when they lack the power to negotiate terms, is a normative
question.
An alternative approach is the use of performance-based contracts, at
least as an intermediary process. Performance-based contracts draw from
Lauren Willis’ powerful proposal that various consumer laws should be
based on proof of their effectiveness.142 That is, courts and regulators should
141 Consumer advocates may care more about the uninformed minority than any strict
majority of readers, while others would note that if a sufficient number of consumers
understand contracts, market pressure would lead to more favorable terms for all. See
generally Schwartz & Wilde, supra note 138.
142 Willis., supra note 17. For earlier discussions of this idea, see Howard Beales et al., The
Efficient Regulation of Consumer Information, 24 J.L. & ECON. 491, 530 (1981) (arguing that
Electronic copy available at: https://ssrn.com/abstract=3519630

<<PAGE_BREAK>>

54 ALL-CAPS [DRAFT] [VOL. ---
move their “focus from firms’ actions to the effects of those actions on
consumers.”143 Under a somewhat modified version of her proposal, the
application of a performance-based approach would entail that courts should
by default hold key terms in the fine print unenforceable unless the firm can
affirmatively substantiate its claim that the term was made conspicuous.144
While one might worry that this will involve a large expense or expenditure
of time, we draw some optimism from the limited budget allotted to the
Article at hand.145 The research budget allocated to academics cannot hope
to compete with that devoted to marketing. Firms routinely engage in large
market research, known as A/B testing, where they test the slightest
variations in their marketing communications, sometimes using complex
statistical models. These are models, budgets, and techniques that can easily
be channeled to support consumer communications.146
Performance-based conspicuousness standards have a few important
advantages. First and foremost, they channel some of the genius that powers
advertising to the copywriting and design of the fine print. “Comprehension
standards allow firms to bring the full force of Madison Avenue to consumer
education in a way that is not possible for the government.”147 Designing
disclosure is hard, and currently, firms have very little motivation to do so.
Performance-based standards thus give firms some stake in informed
consent, because if their key terms cannot be shown to be effectively
communicated, those terms will not be enforced.
firms are best situated to design communications than regulators). See also Jeff Sovern,
Preventing Future Economic Crises through Consumer Protection Law or How the Truth in
Lending Act Failed the Subprime Borrowers, 71 OHIO ST. L.J. 761, 821 (2010) (suggesting
that lenders should affirmatively demonstrate that “a significant proportion of their borrowers
understood the terms of their loans"); M. Ryan Calo, Against Notice Skepticism in Privacy
(and Elsewhere), 87 NOTRE DAME L. REV. 1027, 1067 (2012) (proposing comprehension
standards for privacy disclosures.).
143 Willis, supra note 17, at 1314.
144 Here, conspicuous may be understood more broadly, as according with the consumer’s
expectation rather than comprehensible in isolation.
145 See also Willis, supra note 17, at 1366 (arguing that “inexpensive, painless, objective
testing of consumer factual knowledge could be surprisingly powerful”).
146 Ron Kohavi and Stefan Thomke, The Surprising Power of Online Experiments, HARV.
BUS. REV. (2017).
147 Willis, supra note 17, at 1337.
Electronic copy available at: https://ssrn.com/abstract=3519630

<<PAGE_BREAK>>

2019] ALL-CAPS [DRAFT] 55
Second, and relatedly, all-caps safe havens have been stifling much-
needed creativity in this area. It is quite striking how little the informed
consent technology has progressed since the days of the typewriters. The
safe-haven approach is arguably the bottleneck and removing it could lead
to much-needed innovation. A third point builds on this insight. It is not
improbable that effectiveness-based standards are only an interim measure.
It is quite possible—almost inevitable—that best practices would quickly
evolve once firms have skin in the disclosure game. After all, the marketing
industry has certainly developed standards and common practices.
Given the goals and limits of this Article, the full case for performance-
based conspicuousness will have to wait for another day. But we believe that
our findings here should support this project: It is quite possible to
dramatically increase consumer comprehension, although the design of such
interventions is not trivial and involves experimentation and cost. The future
of disclosure depends on engagement with the ideas of performance-based
conspicuousness.
Finally, we should emphasize that the effects of disclosure are
heterogeneous and one must be highly cognizant of their effect on vulnerable
groups. In our primary experiment, we highlighted how all-caps especially
harms older respondents. This is an important conclusion to bear in mind
when thinking about the future of disclosure, as the goal may not be to
maximize understanding across the board but may well be to minimize
misunderstanding across relevant parameters.
Electronic copy available at: https://ssrn.com/abstract=3519630

<<PAGE_BREAK>>

56 ALL-CAPS [DRAFT] [VOL. ---
VI. CONCLUSION
An old anecdote tells of Niels Bohr, the Nobel-winning physicist,
whose door was adorned by a horseshoe. When asked by an incredulous
guest whether he believed in such superstition, Bohr replied that “I’ve been
told that it works even if you don’t believe in it.”148
This study explores the common practice of using all-caps in
consumer contracts and finds that the belief in their power borders on the
superstitious. Courts and legislators endorse this practice as a means of
improving consumer consent, given the lack of attention consumers pay to
the fine print. In reality, however, all-caps relies on no empirical support and
the evidence produced here suggests that all-caps is actively harmful to older
readers. The fact that all-caps is so widespread suggests that the stakes of
this superstition are significant even for those who do not believe in it. In
myriad cases, courts have been enforcing terms against consumers which
they erroneously thought consumers notice and understand.
Based on the evidence produced and collected here, we believe that
there is a robust case against uppercase. Courts should abandon their reliance
on all-caps as a proxy for quality consumer consent and consider other,
perhaps more contextual factors.
What may come next is best left to the genius of copywriters and the
prudence of lawyers. That courts have given a safe haven to firms that use
all-caps has stalled much innovation in this field, but there is great potential
for developments of new standards. As this Article demonstrated, the
targeted highlighting of key obligations has a strong and significant effect on
consumer consent. There are many other possible interventions, but none
will emerge so long as uppercase has the upper hand. We trust that this article
will help shift the burden of proof back to firms and help prevent future caps-
lock.
148 I Understand It Brings You Luck, Whether You Believe in It or Not, QUOTE INVESTIGATOR
(Oct. 9, 2013), https://quoteinvestigator.com/2013/10/09/horseshoe-luck//.
Electronic copy available at: https://ssrn.com/abstract=3519630

---

## ssrn-3547007: PAYDAY 6/2/2020 6:22 PM
Source: papers/ssrn-3547007/paper.txt

PAYDAY 6/2/2020 6:22 PM
PAYDAY
FORTHCOMING: 98 WASH. U. L. REV. 1 (2020)
Draft: Comments, Suggestions, and Critique Welcome!
Yonathan A. Arbel
Legislation lags behind technology all too often. While trillions of
dollars are exchanged in online transactions—safely, cheaply, and
instantaneously—workers still must wait two weeks to a month to
receive payments from their employers. In the modern economy,
workers are effectively lending money to their employers, as they wait
for earned wages to be paid.
The same worker who taps a credit card to pay for groceries in
semi-automated checkout lines depends on dated payroll systems
that only transfer payments on a “payday.” Workers, especially those
living paycheck-to-paycheck, are hard-pressed to meet their daily
needs and turn to expensive, short-term credit products—notably,
payday lenders. While the need for credit is a real one, credit
providers charge a steep price, often culminating in endless debt
spirals. So, why does the payday still exist?
This Article studies various explanations—economic, historical,
behavioral, and legal. A primary conclusion is that the payday owes
its existence to legacy legal architecture. That is, payday is a software
problem, not a hardware problem. The hardware—i.e., money and
payroll technology—is here. We can pay workers daily; in fact, gig
economy workers in developing countries will often be paid more
quickly than an American employee for the same work. What holds
us back is our legal software: Dated Eisenhower-era legislation that
failed to anticipate technological change. Surprisingly, even pro-
worker legislation, such as minimum wage laws, inadvertently
encourage the practice.
By revealing the overlooked and dated legal infrastructure that
sustains the payday, the Article suggests a path for legal reform.
Daily streams of payment to workers are feasible, practical, and far
more efficient than most people realize. A focused reform could
effectively bring an end to the puzzling and pernicious practice of
 Assistant Professor of Law, University of Alabama, School of Law. For suggestions
and comments I would like to thank John Acevedo, Oren Bar-Gill, Matt Bodie, Deepa Das
Acevedo, Stephanie Didwania, Shahar Dillbary, Don Dornberg, Brian Galle, Victor
Goldberg, Avery Katz, Jonathan Korn, Ron Krotoszynski, Ronald Mann, Ben McMichael,
Jonathan Nash, Mike Pardo, Michael Pressman, Robert Scott, Steve Shavell, Jonathan Korn,
Vincent Buccola, and Paige Skiba, and participants in the following conferences and
workshops—Law and Economic Organization (Columbia), Contracts Conference XIV,
Faculty Workshop (SMU), Midwestern Law & Economics, Law & Economics Workshop
(TAU), and Private & Commercial Law (Hebrew U). Tori Moffa, Hamilton Millwee, Tamara
Imam, and Brett Linley provided diligent and careful research assistance. A companion
playlist can be found here: http://bit.ly/payday_comp
Electronic copy available at: https://ssrn.com/abstract=3547007

<<PAGE_BREAK>>

2 Draft[Vol. __
having workers lend money to their employers while they wait for
their payday.
INTRODUCTION ........................................................................................ 3
I.THE PAYDAY PUZZLE ............................................................................ 8
A. The Two Employment Contracts ......................................... 8
B. The Puzzle of K2 ................................................................. 11
II.PAYDAY: HISTORICAL, LEGAL, SOCIAL, AND ECONOMIC
EXPLANATIONS ............................................................................ 15
A. Path-Dependence ................................................................ 16
B. The Synchronization of Bills and the Payday ................... 20
C. Employer Power and Lack of Sophistication .................... 22
D. Collateral ............................................................................. 26
E. Behavioral Biases ............................................................... 28
F. Legislation ........................................................................... 33
G. Check Cutting Costs ........................................................... 37
III.ABOLISHING THE PAYDAY ................................................................ 41
A. The Stakes of Abolishing the Payday ................................ 41
B. Alternatives to Abolition .................................................... 45
IV.A WORLD WITHOUT THE PAYDAY ..................................................... 48
A. Changing by Information ................................................... 51
B. Changing by Leading .......................................................... 52
C. Fixing Employment Law .................................................... 53
D. Improving Money Technology ............................................ 54
V.THE DAY AFTER PAYDAY: CONCLUDING THOUGHTS ........................ 57
Electronic copy available at: https://ssrn.com/abstract=3547007

<<PAGE_BREAK>>

2020] Payday 3
INTRODUCTION
Legislation often lags behind technology. As Guido Calabresi
observed, “laws are governing us that would not and could not be
enacted today.”1 This failure is resounding in the context of
employment contracts. Payment technology has made incredible
advances, and today trillions of dollars are traded in the online
economy, moving between parties almost instantaneously.2 At the
same time, workers still wait for weeks until a formal “payday” to
receive their hard-earned wages. While workers sell their labor today,
employers only pay them in the future, leveraging wages as another
line of credit.
We seem to take the payday’s existence for granted,3 but it
exacts a heavy price. Workers who wait for payment need to support
themselves; the vicissitudes of everyday life—a sudden toothache, a
flat tire, a stain on their only clean work shirt—demand money, now.4
With many workers living paycheck-to-paycheck,5 the current payday
system pushes them to payday lenders and other short-term credit
providers that dot the modern urban landscape.6 A payday loan is
1 GUIDO CALABRESI, COMMON LAW FOR THE AGE OF STATUTES 2 (1982).
2 16.9%+ Growth for Online Payment Gateway Market Size Raising to USD 4020
Million by 2024, MARKETWATCH (May 21, 2019), https://www.marketwatch.com/press-
release/169-growth-for-online-payment-gateway-market-size-raising-to-usd-4020-million-
by-2024-2019-05-21.
3 The modern literature has mostly neglected this question. This omission is perhaps
most glaring in law and economics analyses of employment contracts, but it is by no means
confined to these works. See, e.g., RICHARD POSNER, THE ECONOMIC ANALYSIS OF LAW (9th
ed. 2014) (reviewing major topics but neglecting pay frequency); MARK ROTHSTEIN & LANCE
LIEBMAN, EMPLOYMENT LAW, 420–21 (2011) (adumbrating pay frequency). But cf. JOHN R.
COMMONS & JOHN B. ANDREWS, PRINCIPLES OF LABOR LEGISLATION 50–52 (1916) (noting the
credit nature of the payday).
4 The three leading reasons why individuals borrow from alternative lenders (such as
payday lenders, pawn shops, and rent-to-own stores) are basic living expenses, making up for
lost income, and house or car repairs. Neil Bhutta et al., Consumer Borrowing After Payday
Loan Bans, 59 J.L. & ECON. 225, 240 (2016). See also Rob Levy & Joshua Sledge, A Complex
Portrait: An Examination of Small-Dollar Credit Consumers, CTR. FOR FIN. SERVS.
INNOVATION, 12 (Aug. 2012),
https://www.fdic.gov/news/conferences/consumersymposium/2012/A%20Complex%20Port
rait.pdf [https://perma.cc/D78A-RLT3] (reporting that approximately 37% of very short-term
borrowers borrowed because “[they] had a bill or payment due before [their] paycheck
arrived.” In addition, 30% of respondents borrowed to meet some unexpected expense). This
borrowing likely result from the payday. See also Nicholas Bianchi & Rob Levy, Know Your
Borrower: The Four Need Cases of Small-Dollar Credit Consumers, CTR. FOR FIN. SERVS.
INNOVATION, 12 (2013), https://s3.amazonaws.com/cfsi-innovation-files/wp-
content/uploads/2017/01/26054909/Know-Your-Borrower-The-Four-Need-Cases-of-Small-
Dollar-Credit-Consumers.pdf [https://perma.cc/G5AB-W4PG] (finding that 32% of
consumers borrow because of misaligned cash flow and 32% to meet an unexcepted expense).
Again, both reasons can be mitigated by regularized pay.
5 15% of households reported having spent more than they earned over the last year.
Bricker et al., Changes in U.S. Family Finances from 2013 to 2016, 103 FED. RES. BULL. 1, 8
(2017).
6 Paige Marta Skiba, Regulation of Payday Loans: Misguided?, 69 WASH. & LEE L. REV.
1023, 1031 n.22 (2012) (noting that “payday lenders outnumber both Starbucks and
Electronic copy available at: https://ssrn.com/abstract=3547007

<<PAGE_BREAK>>

4 Draft[Vol. __
meant to help the worker bridge the gap until payday, but it involves
interest rates are on average twenty times higher than those of credit
cards.7 A $300 loan can quickly balloon into thousands of dollars of
outstanding debt, leading many borrowers to a debt spirals that can
culminate in deep financial distress and even bankruptcy.8
This Article begins by framing the payday in the context of the
employment contract. The employment relationship is, at its core, an
exchange of money for labor.9 The payday also injects into this
relationship a credit transaction, one where the employee is lending
money to the employer. But this is a credit transaction that is
completely artificial from the viewpoint of financial theory. Put
simply, workers should not be in the business of lending money to
their employers.10 Not only do workers lack capital or comparative
specialization in lending, but they are also badly positioned to deal
with counterparty risk.11 A value-creating credit transaction moves
money from those who have it to those who need; not from the
Walmart employee to Walmart.
If the payday does not serve a clear financial purpose, what
might explain its dogged persistence? The Article evaluates a variety
of reasons: economic, sociological, historical, legislative, and even
psychological. The primary conclusion is that the payday is a software
problem, not a hardware problem. The hardware of the economy, both
McDonalds”). Roughly 64% of all adult Americans have at least one credit card and carry an
average balance of $4,800. In addition, roughly 50% of all credit card holders carry a
revolving balance on which they pay interest. CONSUMER FIN. PROT. BUREAU, THE CONSUMER
CREDIT CARD MARKET 46, 48 n.16, 56 (2017),
https://files.consumerfinance.gov/f/documents/cfpb_consumer-credit-card-market-
report_2017.pdf [https://perma.cc/A9UA-TS3E].
7 Levy & Sledge, supra note 4, at 12 (reporting that approximately 37% of borrowers
borrowed because “I had a bill or payment due before my paycheck arrived. In addition, 30%
of respondents borrowed to meet some unexpected expense”). This issue can also be
considered as resulting from payday. See also Bianchi & Levy, supra note 4, at 12 (finding
that 32% of consumers borrow because of misaligned cash flow and 32% to meet an excepted
expense). Both reasons can be mitigated by regularized pay
8 CONSUMER FIN. PROT. BUREAU, CFPB DATA POINT: PAYDAY LENDING 4 (2014),
https://files.consumerfinance.gov/f/201403_cfpb_report_payday-lending.pdf
[https://perma.cc/KD2Y-YXJ7] (finding that 80% of payday loans are rolled over or followed
by an additional loan and that 15% of loans are followed by a loan sequence of at least 10
loans).
To experience firsthand the process of obtaining a payday loan, I borrowed $200 from a
payday lender in Tuscaloosa, Alabama. I signed a postdated check to the benefit of the lender
for $235, representing a 638.75% APR. See @ProfArbel, TWITTER (Nov. 22, 2019, 5:05 PM),
https://twitter.com/ProfArbel/status/1198014702762283008. Sociologist Lisa Sevron worked
for a payday lender and reported her experiences in LISA SEVRON, THE UNBANKING OF
AMERICA (2018).
9 See, e.g., COMMONS & ANDREWS, supra note 3, at 2 (describing the employment
contract as a “relation between a propertyless [sic] seller of himself, on the one hand, and a
propertied buyer on the other”).
10 See infra Part I.B for a discussion of this point.
11 Counterparty risk is defined as the “the likelihood or probability that one of those
involved in a transaction might default on its contractual obligation.” Chris B. Murphy,
Counterparty Risk, INVESTOPEDIA (May 14, 2019),
https://www.investopedia.com/terms/c/counterpartyrisk.asp [https://perma.cc/K7EA-
AEUA].
Electronic copy available at: https://ssrn.com/abstract=3547007

<<PAGE_BREAK>>

2020] Payday 5
money and payroll technologies, has greatly advanced over the last
century, allowing us to quickly and cheaply pay for both goods and
services. To wit, a freelancer doing work in India for an American
employer as part of the gig economy, who performs the same work as
an American employee, will often be paid faster than the American
counterpart.12 What hinders progress is our legal software:13
Eisenhower-era legislation that failed to keep pace with modern
technology. In fact, as this Article reveals, the culprit is often pro-
worker legislation, which stands in the way of progress, sometimes
actively encouraging longer pay periods.
This Article’s central message is that abolishing the payday is
desirable, efficient, and surprisingly feasible. To move to a system of
daily pay, two challenges of legal origin must be overcome: compliance
costs and payment costs. To assure compliance with legal norms,
employers must verify payments—and doing so daily can be
expensive. Transferring money to employees is also costly, given the
sizable minority of workers who are unbanked and under-banked.14
How can we offer payments at scale without compromising
compliance costs or burdening workers with check-cashing costs?
To address these issues and others, the proposed framework
offers to decouple compliance from pay.15 Every day, workers are to
receive roughly 93% of their daily pay, leaving some slack until a
biweekly “accounting day.”16 On accounting day, the employer verifies
compliance and makes true-up adjustments as needed. To address
issues of money transfer, which are of particular concern for the
unbanked and the underbanked, I explore the increasing use of
digital money and payroll cards. The Article concludes that moving
to daily streams of payment is both feasible and desirable, although
it contemplates a transition period. By abolishing payday, we can
spare employees the indignities of the payday, increase consumer
liquidity, enhance worker autonomy, reduce the size of the payday
lending industry, and improve the American economy as a whole.17
12 In the online platform upwork.com, hourly workers receive weekly pay five day
afterwards (a 12 day cycle). See https://community.upwork.com/t5/Announcements/Faster-
payouts-for-hourly-contracts/m-p/739876. Freelancer.com allows some contractors to
withdraw payments within a single business day after verification.
https://www.freelancer.com/support/freelancer/payments/daily-withdrawals
13 Conceptualizing legislation as software is a productive metaphor and suggests a
different paradigm to that envisioned in CALABRESI, supra note 1. Both legislation and
software need to be updated to account for new circumstances and new information; both
need to combine efforts of different groups, sometimes with different agendas; both worry
about documentation of designer intent; and, both face complex inter-dependancies. Software
technology has created a number of interesting solutions to these problems that the legal
literature is yet to address, such as alpha and beta versions, periodic updates, branches, and
commits. See generally Git Theory, GITHUB, https://github.com/SCOREC/core/wiki/Git-
Theory [https://perma.cc/5GFU-2682] (last visited Feb. 13, 2020).
14 I discuss the phenomenon and problems of the unbanked and underbanked infra notes
199–212 and accompanying text.
15 See infra Part I.A.Changing by Information
16 For a discussion of the methodology behind this framework, see infra Part IV.
17 For conceptual clarity, daily streams of payments are no longer payday in the
conventional sense of a special day which aggregates pay for multiple days of work.
Electronic copy available at: https://ssrn.com/abstract=3547007

<<PAGE_BREAK>>

6 Draft[Vol. __
This Article highlights the importance of regularly updating our
legal software. Payday legislation started as a mode of progressive
reform towards the end of the nineteenth century. Overcoming initial
resistance from legislators and courts, payday laws were passed to
discourage predatory behavior of companies, which were lending to
their employees at usurious rates. Remarkably, despite the poor
money and payroll technologies that existed at the time, the
legislation was effective and for a short period of time, workers were
paid weekly. By an ironic twist of fate, it is possibly the rise of the
welfare state that led to the move from weekly to the much slower
biweekly pay.18 The birth of the welfare state was spurred by the
introduction of social security and social security taxes. The
administrative burden occasioned by various related laws, such as the
Federal Insurance Contributions Act (FICA), the Federal
Unemployment Tax Act (FUTA), the Fair Labor Standards Act
(FLSA), and tax withholdings made frequent pay more difficult. Thus,
the same laws that were meant to protect employees ended up
harming them in an unanticipated way: by depressing the frequency
of pay, they increased the need for expensive short-term credit
solutions.
This Article unfolds in four Parts. Part I sets the stage by
explaining the tenuous relationship between employment contracts
and the payday. Part II explores a variety of reasons for the existence
of the payday and evaluates whether any counsels in favor of keeping
of this practice. Part III explains why the payday should be abolished
and Part IV explains how this could be achieved in practice.
To understand why the payday exists, Part I covers the basic
theory of employment contracts. It explains why the payday is not a
natural part of employment contracts and why, from a finance
perspective, it is an artificial and inefficient credit transaction.
If financial logic doesn’t explain the existence of payday, what
does? Part II explores a variety of potential reasons and
justifications—historical, legal, economic, psychological, and
sociological. Special attention is given to a psychological attempt to
justify the payday: the idea that the payday helps employees
overcome some of the behavioral challenges of saving and budgeting
their own money.19 Refuting this idea is important because some
might worry that moving to daily streams of payment would lead to
profligacy among employees. To this end, I present empirical evidence
that frequent pay does not increase spending. In fact, there is some
reason to worry that infrequent pay may result in excessive spending,
because of the higher availability of cash on hand. Most important,
however, is the argument that employer-side savings are extremely
risky, as they expose employees to opportunistic behavior,
18 There are various terms of art used to describe pay frequency. For expositional
simplicity, this Article refers to payment modes that are more frequent than once a month and
less frequent than once a week as ‘biweekly.’ See infra Part I.A.
19 See, e.g. Christopher A. Parsons & Edward D. Van Wesep, The Timing of Pay, 109 J.
FIN. ECON. 373 (2013).
Electronic copy available at: https://ssrn.com/abstract=3547007

<<PAGE_BREAK>>

2020] Payday 7
counterparty risk, and employer bankruptcy.20 To the extent that
workers need help managing money, an insured, trusted financial
institution provides a much more robust solution than postponing
wages.
Part II highlights one especially worrisome reason for the
continued existence of the payday: ineffective legislation. For public
sector employees, legislation often mandates by fiat long pay periods.
The President of the United States is paid, by law, on a monthly
basis.21 In the private sector, badly drafted legislation also
encourages late payments; in particular, and not without irony, wage
and hour legislation unwittingly encourages long pay schedules.
These defects, overlooked by employment law scholars and
policymakers, have substantial consequences for the welfare of
employees.22
Understanding the sources of the payday allows the
development of solutions. Part III first explains the large stakes
involved in abolishing the payday. It then explains why abolishing
the payday is imperative and why seemingly more moderate
alternatives, such as advance payments, are insufficient and risky. It
closes by examining the legislative changes that would be needed to
abolish the payday.
The key proposal here, developed in Part IV, is to move from
biweekly pay to daily streams of payment of the good faith estimate
of the employee’s daily pay. Every two weeks, the employer will have
an “accounting day,” and will add to the day’s pay any shortfall in
payments. For the part of the workforce that is either unbanked or
underbanked, payments can be made using pay cards and similar
Fintech solutions. While there are some nuances and practical
considerations in implementing this proposal, it is important to
recognize at the outset that it does not derogate from the rights of
either employees or employers. By contrast, adopting this proposal
will greatly advance the welfare of all American employees and would
also take a bite out of the large payday lending industry, increase
worker autonomy, and correct some historical defects in legislation.
In fact, implementing this proposal only requires modest changes to
the legislative framework.23
20 See also Shlomo Benartzi et al., The Law and Economics of Company Stock in 401(k)
Plans, 50 J.L. & ECON. 45, 46 (2007) (arguing that employees over-invest in their employers’
stock and that “investing a dollar in company stock . . . is often worth only 50 cents.”).
21 3 U.S.C. § 102 (2004); U.S. CONST. art. II § 1(7) (“The President shall, at stated Times,
receive for his Services, a Compensation…”).
22 The Restatement of Employment Law defers to the employer’s choice regarding the
payday. RESTATEMENT OF EMP’T LAW § 3.01 cmt. a (AM. LAW INST. 2015) (“Employees also
have a right to be paid the compensation they have earned on a timely basis, usually in
conformity with the employer's normal payroll practices.”)
23 Pay frequency interacts in complex ways with a variety of workers’ rights and issues,
such as wage theft, wage discrimination, and minimum wage. For example, frequent pay
would expand workers’ ability to sue for equal-pay violations, as the Lilly Ledbetter Fair Pay
Act of 2009, Pub. L. No. 111-2, 123 Stat. 5 (codified at 42 U.S.C. § 2000e-5 (2009)) holds
that every payment resets the 180-day statute of limitations. In general, frequent pay will tend
to expand worker rights and, at the very least, will not derogate them.
Electronic copy available at: https://ssrn.com/abstract=3547007

<<PAGE_BREAK>>

8 Draft[Vol. __
Even if one disagrees with any of the specific policy
prescriptions, the key message of this Article is that the payday
should not be taken as a neutral or natural fact of the modern
economy. The existence of the payday has substantial consequences
in terms of efficiency, distribution, and autonomy. While we live in an
exceptional period with historically low-interest rates, the harms of
the payday will only be amplified as interest rates rise.24 The recent
outbreak of Covid-19 powerfully demonstrates the importance of
liquidity. Many of the recent developments in Fintech suggest that
the payday lives on borrowed time. It is perhaps time to call this loan.
I. THE PAYDAY PUZZLE
A. The Two Employment Contracts
What is the purpose of an employment contract? Roughly 130
million Americans are considered employees and are thus parties to
an employment contract.25 These contracts feature a great deal of
variability, as they each stipulate different norms the employee must
abide by—the employee’s various rights, benefits, and perquisites, as
well as the employee’s duties, obligations, and loyalties. Still, at its
core, the contract is premised on a very basic economic transaction: a
“bargained-for exchange of labor for consideration.”26 The
employment contract is an exchange relationship, which the parties
seek to optimize according to their own circumstances.27
This exchange transaction stands at the heart of the
employment contract, and I denote it here as K . In this K , the
1 1
employee is selling labor, broadly defined as time, skill, effort, and
any other aspect of his or her human or social capital. In
consideration, the employer gives the employee “money,” which could
include wages, tips, perquisites, in-kind transfers, and any other
value that redounds to the employee from the employer. When the
employment contract describes the employee’s duties, it outlines the
scope of labor that is exchanged. When the employment contract
stipulates the employee’s pay and benefits, it states the payment that
is exchanged for this labor. The concept of K is sufficiently capacious
1
and abstract to capture all employment contracts, despite the fact
that they differ in almost any other respect. In this high level of
24 Federal Funds Rate—62 Year Historical Chart, MACROTRENDS,
https://www.macrotrends.net/2015/fed-funds-rate-historical-chart [https://perma.cc/KLS7-
97UK] (last visited Feb. 13, 2020) [hereinafter MACROTRENDS].
25 BUREAU OF LAB. STAT., LABOR FORCE STATISTICS FROM THE CURRENT POPULATION
SURVEY (2019), https://www.bls.gov/cps/cpsaat08.htm [https://perma.cc/5XN7-HFLA].
26 Vanskike v. Peters, 974 F.2d 806, 809 (7th Cir. 1992).
27 PATRICK BOLTON & MATHIAS DEWATRIPONT, CONTRACT THEORY 4 (2005) (studying
the optimal design of the exchange relationship).
Electronic copy available at: https://ssrn.com/abstract=3547007

<<PAGE_BREAK>>

2020] Payday 9
abstraction, we can say that K is responsible for the annual exchange
1
of at least 6.4 trillion dollars.28
What both economists and lawyers will often miss is another
striking regularity in modern employment contracts. Besides the K
1
aspect of the transaction, most contracts also include a payday—a gap
in time between the moment work is rendered and payment is
transferred. Almost all payments by the employer are paid in
arrears—that is, after the employee “gave” their labor to the
employer. The following figure summarizes the frequency of the
payday and the typical lag involved in payments, based on data made
available by the Bureau of Labor Statistics for the years 2014 and
2019:
Figure 1 - Pay Frequency, US Private Businesses
Sources: Bureau of Labor Statistics (BLS); Private Payroll Company (ADP)
2014 2017 (ADP) 2019
66%
61%
56%
32% 34%
22%
11%11%
5%
WEEKLY BIWEEKLY OR MONTHLY
SEMIMONTHLY
This figure summarizes pay frequency data, based on a very
large sample of nonfarm employees.29 The chart shows that most
American employees are paid twice a month, on either a biweekly or
a semimonthly basis.30 The difference between biweekly and
semimonthly is fairly subtle; a biweekly payday takes place every
fourteen days, while a semimonthly payday takes place twice a
month, on two separate days (e.g., the 1st and the 20th). Given the
existence of fifty-two workweeks in a year, this means that a biweekly
28 Based on the product of 130 million full time employees, supra note 25, working 52
weeks per year and earning on average $956 per week,
https://www.bls.gov/news.release/empsit.t19.htm, the
29 BUREAU OF LAB. STAT., LENGTH OF PAY PERIODS IN THE CURRENT EMPLOYMENT
STATISTICS SURVEY (2019), https://www.bls.gov/ces/publications/length-pay-period.htm#fn5
[https://perma.cc/G39D-JJQQ] (farm workers were excluded from this study). The ADP data
comes from a private payroll company, ADP, as reported in Tomaz Cajner et al., Using
Payroll Processor Microdata to Measure Aggregate Labor Market Activity, Finance and
Economics Discussion Series 2018-005, BD. OF GOVERNORS OF THE FED. RES. SYS. 44 (2018),
https://doi.org/10.17016/FEDS.2018.005 [https://perma.cc/LN9E-Y2AA].
30 Biweekly also denotes twice a week; however, in the wage payment context, it is used
to denote payment frequency of once every 14 days.
Electronic copy available at: https://ssrn.com/abstract=3547007

<<PAGE_BREAK>>

10 Draft[Vol. __
payday translates to either twenty-six or twenty-seven paydays per
year, whereas a semimonthly payday entails a fixed number of
twenty-four paydays. Beyond the twice-monthly pay, a sizable
minority of employees are paid weekly and a small minority on a
monthly basis.31
The existence of a payday may seem obvious—indeed, many
take it for granted—but it hides significant complexity. The worker is
providing work today: stacking the shelves, cleaning the floor,
building a wall, attending to customers, etc. But for services rendered
today, the employee is only paid in the future, on payday. In other
words, payments in the economy are, by and large, in arrears.
Thus, the very idea of the payday implies a temporal distance
between the moment the employee is providing services, the quid of
K , and the moment she is paid, the quo of K . As noted by Commons
1 1
and Andrews in their 1908 treatise on labor law:32
When the laborer starts to work for [the employer], he
also becomes, for a time, a creditor. He contributes his
services in advance of compensation. He is a temporary
investor in the business. While he works he passes over
to the employer the title to his product, and retains a
claim for wages. When his wages are paid his investment
is liquidated.
The economic classification of this aspect of the transaction is
straightforward. When a person buys a car from the dealership, he or
she can pay on the spot for the exchange. But he or she can also agree
with the dealer to pay in the future, perhaps in monthly installments.
This is the financing part of the exchange. By the same logic, when
an employer receives services today but pays for them in the future,
on payday, this is a credit transaction. In addition to the exchange
relationship, what we called K , the employment contract thus
1
embodies a second credit transaction, what we might call K . This K
2 2
contains the agreement between the parties to defer payment for
money earned until payday. The parties will not always explicitly set
the payday in the contract, but of course, they agree to some kind of
payday—and this part of the agreement, explicit or implicit, makes
K . As in any credit agreement, we can identify three parts: an
2
employee-lender, an employer-borrower, and wages-principal.
A natural question is whether this is a true credit transaction,
as K does not seem to indicate any interest rates. This, however,
2
should not be too distracting: Credit transactions do not require
explicit quotes of interest or even any interest at all to count as credit
transactions. Consider how auto traders will sometimes offer ‘zero-
interest financing.’ The auto trader will not really offer a free loan,
but rather, will build the cost of the loan into the price of the car.
Some part of the price, then, can be seen as interest—the premium
31 The data collection methodology is not sufficiently clear to discern what share of
American employees are paid on shorter time spans than weekly.
32 COMMONS & ANDREWS, supra note 3, at 50.
Electronic copy available at: https://ssrn.com/abstract=3547007

<<PAGE_BREAK>>

2020] Payday 11
the dealer charges for offering ‘free’ finance. And even if the trader
charges no interest at all, it would still be a loan that would have to
be repaid on pain of default and collection. That is to say, a loan is a
loan even if it does not involve interest payments.33
It may be tempting to try and define the problem away. If we
were to define the unit of work as two weeks’ full of work, there
wouldn’t be K , because the payment is only due when the work-unit
2
is completed. On reflection, however, such definitional games are
unpersuasive. Defining work in two-weeks units is ad-hoc and does
not map any underlying transfer of value. Effort, skill, and time do
not come in two-weeks increments, rather, they are continuous. The
worker’s daily expenses, as well, do not come in such neat packages.
In fact, employers have attempted to redefine labor units; in one case,
they sought to define work as a year’s full of work.34 This way,
employers hoped, they did not have to pay until the end of the year
and if the employee quits—or is encouraged to quit—before the end
of the year, they could avoid the obligation to pay. For sound policy
reasons, courts and legislators rejected this view.35 More
theoretically, if the employee is understood to be selling time, then
time does not come at two-week increments.36
*
To quickly recap, so far, we have considered the existence of two
“contracts” implicit in the employment relationship: K and K . K is
1 2 1
the standard exchange of labor for money; K is the credit transaction
2
whereby payments for K will only be made on payday. The K loan
1 2
includes some “interest” payment in the form of higher than
otherwise wages. With this in mind, we can turn our attention to how
odd K appears from a finance perspective.
2
B. The Puzzle of K2
Finance theory teaches that, at the most fundamental level,
loans create value by moving money from those who have it to those
who need it.37 Banks lend money to cash-strapped businesses,
33 Loans also have a maturity date; here, the it is the payday. In a biweekly K2, the worker
lends 1/14 of the salary daily to the employer. The period until maturity shortens every day;
at first, the loan is for 13 days, but on the last day of work, the loan is only for that same day.
On average, the maturity date is 6.5 days in the future and the loan is remade every two weeks.
In a daily pay system, the loan mature on the same day it is paid, so it involves minimal
interest, and so I do not explore here the possibility of hourly pay.
34 Britton v. Turner, 6 N.H. 481, 481, 485–86 (1834) (holding that, despite the employee
quitting before the end of the stipulated year of work, the employer still had an obligation to
pay under restitution); Matthew T. Bodie, Employment As Fiduciary Relationship, 105 GEO.
L.J. 819, 840, n. 133 (2017) (“Modern wage payment schemes require that employees be
paid . . . for all time worked, regardless of the length of term”).
35 See infra notes 121–129 and accompanying text.
36 With independent contractors, it is sometimes the case that payment is made on an
project-completion basis (even though, even there, advances are common). Employment
contracts, however, normally separate work tasks and payment, and pay on the basis of time
worked.
37 See generally Dan Bernhardt, Money and Loans, 56 REV. ECON. STUD. 89 (1989).
Electronic copy available at: https://ssrn.com/abstract=3547007

<<PAGE_BREAK>>

12 Draft[Vol. __
venture capitalists to promising entrepreneurs, and bondholders to
growing companies. Such transactions create value because it they
are mutually advantageous. A loan enables the borrower to seize
profitable investment opportunities and smooth consumption over
time. At the same time, the loan also allows the lender to use its
money as a source of profit, through interest payments. As long as the
interest payment is between the value to the borrower and the cost of
lending to the lender, the parties would find a credit transaction
mutually advantageous.
This basic logic of finance is well recognized; however, applying
it to employment contracts presents a puzzle. As we just saw, K is a
2
ubiquitous part of the economy. It covers the Walmart employee
stocking the shelves, the grocery store teller working the register, and
the cook at McDonald’s flipping burgers; it covers employees from
store clerks to university professors to executives. In all of these
cases, K facilitates a loan from employees to employers—it is a loan
2
from those with little money to those with more money. Why, then, is
the Walmart employee lending money to Walmart? Why are service
technicians lending money to Comcast? And why are police officers
lending money to the government?
It may be tempting to answer these questions with the same
logic as any other financial transaction. The borrower (employer)
borrows because it benefits from having cash on hand and the lender
(employee) lends because it profits from the interest payment. On
reflection, however, the benefits to employers are vastly exceeded by
costs to employees. The intuition is straightforward: households are
in no position to lend money to firms.
The benefit to employers from K loans is relatively small. One
2
reason for that is that some employers do not even need cash.
Consider how the publicly listed firm Alphabet, despite holding $117
billion in cash, still uses K with its janitors, programmers, and
2
marketers.38 Apple holds $100 billion in cash, and Microsoft lags with
only $50 billion, yet both use the payday.39 The federal government is
also not particularly cash hungry, and yet it mandates the use of a
biweekly payday in all of its employment contracts.40 Even employees
of the Federal Reserve—which quite literally prints money—are paid
on a biweekly basis.41 This offers some evidence that the reason
behind K is not liquidity.
2
Still, many employers, especially small businesses, are not as
cash rich as these companies, and they do stand to benefit from liquid
funds. However, even for those employers, the benefit from K loans
2
is smaller than first appears. To estimate the size of the benefit,
consider the cost of borrowing from alternative lenders. After all,
employers borrow from banks, capital markets, specialized lenders,
38 Richard Waters, Google Parent Alphabet Overtakes Apple to Become New King of
Cash, FIN. TIMES (July 31, 2019), https://www.ft.com/content/332dd974-b349-11e9-8cb2-
799a3a8cf37b.
39 Id.
40 5 U.S.C. § 5504 (2018).
41 Telephone Interview with Payroll Department, Federal Reserve (Feb. 5, 2020).
Electronic copy available at: https://ssrn.com/abstract=3547007

<<PAGE_BREAK>>

2020] Payday 13
and a variety of other sources. In 2019, for example, the weighted
average interest rate on loans to small businesses ranged from 5.1%
to 5.66%.42 If we use this rate to measure the gain the business
receives from paying a typical employee in arrears, it becomes clear
that the gain is fairly small. For an employee earning $50,000
annually who is paid on a monthly basis, the annual payday credit
benefit to the employer is only $108.43
The benefit to employers is not large, but the cost to employees
of lending money is significant. Employees are not in a position, nor
do they have the skills, to lend money to their employers.44
Monitoring and secured credit, two common features of credit
transactions, are all but absent in the employee-employer
relationship. And, of course, to lend money one needs liquid cash. But
workers are often subject to severe liquidity constraints which make
it very costly for them to offer loans to their employers. 40% of
Americans with a credit card carry a credit card balance,45 and
roughly 16% of households reported essential expenses that are
unmet, with 11.5% percent reporting unpaid utilities.46 In a survey,
roughly 21% of households reported difficulty in accessing credit for
their own needs.47
Rather than being providers of cheap credit, households often
turn to expensive credit products to finance daily expenses—such as
42 See FED. RES. BANK OF KAN. CITY (Sep. 2019),
https://www.kansascityfed.org/~/media/files/publicat/research/indicatorsdata/smallbusiness/
2019/sbls_aggregatedatapdf_sept2019.pdf?la=en [https://perma.cc/N6TN-SEYB].
43 The calculation assumes daily compounding with 5% APR and the average salary in
2019 of $50,000. The calculation itself is not straightforward due to compounding, but it can
be approximated in the following manner.
$50,000 per annum implies a salary payment of $137 per day. At the beginning of the
month, the employee has to wait roughly 30 days to be paid. On the last day of the month,
however, the employee receives pay on the same day. On average, then, each payment is
delayed by 15 days . 5% APR implies a daily interest rate of 0.014% (0.05/365). This means
that the employee is lending every day of the year, on average, $137 for 15 days at a rate of
0.014%. Overall, the value of this transaction is 365∗137∗15∗0.00014=105.01. (The
difference between $105 and 108 is due to compounding).
44 Most lenders will not lend absent a credit check and, where a large part of their
portfolio is staked with a specific borrower, would require contractual controls. Neither of
these characterize household lending decisions to employers.
45 CONSUMER FIN. PROT. BUREAU, supra note 6, at 55. The bottom 20% of Americans
have a median $2,000 in financial assets. BD. OF GOVERNORS OF THE FED. RES. SYS., 2016
SURVEY OF CONSUMER FINANCES, https://www.federalreserve.gov/econres/scfindex.htm
[https://perma.cc/6UC5-AEQG] (last visited Feb. 13, 2020) (Table G.19); cf. Kathleen Elkins,
Here’s How Much Money Americans Have in Savings at Every Income Level, CNBC (Oct.
11, 2018, 12:02 AM), https://www.cnbc.com/2018/09/27/heres-how-much-money-
americans-have-in-savings-at-every-income-level.html [https://perma.cc/Y4QV-BXDZ]
(“29% of households have less than $1,000 in savings.”).
46 JULIE SIEBENS, U.S. CENSUS BUREAU, EXTENDED MEASURES OF WELL-BEING: LIVING
CONDITIONS IN THE UNITED STATES: 2011 11, Table 3 (2013),
https://www.census.gov/prod/2013pubs/p70-136.pdf [https://perma.cc/X87A-BK5C].
47 See Bricker et al., supra note 5, at 27 (2017). See also Matt Tatham, The Number of
Americans with Bank Accounts Rises, EXPERIAN (Mar. 25, 2019),
https://www.experian.com/blogs/ask-experian/research/the-decline-of-the-unbanked-and-
underbanked/ [https://perma.cc/C94N-8H6F] (In 2017, nearly 20% of respondents were
underbanked and 14.1 million adults had no bank account).
Electronic copy available at: https://ssrn.com/abstract=3547007

<<PAGE_BREAK>>

14 Draft[Vol. __
payday lenders, credit card companies, advance tax refunds, and
pawnshops—and the size of these industries illustrates the need felt
by households.48 The cost of such borrowing is considerable. Congress
estimated (quite crudely) that every late-paid dollar costs the
employee an additional dollar—i.e., 100% cost of borrowing.49
However, the real costs tend to be even higher. When households
borrow, they use a variety of sources, which include bank loans (with
a ~10% cost of borrowing on average),50 credit cards (a 16% cost of
borrowing),51 and payday lenders (typically 400%).52 For those
households that use payday lending regularly, the cost of finance can
amount to a large percentage of their annual earnings.
The costs to households are not strictly financial. The liquidity
crunch has broader effects on household welfare. Lack of access to
funds is not only a financial issue; concerns with liquidity create
financial stress, which is associated with higher mortality and worse
health outcomes.53
Judged in terms of the standard model of credit, K fails to
2
produce social value. The cost of lending by the household far exceed
the benefits that accrue to the employers. True, larger employers
would reap larger benefits, but the costs to employees would scale by
the same factor. And, to be sure, if the employer does not bear these
costs, the employer might not care about them and excessively engage
in K , even if it comes at a severe cost to the worker. I will return to
2
the private incentive of employers later,54 but for now, the key point
is that from a social perspective, K destroys value because the costs
2
of the loan exceed its benefits. We—society—want businesses to
borrow using capital markets and lenders that can, more accurately,
48 In 2016, the revenue of short-term lenders (i.e., fee and interest payments) was $57.9
billion dollars. See ERIC WILSON & EVA WOLKOWITZ, CTR. FOR FIN. SERVS. INNOVATION, 2017
FINANCIALLY UNDERSERVED MARKET SIZE STUDY(2017), https://s3.amazonaws.com/cfsi-
innovation-files-2018/wp-content/uploads/2017/04/27001546/2017-Market-Size-
Report_FINAL_4.pdf [https://perma.cc/DV99-99NA].
49 29 U.S.C. § 216(b) (2018) (“Any employer [in violation] . . . shall be liable to the
employee . . . in the amount of their unpaid minimum wages . . . and in an additional equal
amount as liquidated damages.”).
50 See BD. OF GOVERNORS OF THE FED. RES. SYS., CONSUMER CREDIT, DECEMBER 2019,
(Feb. 7, 2020), https://www.federalreserve.gov/releases/g19/current/default.htm
[https://perma.cc/M4W3-5P92].
51 See Kelly Dilworth, Average Credit Card Interest Rates: Week of May 27, 2020,
Creditcards.com (May, 27, 2020), https://www.creditcards.com/credit-card-news/rate-
report.php. Timely payment of credit-card balance would avoid these interest charges, but in
practice, 47% of Americans carry a balance on their credit cards and so they pay interest on
credit-card purchases. CONSUMER FIN. PROT. BUREAU, supra note 6, at 55–56.
52 CFPB, What is a Payday Loan?, (Jun 2, 2017)
https://www.consumerfinance.gov/ask-cfpb/what-is-a-payday-loan-en-1567/
53 Todd H. Baker, FinTech Alternatives to Short-Term Small- Dollar Credit: Helping
Low-Income Working Families Escape the High-Cost Lending Trap Trap 8 (Harv. Kennedy
Sch., M-RCBG Working Paper Series No. 75, 2017),
https://www.hks.harvard.edu/sites/default/files/centers/mrcbg/files/75_final.pdf
[https://perma.cc/YB4B-6FUA].
54 I return to this point infra Section I.C
Electronic copy available at: https://ssrn.com/abstract=3547007

<<PAGE_BREAK>>

2020] Payday 15
price and monitor risk. We do not want to create a line of credit which
consists of employees’ wages.
Importantly, K is not a one-off transaction, so value may be
2
destroyed multiple times. It is not just that households need to bridge
the first two weeks of employment; instead, K involves a continuous
2
cycle of borrowing and repayment. Consider a hypothetical low-pay
employee starting work on January 1, 2020, with only a small amount
of cash on hand. The employee is paid biweekly and so has to borrow
on January 1 against future earnings to support daily expenses. Come
payday on January 15, the employee is paid and finally has cash on
hand. But the employee also owes money. Now the employee has to
repay the loan, plus interest, and make do with whatever is left. If the
remainder is insufficient, the employee will have to borrow again.
And again. And again. In the worst case scenario, a debt spiral
emerges—the employee would need to borrow back-to-back on a
revolving basis.55
*
Employment contracts include two key components, K and K .
1 2
K is the basic exchange of labor for capital. K is a credit transaction
1 2
that is superimposed on the employment relationship. However,
unlike K , the credit transaction of K does not generate social value—
1 2
from a financial perspective at least. The absence of financial logic
presents the payday puzzle. Households are in no position to lend
money to their employers, at least in the general case. Businesses
have better access to liquidity, pay lower interest rates, and do not
face the same pressures as individuals do when funds are running
out. We shall now explore alternative, non-financial reasons for the
existence of the payday, the topic of the next Part.
II. PAYDAY: HISTORICAL, LEGAL, SOCIAL, AND ECONOMIC
EXPLANATIONS
The payday is a fixture of modern employment contracts. As
Part I just demonstrated, however, there is nothing natural—from a
financial perspective—in the modern matrimony between K and K .
1 2
If K serves any social function, it is not one that is rooted in financial
2
logic. So what reasons could there be for the continued existence of
the payday in today’s economy?
In trying to answer this question, a broad range of possible
reasons present themselves: historical, legal, social, and economic.
My goal here is to examine and evaluate the leading reasons on the
basis of two criteria: first as an explanation and then as a
justification. This tracks the difference between understanding why
a social practice exists and understanding whether it should persist.
55 A survey in England found that one in five payday borrowers were unable to repay the
debt on time, leading to a debt cycle. Jill Insley, Payday Loan Borrowers 'Trapped In Debt
Spiral,’ THE GUARDIAN (May 18, 2012),
https://www.theguardian.com/money/2012/may/18/payday-loan-borrowers-trapped-debt-
spiral [https://perma.cc/5DZF-QFZJ].
Electronic copy available at: https://ssrn.com/abstract=3547007

<<PAGE_BREAK>>

16 Draft[Vol. __
The explanation for why the train is late—the conductor is a late
riser—is causally satisfactory, but it does not present a justification.
Similarly, as we will see, many of the possible explanations for the
payday fail as justifications.
A. Path-Dependence
Justice Holmes once observed that the path of the law is not logic;
it is experience.56 From keyboard layouts to tax legislation, path-
dependence explains a variety of social arrangements.57 In these
cases, past choices, justified by historical contingencies, continue to
affect decisions far into the future. Once adopted, too many social
arrangements become dependent on past historical events, making
the transition to an alternative system (even if superior) too costly.58
Consider, for example, how obsolete area codes are in phone numbers
today; although they feel natural, logical, and perhaps inevitable for
participants in the system, they are hard to explain to outsiders. In a
similar manner, the payday may be yet another instance of inefficient
social equilibria that results from path-dependence. This conclusion
becomes clear within a historical analysis that considers how the
payday emerged in an environment with inferior money and payroll
technologies.
The first moral exhortation on the payday is in the Bible, where
it is admonished that one should not "take advantage of a hired
worker who is poor and needy. . . Pay them their wages each day
before sunset, because they are poor and are counting on it.”59
Whether daily pay was indeed broadly practiced in the old world with
any regularity, though, is historically unclear.
Moving to the modern era, under early English common law,
employers were initially only required to pay within the pre-agreed
pay period; in the absence of a specific agreement, the default was
payment at the end of the contract.60 The old default presumably
reflects the idea of piece-rate work, which was a common mode of
employment in the 18th century.61 By contrast, if one counts certain
agricultural workers, such as sharecroppers, as wage laborers, their
56 Oliver Wendell Holmes, The Path of the Law, 10 HARV. L. REV. 457, 457 (1897).
57 See generally Paul A. David, Path Dependence, Its Critics, and the Quest for
“Historical Economics,” in THE EVOLUTION OF ECONOMIC INSTITUTIONS (2007); Mirit Eyal-
Cohen, Path-Dependence in Temporary Legislation (unpublished manuscript) (on file with
author) (discussing the role of path dependence in tax legislation).
58 David, supra note 57, at 10–12.
59 Deuteronomy 24:14–15; see also Leviticus 19:13 (“Do not hold back the wages of a
hired worker overnight.”).
60 ROBERT GILDERSLEEVE PATERSON, WAGE PAYMENT LEGISLATION IN THE UNITED
STATES 68–70 (1918). The duration of the employment contract was imputed, in part, from
the pay period. Jay M. Feinman, The Development of the Employment at Will Rule, 20 AM. J.
LEGAL HIST. 118, 120–21 (1976). For development of similar ideas in early American law,
see id. at 125–26.
61 E. P. Thompson, Time, Work-Discipline, and Industrial Capitalism, 38 PAST &
PRESENT 56, 78–79 (1967).
Electronic copy available at: https://ssrn.com/abstract=3547007

<<PAGE_BREAK>>

2020] Payday 17
pay was only seasonal.62 Still, as early as the 17th century, we find
growing indications of weekly and even daily wages in England.63 By
the 19th century wage work became the dominant form of payment
and English workers were commonly paid on a weekly basis.64 Across
the pond, American workers in the 19th century were also paid
commonly on a wage basis, but it seems like factory workers and
many other employees were only paid on a monthly basis.65
As wage payment evolved in the 19th century, it faced a critical
challenge; both payroll and money technologies were nascent and
highly inefficient.66 Taken for granted today, the use of a standard
unit of currency—the federal US dollar—was not always common in
the early American republic and the Supreme Court labored to
encourage its use.67 Monitoring hours worked and computing pay also
proved challenging, especially if one has to compute withholdings,
garnishments, benefits, and deductions for a large workforce.68 And
then there is the difficulty of disbursing pay—consider the
illuminating complaint of a nineteenth-century business owner:69
If the larger mills should pay once a week it would entail
considerable more expense. The Pacific Company
employs between five and six thousand hands, and it
would be extremely difficult for the paymaster to visit all
these people once a week, carrying his trunk up and
62 See generally Joseph D. Reid Jr., Sharecropping as an Understandable Market
Response: The Post-Bellum South, 62 J. ECON. HIST. 106, 109-120 (Mar. 1973).
63 JAMES E. THOROLD ROGERS, SIX CENTURIES OF WORK AND WAGES: THE HISTORY OF
ENGLISH LABOUR, 430 (1884),
https://socialsciences.mcmaster.ca/econ/ugcm/3ll3/rogers/sixcenturies.pdf
[https://perma.cc/552G-2LDU]; Peter H. Lindert & Jeffrey G. Williamson, English Workers’
Living Standards During the Industrial Revolution: A New Look, 36 ECON. HIST. REV. 1, 13
n.38 (Feb. 1983); Jeremy Boulton, Wage Labour in Seventeenth-Century London, 49 ECON.
HIST. REV. 268 (1996) (noting daily pay).
64 Thompson, supra note 61.
65 PATERSON, supra note 60 at 77 (noting the “custom of monthly wage payments which
prevailed in most lines of industry prior to 1885”). See also FRANCES PERKINS & ISADOR
LUBIN, BUREAU OF LABOR STATISTICS, HISTORY OF WAGES IN THE UNITED STATES FROM
COLONIAL TIMES TO 1928, 93 (1934) (noting that in 1777 pay-per-product was abolished in
the glass industry in favor of monthly pay). However, this source does not find any regular
pay period across industries. See, e.g., id. at 90, 92. See also CHRISTOPHER L. TOMLINS, LAW,
LABOR, AND IDEOLOGY IN THE EARLY AMERICAN REPUBLIC 275 (1993) (citing M'Millan and
M'Millan v. Vanderlip, 12 Johnson 165 (N.Y. 1815)).
66 I turn to the technological issues infra Part I.F. In addition, wage work requires time
technology—a watch—as emphasized by Thompson, supra note 61, and more conceptually,
“the abstraction of a man's labour from both his person and the product of his work. . . . [and]
a method of measuring the labour one has purchased, for purposes of payment, commonly by
introducing a second abstraction, namely labour-time.” MOSES I. FINLEY, THE ANCIENT
ECONOMY 65 (1973).
67 SHARON ANN MURPHY, OTHER PEOPLE'S MONEY: HOW BANKING WORKED IN THE
EARLY AMERICAN REPUBLIC (2017).
68 See infra Part I.G.
69 Esther Redmount et al., The Effect of Wage Payment Reform on Workers’ Labor
Supply, Wages, and Welfare, 72 J. ECON. HISTORY 1064, 1069 (2012).
Electronic copy available at: https://ssrn.com/abstract=3547007

<<PAGE_BREAK>>

18 Draft[Vol. __
down stairs, and taking receipts from each one. He has
to go to the help so as not to stop the work.
These difficulties with cash and computation seem dated today,
but they were of utter importance in the time when wage pay evolved.
The evolution of the payday faced another formative moment
towards the end of the nineteenth century. As part of a large
movement of workers, wage and salary workers started organizing
and lobbying for legislation that would mandate more frequent pay.70
Their efforts were initially met with strong resistance. Many
legislators were unresponsive, and even when the legislature was
responsive, courts were reluctant to approve pay frequency
legislation.71 Such regulation was seen as an unwarranted imposition
on the parties’ freedom of contract and a due process violation.72
The first large win for workers was in Massachusetts.73 The
charismatic governor of Massachusetts, George D. Robinson, was a
champion of regular pay. In the legislative hearing, he urged that a
weekly payday be implemented for several reasons. The proposed law
would increase worker autonomy, limit the scope of debt collection
lawsuits, increase the use of cash (a major concern at the time),74 and
instill a better sense of money management among employees.75 He
also noted that the experience from voluntary weekly pay was
favorable and thus refuted many of the chief concerns. Workers still
saved and did not “waste their earnings in frequent debaucherie
[sic].”76 Indeed, even large employers found that the system was
practicable and added few costs.77
The weekly payday in Massachusetts signaled a national
change. Reports on the enforcement of this law seem positive.78 Other
70 PATERSON, supra note 60, at 70.
71 LINDLEY D. CLARK & STANLEY J. TRACY, BUREAU OF LAB. STATISTICS, LAWS
RELATING TO PAYMENTS OF WAGES 16–19 (1926),
https://fraser.stlouisfed.org/files/docs/publications/bls/bls_0408_1926.pdf
[https://perma.cc/MHS5-RU69].
72 See PATERSON, supra note 60, at 92–93 (documenting twelve cases where wage
regulation was deemed unconstitutional and fourteen where it was also constitutional).
73 Massachusetts Acts of 1879 Ch 128 p. 483; cited in PATERSON, supra note 60, at 70;
Redmount et al., supra note 69, at 1024. See also PATERSON, supra note 60, at 68 (noting that
wage period laws are “comparatively recent origin”). For the legislative history, see Am. Mut.
Liab. Ins. Co. v. Comm'r of Labor & Indus., 163 N.E.2d 19, 21 (1959).
74 See MURPHY, supra note 67Error! Bookmark not defined., at 17–20.
75 See George D. Robinson, Address of His Excellency George D. Robinson to the Two
Branches of the Legislature of Massachusetts 33 (Jan. 3, 1884) (“[T]he lesson of economy be
practically taught every day.”). See also id. at 36–38.
76 Id. at 33.
77 Id. at 34 (“It is, I submit, always wise and salutary to devise legislation of such a
character as will reach the humblest and the poorest citizen, who has no voice but his own to
present his needs, — no power in combination with others to emphasize his opinions.”).
78 KAN. DEP’T OF LAB. AND INDUS. INDU THIRD ANNUAL REPORT OF THE BUREAU OF
LABOR AND INDUSTRIAL STATISTICS, 324–25 (1888). See also See ST. OF N.Y., SEVENTH
ANNUAL REPORT OF THE FACTORY INSPECTORS OF THE STATE OF NEW YORK, 45–46 (1893);
Robinson, supra note 75, at 36–38.
Electronic copy available at: https://ssrn.com/abstract=3547007

<<PAGE_BREAK>>

2020] Payday 19
states followed suit and adopted weekly or biweekly pay periods.79
Courts, too, changed their attitude and grew increasingly accepting
of such provisions.80 One reason for this growing acceptance was the
concern that employers use their bargaining power to offer unfair
loans (advances) to employees.81 Another was the concern that
regular payment is “much more a matter of life and death to a
workingman . . . than to the employing corporation.”82 Even the
Supreme Court weighed in and held that states are well within their
powers to regulate pay frequency legislation.83 This ruling came only
nine years after Lochner,84 but it withstood Lochner era standards,
as it was seen more as a form of preventing fraud and abuse than
substantive regulation of the terms of the deal.85
The boom in payday regulation was followed by a quick bust. As
soon as 1908, most states had already moved to the modern system of
biweekly pay.86 Massachusetts was the last bastion of weekly pay,87
but even there the practice has changed drastically. In 1959, the
weekly pay law was still on the books, but many companies were
paying biweekly.88 In a high-profile case, the Supreme Judicial Court
of Massachusetts ruled that weekly pay was still the norm,89 but the
decision recognized that it was perhaps time for a change.90 Others
criticized the decision for creating “unnecessary paper work . . . and
add[ing] administrative burdens.”91 Soon thereafter, the legislature
changed the law to allow for biweekly pay.92
79 PATERSON, supra note 60, at 70–88. A few states adopted a monthly pay obligation.
Id. at 88–92. One example of weekly pay is 1891 R.I. Pub. Laws 38.
80 Claudio J. Katz, Protective Labor Legislation in the Courts: Substantive Due Process
and Fairness in the Progressive Era, 31 L. & HIST. REV. 275, 288 (2013).
81 Steven L. Willborn, Indirect Threats to the Wages of Low-Income Workers:
Garnishment and Payday Loans, 45 STETSON. L. REV. 35, 40 (2015); State v. Brown & Sharpe
Mfg. Co., A. 246, 252 (1892) (grounding payday legislation in a concern with “the greed of
corporate capital.”).
82 COMMONS & ANDREWS, supra note 3, at 51.
83 Erie R. Co. v. Williams, 233 U.S. 685 (1914).
84 Lochner v. New York, 198 U.S. 45 (1905).
85 See Adkins v. Children's Hosp. of D.C., 261 U.S. 525 (1923), overruled in part
by W. Coast Hotel Co. v. Parrish, 300 U.S. 379 (noting that “[i]n none of the statutes thus
sustained was the liberty of [the parties] interfered with. Their tendency and purpose was to
prevent unfair, and perhaps fraudulent, methods in the payment of wages.”). See also David
E. Bernstein, Lochner Era Revisionism, Revised: Lochner and the Origins of Fundamental
Rights Constitutionalism, 92 GEO. L.J. 1, 9 (2003); David N. Mayer, Substantive Due
Process Rediscovered: The Rise and Fall of Liberty of Contract, 60 MERCER L. REV. 563,
650 (2009).
86 COMMONS & ANDREWS, supra note 3, at 51.
87 Emilie Tavel, Companies Request Talk With State On Weekly Pay Ruling: 'Ample
Time' Indicated, CHRISTIAN SCI. MONITOR (1908).
88 Id.
89 Am. Mut. Liab. Ins. Co. v. Comm'r of Labor & Indus., 163 N.E.2d 19 (1959).
90 Id. at 22. (“[m]any good reasons may today exist for the payment of wages less often
than weekly, including the greater financial responsibility of most employers, the payment of
family obligations on a monthly basis or better family financial security than existed in years
gone by.” )
91 Tavel, supra note 87.
92 Mass. Gen. Laws ch. 149, § 148 (1990). For the reforming act, see Mass. Gen. Laws
ch. 133, § 502, approved July 20, 1992, and by § 599 made effective as of July 1, 1992.
Electronic copy available at: https://ssrn.com/abstract=3547007

<<PAGE_BREAK>>

20 Draft[Vol. __
Labor historian Nelson Lichtenstein proposed a more
provocative explanation for the decline of weekly pay. In the 30s, as
part of the New Deal, President Franklin D. Roosevelt introduced the
Federal Insurance Contributions Act (FICA) tax as part of the social
security reform. In 1938, Congress introduced the minimum wage
and the Fair Labor Standards Act (FLSA).93 Then, in 1943, Congress
also introduced the payroll tax, which required employers to withhold
federal income tax from employees’ pay.94 The result was an increased
administrative load on employers who had to compute pay without
computers.95 According to Lichtenstein, the effect of this legislation
was to make weekly pay too expensive, leading to a push to move to
biweekly pay.96 There is a bitter irony here, as legislation that is
ostensibly pro-worker might have had this unanticipated adverse
consequence on pay frequency. The same legislation that guarantees
minimum wage, unemployment insurance, and Medicare may be
inadvertently pushing employees into the hands of payday lenders
and other short-term credit providers.
*
Path-dependence may explain why we still have the payday
today: we are relying on a century-old body of legislation that was
optimized to deal with inferior money and payroll technology.
Defaults tend to become sticky and even the presence of financial
incentive to contract out of them may not be enough to overcome their
viscid pull.97 Being the first-mover to break a social equilibrium
carries risks and costs, and free-riding logic may result in inaction
(consider, again, our dated system of area codes). However compelling
as an explanation, path-dependence is only a weak justification for
the continuation of this practice. Fin-de-siècle labor wars, concerns
with scrip and truck, difficulties of computing wages by hand, and
heavy coin chests carried among work sites – are considerations that
carry little weight in the age of modern payroll and money
technology.98
B. The Synchronization of Bills and the Payday
Another potential reason for the continued existence of the
payday is the seeming alignment of the timing of bill payments and
the payday. Today, households pay most of their bills—utilities, rent,
93 Fair Labor Standards Act, 29 U.S.C. § 201 (2018).
94 Current Tax Payment Act of 1943, Pub. L. No. 68–120, 57 Stat. 126 (June 9, 1943).
95 For proportion, today, roughly 30% of the pay is made through “fringe benefits” which
are often paid to third parties and require a more complex set of computations. BUREAU OF
LAB. STATS., EMPLOYER COSTS FOR EMPLOYEE COMPENSATION HISTORICAL TABLES 2 (2019),
https://www.bls.gov/web/ecec/ececqrtn.pdf [https://perma.cc/9GDV-GVVT].
96 Chris Hayes, The Breakdown: Why Are We Paid Every Two Weeks?, THE NATION (Jan.
21, 2011), https://www.thenation.com/article/breakdown-why-are-we-paid-every-two-
weeks/ [https://perma.cc/3S2D-P5KU].
97 See generally Alan Schwartz & Robert E. Scott, The Common Law of Contract and
the Default Rule Project, 102 VA. L. REV. 1523, 1566–69 (2016).
98 See infra Part I.F.Legislation
Electronic copy available at: https://ssrn.com/abstract=3547007

<<PAGE_BREAK>>

2020] Payday 21
mortgage, internet, phone, insurance payments, and so on—on a
monthly basis.99 Monthly outlays place the payday into a larger social
equilibrium, with both ingoing and outgoing money streams being
closely tied together. Monthly bill payments, it is worth noting, are a
somewhat recent historical development—a fact that played a role in
the debates over longer pay periods.100
The synchronization of bills and the payday appears, at first
glance, harmonious; like clockwork, money comes in and goes out. But
this is deceptive. Households pay bills for goods and services that they
consume or use throughout the month. Whereas households consume
daily, they only pay monthly.101 This means that the service provider
is not only providing the service, but it is also providing credit: selling
electricity today but receiving payment only at the end of the month.
We see here K attaching again to a primary transaction, the sale of
2
electricity, only that this time around it is the household that borrows
rather than lends.
Economic logic dictates that utility providers charge for this
service and for the risk of default. Households, however, are not the
most reliable borrowers. Some households default on their utility
payments, and the cost borne by all other households is greater for
this reason.102 After all, the provider bears both the cost of not having
access to their earned payments and the risk of default by the
household. Hypothetically, out of every $150 in the electric bill,
perhaps $10 can be seen as interest. Exactly how much households
today pay for this loan is not clear, but the overall economic effect is
likely to be noticeable.103
Consider, then, the situation from the individual’s perspective.
Jane is working all month as a store clerk, but she is paid at the end
of the month. Throughout the month, she needs to consume groceries,
utilities, and other everyday expenses, but her employer will not pay
her until the end of the month. For groceries, she uses her credit
card—paying a few dozen dollars on her revolving balance. For
utilities, she doesn’t need to borrow per se, but she is paying a higher
price, perhaps a dozen more dollars. And while most of her daily
expenses are financed by someone else, she is lending money to her
employer. Somehow, on each transaction, she is on the losing end.
Being a risky borrower, Jane is paying a large amount to the utility
company in implicit interest; being an unsophisticated, under-
99 See e.g., Nevada Public Utilities Commission, http://puc.nv.gov/FAQ/Utility_Bills/
(“Generally, meters are read monthly for electric, natural gas and water services, and monthly
bills are generated for phone services.”)
100 Am. Mut. Liab. Ins. Co. v. Comm'r of Labor & Indus., 163 N.E.2d 19 (1959).
101 Technically, mortgage payments are in arrears, but rent is most often paid in advance.
102 See Residential Energy Consumption Survey (RECS), U.S. ENERGY INFO. ADMIN.
(2015), https://www.eia.gov/consumption/residential/data/2015/hc/php/hc11.1.php
[https://perma.cc/3CWE-VUDT] (roughly 10% of all households received disconnect
notices). The cost of default by some households is then spread to the bills of all other paying
households.
103 The savings from abolishing K2 will be split between the utility providers and the
end-consumer—but the exact split requires a more nuanced analysis of the market and tariff
regulation.
Electronic copy available at: https://ssrn.com/abstract=3547007

<<PAGE_BREAK>>

22 Draft[Vol. __
capitalized lender, Jane is receiving less in wage premium than her
cost of borrowing.104
Overall, households both borrow and lend, always on worse
terms. Borrowing and lending do not offset each other; instead, they
amplify each other, being two unnecessary and costly credit
transactions. Rather than clockwork, bills and the payday are more
like oarsmen—rowing in opposite directions, only to stay in place.105
As an explanation, the synchronization of bills and pay may make
some sense, syncing income and expense. As a justification, however,
it fails completely; there is no reason to preserve one for the other. If
anything, it would be socially desirable to abolish both. On reflection,
this synchronization seems to be contributing to the path-dependent
pull of historical considerations, making it all the more harder to
imagine breaking away from the biweekly pay convention—although
it makes the case for abolishing the payday more compelling.
C. Employer Power and Lack of Sophistication
Another potential reason for the persistence of K is rooted in
2
the unequal distribution of power and sophistication between
employers and employees. If employers enjoy strong bargaining
power, they may insist on K as a source of cheap credit. And if
2
employees are unsophisticated, they may yield to such demands with
negotiation, not realizing that K is a essentially a credit transaction.
2
In the standard economic model of wages, what determines
wages is marginal productivity—how much value the employee is
producing for the employer.106 A more productive worker would
receive higher wages. In this model, one consistent idea is that of a
wage premium or a “compensating wage differential.”107 If the
104 The loan from the utility company relives some of the liquidity pressure of the
household, but as explained, this is a form of (forced) credit that comes at a cost, albeit implicit
in the price of utilities. .
105 The reasons for K2 in this context are likely to be distinctive from the ones in the
employment context. It is possible that houesholds prefer lump sums outlays because they
allow for easier detection of overcharges or give them power in disputes vis-à-vis the
company. This is a fertile area for future research.
106 PIERRE CAHUC ET AL., LABOR ECONOMICS 82–83 (2d ed. 2014) (exploring, in the
simple model of labor demand, optimal wages).
107 The existence of wage premiums was consistently confirmed. See e.g., Don Fullerton
& Gilbert E. Metcalf, Tax Incidence, NAT’L BUREAU OF ECON. RES. 28 (Mar. 2002),
https://www.nber.org/papers/w8829.pdf [https://perma.cc/KQE7-N5XH] (noting that the
shared incidence of payroll taxes “has been tested and confirmed repeatedly.”); Johnathan
Deslauriers et al., Estimating the Impacts of Payroll Taxes: Evidence from Canadian
Employer-Employee Tax Data, INST. OF LAB. ECON. (2018), http://ftp.iza.org/dp11598.pdf
[https://perma.cc/8VAY-L6Z4] (“The consensus is that [payroll] taxes are partially to
completely shifted to workers, at least in the long run.”). But see Emmanuel Saez, et al.,
Payroll Taxes, Firm Behavior, and Rent Sharing: Evidence from a Young Workers' Tax Cut
in Sweden, 109 AM. ECON. R. 5, 1717 (2017) (finding firm-level differences in incidence and
employment effects of payroll tax cuts). In other contexts, see e.g., John M. Abowd & Orley
Ashenfelter, Anticipated Unemployment, Temporary Layoffs, and Compensating Wage
Differentials, STUDIES IN LABOR MARKETS (1981) (premium for risk of layoffs); John R.
Graham et al., Employee Costs of Corporate Bankruptcy, NAT’L BUREAU OF ECON. RES. 25922
(Jun. 2019) (Bankruptcy risk).
Electronic copy available at: https://ssrn.com/abstract=3547007

<<PAGE_BREAK>>

2020] Payday 23
employee produces some additional benefit to the employer beyond
his direct labor output, the wage would be adjusted upwards to
include a wage premium. That is, if the employee agrees to receive
payment infrequently, the employer would be willing to pay a wage
premium relative to an employee who is paid frequently.
The size of the wage premium for payday, as well as its very
existence, are empirical questions that were never investigated.
Some complicating factors are market failures, market organization,
and regulation. Now, on theoretical grounds alone, it is clear that
employers will not be willing to offer a wage premium that fully
compensates the worker. To do so, the employer would have to pay
them their costs of lending—but as we just saw, the costs to
employees exceed the benefits to employers.108
Still, if employers do not have to pay a full wage premium, they
may use employee wages as a line of credit. To be able to extract such
a benefit, employers must wield considerable bargaining power. And
while it is clear that many employers do, in fact, wield such power
(think of a single employer in a small town), this surely this does not
describe the entire economy. Outside of monopsonic employers, the
distribution of power is far more heterogeneous. Even middle-class
employees often find themselves in a position to negotiate portions of
their salary and benefits, and firms invest considerably in the
retention efforts of these employees. Yet, we do not find daily pay
common even among these employees.109
A deeper challenge to the asymmetric power explanation lies in
the idea of effective pay. Even supposing that the employer can avoid
paying a wage premium, the employer would find better and worse
ways to exercise its bargaining power. Both the employer and the
employee care about more than the per-hour wage; they care about
the entire package of pay, benefits, work conditions, and duties—that
is, they care about the effective wage. The more benefits the employer
provides, the more costly it becomes to employee workers, even if the
per-hour wage remains the same.
108 See supra Part I.B.
109 Parsons & Van Wesep, supra note 19, 374 (showing that frequency of pay falls with
income, so that middle and high-income workers are paid less frequently than low-income
workers).
Electronic copy available at: https://ssrn.com/abstract=3547007

<<PAGE_BREAK>>

24 Draft[Vol. __
Now, even for employers who wield enough power that they can
unilaterally dictate the terms of employment, the choice of effective
pay requires some balancing. Set too low, few workers would come to
work and those who do would work fewer hours and leave at the first
opportunity. The profit-maximizing employer would want to offer the
minimal package of pay and benefits that still attracts enough
workers. If the benefits are high, the employer can offer a somewhat
lower wage and still attract enough workers; if the employer cuts
benefits, it would likely have to offer more in the way of pay to attract
the same number of employees. The following figure illustrates this
basic tradeoff:
Figure 2 -- Effective Pay with Different Mixes of Per-Hour Pay and
Pay Frequency
As the Figure illustrates, paying more frequently allows the
employer to pay less per-hour while maintaining the same effective
wage. In designing the optimal mix, the employer would compare its
own costs in providing frequent pay against the savings in direct wage
payments.110 If it is indeed the case that the employee’s cost of
infrequent pay is higher than the employer benefit, even the
asymmetrical powered employer would tend to favor more frequent
pay because it would allow her to reduce paid wages while
maintaining the same effective pay that is needed to retain
employees. Thus, even selfish, dominant employer who is committed
to profit-maximization may find it better to pay less but more
frequently.
While asymmetric power fails to explain the payday
phenomenon in general, there is one area in which it provides a more
110 The value of infrequent pay also includes savings on check-cutting costs and stronger
leverage against the employee, issues that are analyzed infra Section II.D. and II.G.
Electronic copy available at: https://ssrn.com/abstract=3547007

<<PAGE_BREAK>>

2020] Payday 25
cogent explanation: minimum wage employees.111 Potentially a
design flaw, the minimum wage legislation does not consider effective
pay, only nominal wages. Consider, an employer who—before the
minimum wage—were paying $7 an hour and still attracting enough
workers. Now suppose the legislator requires a minimum wage
payment of $7.25 per hour. If the employer complies and pays more,
the employee’s effective wage is raised above the market clearing
equilibrium. The employer can offset that increase and reduce
effective pay by paying less frequently, thus still keeping compliance
with the letter (but not the spirit) of minimum wage law. Hence, there
is a theoretical possibility that, in the presence of minimum wages,
employers would seek longer payment periods.112 This possibility has
not been investigated in the voluminous literature on the effects of
minimum wages and should be analyzed in future research, because
it is very worrisome.113 Minimum wage employees are also most likely
to suffer low access to liquidity and improving their liquidity should
be an important policy consideration.114
As for lack of sophistication, it may have some explanatory
power, but it does raise some questions. It may be that many
employees lack the financial sophistication to properly classify K as
2
a credit transaction. But what they lack in academic sophistication of
this sort, they have in terms of skin-in-the-game. One does not need
a degree in finance to understand that getting paid every day will
make life easier than waiting a month to be paid. As workers
viscerally feel the consequences of the payday, we would expect them
to gravitate more towards employers who pay regularly. Indeed, one
consequence of the Covid-19 pandemic is the increased demand for
daily pay.115
Overall, employers’ market power and employees lack of
sophistication may explain some part of the practice of payday,
although it seems unpersuasive as a general explanation—especially
given the fact that we find prolonged payment periods even among
111 I emphasize that this is only a possible effect, as the literature on the effects of
minimum wages is complex, nuanced, and hotly-debated. Here I consider the classic wage
model, noting that its applicability in different markets may be limited. See generally David
Neumark, The Employment Effects of Minimum Wages: Some Questions We Need to Answer,
NAT’L BUREAU OF ECON. RES. 23584, at 1 (Oct. 2017), https://www.nber.org/papers/w23584
(“the debate among researchers about the employment effects of minimum wages remains
intense and unsettled.”).
112 There are limitations on the frequency of pay, as discussed infra Section I.F.
113 There is empirical evidence that employers sometimes cut fringe benefits in response
to higher minimum wages. Jeffrey Clemens et al., The Minimum Wage, Fringe Benefits, and
Worker Welfare, NAT’L BUREAU OF ECON. RES. 24635 (May 2018),
https://www.nber.org/papers/w24635.pdf [https://perma.cc/7HGY-ETMK].
114 See e.g., Jonathan Morduch, Poverty and Vulnerability, 84 AMERICAN ECONOMIC
REVIEW, 221, 221 (1994) (noting the “reasonably universal phenomenon by which the lack
of collateral limits borrowing by the poor in bad times”)
115 See Ellen Sheng, Companies Offer Cash-Strapped Employees Daily Pay Cards and
Other Flex-Pay Options as a Lifeline, CNBC (Mar. 30, 2020). As this Article was in edits in
the midst of the pandemic, it is too early to determine its long term labor market effects.
Electronic copy available at: https://ssrn.com/abstract=3547007

<<PAGE_BREAK>>

26 Draft[Vol. __
higher-paid employees.116 As a justification, however, both reasons
fail. Both information gaps and market monopolies, are types of
market failures—and there is little appeal to market outcomes that
result from market failures.
D. Collateral
A different reason for the existence of the payday grounds the
practice in the need of employers to retain their employees.
Employers worry that employees may decide to quit midstream,
leaving the employer stranded without the necessary personnel or
skill necessary to produce their products or serve their clientele.
Contract law can protect employers against this possibility—they can
require the employee to give notice. But such protection is quite weak,
as employees can be judgment-proof and the cost of litigation can be
prohibitive.117 Postponing pay thus creates collateral and, with it,
leverage; if the employee disappears, the employer may threaten to
expropriate this collateral.118
As an explanation, the idea of collateral faces a challenge in
explaining why the payday is used even when there is little flight risk
or when employees are not judgment proof.
Indeed, the average worker stays with his or her employer for at least
four years.119 It may still be true that employers are reluctant to sue
employees for reputational reasons, rendering the employment
contract unprotective of the employer’s interests. But the same logic,
the same concern with reputational effects, would also lead employers
to avoid sequestering the collateral.120 In any case, collateral offers a
plausible explanation for some of the practices of payday. As a
justification, however, things are more complicated.
As a society, we decided that employers should not be allowed
to sequester earned wages, even when the employee quits. Employers
are legally prohibited from taking earned wages in retaliation for the
116 As of 2013, the average hourly pay per period was $18.6/weekly; $24.8 biweekly;
$29.7 semimonthly; and $28.4 monthly. Matt Burgess, How Frequently Do Private
Businesses Pay Workers?, 3 PAY & BENEFITS 3 (2014).
117 See e.g, 80 Fed. Reg. 62,958 (Oct. 16, 2015) (Private employers
asking, in the context of new rules on commissions, “that DOL permit employers
to withhold a portion of wages as an incentive for the employee to complete the
contract period and to discourage workers from leaving to work in other
industries”). A deeper problem is strategic judgment proofing through asset
shielding. See generally Yonathan A. Arbel, Shielding of Assets and
Lending Contracts, 48 INT'L REV. L. & ECON. 26 (2016)
118 Redmount et al., supra note 69, at 1065.
119 BUREAU OF LAB. STATS., EMPLOYEE TENURE IN 2018 (2018),
https://www.bls.gov/news.release/pdf/tenure.pdf [https://perma.cc/SC4C-ESPD] (based on
the median).
120 Reputational concerns may indeed push the employer to sue and sequester the
collateral to develop a reputation for “toughness.”
Electronic copy available at: https://ssrn.com/abstract=3547007

<<PAGE_BREAK>>

2020] Payday 27
worker quitting.121 A large number of jurisdictions have enacted
“final pay statutes,” which compel the payment of all unpaid wages
upon termination, or soon thereafter.122 Final pay statutes are often
accompanied by penalties and fee-shifting provisions to further
compel employers to make timely payments.123 State courts have
likewise recognized the public policy imperative in favor of prompt
payment.124 The policy underlying these statutes is widely endorsed:
The Supreme Court held that legislation requiring prompt payment
upon discharge—i.e., payment without “abatement or deduction”—is
constitutional.125 The Department of Labor denounced any pay
practices that have the effect of payment deferral.126 In some
jurisdictions, courts adhere to the “faithless servant” doctrine, which
denies employees any pay (even in quantum meruit) if they are
disloyal to their employers.127 However, disloyalty is generally
understood to mean unlawful competition with the employer or
perhaps dissemination of trade secrets.128 This doctrine is of little
relevance, then, to employees who quit midstream.129
While collateral fails as a justification for withholding earned
wages, it does provide justification to a subtly different issue—not the
existence of payday but why payday is always in arrears. The reason
that employers do not prepay employees is clearly rooted in the
difficulty of recovering unearned wages from an employee who
absconds. Anticipating this difficulty in recovery, some workers may
want to assume positions just for the sake of prepayments, making
the hiring process difficult and costly. Hence, a “reverse” K , where
2
the employer lends money to the employee, is not a general solution—
a point worth remembering as we move to the normative discussion.
Overall, collateral may explain the practice of payday to some
extent and may justify the absence of “reverse K ,” but it fails to
2
121 See, e.g., Britton v. Turner, 6 N.H. 481, 489–92 (1834) (establishing the duty to pay
an employee for part performance); Pineda v. Bank of Am., 241 P.3d 870, 877 (Cal. 2010)
(“[t]he public policy in favor of full and prompt payment of an employee's earned wages is
fundamental and well established…”) (quoting Smith v. Superior Court, 137 P.3d 218, 220
(Cal. 2010)).
122 William C. Martucci & Jennifer K. Oldvader, Avoiding Another Wage-and-Hour
Pitfall:State Late-Paycheck Laws, EMP. REL. TODAY 71 (2011).
123 See e.g., Alaska Stat. § 23.05.140(d), Del. Code Ann. tit. 19, § 1103(b); Va. Code §
40.1-29 (2), (f).
124 See, e.g., Pineda, 241 P.3d at 877 (“[T]he public policy in favor of full and prompt
payment of an employee's earned wages is fundamental and well established…”) (quoting
Smith v. Superior Court, 137 P.3d 218, 220 (Cal. 2010)).
125 St. Louis, Iron Mountain & St. Paul Ry. Co. v. Paul, 173 U.S. 404, 405 (1899).
126 See, e.g., 80 Fed. Reg. 62,957, 62985-86 (Oct. 16, 2015) (to be codified at 20 C.F.R.
pt. 655).
127 See Charles A. Sullivan, Mastering the Faithless Servant?: Reconciling Employment
Law, Contract Law, and Fiduciary Duty, 2011 WIS. L. REV. 777, 779 (2011).
128 See Alan Hyde, What Should the Proposed Restatement of Employment Law Say
About Remedies?, 16 EMP. RTS. & EMP. POL'Y J. 497, 508 (2012).
129 See STEVEN L. WILLBORN ET AL., EMPLOYMENT LAW: CASES AND MATERIALS 609–12
(4th ed. 2007).
Electronic copy available at: https://ssrn.com/abstract=3547007

<<PAGE_BREAK>>

28 Draft[Vol. __
justify K as a social practice. Employers, we have decided as a
2
society, should not sequester earned wages.
E. Behavioral Biases
The reasons discussed so far were mostly concentrated on the
employer. Another potential reason for the existence of the payday
comes from the employees and their own well-being. While the
question of the payday was mostly neglected in the legal literature,130
a recent theory in financial economics argues that the payday caters
to psychological biases of employees and helps resolve them.131 This
theory was published in the leading Journal of Financial Economics,
, and it is based on a common intuition; still, for the following reasons
I believe it fails as both an explanation and as a justification for the
existence of the payday.
The idea goes as follows: people find it difficult to budget and
control their expenses. When employers pay frequently, individuals
are more likely to spend the money in their pockets due to behavioral
biases such as “present-bias” that prevent them from considering the
full, long-term implications of their behavior. The same way as some
of us would benefit from a pizzeria that would only sell us a few slices,
employees are said to benefit from having infrequent pay. Under this
account, employers are delaying payments as a service to employees,
sparing employees from their weak impulse control.132
This theory is not without evidence. The basic proposition—that
households need help budgeting money—is consistent with some
evidence showing that the timing of payments influences household
money management. One study showed that pension recipients
consume the fewest calories the week before the benefits are paid,
perhaps suggesting a difficulty in saving evenly across the entire pay
period.133 Similarly, another study showed that individuals make the
most of their food and necessity purchases right after receiving
benefit payments.134 The authors and economists Parsons and Van
Wesep further argue that their findings are consistent with the fact
that low-paid employees are paid more frequently than higher-paid
employees. To them, this is simply the result of low-paid employees
being more presently-biased than their wealthier counterparts and
130 See supra note 3.
131 Parsons & Van Wesep, supra note 19.
132 Id, at 374
133 Giovanni Mastrobuoni & Matthew Weinberg, Heterogeneity in Intra-Monthly
Consumption Patterns, Self-Control, and Savings at Retirement, 1 AM. ECON. J.: ECON. POL’Y
163, 164 (2009). See also Jani-Petri Laamanen et al., Once or Twice a Month? The Impact of
Payment Frequency on Consumption Patterns, (2019),
https://pdfs.semanticscholar.org/794a/c54611eeff7bd40efa93729cada5e0e03fa5.pdf
[https://perma.cc/24ND-DYMA].
134 Melvin Stephens Jr., "3rd of tha Month": Do Social Security Recipients Smooth
Consumption Between Checks?, 93 AM. ECON. REV. 406 (2003).
Electronic copy available at: https://ssrn.com/abstract=3547007

<<PAGE_BREAK>>

2020] Payday 29
lacking a financial buffer, making their need for money exceed their
desire to save.135
There is no doubt that saving money can be difficult, but this
point should not be taken to mean that workers need their employers
to help them save. If that were the case, we would expect to see at
least some workers asking their employers to delay payments—so
this dog doesn’t bark. More generally, this behavioral explanation
fails, both on theoretical and empirical grounds.
First, consider how behavioral biases may work in this context
in the exact opposite direction. By waiting until payday, employees
receive a larger paycheck than they would if they were to be paid on
an ongoing basis. This large payment can create a sense of windfall—
an illusion of plenty.136 This behavioral bias may lead individuals to
spend more on luxuries than when individuals operate under a sense
of scarcity. Indeed, the concern with the illusion of plenty was
precisely the reason some legislators enacted frequent pay legislation:
“[large payments could mean] dissipation on payday of a large part of
the accumulated sums by irresponsible employees with consequent
adverse effect on family and community.”137 Empirical evidence
suggests that this concern is not only theoretical. For example,
research shows that individuals consider tax refunds to be “extra”
money, leading them to spend it more easily than their “regular”
money.138 Similarly, when benefits are paid in a lump sum, one finds
a spike in drug use, hospitalization, and mortality—as some
135 Parsons & Van Wesep, supra note 19, at 389 (“Insofar as education and wealth
correlate negatively with time-inconsistency, more educated and more wealthy workers
should be, and are empirically, paid less frequently.”).
136 See e.g., Hal R. Arkes et al., The Psychology of Windfall Gains, 59 ORGANIZATIONAL
BEHAVIOR & HUMAN DECISION PROCESSES 331 (1994) (finding higher propensity to spend
money viewed as a windfall); C. Yiwei Zhang & Abigail B. Sussman, The Role of Mental
Accounting in Household Spending and Investing Decisions, p. 69, in CLIENT PSYCHOLOGY
(2018)(noting the evidence of a higher propensity to spend windfalls on luxury items). Such
debates are not new; in nineteenth-century Massachusetts, mill owners thought that moving
to weekly pay would lead to more employee intoxication, but “our treasurer determined to
give it a fair trial and the result exceeded our anticipations, for we found that instead of
increasing drunkenness, it has had a contrary effect, so far as we could ascertain by the
working days of our operatives.” Redmount et al., supra note 69, at 1069–70.
137 Am. Mut. Liab. Ins. Co. v. Comm'r of Labor & Indus., 163 N.E.2d 19, 21 (1959). See
also Rebekah D. Provost, Punishing and Deterring the Unknowing: Mandatory Treble
Damages Under the Massachusetts Wage Act, 18 SUFFOLK J. TRIAL & APP. ADVOC. 305, 311
(2013). Payday was a special occasion in turn of the century America, when mostly men
engaged in communal binge drinking, spending a large portion of their payday wages. See
also MADELON POWERS, FACES ALONG THE BAR: LORE AND ORDER IN THE WORKINGMAN'S
SALOON, 1870–1920 52–53 (1998); COMMONS & ANDREWS, supra note 3, at 52 (noting that
some states had special legislation mandating payment during pay hours, to avoid the payment
bar-rooms). In contrast, some legislators expressed concern that too-frequent pay would lead
to “frequent debaucheries . . . .” See Robinson, supra note 75, at 33.
138 See William Adams, Liran Einav & Jonathan Levin, Liquidity Constraints and
Imperfect Information in Subprime Lending, 99 AM. EC. REV. 49, pp. 49-50 (2009) (finding a
sharp increase in auto purchases in the subprime market during tax refund season); Brian
Baug et al., Disentangling Financial Constraints, Precautionary Savings, And Myopia:
Household Behavior Surronding Federal Tax Returns, NBER Working Paper 19783, 2 (2014)
(finding a large temporary increase in expenses following tax refunds, which is interpreted as
suggesting myopic behavior).
Electronic copy available at: https://ssrn.com/abstract=3547007

<<PAGE_BREAK>>

30 Draft[Vol. __
individuals purchase excess drugs and alcohol.139 One recent report
notes a spike in child abuse on payday, as adults engage in excessive
drinking.140 Another study compared the expenditure profile of
benefits recipients who receive payment twice a month with those
who receive a larger payment once a month. It found that the single
payment leads to high within-month variability, with most of the
money spent early, thus concluding that “two temporally separate
payments might lead to smoother spending than just one
payment.”141 It is also possible that it is easier to save pennies than
dollars, which is the business model of a few recent start-ups.142
Second, to explain why low-income workers are paid more
regularly than higher-income workers, Parsons and Van Wesep posit
that low-paid workers are more prone to present-bias.143 How likely
is this assumption? Are middle-income employees more money
conscious and less likely to overspend than their paycheck-to-
paycheck counterparts?144 And even if that were the case, low-paid
employees are hardly a homogenous or static group. A large body of
research documents earning mobility, suggesting that many (but of
course, not all) employees are on their path to higher earnings in the
future—think interns, students working a side job, or a manager-
track employee working the ranks.145 Of course, pay raises do not
come with an antidote to present bias.
Third, there is a subtle legal point that belies this explanation.
The entire utility of delayed pay is undermined if employees can ask
139 Laamanen et al., supra note 133, at 4.
140 Martin Selsoe Sorensen, Greenland Calls On Denmark to Help Fight Child Sexual
Abuse, N.Y. TIMES, Sept. 27, 2019, at A10,
https://www.nytimes.com/2019/09/27/world/europe/greenland-sexual-abuse-tasiilaq-
denmark.html [https://perma.cc/AFM8-XVUP] (“Pay days are the worst time for the children
of Tasiilaq, . . . With their salaries or social benefits in hand, many adults tend to drink and
parents become too inebriated to look after their children . . . . So on the last Friday of every
month, officials open a sports hall in the district as a shelter to keep children away from sexual
abuse.”).
141 Laamanen et al., supra note 133, at 20.
142 See, e.g., ACORNS, https://www.acorns.com/ [https://perma.cc/MR26-Y7GY] (last
visited Dec. 25, 2019) (a micro-investing platform with corresponding app that allows
customers to invest spare change into an aggregated portfolio managed by industry
professionals). To be clear, I do not consider the windfall bias as necessarily stronger than
myopia—but I note that both are equally plausible forces that operate in opposing directions.
143 Parsons & Van Wesep, supra note 19, at 389 (“Insofar as education and wealth
correlate negatively with time-inconsistency, more educated and more wealthy workers
should be, and are empirically, paid less frequently”)
At least in the aggregate data presented by the Bureau of Labor Statistics, the correlation
between pay and pay frequency breaks if one excludes weekly paid employees—in fact, semi-
monthly paid employees are paid somewhat more than monthly-paid employees. See BUREAU
OF LAB. STAT., supra note 28.
144 Economists are divided on these questions. See Leandro Carvalho, Poverty and Time
Preference, (RAND Lab. & Population, Working Paper No. WR-759, 2010), 2-3
https://www.rand.org/content/dam/rand/pubs/working_papers/2010/RAND_WR759.pdf
[https://perma.cc/CC65-V63F].
145 See, e.g., Katharine Bradbury, Levels and Trends in the Income Mobility of U.S.
Families, 1977–2012, 21 n. 21 (Federal Reserve Bank of Boston, Working Paper No. 16-8,
2016) (“[F]or those starting poor, an average of 58 percent moved out of the poorest group”).
Electronic copy available at: https://ssrn.com/abstract=3547007

<<PAGE_BREAK>>

2020] Payday 31
employers to advance their wages—and if employees are indeed
present-biased, they would be expected to do so. The authors
themselves admit that wage advances “will cause our results thus far
to unravel, implying a need for regulation.”146 They argue, however,
that the law prevents advances because “regulators in 45 U.S. states
require wages to be paid at a minimum frequency.”147 This is,
however, a mistake. Pay frequency legislation does not require
minimum pay frequency (but a maximum) and, more importantly,
does not bar wage advances.148 The legality of wage advances means
that if workers are indeed blinded by present-bias, they could and
would use wage advances to squander their pay.
The last problem with this explanation is that it overstates the
difficulty of saving money. A recent study concludes that “pay
frequency does not affect household’s savings” and that the amount
of money that households spend over the month has no relation to the
frequency of pay.149 The evidence also suggests that households do not
change their spending categories based on pay frequency. Perhaps it
is because of conflicting behavioral biases, or perhaps it is due to other
reasons—but in practice, the withholding of pay does not significantly
change either saving or consumption patterns. Moreover, while
almost all households are paid infrequently, most households
demonstrably manage liquid assets without squandering them
recklessly. Over 55% of households have liquid assets at their
disposal, thus demonstrating their ability to save and manage money
without a third-party.150 As these households are demonstrably
capable of not wasting the money sitting in their checking and savings
accounts, they do not suffer from such a degree of present-bias that
would make them dependent on the employer’s paternalistic
withholding of cash. Indeed, if this explanation were persuasive, we
might expect to see workers asking their employers to delay
payments, so they can save better—but of course, such behavior is
rarely observed.
Overall, then, while the inability to save may explain a portion of
the payday phenomenon, it fails as a general explanation. However, I
want to make a stronger claim; behavioral biases also fail as a
justification for the payday. To show this, I would like to take a step
back from the question of whether employees need help saving and
focus on the question of whether employers should be the ones who
help them save.
146 Parsons & Van Wesep, supra note 19, at 382.
147 Id.
148 See Jim Hawkins, Earned Wages Access and the End of Payday Lending, 32
(forthcoming Bos. Uni. L. Rev., 2020),
https://papers.ssrn.com/sol3/papers.cfm?abstract_id=3514856 (“Currently, no states
specifically regulate [earned wage advance] transactions”)
149 Inés Berniell, Pay Cycles: Individual and Aggregate Effects of Paycheck Frequency
(Apr. 2019), 19 (unpublished manuscript),
https://inesberniell.weebly.com/uploads/9/1/2/2/91228902/pay_cycles_berniell_in
es.pdf [https://perma.cc/4FH2-LGJ9].
150 See FED. RES. SYS., supra note 5, at 17. Conditional on having financial assets, the
median family held $23,500 in assets. Id. at 18.
Electronic copy available at: https://ssrn.com/abstract=3547007

<<PAGE_BREAK>>

32 Draft[Vol. __
The core of the problem is simple: employers are unreliable
agents for the management of employee savings.151 There is a reason
why pension funds, such as 401(k)s, are not owned by employers.152
Employers are not some neutral bank; in practice, wage theft—the
withholding of pay due—is “rampant in the low-wage workforce.”153
Employers (and the government is no exception) sometimes
unilaterally suspend pay.154 Moreover, keeping money with one’s
employer also gives the employer leverage, and the employer may
abuse it.155 Worse, unlike banks, employers are not insured against
bankruptcy.156 Thus, using employers as vaults not only exposes
employees to abuse but also to the risk of bankruptcy, a risk over
which the employee has little control.157 Bankruptcy risk also exposes
another problem with employer-side saving. Employers, after all, are
also humans and are inherently not immune to the same present bias
that would lead employees to squander money. The manager may be
tempted to spend the money on a new machine, a shiny business
opportunity, or a private car, not leaving enough slack to pay
wages.158 Given these problems, employees are likely better off facing
their own temptations than dealing with those of their employers. At
the very least, employees would benefit from having reliable, insured
third parties manage their savings (such as their 401(k) retirement
accounts), rather than having their bankruptcy-prone employer
manage them.159
151 A key component of prudent financial planning is diversification. Tying one’s money
with one’s place of employment is the opposite of diversification. See e.g., Sarah O’Brien,
Don’t overlook the risk that comes with your employee stock options, CNBC (Feb, 27, 2018),
https://www.cnbc.com/2018/02/27/employee-stock-options-can-come-with-expensive-
risks.html.
152 The Employee Retirement Income Security Act of 1974 (ERISA) was enacted to
minimize the “looting and mismanagement that had previously plagued private pensions” by
borrowing a trust law model. Natalya Shnitser, Trusts No More: Rethinking the Regulation of
Retirement Savings in the United States, 2016 BYU L. REV. 629, 642 (2016).
153 Llezlie L. Green, Wage Theft in Lawless Courts, 107 CAL. L. REV. 1303, 1309 (2019).
See also IMMIGRANTS’ RIGHTS/INTERNATIONAL HUMAN RIGHTS CLINIC, SETON HALL
UNIVERSITY, ALL WORK AND NO PAY: DAY LABORERS, WAGE THEFT, AND WORKPLACE
JUSTICE IN NEW JERSEY (2011), https://www.immigrationresearch.org/report/seton-hall-
university-school-law/all-work-and-no-pay-day-laborers-wage-theft-and-workplace-ju
[https://perma.cc/3MHZ-S5H7].
154 The concern with suspended government pay is longstanding. See, e.g., Payless
Payday, WASH. POST, Aug. 17, 1949, at 10 (noting that “[y]ear after year, Federal employees
[sic] face suspensions of income”).
155 See supra Part I.D.
156 The Federal Deposit Insurance Act of 1950, Pub. L. 81–797, 64 Stat. 873 (1950)
157 Aside from bankruptcy, letting the employer control more money provides it with
leverage which it can use against the employee in various ways, making quitting, for example,
more difficult. Employers are also less efficient than financial institutions at making
periodical payments.
158 Even without present-bias, large debts can exacerbate risk taking by managers. See
e.g., Zhiyao Chen and Ran Duchin, Do Nonfinancial Firms Use Financial Assets to Take
Risk? At 2 (May 1, 2019). Available at SSRN: https://ssrn.com/abstract=3284205 or
http://dx.doi.org/10.2139/ssrn.3284205 (“A vast body of theoretical work predicts that firms
will invest in riskier projects as they become distressed)
159 The authors foresee this objection but dismiss it: “[I]t is not particularly important
Electronic copy available at: https://ssrn.com/abstract=3547007

<<PAGE_BREAK>>

2020] Payday 33
Besides this core problem, one must also consider that
withholding pay from employees is a particularly severe form of
paternalism. Proposing to withhold property from individuals
because one thinks they are insufficiently responsible to handle it is
a very strong claim that would require very strong evidence. But as
noted, the evidence suggests otherwise.160 In fact, there are some
deeply disturbing stories of how the larger lump sum payments, due
to infrequent pay, result in substance abuse.161
*
This section tackled the argument that the payday serves
employees by helping them budget their own money. It showed why
this intuitive idea fails as an explanation—among other things, it
neglects to consider how larger paychecks can invite excess spending.
More critically, this section argued that this theory also fails as a
justification for the payday; this type of paternalism requires an
excessive degree of trust in employers. Thus, whatever limited
explanatory power this theory has, it is insufficient to justify this
practice.
F. Legislation
Employment law is highly regulated at both the federal and
state level, and the payday is no exception. As this section shows, the
payday is affected by both federal and state legislation in ways both
visible and invisible.
Legislation provides the most direct explanation of the payday
in the public sector. As a result of extensive pay regulation, most
public employees are paid on a biweekly or a semimonthly basis.
Federal legislation sets a biweekly pay period.162 State laws,
similarly, will often set a biweekly or a semimonthly pay schedule for
state employees.163 Local governments also pay twice a month. Of the
200 largest cities in the United States, 189 (94.5%) pay on a biweekly
who conducts the timing-welfare calculation, as long as someone does.” Parsons & Van
Wesep, supra note 19, at 383. The fact that, despite the considerable risks, employers are the
ones who supposedly save for employees is too important to be casually dismissed.
160 See supra Part I.E
161 Martin Selsoe Sorensen, Greenland Calls On Denmark to Help Fight Child Sexual
Abuse, N.Y. Times (Sep. 27, 2019) (“Pay days are the worst time for the children of Tasiilaq,
… With their salaries or social benefits in hand, many adults tend to drink and parents become
too inebriated to look after their children . . . That’s when an already high rate of sexual abuse
rises”)
162 5 U.S.C. § 5504(a) (2018) (“The pay period for an employee covers two
administrative workweeks.”). See also U.S. BUREAU OF THE CENSUS, STATISTICAL ABSTRACT
OF THE UNITED STATES 1986, 302 (1986),
https://www.google.com/books/edition/Statistical_Abstract_of_the_United_State/R7M_0H
XXZ48C?hl=en&gbpv=1&dq=biweekly+payroll&pg=PA302&printsec=frontcover
[hereinafter 1986 ABSTRACT] (noting that ““most Federal employees are paid on a biweekly
basis.”)
163 ALA. CODE § 36-6-1 (2020) (semi-monthly); N.Y. STATE FIN. LAW § 200(1)
(McKinney 2018) (biweekly); WASH. ADMIN. CODE § 82-50-021 (2020) (semi-monthly).
Electronic copy available at: https://ssrn.com/abstract=3547007

<<PAGE_BREAK>>

34 Draft[Vol. __
or semimonthly basis.164 With 22 million Americans employed as
government employees,165 we thus find legislation to be a direct
explanation for pay practices in this sector.
As for the private sector, the analysis is far more nuanced. In
the private sector, no law sets pay frequency directly. Instead, states
set payment frequency floors—the requirement that the employer
won’t delay pay for longer than, normally, two weeks. It is possible
that the private sector simply imitates pay practices in the public
sector, but this possibility seems weak, given the stakes involved. If
employers could set lower pay with more frequent pay, then the
analysis above suggests that it would be profitable for them to do so.
To the extent that debt spirals also affect worker productivity,
stability, and reliability, we would expect the private sector to be
somewhat responsive to such pressures.166
Indirectly, however, legislation inadvertently incentivizes
infrequent pay. Ironically, it is mostly pro-worker legislation that
promotes infrequent pay. Legal scholars, however, have failed to note
and grapple with this complexity.
Take minimum wage laws. We have already seen these laws fail
to regulate the interaction of minimum wage and pay frequency—
thus, allowing employers to cut back on pay frequency without
violating the law.167 Another problem emerges in the context of tipped
and commission-based employees—an important part of the
workforce, with approximately 4.3 million tipped workers in the
United States.168 For these employees, the Fair Labor Standards Act
(FLSA) permits employers to pay below minimum wage, so long as
the lower wage plus tips averages to the minimum wage over the pay
period.169 As a result, employers are induced to set a long pay period,
164 CITY OF CHESAPEAKE, VA AUDIT SERVICES DEP’T, CITY PAYROLL CYCLES SPECIAL
AUDIT App. B (2019),
http://www.cityofchesapeake.net/Assets/documents/departments/aud
it/department-audits/Payroll+Cycle+Full+Report.pdf
[https://perma.cc/NVH4-4XMR].
165 Employment, Hours, and Earnings from the Current Employment Statistics survey
(National), U.S. BUREAU OF LAB. STATS. (Apr. 18, 2020),
https://data.bls.gov/timeseries/CES9000000001 [https://perma.cc/8N8F-A2DS] (last visited
Feb. 13, 2020).
166 A set of economic arguments involve nominal rigidity of wages or “sticky wages”—
the failure of payments to adjust, mostly downward, to changing market conditions. This may
further explain the pattern of biweekly pay, although even sticky wages are thought to adjust
in the long run. See generally Alessandro Barattieri et al., Some Evidence on the Importance
of Sticky Wages, 6 AM. ECON. J.: MACROECON. 70 (2014).
167 See supra Part I.C.
168 SYLVIA A. ALLEGRETTO & DAVID COOPER, ECON. POL’Y INST., TWENTY-THREE
YEARS AND STILL WAITING FOR CHANGE: WHY IT’S TIME TO GIVE TIPPED WORKERS THE
REGULAR MINIMUM WAGE 23 (2014), https://www.epi.org/files/2014/EPI-CWED-BP379.pdf
[https://perma.cc/ZSH7-LFZ6]. This estimate does not cover commission-based employees.
169 Fair Labor Standards Act, 29 U.S.C. §203(m) (2018); 48B AM. JUR. 2D Labor and
Labor Relations § 3108 (2020). See also DEP’T OF LABOR, FIELD OPERATIONS HANDBOOK
CHAPTER 30, RECORDS, MINIMUM WAGE, AND PAYMENT OF WAGES 30b01(b)(1) (2016),
https://www.dol.gov/whd/FOH/FOH_Ch30.pdf (“[T]he salary is sufficient to meet the
Electronic copy available at: https://ssrn.com/abstract=3547007

<<PAGE_BREAK>>

2020] Payday 35
so as to average daily variations in pay, as the following example
demonstrates.
Suppose that an employee makes $1,300 in tips in one week and
$100 in the next. The average is $700—well beyond the biweekly
federal minimum of $580—so the employer need not pay the employee
any extra amount.170 But what happens if the pay period is shorter?
Suppose an employer instead paid on a weekly basis. The employee
makes $1,300 the first week, well beyond the minimum wage, so the
employer would again not need to compensate the employee. But in
the second week, the employee only makes $100, well below the
weekly minimum wage of $290. By making the payday shorter, the
employer now has to pay the employee an extra $190. As this example
demonstrates, for tipped and commissioned employees, minimum
wage legislation unwittingly incentivizes longer pay periods.
Admittedly, for many tipped employees this harm is mitigated by the
common practice of paying cash tips daily—but as many tips are paid
on credit, this problem remains important.171
Overtime legislation presents a similar averaging problem,
although to a lesser extent. If overtime obligations are tied to pay
frequency, employers would want to prolong pay periods to smooth
periods of high work. In a biweekly pay period, the employer could
avoid paying overtime in the first week if there is less work in the
second week. The Department of Labor and many courts have taken
the view that employers are not allowed to average over more than
one week and that overtime legislation is done on a weekly basis.172
Some courts, however, has taken a different approach, as explained
by Judge Easterbrook: “[I] is unlikely that Congress meant to require
employers to pay overtime in the lean weeks when the fat weeks more
than make up.”173 To the extent that employers are allowed to average
minimum wage requirements for all hours worked during the pay period . . . .”); id. at
30b05(c)(1) (“There is no requirement that wages be paid weekly, as long as some regular
pay period (such as biweekly or monthly) is established . . . . The only requirement is that
employees receive prompt payment of the minimum wage covering all hours worked during
the pay period.”). see CAL. CODE REGS. tit. 8 § 11010(4)(B) (2020) (“[M]inimum wage for all
hours worked in the payroll period”)
170 The employer still owes the employee the federal minimum wage per hour for a tipped
employee of $2.13/hr, which is not included in the example for the sake of clarity. Fair Labor
Standards Act, 29 U.S.C. §203(m) (2018)
171 See MONEYTIPS, Should You Use Your Credit Card to Tip?, CBS NEWS (Jun. 16,
2015, 1:34 PM), https://www.cbsnews.com/news/should-you-use-your-credit-card-to-tip/
[https://perma.cc/64EZ-ELUH] (noting the time lag associated with credit card tips).
172 29 C.F.R. § 778.104 (2020) (“[FLSA] takes a single workweek as its standard and
does not permit averaging of hours”); Overtime Frequently Asked Questions, N.Y. DEP’T. OF
LAB., https://www.labor.ny.gov/legal/counsel/pdf/overtime-frequently-
asked-questions.pdf [https://perma.cc/8YCB-QBPT] (last visited Dec. 25, 2019). See
also Fernandez v. Centerplate/NBSE, 441 F.3d 1006, 1007 (D.C. Cir. 2006) (“FLSA
requires employers to pay overtime compensation for time worked in excess of forty hours
per week, but not for time worked in excess of eight hours per day”); Freixa v. Prestige
Cruise Servs., LLC, 853 F.3d 1344, 1346 (11th Cir. 2017).
173 Walton v. United Consumers Club, Inc., 786 F.2d 303, 307 (7th Cir. 1986). See also
Triple "AAA" Co. v. Wirtz, 378 F.2d 884, 887 (10th Cir. 1967) (allowing for averaging over
Electronic copy available at: https://ssrn.com/abstract=3547007

<<PAGE_BREAK>>

36 Draft[Vol. __
pay over pay periods, they would have an incentive to prolong that
period.
A much deeper problem with overtime legislation concerns the
definition of salaried employees, who are a large minority of the
working population.174 A salary is a fixed payment that does not
depend on actual hours worked.175 The FLSA permits employers to
avoid paying overtime to salaried employees.176 Because employers
might abuse this system by designating employees as salaried
employees, the FLSA sets clear criteria as to which class of workers
are exempt from overtime obligations, the “exempt” employee.177 For
example, if a worker is docked pay for working fewer hours, then the
employer can no longer claim that the worker is exempt from
overtime pay.178
The problem is that the FLSA also imposes a formal test, the
“salary basis test”: an employee cannot be considered salaried “if the
employee regularly receives each pay period on a weekly, or less
frequent basis.”179 This test links pay frequency and pay status, and
it leads to the absurd result that an employer who pays employees
frequently will also have to pay overtime, whereas an employer who
chooses infrequent pay can also avoid overtime pay.180 This outcome
directly contradicts FLSA’s purpose to protect workers from “labor
conditions [that are] detrimental to the maintenance of the minimum
standard of living necessary for [the] health, efficiency, and general
well-being of workers.”181 By tying pay frequency to legal protections,
the law deters employers from paying employees daily, lest they be
considered unsalaried.
a year); Forster v. Smartstream, Inc., No. 3:13-CV-866-J-PDB, 2016 WL 70605, at *6 (M.D.
Fla. Jan. 6, 2016); Schwind v. EW & Assocs., Inc., 371 F. Supp. 2d 560, 568 (S.D.N.Y. 2005);
Gatto v. Mortg. Specialists of Ill., Inc., 442 F. Supp. 2d 529, 542 (N.D. Ill. 2006).
174 BUREAU OF LAB. STATS., CHARACTERISTICS OF MINIMUM WAGE WORKERS 2018 (Mar.
2019), https://www.bls.gov/opub/reports/minimum-wage/2018/home.htm
[https://perma.cc/3PBD-SQYE].
175 Garrett Reid Krueger, Straight-Time Overtime and Salary Basis: Reform of the Fair
Labor Standards Act, 70 WASH. L. REV. 1097, 1103 (1995) (“Typically, salaried employees
do not ‘punch a clock,’ are not paid by the hour, and are not docked pay if they do not work
forty hours in a given week.”).
176 Fair Labor Standards Act, 29 U.S.C. § 213(a)(1) (2018).
177 Robert L. Levin, Salaried or Hourly: Do Your Exempt Employees Meet the “Salary
Test” Under the FLSA?, 11 LAB. LAW. 25, 25 (1995). When employers pay employees who
work in a “fluctuating workweek” arrangement, they need to pay only one half of the regular
hourly rate, rather than 1.5 of that rate. The hourly rate, oddly, is lower the more overtime
hours the employee clocks, a practice approved by the courts. See generally C.W. Von
Bergen, Using the Fluctuating Workweek Compensation Method to Reduce Overtime
Expenses in Public Organizations, 40 PUB. PERSONNEL MGMT. 165 (2011).
178 Brock v. The Claridge Hotel & Casino, 846 F.2d 180, 184–85 (3d Cir. 1988).
179 29 C.F.R. § 541.602 (2018).
180 To the best of my knowledge, this topic was never litigated, so it is an open question
how the courts would rule. My conversations with practitioners suggest a general belief that
courts would be willing to divorce pay frequency from the actual definition of salaried
employees, although given the plain language of the text, it is unclear how they would reach
this outcome.
181 29 U.S.C. § 202(a) (2018).
Electronic copy available at: https://ssrn.com/abstract=3547007

<<PAGE_BREAK>>

2020] Payday 37
In these various ways, legislation explains pay practices. In the
public sector, the explanation is simple fiat; but why not pay public
sector employees more often? The low return on treasury bonds shows
that the government can easily borrow at low rates.182 Private
employers may conform to public sector standards and are, in any
case, incentivized to delay payments because of well-intentioned but
poorly-drafted legislation. And while fiat and bad legislative design
may explain the payday, it does not justify it.
G. Check Cutting Costs
Paying workers is expensive. This section explores the various
costs involved in paying workers, and highlights how these costs can
be an obstacle to regular pay. Schematically, paying involves four
different stages: (1) determining pay due; (2) calculating withholding
for compliance purposes; (3) transferring payments; and (4) receiving
payments. The first two stages involve costs that are affected by
payroll technology; the latter two involve costs due to money
technology.
The first cost is that of the determination of payment due. This
is mostly a technological problem, and it has largely been resolved.
Determining due pay for salaried employees is almost trivial in
modern times.183 For other types of employees, the determination
may be somewhat more complex—but not by a large margin. The
employee time clock was patented in 1891,184 and with the broad
integration of computers and mobile devices in the modern workplace,
most time-tracking today is automated.185 True, employers want to
verify every reported work hour—a task that does not scale up well,
however, this difficulty is inherent to the employment relationship for
reasons other than pay frequency, and, as we shall see, this concern
can be effectively resolved with careful design of pay obligations.186
A seemingly more serious cost is compliance. Even after
assessing the employees’ wages, the employer must still verify that it
is properly assessing compulsory and voluntary deductions, that
levies are effectively put aside, that child support and alimony
payments are correctly computed, and that any wage garnishments
182 Daily Treasury Yield Curve Rates, DEP’T OF TREASURY,
https://www.treasury.gov/resource-center/data-chart-center/interest-
rates/pages/textview.aspx?data=yield [https://perma.cc/RT6G-6CGB] (last visited Feb. 13,
2020).
183 The biweekly pay is simply given by dividing the annual salary by 24 for a semi-
monthly paid employee. Withholdings and deductions can complicate the calculus, but with
payroll software, these issues are generally easily resolved in practice.
184 U.S. Patent No. 452,894 (issued May 26, 1891).
185 See https://www.tsheets.com/resources/time-tracking-survey (finding in a survey of
954 employees that only 25% track time with paper or a timesheet).
Roughly 2.9% of US employees are reportedly working remotely at least half of the time,
requiring alternative arrangements (such as salary or software tracking). Brie Weiler
Reynolds, The State of the Remote Job Marketplace, FLEXJOBS (Mar. 27, 2018),
https://www.flexjobs.com/blog/post/state-of-the-remote-job-marketplace/
[https://perma.cc/GNQ8-M55S].
186 See infra Section IV.A.
Electronic copy available at: https://ssrn.com/abstract=3547007

<<PAGE_BREAK>>

38 Draft[Vol. __
are deducted. Then, the employer must verify compliance with all
minimum wage and overtime legislation. Finally, the employer must
keep a record of hours worked and communicate this information to
the employee. These challenges may have been enormous in the past,
as properly computing withholding manually is a long, arduous, and
error-prone process. But today, none of these challenges are especially
onerous with the advent of the modern computer and payroll
software. The per payroll cost of paying an employee in medium-sized
companies appears to be between $1 and $5, although companies
differ significantly in their pricing methodologies.187 Completing a
payroll “run” may involve a real cost, but this cost is no longer
prohibitive.188
Despite the availability of software, employers still want to verify
the accuracy of all payments, because failure to comply can result in
criminal, civil, and ethical sanctions. The FLSA, for example, imposes
criminal fines and even imprisonment for failures to comply.189 This
liability also extends to corporate officers.190 The consequences can
also be disciplinary for some professionals. One lawyer was put on
probation for eighteen months for failure to file and pay various
federal, state, and local payroll tax obligations on a timely basis.191
The FLSA also includes a civil sanction: failure to pay wages can
result in liquidated damages equal to all unpaid wages192 and
attorney fees.193 Given the costs of mistakes, the employer will want
to include safeguards—such as manual revision of at least some of the
paystubs. Under the current system, these safeguards should be
187 See Real-world Payroll Services Prices From BuyerZone Buyers, BUYERZONE,
https://www.buyerzone.com/hr-personnel/payroll-services/ar-prices-payroll-large/
[https://perma.cc/HX32-TFCW] (last visited Dec. 25, 2019); See also Easy,
modern payroll starting at just $45, $25/month, GUSTO, https://gusto.com/product/pricing
[https://perma.cc/CX2L-8XWL] (last visited Dec. 25, 2019); Our Prices,
CORPORATE PAYROLL SERVICES, https://www.corpay.com/pricing/
[https://perma.cc/7EKG-C8N3]
(last visited Dec. 25, 2019); Online Payroll Service Prices, PRICE IT THERE,
https://priceithere.com/online-payroll-cost/ [https://perma.cc/994N-6HPD]
(last visited Dec. 25, 2019).
188 As I discuss later, the compliance cost would remain largely the same under my
proposal, because the verification process will only take place once every two weeks. See
infra Part I.A.
189 29 U.S.C. § 216(a) (2018) (setting a fine of up to $10,000 and imprisonment of up to
six months for willful violations).
190 Erwin v. United States, 591 F.3d 313, 320 (4th Cir. 2010); Hina Shah, Broadening
Low-Wage Workers’ Access to Justice: Guaranteeing Unpaid Wages in Targeted Industries,
28 HOFSTRA LAB. & EMPL. L. J. 9, 30 (2010).
191 In re Finestrauss, 32 A.3d 978, 979 (Del. 2011).
192 See 29 U.S.C. § 216(b) (2018). The liquidated damages can be reduced if the
employer shows good-faith and reasonable grounds for underpayment, 29 U.S.C. § 260
(2018). The standard norm, however, is double damages.See Kinney v. D.C., 994 F.2d 6, 12
(D.C. Cir. 1993) (citing Walton v. United Consumers Club, Inc., 786 F.2d 303, 310 (7th Cir.
1986)).
193 29 U.S.C. § 216(b) (2018) (“The court in such action shall, in addition to any
judgment awarded to the plaintiff or plaintiffs, allow a reasonable attorney’s fee to be paid by
the defendant, and costs of the action.”).
Electronic copy available at: https://ssrn.com/abstract=3547007

<<PAGE_BREAK>>

2020] Payday 39
employed at every pay cycle, and because they do not scale well,
increasing the pay frequency can drastically increase costs.
Illustrative was the momentary expression of horror when, in an
interview with a payroll director for a large organization, I mentioned
the possibility of moving to a daily payday.194
Overall, payroll technology is sufficiently mature to resolve the
basic aspect of calculating pay; however, an outstanding issue is the
problem of verification and compliance. These processes do not scale
well and become increasingly costly with higher-frequency pay.
Moving to money technology, for most employers and employees,
transferring money is a largely invisible process. Roughly 87% of
households are paid using direct deposit,195 a money transfer
technology that involves the Automated Clearing House (ACH)
system. Normally, there are no charges on the employee side; but
employers are charged roughly $0.26–$0.50 per transfer.196
Employers also incur an additional administrative cost (in terms of
personnel and IT) of $0.11–$0.25, suggesting a total cost of $0.37–
$0.75 per single employee payment for one pay period.197 These costs
are not substantial by themselves, although moving from biweekly to
daily payments can increase costs by $5.18–$10.5 per two weeks.198
Even for a minimum wage employee, this is roughly the cost of
another hour of work—a real, but not prohibitive, cost.
The problem is the “Other America.”199 In 2017, 14.1 million
adults were unbanked, meaning they did not have either a checking
or a savings account.200 In addition, 48.9 million were “underbanked,”
i.e., they were using non-banks for financial products (such as check
cashing, payday lending, or money orders) despite having a bank
account.201 As a consequence, 27.6% of households receive some of
their payments in a paper check or a money order, and 7.9% receive
payments in cash.202 The under- and unbanked are also poorer on
average.203
194 Interview with anonymous payroll director, (Nov. 19, 2019) (details on file with
author).
195 FED. DEPOSIT INS. CORP., FDIC NATIONAL SURVEY OF UNBANKED AND
UNDERBANKED HOUSEHOLDS 12 (2017),
https://www.fdic.gov/householdsurvey/2017/2017report.pdf [https://perma.cc/239V-XYEF].
196 Payment Cost Benchmarking Survey, ASS’N FOR FIN. PROF’LS. 8-9 (2015),
https://www.bottomline.com/application/files/faster-cost-effective-afp-payments-cost-
benchmark-survey-gen-us-srr-1510.pdf [https://perma.cc/RXY7-26EF].
197 id.
198 The range of total costs per-transfer is $0.37-0.75. Moving from biweekly to daily
pay multiplies the number of transactions by (at most) 14, giving the estimate above.
In addition, ACH only recently (in 2016) started moving to a same-day process, a
transition that is still on going.
199 MICHAEL HARRINGTON, THE OTHER AMERICA (1962) (documenting the spread of
poverty in the U.S.).
200 FDIC National Survey of Unbanked and Underbanked Households, supra note 195,
at 1.
201 Id.
202 Id. at 12. Note that the percentages do not add up to 100% as households may be paid
in more than one method.
203 See https://www.fdic.gov/householdsurvey/2012_unbankedreport.pdf at 18.
Electronic copy available at: https://ssrn.com/abstract=3547007

<<PAGE_BREAK>>

40 Draft[Vol. __
Employees not paid via direct deposit are mostly paid by check or
money orders—two dated, lengthy, unreliable, and expensive money
technologies. For the employer, the simple cost of writing a check is
estimated at $4 per check.204 Checks are also physical objects, which
add friction and costs related to security and delivery. Even the
delivery of checks is unreliable; one employee described her
experience: “the checks . . . were delivered by oft-delayed trucks that,
living paycheck-to-paycheck, sometimes left her family in dire
financial straits.”205
Checks must be cashed somehow, and cash checking services
flourish around the nation.206 These services offer immediate money
for checks, but because checks are such a slow and unreliable
technology, these businesses assume a considerable risk for their
services.207 A check can be easily forged and, even if authentic, can
still bounce. Cash checking services provide a real service, but they
charge high rates. One study reports a range of 1.5%–3.3% of the
check’s face value.208 This means that, on average, there is a cost of
$40 per paycheck for typical households with full-time workers to even
access their earned money.209 If used regularly over one’s career, the
household will spend $41,600 in fees—money that could otherwise be
used to build wealth for retirement.210 Indeed, some of these fees are
avoidable, by cashing the check at the bank of issue (i.e., the
employer’s bank), but this involves the time and cost of travel to the
bank.211 Getting to the location, safely carrying the check, and
204 Vipal Monga, U.S. Companies Cling to Writing Paper Checks, Wall
Street J. (Mar. 10, 2014). Another estimate suggests a per-check cost of $1.22,
see ADAM J. LEVITIN, CONSUMER FINANCE LAW: MARKETS AND REGULATION,
at 348 (2018).
205 Michael M. Oswalt & César F. Rosado Marzán, Organizing the State: The "New
Labor Law" Seen from the Bottom-Up, 39 BERKELEY J. EMP. & LAB. L. 415, 453 (2018). In
1908, a similar report emerged: the “pay car” containing payments was delayed, suspending
all of the employees monthly pay. Missouri Pacific Postpones Payday, Gives No Reason,
ST. LOUIS. POST, Feb. 17, 1908.
206 Check cashing is not unique to the unbanked. See Michael S. Barr, Banking the Poor,
21 YALE J. ON REG. 121, 144 (2004).
207 Beware of Fake Checks, FED. DEPOSIT INS. CORP. CONSUMER NEWS (Aug., 26, 2019),
https://www.fdic.gov/consumers/consumer/news/august2019.pdf [https://perma.cc/EA3N-
ZUGE].
Anecdotally, online users report their experience running a check cashing service as
“Check Cashing Business is a Big NO. . . . it will ruin you.” V. Sheth, Answer to “Does check
cashing business bring good profit?, QUORA (Jun. 20, 2019), https://www.quora.com/Does-
check-cashing-business-bring-good-profit [https://perma.cc/H6E9-T8EJ].
208 Barr, supra note 206, at 146–47. See also Robin A. Prager, Determinants of the
Locations of Alternative Financial Service Providers, 45 REV. INDUS. ORG. 21, 24 (2014).
209 Matt Fellowes & Mia Mabanta, Banking on Wealth: America’s New Retail Banking
Infrastructure and its Wealth-Building Potential, BROOKINGS 3 (2008),
https://www.brookings.edu/wp-content/uploads/2016/06/01_banking_fellowes.pdf.
[https://perma.cc/49G6-F7JC].
210 Id. at 14.
211 Barr, supra note 206, at 145 (“[A] large portion of the unbanked manage to avoid
paying high costs for at least some of their financial services.”).
Electronic copy available at: https://ssrn.com/abstract=3547007

<<PAGE_BREAK>>

2020] Payday 41
waiting in line are non-trivial costs; especially since paydays tend to
be synchronized, leading to congestion.212
Finally, the use of cash presents its own difficulties. Roughly 8%
of households are paid in cash.213 Paying with cash requires carrying
large amounts, which involves administrative overhead. More
importantly, the perfect liquidity of cash invites theft risk, both for
the employer and for the employee. Carrying large amounts of cash
exposes one to risks, and there is little wonder why most people prefer
to carry small amounts of cash on their person.
In conclusion, while money technology has improved
dramatically over the last century, many employees are still being
paid using dated technologies—checks and cash. These dated
payment methods impose significant costs, making daily payment
prohibitively expensive. While digital money exists and offers
important efficiencies, it still has to overcome the under-banking gap
and other issues of implementation.
III. ABOLISHING THE PAYDAY
The payday is a common feature of employment contracts. The
payday implicates a credit transaction (K ), but this credit
2
transaction is not motivated by the logic of credit. Instead, the
investigation of this practice suggests that it owes a large part of its
vitality to outdated legislation and money technology. Even the most
sympathetic justifications of the payday—those which are rooted in
employee psychology—still leave the current arrangements in a poor
light.
The goal of this Part is to explain why abolishing the payday
and moving to daily streams of payment is critical, valuable, and more
effective than some intermediate solutions that are currently being
proposed. If abolition initially strikes one as radical, recall that in the
19th century, weekly payment systems were already in place214—
during a time in which one had to do all calculations by hand and
transport a chest with coins between work locations.215 Daily
payments are well within reach today.
A. The Stakes of Abolishing the Payday
Suspending for a moment the how, let us consider the
implications of abolishing the payday and moving to daily streams of
payment.
212 The concern with congestion is a longstanding one. See e.g., Congested Payday,
WASH. POST (May 13, 1941) (“Residents of Washington . . . always know when payday
arrives. For twice each month they are subjected to major and minor inconveniences”). At
one point, President Roosevelt ordered the spreading of payday to 20 days for this reason.
Federal Paydays To Be Increased: WASHINGTON POST (Oct. 17, 1942) (On file).
213 Beware of Fake Checks, supra note 207.
214 See supra note 65.
215 See Redmount et al, supra note 69, at 1096.. xx
Electronic copy available at: https://ssrn.com/abstract=3547007

<<PAGE_BREAK>>

42 Draft[Vol. __
In the first instance, the current biweekly payday harms
workers. True, paying employees more frequently will not make
households wealthier; but it will make them more capable of meeting
life challenges as they come. Over the last few years, interest rates
were at a historic low; but the stakes of abolishing payday will only
increase if interest rates revert to their historical rates.216 Lack of
liquidity is associated with a variety of negative health outcomes.217
Abolishing the payday would help ease some of this pressure. The
stress of thinking about how to pay for groceries the next day,
whether one should skip the next dentist appointment, or the
arguments with one’s partner can be alleviated with greater control
over one’s finances. Indeed, the records from the nineteenth-century
move to weekly payments suggest a marked increase in reported
employee well-being.218
Greater liquidity also allows one to seize opportunities as they
present themselves. Some of these opportunities are humdrum,
although consequential for one’s financial health, like buying
discounted items in bulk. Other opportunities can have even larger
effects, like buying a ticket to fly out to an interview with another
employer. It is perhaps natural for a well-off reader to discount the
difficulty insufficient liquidity imposes on life choices, but even the
cost of dry cleaning or a haircut can prevent some from attending a
job interview.219
One potential negative aspect of abolishing payday is that it will
restrict credit access to businesses. Firms today borrow at cheap rates
through the withholding of pay and abolishing the payday might limit
their access to credit, especially if the firm is a small business. This
issue should not be overstated. Worker wages should not be an open
line of credit. When the firm taps into this source of credit, it exposes
workers to the risk of its own bankruptcy and it imposes on them the
costs associated with low liquidity. While Walmart enjoys the float
from withholding pay, the costs endured by its employees far exceed
this benefit.
Small businesses are often under more severe credit pressures,
and for many of them, access to credit is even more essential.220 This
consideration, however, does not mean that workers wages should be
the solution. In fact, it may suggest more caution with exposing
workers’ wages to business risks. If the small business is over-
216 MACROTRENDS, supra note 24.
217 See Lorraine T. Dean & Lauren Hersch Nicholas, Using Credit Scores to Understand
Predictors and Consequences of Disease, 108 Am. J. Public Health 1503, 1504 (2018).
218 Redmount et al., supra note 69, at 1083.
219 A Good Impression Begins With the Way you Dress, JAILS TO JOBS
https://jailstojobs.org/free-interview-clothes/ [https://perma.cc/62LC-8C8F]
(last visited Dec. 24, 2019); Amelia Ward, Barber Gives Homeless Free Haircuts and
Trains Them to Work In His Shop, LAD BIBLE (Dec. 21, 2019),
https://www.ladbible.com/news/daily-ladness-barber-gives-homeless-people-free-haircuts-
and-trains-them-up-20191220 [https://perma.cc/5PR4-W82D].
220 Claire Kramer Mills et al., Growing Pains: Examining Small Business Access to
Affordable Credit in Low-Income Areas, 2019 CONSUMER & COMMUNITY CONTEXT 22, 23-24
(2019)
Electronic copy available at: https://ssrn.com/abstract=3547007

<<PAGE_BREAK>>

2020] Payday 43
extended, using unpaid wages to finance operations jeopardizes
workers. As a society, we face a basic choice as to who should be the
source of liquidity to small businesses—should it be workers with
their salaries or sophisticated credit markets, which are capable of
evaluating, monitoring, and pricing risk. Keeping the payday to
finance business operations is a policy choice that is available to us—
but it appears a bad one: workers should not be in the business of
lending money to their employers.
Another related negative consequence of abolishing the payday
is the elimination of the wage premium associated with it. As
discussed, one might expect a wage premium for longer paydays for
two reasons. First, the employer receives the benefit of holding (and
using) the money until the payday, and, second, the employer saves
the costs of making more regular payments. Now, for those who think
that employees do not receive a meaningful wage premium today for
K loans, this consequence is largely irrelevant. Even for those who
2
believe that there may be a wage effect, there is some reason to doubt
its magnitude, if not its existence. The single study that evaluated the
effect of moving from the monthly payday to the weekly payday—
while admittedly dated and incomplete—found that this move
actually led to an increase in the effective pay and well-being of
employees.221 This is, in part, because workers chose to work more
when pay was more frequent (what economists call a ‘income
effect’).222 This finding should not be overstated because of various
methodological and data issues, but it at least suggests that the
effects of abolishing the payday may be more nuanced than what
appears at first sight.
Whatever the case might be about the wage premium, daily pay
would also have strong positive effects. Most directly, more frequent
pay would remove workers from the unnatural position of lending
money to their employers. The employer’s benefit from retaining this
money is more than offset by the worker’s need for the money. In a
very early decision, the Supreme Court clearly recognized this point:
“[t]here [is] certainly . . . advantage to those who work for a living of
a ready purchasing power for their needs over the use of credit.”223
The lack of purchasing power manifests itself in many ways—most
painfully, in the cost of short-credit solutions. The average American
has $5,673 in revolving credit card debt,224 on which they pay 16%
APR ($580 per year, roughly).225 Credit cards appear cheap relative
to the burgeoning installment loans industry, which charges an
221 Redmount et al., supra note 69, at 1083.
222 Jim Chappelow, Income Effect, INVESTOPEDIA (May, 28, 2020).
223 Erie R.R. Co. v. Williams, 233 U.S. 685, 704 (1914).
224 Jeff Herman, Average Credit Card Debt Statistics, CREDITCARDS.COM (Jul. 16, 2019),
https://www.creditcards.com/credit-card-news/credit-card-debt-statistics-1276.php
[https://perma.cc/9VFQ-X97P].
225 See Dilworth, supra note 51. This is not an exact calculation, as the households do
not carry the same balance throughout the year, and it does not account for monthly
compounding.
Electronic copy available at: https://ssrn.com/abstract=3547007

<<PAGE_BREAK>>

44 Draft[Vol. __
effective APR of 40%–90%.226 The installment loans industry serves
10 million Americans annually and earns over $10 billion in finance
charges.227 And this industry is still cheaper than the payday lending
industry, which charges a typical 400% APR.228
I do not mean to argue that abolishing the payday would abolish
either the payday industry or the short-term credit industry.229
People borrow for many reasons—smoothing consumption, pursuing
opportunities, bracing shocks, etc.230 The demand for short-term
credit solutions is based on real need, and the lack of liquidity due to
the payday is but one of them. Still, there is little doubt that short-
term credit solutions are very expensive and can often lead to
inescapable debt spirals. Thus, achieving even a meaningful
reduction in the demand for these services is a worthy social goal. To
get a sense of the potential impact, consider the results of a study that
examined the effects of an unexpected $600 tax rebate on payday
borrowing. Using a variation in the timing of the rebate, the
researchers found a large and marked effect on the demand for
payday loans. In their analysis, payday borrowers were roughly 16%
less likely to borrow from payday lenders within two pay cycles of
receipt of the rebate.231 This effect, unfortunately, disappeared after
two pay cycles.232
Another important potential effect of abolishing the payday is
that it may also lead to the abolition of the wasteful monthly utility
payment practice. As noted, households consume daily but pay
monthly. In consuming now and paying later, households are
essentially borrowing from utility providers. And of course, this credit
transaction comes at a cost; utility providers charge for offering credit
services. This credit transaction is artificial; it may be an artifact of
the payday itself. With greater liquidity, perhaps service providers
can be made to charge households on a daily basis as well. By moving
to daily payments, the cost of utilities can decline by what is now the
cost of the interest payments that are implicit in the monthly bill. If
the technology is ripe—and to a large extent it already is—then the
costs of these additional transactions would be trivial. This means
that removing this unnecessary credit transaction may result in
dramatic savings—think about a household that borrows a few
hundred dollars every month and its annual cost of doing so,
226 State Laws Put Installment Loan Borrowers at Risk, PEW 3 (Oct. 17, 2018),
https://www.pewtrusts.org/en/research-and-analysis/reports/2018/10/17/state-laws-put-
installment-loan-borrowers-at-risk [https://perma.cc/7AEP-NXZD].
227 Id. at 2.
228 See CFPB, supra note 52.
229 Cf. Hawkins, supra note 148, at 7(“[E]arned wage advances have the potential to end
payday lending”).
230 See Robert B. Nielsen et al., Consumer Finances of Low-Income Families, in
HANDBOOK OF CONSUMER FINANCE RESEARCH 167, 169 (2016) (“Credit can help low-income
consumers smooth consumption, invest in human capital, and build assets, but the high cost
of credit can crowd out current consumption and saving”).
231 Marianne Bertrand & Adair Morse, What Do High-Interest Borrowers Do with Their
Tax Rebate?, 99 AMERICAN ECON. REV. 418, 422 (2009).
232 Id.
Electronic copy available at: https://ssrn.com/abstract=3547007

<<PAGE_BREAK>>

2020] Payday 45
multiplied by almost all households.233 How much of the savings will
actually be passed on to households is an important question, and
while there is no reason to assume that all of the savings will be
passed to households, there is also no general reason to assume that
none of the savings will pass. It is enough for now to note that even if
some of the savings will pass, the effect of abolishing the payday on
households can be significant.
Overall, paying workers more frequently would have an
important positive effect on their well-being and reduce the demand
for short-term credit solutions.
B. Alternatives to Abolition
At this point, I hope, the question is no longer whether the
payday is worth preserving, but rather what the viable alternatives
are. As I propose the abolition of the payday in favor of daily streams
of payment, I should explain why other more “moderate” solutions are
ill-advised.
What is perhaps the leading alternative to dealing with the
problem of the payday is the use of wage-advances. Today, there is a
flurry of activity in this space by Fintech companies that compete over
a variety of wage advance solutions.234 These products go by different
names—wages on demand, earned income access, advance wage
payment—but they all share a basic structure: the employee is paid
ahead of the payday as part of the anticipated pay.235 The advance is
paid by either the employer or a third party, which specializes in
making advances against the employee’s wages. In a strict sense,
these are not really advances, as they mostly apply to earned wages.
Hence, the employee is not paid early but is instead lending less. But
whatever the terminology, the effect is the same—bridging the gap
between earning one’s pay and the payday. Thus, the concentration
of activity in this sector is a good indication of the size of the problem
of K and vividly demonstrates K ’s inefficiency.
2 2
Such advances can offer a response to short-term liquidity
shocks, such as a car that suddenly needs a costly repair or an
emergency hospital visit. Nonetheless, advances are a flawed,
incomplete, and potentially harmful solution to the underlying
problem—justified only if deeper solutions are unavailable but
otherwise a band-aid for a lost limb.
The central objection is cost. Paying employees in advance
involves cost on the side of either the employer or the third-party
company. Someone has to hold sufficient capital, handle requests, and
233 As noted, millions of households default on utility payments and the costs of default
are spread, at least in part, among all other consumers. See supra note 102.
234 See Hawkins, supra note 148, at 5–6; Nakita Q. Cuttino, The Rise of “FringeTech”:
Regulatory Risks in Early Wage Access, 115 NW. U. L. REV. (forthcoming, 2020).
235 Stephen T. Middlebrook, What Business Lawyers Need to Know About Wage Advance
Products, A.B.A. 4 (Sep. 5, 2019), https://businesslawtoday.org/2019/09/business-lawyers-
need-know-wage-advance-products/ [https://perma.cc/JJQ9-EWTT].
Electronic copy available at: https://ssrn.com/abstract=3547007

<<PAGE_BREAK>>

46 Draft[Vol. __
create mechanisms to ensure proper deductions come payday. Few
would be willing to bear this cost for free.
While Fintech and terms such as “wage on-demand” sound novel,
the history of employer advances is longstanding, and it is not
wholesome. The first wage payment laws emerged as a response to
concerns with “employers that took improper deductions from worker
wages or forced them to borrow from employers.”236 The effect of these
issues is reflected in the memorable “Sixteen Tons,” written by Merle
Travis in 1946 and modeled after his father’s experiences working in
the coal mines:237
You load sixteen tons, what do you get?
Another day older and deeper in debt
Saint Peter don't you call me 'cause I can't go
I owe my soul to the company store238
To combat abuse, states passed legislation that regularized
paydays and limited employer’s ability to deduct fees and interest
from employees’ wages.239 It is not without irony, notes Professor
Willborn, that “the payday loan industry had arisen to do almost
exactly what employers were doing prior to the state wage- payment
laws.”240
Today, there is still great regulatory uncertainty regarding
advances.241 While some view these as services that provide the
consumer with much-needed credit, others see them as opportunities
to profit at employees’ expense.242 The relevant framework, even at
the Federal level, is complex—involving the interpretation of the
Truth in Lending Act (TILA), the Equal Credit Opportunity Act
(ECOA), the Fair Credit Reporting Act (FCRA), the Fair Debt
Collection Practices Act (FDCPA), and the Consumer Financial
Protection Act (CFPA).243 Article 9 of the Uniform Commercial Code
(UCC) also adds complexity, as it views the sale of accounts (i.e.,
future payments) as a secured transaction, thus subjecting it to its
burdensome framework.244 Some state laws also require licenses to
lend, limit wage assignments, and impose usury limits.245 This results
236 Willborn, supra note 81, at 40.
237 Sixteen Tons: The Story Behind the Legend, TENNESSEE ERNIE FORD,
https://www.ernieford.com/sixteen-tons [https://perma.cc/9HSZ-B3GF] (last visited Feb. 13,
2020). The song resonates other problems of the time – payment in script and company credit
and wage theft.
238 MERLE TRAVIS, SIXTEEN TONS (Capitol Records, 1947).
239 Willborn, supra note 81, at 40.
240 Id, at 41.
241 See Cuttino, supra note 234, 39–45.
242 For the debate, see Hawkins, supra note 148,, at 36–40.
243 Adam Levitin, What Is “Credit”? AfterPay, Earnin’, and ISAs, CREDIT SLIP (Jul. 16,
2019, 1:31 PM), https://www.creditslips.org/creditslips/2019/07/what-is-credit-afterpay-
earnin-and-isas.html [https://perma.cc/CG8U-B5T7] (arguing that, inasmuch as no finance
charges are levied, some advance products are exempt from TILA but subject to other forms
of credit legislation).
244 U.C.C. § 9-109(a)(3) (AM. LAW INST. & UNIF. LAW COMM’N 1977).
245 Hawkins, supra note 148,at 15–24.
Electronic copy available at: https://ssrn.com/abstract=3547007

<<PAGE_BREAK>>

2020] Payday 47
in a very complex regulatory landscape, and employers explain their
reluctance to offer advances in this complexity.246
Third-party advance companies are for-profit companies, and
they turn a profit by charging fees, commissions, and, oddly, tips. One
such product is called Earnin’, where users are encouraged to leave a
tip of $0-14 per $100 advanced; failure to leave a tip is believed to
restrict the user’s access to cash.247 A $14 charge per $100 is very close
to the cost of payday lending ($15). Another study of Fintech
companies finds that the average APR ranges from 20% to 145%.248
It is damning with faint praise to say that these products, “although
[expensive] in absolute terms, appear[] clearly superior to [short-term
loan] alternatives.”249
Some of the costs are less visible. Professor Jim Hawkins recently
reviewed the contracts used by market players. He found that despite
Fintech companies' self-attestation to being “concerned with their
social impact” and notwithstanding the intense regulatory scrutiny,
their contracts are “surprisingly unfriendly” to the consumer.250
Arbitration, disclaimers of warranties, unilateral contract
amendments, and high fees are some of the more common issues.251
It is highly likely that, even if permitted to operate, purveyors of
advances will be held under strict regulation.252
Reforming laws to facilitate advances would result in a
complicated and costly patchwork of legislation. It is inevitable that
some advance companies will go the way of many lenders in the past:
resorting to abusive terms, one-sided “mistakes,” and excessive rates.
The issue is not so much that companies seek to profit; it is that the
problem they seek to solve is an artifact of badly-designed legislation
and dated money technology. Treating this problem directly can
resolve the liquidity problem directly without requiring the
development of a newly-regulated industry. Although the focus
should be on eradicating the payday entirely, advance payments are
a step in the right direction. They highlight, quite clearly, the
unreasonable burden K imposes on workers. They also develop
2
technologies and solutions for regularizing payments. And, to the
246 Id. at 8.
247 Kevin Dugan, Cash-advance App Earnin Gets Subpoenaed by NY Regulator, N.Y.
POST (Mar. 28, 2019), https://nypost.com/2019/03/28/cash-advance-app-earnin-gets-
subpoenaed-by-ny-regulator-source/ [https://perma.cc/R6MR-N8MJ] (“Earnin encouraged
users to leave a tip of anywhere between zero and $14 on a $100 weekly loan. Users who
don’t leave a tip appear to have their credit restricted. Meanwhile, a $14 tip would equate to
a 730- percent APR—nearly thirty times higher than New York’s 25 percent cap.”). In
evaluating the costs, one should consider the regulatory uncertainty; if it would ever be
resolved, one might expect greater competition in this space.
248 Todd H. Baker, FinTech Alternatives to Short-Term Small-Dollar Credit: Helping
Low-Income Working Families Escape the High-Cost Lending Trap, HARV. KENNEDY SCH.
46 (2017), https://www.hks.harvard.edu/sites/default/files/centers/mrcbg/files/75_final.pdf
[https://perma.cc/Z8SF-FEDY].
249 Id.
250 Hawkins, supra note 148,at 23–24.
251 Id.
252 Id. at 43–48 (proposing regulation).
Electronic copy available at: https://ssrn.com/abstract=3547007

<<PAGE_BREAK>>

48 Draft[Vol. __
extent the solutions provided here would take time and political will
to implement, wage advances can serve as an interim solution.
IV. A WORLD WITHOUT THE PAYDAY
The abolition of the payday requires steps that are far more
conservative than the goal might seem to imply. Indeed, while the
problems caused by the payday are severe, the solutions are fairly
mild. This suggests a low-hanging policy fruit: large effects with small
changes—ones that do not risk complex, unanticipated systemic
effects. With sufficient goodwill, this policy can be implemented in a
very short time span, dramatically improving the welfare of millions
of Americans. In this Part I will present a workable alternative to
payday and then move to discuss several complementary ways to
implement it. Each method has somewhat different benefits and
costs, and much can be achieved even if only some of these methods
are implemented.
Let us first reflect on the two most important barriers to regular
pay: compliance costs and money technology for the underbanked.
Both of these issues create a scale problem: while payroll software can
fairly accurately estimate pay, the costs of inadvertent compliance
errors are high, thus requiring human supervision and authorization
for each payment. Whereas ACH money transfers provide a fairly
cheap solution, even with daily payments, it is inapplicable with
respect to the unbanked and the underbanked who must rely on
inefficient alternative money instruments, such as checks.
In considerations of these issues, I propose the following.253 At
the end of each day, employers will be required to pay employees at
least 93% of a good-faith estimate of their earned income.254 The
payday will be replaced by an “accounting day,” or a true-up, once
every two weeks when the employer must complete a final calculation
of the employee’s full earned income for the period. After making this
calculation, including all adjustments for unclaimed deductions,
bonuses, commissions, etc. , the employer will adjust the daily pay to
reflect outstanding amounts. If no adjustments are necessary, the
employer will pay the employee the daily 7% shortfall, which would
come to an extra day’s worth of pay, once every two weeks. As long
as the employer makes a good faith estimate of the daily pay, the
employer will not be held liable for regulatory compliance issues for
daily pay—such liability will only follow if, as is today, the employer
fails to pay in full on accounting day.255
253 The mode of reform can be legislative, but it is worth noting that the Restatement of
Employment Law also recognizes the possibility of changes to employment law through the
common law. See RESTATEMENT OF EMP’T LAW § 3.01 (AM. LAW INST. 2015) (“wage-
payment laws . . . do not generally preclude common-law development because they are
based on contract principles found in the common law”).
254 The choice of 93% is meant to create enough reserve to capture a full day’s wage. So
if the employee works 10 days in a 14 days period, and earns $1923, the employee’s daily pay
will be $137.6, and the biweekly adjustment will pay the employee an additional $134.6.
255 Given the predictability of pay for most professions, and the low profit from
underpaying every day, this duty is not expected to generate considerable friction or litigation.
Electronic copy available at: https://ssrn.com/abstract=3547007

<<PAGE_BREAK>>

2020] Payday 49
Under this proposal, employers will not pay their workers their
full daily pay but only an estimate of part of it. The reason why
employers will not be required to pay in full is grounded in a few
considerations. It is very difficult to know the total amounts due to
employees, given all the possible deductions, taxes, and levies. Hence,
some estimation may be unavoidable, and this means that there will
often be errors, either of over- or under-payment. If employers are not
afforded some margin of error, that would require them to carefully
review each payment—and the costs of doing so daily may be
prohibitive.256 Another important consideration is that it is arguably
harder for the employer to collect money owed from the employee than
vice versa, given the greater mobility of the employee and lack of
collateral. Leaving 7% of the income to the last day of the fourteen-
day period is calculated to create a buffer that, on the one hand,
allows the employee to keep most of the daily pay and, on the other
hand, accounts for potential errors in daily estimates. Subject to
further experimentation, this margin should be sufficient to allow
employers to make offsets against mistakes in overpaying
employees.257 It also means that the employee is receiving on the last
day of the biweekly period an extra day’s pay (which is deducted from
their on-going payments). This feature may appeal to those who think
employer-based budgeting is helpful.
The design of biweekly pay is meant to address two concerns:
wage monitoring and compliance-cost control. Wage theft is an
important concern, and monitoring daily payments may be harder
than monitoring the transfers of larger lump sums.258 Of course, once
the employee grows accustomed to daily pay, he or she could detect
deviations by comparing actual payments to normal payments. Still,
with possible daily fluctuations, deviations are harder to detect. To
deal with this problem, on accounting day, the employer would
produce a pay stub that accounts for all of the biweekly payments.
The employee can then compare this amount to amounts paid, just as
easily as can be done today.259 The second function is controlling
compliance costs. As noted, a large part of the cost of making
payments is due to the need to verify compliance with a variety of
different laws. Because the final accounting is only done once every
two weeks, the employer would not need to engage in more
compliance than they do today, besides the fairly trivial calculation of
93% of the expected daily pay. Note that the employer does not bear
liability for small or unintentional deviations, making it unnecessary
to verify daily payments with the same degree of attention as the
biweekly pay.
256 See supra Part I.F (discussing costs of payroll).
257 In most industries, a much smaller buffer would be needed—and perhaps no buffer is
even needed for salaried employees with fix wages. Still, it is prudent to start with a moderate
buffer in experimenting with the implementation of this proposal.
258 On wage theft, see supra note 153 and accompanying text.
259 It may be necessary to add in the bank’s user-interface support for easy comparisons
of employer-pay per wage period. Such technology is already implemented in the apps and
websites of most banks, which allow users to filter deposits by recipient per period.
Electronic copy available at: https://ssrn.com/abstract=3547007

<<PAGE_BREAK>>

50 Draft[Vol. __
One remaining issue is the control of money-transfer costs. As
noted, this is not an issue for the majority of workers, who are banked
and can benefit from ACH transfers, but it is still a pressing and
painful issue for the under- and unbanked. The solution here is
technological and I explore in greater length the use of pay cards as a
viable solution to this problem.260 In addition to pay cards, others
have proposed non-technological alternatives, such as postal and
public banking, which can also mitigate these issues.261
An optional addition to this proposal would be to allow
employees to elect a biweekly payday. That is, the daily pay would be
presented as an option alongside biweekly pay, and employees could
elect which payment option they prefer. In terms of preserving
employee choice, this would seem superior, as those employees who
find biweekly pay more manageable would elect it. Such a choice may
be preferred by some—if the worker has no need for liquidity or finds
it difficult to budget otherwise. But for the reasons I laid out earlier,
I believe employer-side savings is a bad idea due to the counterparty
risk.262 If employees need help budgeting, bank-side savings
programs are a superior alternative. And if employees want to lend
money, they can always do so in explicit capital markets, where there
is more robust competition for their money. Hence, there is legitimate
concern that presenting this option may be a trap for the unwary and
will serve little other function.263
The final part of this proposal is that it envisions a transition
and experimentation period. Wages and payments are systemic
issues; they affect every part of the economy. The urgent need for
reform should be tempered with patience and understanding that
immediate implementation may be harmful. Instead, an
announcement of a target date for daily pays in a few years, perhaps
coupled with a transition to weekly pay, is likely the most prudent
course of action.
Implementing this reform would require some legislative
changes. The key changes are focused on changing labor laws that
impede more frequent pay; changing our money infrastructure;
improving market education; and changing the market by leadership.
Each of these interventions, summarized in the Table below, is
developed in the following subsections:
Promoting Frequent Pay
Method Type of Change Notes
260 See infra Part I.D.
261 The U.S. postal banking system was abolished in 1966. On its history and for a
proposal to reinstate it, see MEHRSA BARADARAN, HOW THE OTHER HALF BANKS, 183–226.
See also Know the Facts, CAMPAIGN FOR POSTAL BANKING,
http://www.campaignforpostalbanking.org/know-the-facts/ [https://perma.cc/GW9R-XJKB]
(last visited May 12, 2020).
262 See supra Part III.A.
263 A more compelling reason to favor biweekly pay is if the check-cutting costs are high,
the employee could be paid more by being paid less frequently. However, this is a
transitionary issue until the money and payroll technology are sufficiently advanced.
Electronic copy available at: https://ssrn.com/abstract=3547007

<<PAGE_BREAK>>

2020] Payday 51
Information Demand-side pressure by Least intrusive
making implicit interest
transparent
Leading/fiat Changing legislation to Requires
encourage and mandate political will
frequent pay but can have
cascading
effects
Fixing Removing inadvertent Requires
employment incentives to reduce pay political will
law frequency but involves
relatively few
partisan issues
Money Making payments cheaper, Long term
technology especially to the underbanked investment
with positive
externalities
A.Changing by Information
One reason why the payday persists is related to the employer’s
power in employment negotiation. Perhaps employees are
insufficiently aware of the credit nature of K . If that is the case,
2
employees would also be unaware of the true cost of K and would not
2
demand an appropriate wage premium. This imbalance of
information or sophistication tilts the balance in favor of the employer
and leads to inefficiently infrequent pay periods.
This idea—that individuals misprice credit transactions—is a
central impetus for the enactment of TILA. Congress diagnosed that
consumers engage in “uninformed use of credit” and prescribed
“meaningful disclosure of credit terms.”264 By conspicuously
disclosing credit terms using a uniform standard, TILA hopes to
improve consumer finance decisions.265
The logic of TILA can be brought to bear on payday.266 If
employers want to borrow money from employees through the
payday, they might be required to disclose the fact that payday is a
credit transaction. This can be done in the written employment
contract or in a separate disclosure. More importantly, the employer
might be required to display the (implicit) interest rate in this
transaction. Using the same language as that used when consumers
borrow—the so-called Schumer’s Box—the employer will be required
to disclose how much the employee receives in exchange for the
extension of credit. This disclosure would allow workers, subject to
264 Truth in Lending Act § 102(a), 15 U.S.C. § 1601(a) (2018).
265 See generally Hosea H. Harvey, Opening Schumer's Box: The Empirical Foundations
of Modern Consumer Finance Disclosure Law, 48 U. MICH. J.L. REFORM 59 (2014)
266 For illustration, see Figure 2 in Part II.C., which illustrates how effective pay is
comprised of both per-hour wages and frequency of payments.
Electronic copy available at: https://ssrn.com/abstract=3547007

<<PAGE_BREAK>>

52 Draft[Vol. __
the general caveats about disclosure in general,267 to better
understand the meaning of the credit element of the payday and to
“shop” effectively—that is, to understand how pay frequency
compares to the cost of borrowing from other sources and choose, if
given the option, a shorter pay period. The following figure illustrates
using a typical employee who earns $1,923 biweekly.268
Figure 3 – A “Schumer’s Box” for
Interest Rates and Interest Charges
Annual Percentage Rate 5% This the amount of interest paid to you.
(APR) for Biweekly Pay Compare to your cost of borrowing.
Biweekly Interest $4 This is the amount of interest the
Charges Paid to employer pays you for delaying your
Employee payments by two weeks
Total Wage (Biweekly) $1923 $1919 base + $4 interest
The use of disclosure also has one substantive implication in the
context of the minimum wage. If an employer borrows money, it
should identify the portion of the pay that is the wage premium. The
remaining pay is the pay-for-work portion of the wage paid to the
worker. A prolonged pay period undercuts the minimum wage
obligations of the employer; paying $7.25 hourly with a daily payday
is not the same as paying it monthly. In the latter case, the effective
pay is much lower and the employer is arguably failing to meet the
minimum wage obligations, at least in spirit. That federal legislation
does not account for this difference suggests a serious blind spot, even
among legislators and judges. Once advertised, courts could start
paying better attention to determine the proper baseline envisioned
by the FLSA—is it daily pay, weekly pay, or something else?
B.Changing by Leading
Another potential explanation for the persistence of the payday
is that government employees are paid biweekly.269 Social norms can
have a significant effect on market outcomes, and if the government
declares a certain pay period to be the standard, then this
pronouncement might have downstream effects on private employers.
If this explanation carries any explanatory power, it opens the
road to straightforward intervention. Under Title 5 of the United
States Code, all federal employees are to be paid once every two
267 See Yonathan A. Arbel and Andrew Toler, ALL-CAPS, (U. of Ala. Legal Stud. Working
Paper No. 3519630, 2020) (providing evidence of the failure of the most common mode of
conspicuous disclosures, disclosure via all-caps)
268 Wage data based on Measures of Central Tendency for Wage Data, SOC. SECURITY
ADMIN., https://www.ssa.gov/oact/cola/central.html [https://perma.cc/QM3L-FENF] (last
visited Feb. 13, 2020).
269 See supra Part I.E.
Electronic copy available at: https://ssrn.com/abstract=3547007

<<PAGE_BREAK>>

2020] Payday 53
administrative workweeks.270 This period could be changed to a daily
payment of 93% of the daily pay, subject to a biweekly accounting.
Notably, the change will not infringe on any employee’s rights. Nor
will this reform require large substantive changes. Admittedly,
changing federal legislation is not easy, and I do not mean to discount
the political and procedural challenges, especially because state law
is so diverse and will also have to be amended. However, the
importance of the goal, and its non-partisan nature, promise some
optimism.
C.Fixing Employment Law
One impediment to abolishing the payday is, ironically,
minimum wage legislation. As I have noted, the FLSA makes
employers average the minimum wage payments over the entire pay
period. This incentivizes employers to extend the pay period as much
as possible so they can benefit from averaging. If a tipped employee
is making above minimum wage in week one and below minimum
wage in week two, the employer could avoid compensating the
employee for week two by setting a biweekly payday. We also saw that
overtime legislation, at least in theory, does not have this flaw.
The faulty legislative design opens the door to a number of
potential interventions. The key to all of these options is to divorce
the averaging period from the pay period. Hence, the option with the
least effect on the status quo would permit employers to choose their
accounting periods. The accounting period would substitute today’s
payday and would be the day on which the employer will average the
employee’s pay and see if any amounts are still due to meet the
minimum wage requirement for the accounting period. The length of
the accounting period could be regulated by the same limitations set
today by state legislation on pay periods. This way, the employer
would pay the employee each day of the week and then, come
accounting day, make sure that a minimum wage was paid. If there
was any shortfall in payments, the employer would add it to that day’s
pay. Over a two-week period (or however long the accounting period
is) the employee would be paid the exact same amount the employee
would have been paid under the payday—but at more frequent
intervals. This aspect of the proposal means that neither employee
nor employer rights are harmed by this transition, yet the indignities
of the payday are avoided.
Similarly, overtime legislation should divorce pay frequency
from the definition of who is a salaried employee; there is no reason
to tie the definition to the (in)frequency of pay.271 A daily-paid
employee can equally be salaried or unsalaried, and the frequency of
pay need not reflect on this determination.
270 5 U.S.C. § 5504(a) (2018).
271 If one believes that this definition tracks any meaningful practical distinction, it is
possible to use the accounting period instead of the current pay period as the measure of the
period.
Electronic copy available at: https://ssrn.com/abstract=3547007

<<PAGE_BREAK>>

54 Draft[Vol. __
Finally, employers’ compliance with wage and hour laws should
be evaluated at the accounting period. Thus, if an employer makes a
compliance error on a specific day, this should not be a cause for a
lawsuit. The goal is to reduce ongoing compliance costs, and allowing
lawsuits to proceed based on random errors would undermine this
goal. At the same time, employers are still under a duty to make a
good-faith estimate of the 93% pay the employee deserves. This
means that employers do not have a carte-blanche right to underpay
employees daily. While one-off or even occasional mistakes should not
be grounds for a lawsuit, the employee should be allowed to sue for
systematic mistakes if they are done in the employer’s favor. Hence,
the proposal does not derogate in any way from minimum wage laws
or overtime laws under the status-quo; it neither increases pay nor
reduces it. The only effect is on pay frequency.
D.Improving Money Technology
Transferring money is more difficult than would appear at first
glance. I have already noted the various costs associated with bank
transfers, the difficulty of storing and handling cash, and the many
costs of writing and liquidating checks.
Digital money is clearly the future, and, to a growing extent, it
is the present.272 In particular, employers are now increasingly using
payroll cards.273 A payroll card is akin to a debit card and is issued by
a bank or another financial institution. The account is not attached
to any depository account, and thus, the card owner is spared the cost
and difficulty of opening a bank account. Instead, the owner charges
the card against the available balance. In 2017, roughly 3.4% of
households reported receiving income with a payroll card,274 and the
CFPB estimates a 6% growth, amounting to $44.6 billion loaded onto
these cards.275 In 2015, nineteen state governments were already
using payroll cards,276 and one survey suggests that 7 million
workers were using them in 2014.277
272 An estimated 4% of Americans hold only a prepaid card. Analysis based on data
presented in FED. RES. SYS., supra note 5, at 18–19.
273 On the other hand, a survey by the FDIC found that usage of prepaid cards by
households ranged between 7.9% (2013), 9.8% (2015), and 9.2% (2017). FED. DEPOSIT INS.
CORP., supra note 195, at 7. 9.2% of households using a prepaid card reported receiving it as
a payroll card. Id.
274 Id. at 12. One estimate by a consulting firm from 2015 estimated that payroll
payments will exceed check payments by 2017, but FDIC data still shows that checks are far
more common. See Madeline K. Aufseeser, Checkmate: U.S. Payroll Card Programs Trump
Paper Checks, AITE GROUP (2015), http://www.aitegroup.com/report/checkmate-us-payroll-
card-programs-trump-paper-checks [https://perma.cc/3FE4-ZRUB].
275 See Prepaid Accounts Under the Electronic Fund Transfer Act (Regulation E), 12
C.F.R. § 1005 (2018); see also Truth in Lending Act (Regulation Z), 12 C.F.R. § 226
(2018).
276 Rating State Gov’t Payroll Cards, NAT’L CONSUMER L. CTR. 3 (2015).
277 Gregg Gelzinis et al., How Workers Get Paid Is Changing: Consumer Protections
Need to Catch Up, CTR. FOR AM. PROGRESS,
https://www.americanprogress.org/issues/economy/reports/2019/01/17/465223/workers-get-
paid-changing-consumer-protections-need-catch/ [https://perma.cc/DN9K-NJD5].
Electronic copy available at: https://ssrn.com/abstract=3547007

<<PAGE_BREAK>>

2020] Payday 55
Payroll cards are convenient, safe, and allow the immediate use
of the funds paid. Importantly, the employee does not have to have a
bank account to use a payroll card. This means that one’s
creditworthiness and legal status are not hurdles. Moreover, the
employee need not maintain a minimum balance in his or her bank
account or pay fees. The cost of depositing funds is also reportedly
low: $0.35 in deposit costs.278 It is not surprising, then, that many low-
paid employees view payroll cards positively.279
There are also various concerns with payroll cards, many of
which will be familiar to users of bank accounts.280 One concern is the
insurance of amounts deposited on these cards—what prevents a “run
on the card”? Then there is the issue of fees: ATM-use fees, point of
sale fees (i.e., a transaction fee), overdraft fees, and even balance
inquiry fees.281 By one estimate, the average per-employee fees were
$20 per month.282 To make things worse, the fees are badly
disclosed,283 among other concerns.284
Federal legislation partially covers payroll cards. Under the
Electronic Fund Transfer Act (EFTA) and Regulation E,285 financial
institutions that offer payroll card accounts must make account
information available to consumers by specific means, but they are
exempted from providing periodic statements.286 In addition, the
financial institution must allow consumers to report errors and limit
customers’ liability for unauthorized transfers.287 In April 2019, a new
CFPB rule came into effect, expanding the fraud, error, and
unauthorized charges protections to these cards; requiring simplified
disclosure; and providing for easy access to information.288 State
legislation in this area is developing. Roughly half of the states have
some laws that regulate payroll cards.289 The regulations usually
278 NEW YORK STATE ATT’Y GEN., PINCHED BY PLASTIC: THE IMPACT OF PAYROLL CARDS
ON LOW-WAGE WORKERS 3 (2014),
http://www.ag.ny.gov/pdfs/Pinched%20by%20Plastic.pdf [https://perma.cc/9EG4-9DVC].
279 Oswalt & Marzán, supra note 205, at 453.
280 Payroll cards do not bear interest, but given the typical rates in checking accounts,
this concern is of little practical consequence. See Liran Haim & Ronald Mann, Putting
Stored-Value Cards in Their Place, 18 LEWIS & CLARK L. REV. 989, 1008 (2014). .
281 See supra note 220, at 6.
282 Id. at 9.
283 Id. at 13.
284 Jessica Silver-Greenberg & Stephanie Clifford, Paid via Card, Workers Feel Sting of
Fees, N.Y. TIMES (June 30, 2013), http://goo.gl/VzyTz [https://perma.cc/CZ74-Z7T8].
285 Electronic Fund Transfer Act (EFTA), 15 U.S.C. § 1693 (2012).
286 Electronic Fund Transfer Act, FED. RES. 18,
https://www.federalreserve.gov/boarddocs/caletters/2008/0807/08-07_attachment.pdf
[https://perma.cc/XL2T-72P5] (last visited Dec. 28, 2019).
287 FED. RES., REGULATION E: ELECTRONIC FUND TRANSFER ACT 6,
https://www.federalreserve.gov/boarddocs/supmanual/cch/efta.pdf [https://perma.cc/48JL-
EHDY] (last visited Dec. 28, 2019).
288 See generally CONSUMER FIN. PROT. BUREAU, PREPAID ACCOUNTS UNDER THE
ELECTRONIC FUND TRANSFER ACT (REGULATION E) AND THE TRUTH IN LENDING ACT
https://files.consumerfinance.gov/f/documents/20161005_cfpb_Final_Rule_Prepaid_Accou
nts.pdf [https://perma.cc/KZL4-DKJL] (last visited Dec. 28, 2019).
289 Rachel Blakely-Gray, Pay Card Laws By State and Regulations, PATRIOT SOFTWARE
Electronic copy available at: https://ssrn.com/abstract=3547007

<<PAGE_BREAK>>

56 Draft[Vol. __
permit the use of these cards but impose some limits on fees and set
rules on proper fee disclosure.290 Finally, a series of class actions were
filed against employers who offered payroll card programs for failing
to obtain employee consent and for violating wage and hour laws.291
In one of these cases, a court in Pennsylvania ruled that the
mandatory use of pay cards that impose fees is illegal.292
Facilitating the use of payroll cards is an important step
towards the abolition of the payday. The recent CFPB regulation
offers an initial framework, safeguarding certain employee rights,
although more experimentation is needed.293 Still, the fragmented
nature of state legislation impedes much innovation.294 Admittedly,
it is difficult to design a fee structure that would make payroll cards
profitable to operate and yet not encumber poor households with
additional expenses. Still, others have made the case that increasing
access to banking through public subsidies can be justified both as a
matter of redistribution and efficiency.295
Against this regulatory backdrop, positive steps can be taken to
promote payroll cards, at least for an initial period of adoption, such
as offering certain tax subsidies or requiring all employers to offer
this option.
A less obvious hurdle in the way of payroll cards is pro-employee
regulation that mandates that employers offer the choice of payment
methods. The Electronic Fund Transfer Act and Regulation E prohibit
employers from forcing employees to receive wages via pay card.296
New York law requires employers to provide employees with at least
one fee-free method of payment every payday.297 This choice creates
unanticipated problems: if, when setting a daily payday, employers
(June 5, 2019), https://www.patriotsoftware.com/payroll/training/blog/pay-card-laws-by-
state/ [https://perma.cc/KMQ8-LHAG].
290 See generally id. (surveying state laws); see also Sarah Jane Hughes & Stephen T.
Middlebrook, Are These Game Changers? Developments in the Law Affecting Virtual
Currencies, Prepaid Payroll Cards, Online Tribal Lending, and Payday Lenders, 70 BUS. L.
261, 265 (2015).
291 See Joint Stipulation of Class Action Settlement and Release ¶¶ 42, 47, Chavez v.
PVH Corp., No. C 13-01797-LHK (N.D. Cal. Feb. 12, 2014); First Amended Compl. ¶¶ 1-4,
Lapan v. PVH Corp., No. C 13-05006-YGR (N.D. Cal. Dec. 9, 2013); Plaintiffs' Original
Petition ¶¶ 14, 16, 19, Branson v. Destiny Foods, Inc., No. D-1-GN-14-001131 (Travis Cty.,
Tex., May 13, 2014).
292 See Siciliano v. Mueller, 149 A.3d 863 (Pa. Super. 2016).
293 See Haim & Mann, supra note 280, at 1014–19.
294 See Benjamin Lo, Fatal Fragments: The Effect of Money Transmission Regulation
on Payments Innovation, 18 YALE J. L. & TECH. 111 (2016).
295 Barr, supra note 206, at 237 (“[N]etwork externalities in electronic payments
systems and distribution networks suggest that net social benefit could be obtained through
further expansion.”).
296 See Letter from Richard Cordray, Dir., CFPB, to Sen. Richard Blumenthal (Sept. 12,
2013), http://goo.gl/KOqFzB [https://perma.cc/3KCJ-2QSN]; CONSUMER FIN. PROT.
BUREAU, CFPB BULL. NO. 2013-10: PAYROLL CARD ACCOUNTS (REGULATION E) 1–2 (Sept.
12, 2013), http://goo.gl/98d8I6 [https://perma.cc/FM77-RZJS].
297 N.Y. LAB. LAW § 191 (2018); see also N.Y. STATE DEP'T. OF LAB., aOp. No. RO-08-
0001
https://labor.state.ny.us/legal/counsel/pdf/Direct%20Deposit%20of%20Wages/Payroll%20c
ards%20Letter%2010-29-2009.pdf [https://perma.cc/57T7-D4ZY] (Oct. 29, 2009).
Electronic copy available at: https://ssrn.com/abstract=3547007

<<PAGE_BREAK>>

2020] Payday 57
must pay some employees in cash or check, this cost could be
significant. Employee choice, then, can undermine the viability of
payment streams.
The solution, however, is straightforward. The daily pay option
can be made open only to employees who are willing to use pay cards
or bank transfers. Relative to today, where all employees are paid on
long intervals, employees who favor cash will not be harmed by
having this additional option. But for all other employees, this option
would greatly advance their wellbeing.
V. THE DAY AFTER PAYDAY: CONCLUDING THOUGHTS
A complicated dynamic of dated legislation, path-dependence,
and inefficient money technology has contributed to the economy-
wide practice of paying employees in arrears. This dynamic puts
employees in the absurd position of lending money to their employers.
This feature of the modern economy is clearly a software
problem, not a hardware problem. We can, and should, pay workers
in at least the same frequency we pay overseas vendors. Instead, our
antiquated system of payments creates significant financial stress,
leading households to borrow from payday lender and other providers
of short-term credit products.
Abolishing the payday might take time, as it will face
resistance. No change is easy. However, the case for paying people for
their work is too compelling to ignore. Paying employees late may
made sense when we had to compute wages by hand and carry cash
chests between worksites. But it makes little sense when sending
digital money has become so ubiquitous that our vocabulary includes
new verbs to describe instantaneous money transfer – e.g., “I will
Venmo you the money tomorrow,” and “I just Paypaled you.”
With our new hardware, it is time to update our legal software.
Electronic copy available at: https://ssrn.com/abstract=3547007

---

## ssrn-3568768: DDeePPaauull LLaaww RReevviieeww
Year: 2020
Authors: Yonathan Arbel
Source: papers/ssrn-3568768/paper.txt

DDeePPaauull LLaaww RReevviieeww
Volume 69
Article 3
Issue 2 Winter 2020
CCoonnssuummeerr AAccttiivviissmm:: FFrroomm TThhee IInnffoorrmmeedd MMiinnoorriittyy TToo TThhee
CCrruussaaddiinngg MMiinnoorriittyy
Yonathan A. Arbel
Roy Shapira
Follow this and additional works at: https://via.library.depaul.edu/law-review
Part of the Law Commons
RReeccoommmmeennddeedd CCiittaattiioonn
Yonathan A. Arbel & Roy Shapira, Consumer Activism: From The Informed Minority To The Crusading
Minority, 69 DePaul L. Rev. (2020)
Available at: https://via.library.depaul.edu/law-review/vol69/iss2/3
This Article is brought to you for free and open access by the College of Law at Via Sapientiae. It has been
accepted for inclusion in DePaul Law Review by an authorized editor of Via Sapientiae. For more information,
please contact digitalservices@depaul.edu.
Electronic copy available at: https://ssrn.com/abstract=3568768

<<PAGE_BREAK>>

\\jciprod01\productn\D\DPL\69-2\DPL206.txt unknown Seq: 1 21-APR-20 11:48
CONSUMER ACTIVISM: FROM THE INFORMED
MINORITY TO THE CRUSADING MINORITY
Yonathan A. Arbel and Roy Shapira*
CONTENTS
INTRODUCTION................................................. 234 R
I. CONSUMER GOVERNANCE VIA INFORMED MINORITY
AND REPUTATIONAL SANCTIONS........................ 237 R
A. The Limits of Consumer Governance ............... 237 R
B. The Informed Minority Theory and Its Limits ...... 240 R
C. Reputational Discipline Theory and Its Limits ...... 242 R
II. THE CRUSADING MINORITY THEORY................... 243 R
A. The Nudnik and Other Types of Consumers ........ 244 R
B. Nudniks in Action: Motivating Examples............ 250 R
C. Why do Nudniks Prevail where the Informed
Minority Fails?...................................... 255 R
D. Why and How Sellers Accommodate Nudniks’
Concerns............................................ 259 R
III. LIMITATIONS OF NUDNIK-BASED CONSUMER
GOVERNANCE........................................... 261 R
CONCLUSION ................................................... 266 R
Legal scholars have long recognized that market norms are respected
not only because of consumer protection laws, but also because of
internal market dynamics. Consumers, the argument goes, fend for
themselves and hold sellers accountable. But how exactly do consumers
discipline sellers? The most influential model has been the informed
minority theory, according to which a critical mass of informed
consumers reads and negotiates contracts in advance, thereby
pressuring sellers to offer better contracts to all consumers. Recent
empirical studies, however, cast doubt on the existence of such a mass,
leading many to view the informed minority theory as unrealistic. What,
* The University of Alabama, School of Law; Interdisciplinary Center (IDC). We thank par-
ticipants at the Clifford Symposium Rising Stars: A New Generation of Scholars Looks at Civil
Justice, as well as Lisa Bernstein, Eric Goldman, Stephen Laandsman, Ben McMichael, Tony
Sebok, Catherine Sharkey, Steve Shavell, and Rory Van Loo for helpful comments and discus-
sions. Cade McGavin Brown provided invaluable research assistance.
233
Electronic copy available at: https://ssrn.com/abstract=3568768

<<PAGE_BREAK>>

\\jciprod01\productn\D\DPL\69-2\DPL206.txt unknown Seq: 2 21-APR-20 11:48
234 DEPAUL LAW REVIEW [Vol.69:233
then, may explain bottom-up governance in a world where consumers
do not read contracts?
In this contribution to the Clifford Symposium, we aim at exposing a
different mechanism of market discipline: one that works not through
ex ante reading and negotiating, but rather through ex post pressures to
meet buyers’ expectations. We specifically emphasize the role of a small
subset of consumers that we dub “nudniks.” Nudniks are those
consumers who call in to complain, fill out satisfaction surveys, post
online reviews, and file lawsuits. Driven by an innate sense of justice
and atypical motivations, these nudniks act as crusading consumers
against underperforming sellers. Through their actions, nudniks direct
attention to seller failure, leading to a variety of formal and informal
sanctions, thus presenting a more realistic form of consumer activism in
today’s overwhelming information environment.
INTRODUCTION
Market discipline comes not only from legal protections, but also
from consumers themselves. Understanding the effectiveness of con-
sumer-driven market discipline mechanisms is key, as it dictates the
scope and design of legal interventions.
The leading theory of market-based discipline has traditionally been
the informed minority theory.1 The theory concedes that most con-
sumers lack sophistication or time to read their contracts and shop for
better terms.2 Yet, it suggests that consumer-based governance of
market discipline can be powerful.3 As long as a minority of consum-
ers are engaged with these aspects of the transaction, one could still
expect sellers to provide favorable terms. Sellers would compete over
who wins the segment of informed buyers, and in the process will have
to modify their standard form contracts in ways that benefit the entire
consumer body, or so the theory goes. While enjoying large influence,
over the years, the informed minority theory has encountered increas-
ing opposition. Perhaps most critically, recent empirical evidence sug-
gests that the number of consumers that actually read and understand
contracts is too low to justify a change in sellers’ behavior.4 Even the
1. Alan Schwartz & Louis L. Wilde, Intervening in Markets on the Basis of Imperfect Informa-
tion: A Legal and Economic Analysis, 127 U. PA. L. REV. 630, 655 (1979).
2. Id. at 642.
3. We use the term “consumer governance” in ways that bear similarities to the more oft-used
“corporate governance” term: denoting the set of formal and informal rules that govern the
interactions between sellers and buyers.
4. Yannis Bakos et al., Does Anyone Read the Fine Print? Consumer Attention to Standard
Form Contracts, 43 J. LEGAL STUD. 1, 2 (2014) (providing empirical data that few consumers
Electronic copy available at: https://ssrn.com/abstract=3568768

<<PAGE_BREAK>>

\\jciprod01\productn\D\DPL\69-2\DPL206.txt unknown Seq: 3 21-APR-20 11:48
2020] CONSUMER ACTIVISM 235
theory’s progenitors now seem to question its practicality.5 This has
left a gap in our understanding of market discipline through consumer
governance: If market discipline does not come from a critical mass of
informed readers, where does it come from?
This Essay suggests looking elsewhere: Instead of focusing on buy-
ers who read and negotiate before the purchase, focus on buyers who
feel compelled to respond strongly whenever sellers disappoint. In-
stead of focusing on avid readers, focus on avid “enforcers”—those
consumers who demand to speak with the manager, fill out satisfac-
tion surveys, post online reviews, and file lawsuits. We dub these con-
sumers “nudniks.”6 Nudniks do not operate like most of us. They
possess an innate sense of justice, atypical motivations, and an idio-
syncratic cost structure, which lead them to fight sellers who disap-
point—even in situations where most of us would not notice, or notice
and stay passive. Nudniks are often perceived as petty and vindictive.
Yet, through their actions, nudniks provide an important public ser-
vice: directing attention to failures in the market, thus leading to a
variety of formal and informal sanctions against misbehaving firms. In
other words, nudniks generate underappreciated spillover effects that
reverberate throughout the economy. This Essay explores the role of
nudniks in the enforcement of market norms and consumer govern-
ance, evaluates their social contribution, and suggests this “crusading
minority” of nudniks as a missing piece in theories of consumer mar-
ket governance.
This Essay argues that consumer activism predicated on a crusading
minority of nudniks, who notice seller misbehavior and respond to it
through legal-reputational channels, is a more realistic depiction of
how market discipline works than the informed minority theory.7
Nudniks complain and fight sellers publicly regardless of whether they
read the contract in advance. They often complain based on their
transactional expectations from the seller. And transactional expecta-
read End Users License Agreements); Shmuel I. Becher & Esther Unger-Aviram, The Law of
Standard Form Contracts: Misguided Intuitions and Suggestions for Reconstruction, 8 DEPAUL
BUS. & COM. L.J. 199, 206 (2010) (providing empirical data that most consumers are not likely to
read contracts ex ante); Clayton P. Gillette, Rolling Contracts as an Agency Problem, 2004 WIS.
L. REV. 679, 680 (2004) (“[C]ommentators agree that buyers, or the vast majority of them, do
not read the terms presented to them by sellers.”). We note that most of the evidence is focused
on online contracts and in specific domains; more work is needed in other areas.
5. See infra note 35.
6. The word derives from Yiddish and can be loosely translated to “a busybody.” See infra
Part II.A.
7. Consumer activism here denotes activism with respect to the properties of the good, ser-
vice, contract, or transaction. We do not deal here with consumer activism with respect to social
or political goals.
Electronic copy available at: https://ssrn.com/abstract=3568768

<<PAGE_BREAK>>

\\jciprod01\productn\D\DPL\69-2\DPL206.txt unknown Seq: 4 21-APR-20 11:48
236 DEPAUL LAW REVIEW [Vol.69:233
tions are a function not only of the explicit terms in the contract, but
also of sellers’ oral representations, advertisements, market norms,
fairness standards, and so on.8 Even if the seller is contractually pro-
tected by a disclaimer nestled in the fine print, she will anticipate the
potential risk that comes from entering a public battle with nudniks
and may find it best to deliver better service ex ante.
Such a nudnik-driven mode of consumer activism creates positive
spillovers, but also comes with social costs. Some nudniks pursue nar-
row interests that do not benefit the rest of the consumer body and
impose unnecessary costs on sellers. While we do not venture to offer
a conclusive quantification of the net effect of nudniks, we do offer
here a synthesis of findings from the consumer complaining behavior
literature, suggesting that many nudniks positively contribute to the
market. At the minimum, our analysis suggests that legal scholars and
policymakers should pay more attention to nudniks’ effects.
The nudniks are a response to the problems with the informed mi-
nority theory. This theory essentially rests on two assumptions, re-
garding the what and the how of seller behavior. First, what sellers do:
The theory assumes that sellers compete over a small segment of con-
sumers who read the contract and care about its terms. Second, how
they do it: To win the segment of readers, sellers have to offer better
terms to all consumers across the board. Sellers operate through stan-
dard-form contracts, and cannot tell which consumer is a reader and
which is not before the fact; therefore, they are forced to offer better
terms for all. In this Essay, we respond to the first premise. Many have
taken the recent empirical evidence of low readership rates to as un-
dermining the possibility of internal market discipline. This Essay sug-
gests that market discipline does not have to be predicated on
consumers reading the contract before purchasing; it can also come
from consumers noticing and complaining publicly about sellers who
fail to meet consumers’ transactional expectations, regardless of the
contract. In a separate paper, we confront the second assumption of
the informed minority theory: the premise that sellers cannot distin-
guish between active and passive consumers.9 In today’s world, we ar-
gue there, sellers can, and to a growing extent already do, employ big
8. Contract law, and in particular, the Uniform Commercial Code, is sensitive to background
expectations, which form the penumbra of the rights and obligations the parties owe each other.
See RESTATEMENT (SECOND) OF CONTRACTS §§203(B), 211(A), (C), 220–23; U.C.C. §§1-303,
2-208(2).
9. See Yonathan A. Arbel & Roy Shapira, Theory of the Nudnik: The Future of Consumer
Activism and What We Can Do to Stop It, VAND. L. REV. (forthcoming 2020) [hereinafter Arbel
& Shapira, Theory of the Nudnik]. Another important contribution of this paper is the classifica-
tion of the nudnik and the identification of its role within theories of consumer law.
Electronic copy available at: https://ssrn.com/abstract=3568768

<<PAGE_BREAK>>

\\jciprod01\productn\D\DPL\69-2\DPL206.txt unknown Seq: 5 21-APR-20 11:48
2020] CONSUMER ACTIVISM 237
data tools to tell which consumer is most likely to be nudnik, and then
cater to these consumers personally.
This Essay proceeds in three parts. Part I explores the leading theo-
ries of market-based, consumer governance mechanisms and their
shortcomings. Part II suggests a new direction for thinking of market-
based consumer governance. Instead of counting how many consum-
ers read contracts, we need to shift attention to consumer dissatisfac-
tion behavior: How many consumers complain after the purchase?
How do other potential consumers react to these complaints? What
impact do such complaints have on sellers? We emphasize the rise of
the internet and social media as factors that greatly empowered
nudniks and increased their potential reach. As long as sellers are un-
able to spot nudniks in advance,10 they are incentivized to provide
higher-quality service to all consumers ex ante, so as not to risk the
reputation and legal risk that comes with nudniks. Part III evaluates
the shortcomings of nudnik-based activism. We conclude that while
not all nudnik-activity is socially beneficial, overall there is reason to
believe that nudniks are the unsung heroes of market governance.
I. CONSUMER GOVERNANCE VIA INFORMED MINORITY
AND REPUTATIONAL SANCTIONS
When parties enter into a contract, they assumedly select the terms
that advance their mutual goals.11 Yet in the context of consumer con-
tracts, this standard assumption too often does not apply: For a variety
of reasons, consumers are limited in their negotiation, enforcement,
and monitoring of contract terms, thus creating an opportunity for
sellers to offer inferior, one-sided terms. Do sellers take advantage of
this opportunity? If not, why? This Part provides a quick overview of
the extant literature on consumer governance. We start by noting the
factors that limit consumers’ ability to monitor sellers’ behavior di-
rectly. We then detail the two most influential theories of how con-
sumers can nevertheless discipline sellers—the informed minority
theory and the reputational discipline theory.
A. The Limits of Consumer Governance
We use the term “consumer governance” here to denote the idea
that consumers can exert pressure on sellers who “misbehave,”
10. For an exploration of how firms respond to the challenge posed by the nudnik based on
big-data and predictive algorithms, see id.
11. See, e.g., CHARLES FRIED, CONTRACTAS PROMISE 8 (1981); STEVEN SHAVELL, FOUNDA-
TIONSOF ECONOMIC ANALYSISOF LAW 293 (2004).
Electronic copy available at: https://ssrn.com/abstract=3568768

<<PAGE_BREAK>>

\\jciprod01\productn\D\DPL\69-2\DPL206.txt unknown Seq: 6 21-APR-20 11:48
238 DEPAUL LAW REVIEW [Vol.69:233
thereby disciplining sellers’ behavior and participating in the govern-
ance of market norms. Thus defined, consumer governance runs into
several well-known issues that ostensibly limit its effectiveness.
First, consumers often lack the necessary sophistication to under-
stand the terms of their contracts.12 The contractual language is com-
plex, the grammar is convoluted, the vocabulary is full of legalese, and
even the format tends to be quite jarring.13 The substance itself can
also be difficult to grasp, given the complex nature of some common
transactions (think, e.g., about the number of the parties involved in a
typical home purchase agreement). These difficulties present a chal-
lenge to many consumers, especially in groups that suffer from low
rates of financial and legal literacy.14
Second, many consumers are apathetic about the terms of their con-
tracts.15 Apathy is said to be rational if the costs of being engaged
outweigh the benefits. For many consumers, this is indeed the case:
The costs of reading contracts are immediate and certain, namely
one’s time and effort. The benefits of reading, by contrast, are remote
and uncertain. Even if a consumer identifies an unfavorable choice-of-
law clause, the odds of this clause mattering is quite low for any indi-
vidual consumer.16 Moreover, the consumer will often lack the bar-
gaining power necessary to negotiate any of the terms in contracts that
are mostly based on standard forms. This makes reading the contract a
losing proposition from the consumer’s standpoint in many cases.17 In
12. Michael I. Meyerson, The Efficient Consumer Form Contract: Law and Economics Meets
the Real World, 24 GA. L. REV. 583, 598–99 (1990) (noting consumer inability to discern legal
meaning of contractual terms, even those in plain language, due to high costs).
13. See Yonathan A. Arbel & Andrew Toler, All-Caps (U. of Ala. Legal Studies, Research
Paper No. 3519630, Jan. 15, 2020) (finding that all-caps blocks of text in contracts fail to improve
the quality of consumer consent and make it worse for older readers), available at http://
papers.ssrn.com/sol3/papers.cfm?abstract_id=3519630; Uri Benoliel & Shmuel I. Becher, The
Duty to Read the Unreadable, 60 B.C. L. REV. 2255 (2019).
14. See generally Annamaria Lusardi & Olivia S. Mitchell, Financial Literacy: An Overview,
10 J. PENSION ECON. & FIN. 297 (2011). See also Annamaria Lusardi & Olivia S. Mitchell, Finan-
cial Literacy and Retirement Planning in the United States, 10 J. PENSION ECON. & FIN. 509, 512
(2011) (finding, in a survey of American adults, that only 30% could answer correctly three basic
questions of financial literacy); Judy T. Lin et al., The State of U.S. Financial Capability: The 2018
National Financial Capability Study, https://www.usfinancialcapability.org/downloads/NF-CS_
2018_Report_Natl_Findings.pdf (finding lower rates of financial literacy among minorities).
15. See generally William M. Landes & Richard A. Posner, The Private Enforcement of Law, 4
J. LEGAL STUD. 1, 33 (1975); Roger Van Den Bergh & Louis Visscher, The Preventive Function
of Collective Actions for Damages in Consumer Law, 1 ERASMUS L. REV. 5, 6 (2008).
16. See Melvin Aron Eisenberg, The Limits of Cognition and the Limits of Contract, 47 STAN.
L. REV. 211, 243 (1995). For the consumer, a 1-in-100 chance of litigation is a remote possibility.
For a firm serving 100 consumers, it is a high likelihood.
17. Robert A. Hillman & Jeffrey J. Rachlinski, Standard-Form Contracting in the Electronic
Age, 77 N.Y.U. L. REV. 429, 445 (2002).
Electronic copy available at: https://ssrn.com/abstract=3568768

<<PAGE_BREAK>>

\\jciprod01\productn\D\DPL\69-2\DPL206.txt unknown Seq: 7 21-APR-20 11:48
2020] CONSUMER ACTIVISM 239
other cases, consumers can suffer from the other side, namely, irra-
tional apathy. That is, even if it is worthwhile for them to read and
negotiate terms, they are bound by a variety of cognitive limitations
and biases that would prevent them from reading. For example, con-
sumers may act myopically, by failing to consider future possibilities
or overly discount future events.18
Finally, consumers often ignore and tend to remain passive when
sellers disappoint. That is, consumers are not just passive pre-
purchase, in reading and negotiating, but also passive post-purchase.
Part of the reason for this passivity is that consumers are often una-
ware that their contractual rights were violated.19 Even when consum-
ers are sophisticated and sufficiently aware, they may opt to do
nothing, simply because they consider taking action to be too costly.
This is especially true for bringing lawsuits and waging a legal battle.
The costs of bringing a lawsuit, the risk of losing the case, and the
difficulty of collecting judgments if you have won, all lead consumers
to frequently abandon the pursuit of rights that they know were not
met.20 In fact, recent work suggests that reading the contract after the
consumer experienced a breach may actually make the consumer less
likely to complain, as sellers include unenforceable and otherwise mis-
leading terms in their contracts, which cause buyers to give up.21
On paper, sellers would be aware of the confluence of these
problems and offer buyers inferior terms in their contracts ex ante,
and fail to deliver on obligations ex post. Such seller behavior may
easily lead to an eventual breakdown of consumer trust—akin to a
“lemons problem,” whereby deep mistrust prevents many desirable
transactions.22 What stops this supposed race to the bottom? How do
consumer markets function given all these inherent problems? The le-
gal literature has offered several theories in response. The next two
Sections elaborate.
18. See, e.g., Oren Bar-Gill, The Behavioral Economics of Consumer Contracts, 92 MINN. L.
REV. 749, 755 (2008); Christine Jolls, Cass R. Sunstein & Richard Thaler, A Behavioral Ap-
proach to Law and Economics, 50 STAN. L. REV. 1471, 1476–80 (1998).
19. From experience teaching this subject (Arbel), even most law students are unaware of the
implied warranty of fitness for a particular purpose before it is covered in class. See U.C.C §2-
315 (AM. LAW INST. & UNIF. LAW COMM’N, amended 2011).
20. For a concrete example from the most common type of consumer cases—debt collection
cases—see generally Yonathan A. Arbel, Adminization: Gatekeeping Consumer Contracts, 71
VAND. L. REV. 121, 130–42 (2018).
21. Meirav Furth-Matzkin, On the Unexpected Use of Unenforceable Contract Terms: Evi-
dence from the Residential Rental Market, 9 J. LEGAL ANALYSIS 1, 3 (2017).
22. See George A. Akerlof, The Market for “Lemons”: Quality Uncertainty and the Market
Mechanism, 84 Q. J. ECON. 488 (1970).
Electronic copy available at: https://ssrn.com/abstract=3568768

<<PAGE_BREAK>>

\\jciprod01\productn\D\DPL\69-2\DPL206.txt unknown Seq: 8 21-APR-20 11:48
240 DEPAUL LAW REVIEW [Vol.69:233
B. The Informed Minority Theory and Its Limits
The most influential response to the abovementioned concerns has
been Schwartz & Wilde’s informed minority theory.23 The informed
minority theory readily concedes that the majority of consumers are
unsophisticated and do not engage with the contracts before they
purchase. Still, the theory argues that a minority of consumers are so-
phisticated and do read their contracts carefully and negotiate the
terms before purchasing. This informed minority diligently compares
the product and its terms to those offered by competitors. The efforts
of the minority create demand-side pressure on firms to offer better
contractual terms, as doing so will allow firms to win this segment of
the market. Now, either because many consumer contracts are stan-
dard-form agreements or because firms cannot distinguish between
consumers on the basis of their sophistication and tendency to read,24
the way a firm can win the hearts of the informed minority is by offer-
ing better terms across the board.25 Consequently, competitive pres-
sures created by an informed minority push the entire market towards
a more consumer-friendly equilibrium where firms are competing not
only on price, but also on the quality of their contracts.
The informed minority theory thus explains why despite the lack of
sophistication on the part of many consumers, contractual terms are
not the worst possible terms conceivable. The diligence of the in-
formed minority is a bulwark against sellers’ tendency to grossly favor
themselves.
While highly influential, the informed minority theory runs into the-
oretical and empirical problems.26 For the theory to work, there must
be a sufficiently sizable minority, a critical mass of readers (after all,
23. Alan Schwartz & Louis L. Wilde, Intervening in Markets on the Basis of Imperfect Infor-
mation: A Legal and Economic Analysis, 127 U. PA. L. REV. 630 (1979). For a review of its
influence, see generally Eyal Zamir, Contract Law and Theory: Three Views of the Cathedral, 81
U. CHI. L. REV. 2077 (2014) (reviewing DOUGLAS G. BAIRD, RECONSTRUCTING CONTRACTS
(2013); BRIAN H. BIX, CONTRACT LAW: RULES, THEORY, AND CONTEXT (2012)); R. Ted Cruz &
Jeffrey J. Hinck, Not My Brother’s Keeper: The Inability of an Informed Minority to Correct for
Imperfect Information, 47 U.C. HASTINGS L. J. 635 (1996).
24. Elsewhere we focus on the ways the assumption of inability to screen consumers might
break, given big data and predictive analytics, and detail the alarming consequences. Arbel &
Shapira, Theory of the Nudnik, supra note 9.
25. See also George L. Priest, A Theory of the Consumer Product Warranty, 90 YALE L.J.
1297, 1347 (1981) (“If a small group of consumers reads warranties and selects among products
according to warranty content, manufacturers may be forced to draft warranties responsive to
the group’s preferences, even though the large majority of consumers generally neglect warranty
terms.”).
26. For examples of notable objections, see Shmuel I. Becher, Asymmetric Information in
Consumer Contracts: The Challenge That Is Yet to Be Met, 45 AM. BUS. L.J. 723, 735–54 (2008);
Cruz & Hinck, supra note 23; Zamir, supra note 23; Jeff Sovern, Toward a New Model of Con-
Electronic copy available at: https://ssrn.com/abstract=3568768

<<PAGE_BREAK>>

\\jciprod01\productn\D\DPL\69-2\DPL206.txt unknown Seq: 9 21-APR-20 11:48
2020] CONSUMER ACTIVISM 241
why should sellers alter their form contracts in order to win the busi-
ness of only a handful of reading consumers?). But consumers gener-
ally dislike reading contracts,27 and the private gains from reading can
be quite marginal—there is limited opportunity to negotiate terms,
competitors might not offer significantly better terms, and there is a
good chance that the covered provision will never materialize.28 While
the costs are real and private, the benefits of reading are more remote
and public—leading each individual consumer to attempt to free-ride
the efforts of others.29 Some recent empirical work now documents
the theoretical prediction: The number of people who actually read
contracts is too small to reach the critical mass needed for the in-
formed minority mechanism to work.30
Even if the informed minority theory was plausible when Schwartz
and Wilde first developed it in the 1970s, the increase in length and
complexity of consumer contracts occasioned by the rise of the digital
age has gradually rendered the theory less and less fit for today’s
world.31 Contracts nowadays are also encumbered by the rise of ever-
increasing disclosures, which compete over, and overload, limited con-
sumer attention.32 And while the non-law-and-economics scholars
have long been skeptical of the theory,33 nowadays even the law and
economics community loses faith.34 Exhibit A: Schwartz himself
seems to believe that nobody reads contracts these days.35
sumer Protection: The Problem of Inflated Transaction Costs, 47 WM. & MARY L. REV. 1635,
166–72 (2006).
27. See, e.g., Omri Ben-Shahar, The Myth of the ‘Opportunity to Read’ in Contract Law
(Coase-Sander Working Paper Series in L. & ECON. No. 415, 2008), https://chicagounbound.uchi
cago.e-du/law_and_economics/549/. For a review of the literature on the no-reading problem, see
Arbel & Toler, supra note 13.
28. See supra notes 15–18 and accompanying text.
29. Id.
30. Bakos et al., supra note 4, at 4 (“We find that the fraction of consumers who read such
contracts is so small that it is unlikely that an informed minority alone is shaping software license
terms.”).
31. See Todd D. Rakoff, Contracts of Adhesion, An Essay in Reconstruction, 96 HARV. L. REV
1173, 1179 n.22 (1983); Zamir, supra note 23, at 2102–03; Robert A. Hillman & Jeffrey J. Rach-
linski, Standard-Form Contracting in the Electronic Age, 77 N.Y.U. L. REV. 429, 448 (2002).
32. SeeOMRI BEN-SHAHAR & CARL E. SCHNEIDER, MORE THAN YOU WANTEDTO KNOW:
THE FAILUREOF MANDATED DISCLOSURE 94–101 (2014).
33. See Rakoff, supra note 31; Zamir, supra note 23; Hillman & Rachlinski, supra note 31.
34. Cruz & Hinck, supra note 23.
35. Ian Ayres & Alan Schwartz, The No-Reading Problem in Consumer Contract Law, 66
STAN. L. REV. 545, 552 (2014) (“[T]he state should jettison the disclosure project of making all
terms accessible to consumers with the expectation that consumers can read the entire docu-
ment.”). See also Ian Ayres & Eyal Zamir, Mandatory Rules 12 n.54 (Hebrew Univ. of Jerusalem
Legal Res. Paper No. 19-12), https://papers.ssrn.com/sol3/papers.cfm?abstract_id=3420179 (not-
ing the absence of the informed minority theory from Schwartz’ recent work).
Electronic copy available at: https://ssrn.com/abstract=3568768

<<PAGE_BREAK>>

\\jciprod01\productn\D\DPL\69-2\DPL206.txt unknown Seq: 10 21-APR-20 11:48
242 DEPAUL LAW REVIEW [Vol.69:233
C. Reputational Discipline Theory and Its Limits
Other theories of bottom-up market discipline usually invoke the
concept of reputational sanctions.36 Legal scholars and economists
have suggested that reputational forces play an increasingly important
role in today’s consumer markets, given the rise of the internet and
social media.37 The idea is that a seller who underperforms can expect
buyers to post negative online reviews, thereby causing other poten-
tial buyers to avoid purchasing from the seller in the future. The pros-
pect of negative reputational information deters such seller
misbehavior ex ante, or so the argument goes.
The appeal of the reputational discipline theory is quite clear. And
indeed, there exists evidence that both negative and positive reputa-
tional information affect business revenues.38 However, theories that
invoke reputational discipline are usually underspecified and rely too
much on strong assumptions. Sure, reputation matters. But how ex-
actly is reputation produced? Who disseminates details of private in-
teractions between a seller and a buyer? Is the information considered
credible? Do other buyers act on it? Existing accounts do not develop
satisfying answers to these questions. They implicitly assume that dis-
satisfied consumers put in motion meaningful reputational sanctions
by transparently and mechanically sharing details of their dissatisfac-
tion with others online. But given that accurate reputational informa-
tion is a public good, why would an individual consumer find it
worthwhile to share this information with others? And why would
other consumers read, believe, and decide to act based on such infor-
mation from another buyer (who, in all likelihood, they never met)?
Writing reviews comes with certain costs—the time it takes to write
the review, the legal risk involved in defamation lawsuits,39 the social
36. On reputational sanctions more generally see Roy Shapira, A Reputational Theory of Cor-
porate Law, 26 STAN. L. & POL’Y REV. 1 (2015); Roy Shapira, Reputation through Litigation:
How the Legal System Shapes Behavior by Producing Information, 91 WASH. L. REV. 1193
(2016); Yonathan A. Arbel, Reputation Failure: The Limits of Market Discipline in Consumer
Markets, WAKE FOREST L. REV., 2019 (Univ. of Ala. Legal Stud. Res. Paper No. 3239995),
https://papers.ssrn.com/sol3/papers.cfm?abstract_id=3239995 [hereinafter Arbel, Reputation
Failure].
37. See, e.g., Alex Tabarrok & Tyler Cowen, The End of Asymmetric Information, CATO UN-
BOUND (2015); Adam Thierer et al., How the Internet, the Sharing Economy, and Reputational
Feedback Mechanisms Solve the “Lemons Problem,” 70 UNIV. MIAMI L. REV. 830, 830 (2016).
38. Michael Luca, Reviews, Reputation, and Revenue: The Case of Yelp.com 10, 12 (Harv. Bus.
Sch. Working Paper No. 12-016, 2016), https://www.hbs.edu/faculty/Publication%20Files/12-
016_a7e4a5a2-03f9-490d-b093-8f951238dba2.pdf.
39. See Yonathan A. Arbel, Reputation Failure: The Limits of Market Discipline in Consumer
Markets, 54 WAKE FOREST L. REV. 1239 (2019) (noting how consumer reviews can lead to litiga-
tion), available at https://papers.ssrn.com/sol3/papers.cfm?abstract_id=3239995.
Electronic copy available at: https://ssrn.com/abstract=3568768

<<PAGE_BREAK>>

\\jciprod01\productn\D\DPL\69-2\DPL206.txt unknown Seq: 11 21-APR-20 11:48
2020] CONSUMER ACTIVISM 243
pressure to conform, and so on.40 Indeed, evidence shows that few
consumers actually write reviews, and among those who choose to do
so, there is a strong self-selection that might bias reputational infor-
mation in unpredictable ways.41 The fast-growing body of evidence on
online reviews suggests that consumer-sourced reputational informa-
tion can be an unreliable guide to future consumers, and therefore a
weaker restraint on firm behavior than proponents admit.42
To emphasize, we do not claim here that reputational forces are un-
important or insufficiently potent. Both of us have written extensively
on the important role that reputation plays in market discipline.43 Our
point here is that too often consumer governance theories that invoke
reputation are under-specified. This gap calls for an explanation that
current theories fail to provide.
*
For bottom-up market governance to emerge, consumers must
wield sufficient power. Yet most consumers remain uninformed and
unengaged. The public good nature of market discipline makes it sus-
ceptible to free riding and consumer collective action problems.
Where does effective consumer activism come from, then? One influ-
ential theory suggested that a critical mass of consumers who do read
contracts make sellers change their behavior toward all other consum-
ers. Yet the accumulated evidence suggests that in many markets such
a critical mass does not exist. Another influential theory suggests that
dissatisfied consumers will complain online, thereby creating a reputa-
tional risk for sellers. However, this reputational theory fails to ex-
plain who invests in creating and diffusing credible information that
leads other consumers to stop purchasing from a given seller, why
they do so, and how. Accordingly, there is a gap in our understanding
of how consumer governance works. The next Part suggests a way to
narrow this gap by examining the role of a small subset of consumers
who notice and fight back whenever sellers underperform.
II. THE CRUSADING MINORITY THEORY
Bottom-up market discipline relies on the work of a small subset of
active consumers. Among those activists, we focus here on a specific
type that we call nudniks. Part II.A offers a typology of different types
of consumers to explain what exactly we mean by nudniks. Part II.B
40. Arbel, Reputation Failure, supra note 36.
41. Id. at 6.
42. Id. at 14–15, 33.
43. Id.; ROY SHAPIRA, LAWAND REPUTATION (forthcoming 2020).
Electronic copy available at: https://ssrn.com/abstract=3568768

<<PAGE_BREAK>>

\\jciprod01\productn\D\DPL\69-2\DPL206.txt unknown Seq: 12 21-APR-20 11:48
244 DEPAUL LAW REVIEW [Vol.69:233
offers a few motivating examples of nudniks in action. Part II.C ex-
plains why consumer activism driven by nudniks is a more realistic
possibility in today’s world than consumer activism driven by an in-
formed minority. Finally, Part II.D elaborates on how nudniks bring
change in seller behavior.
A. The Nudnik and Other Types of Consumers
Originally deriving from Yiddish, “nudnik” can be translated as “a
bore, a nag, a jerk”44 or a “busybody.” While all these terms carry
negative connotations, we use the relatively unfamiliar nudnik term in
a neutral way.45 A nudnik, in our framework, denotes a consumer who
is likely to vindicate her transactional rights. When she feels that her
rights were breached, she will not “let it go” until she has addressed
the issue, even if most other consumers will not do so. The nudnik is
the type of consumer who will demand to speak with the manager,
write an angry letter to the editor, or bring a lawsuit over a torn pair
of pants that cost $40.
To understand the attributes and the role that nudniks play in con-
sumer markets, it is useful to consider nudniks alongside various pro-
totypes of consumers. We can roughly separate the different types of
consumers into four categories: “Passivists,” “Shoppers,” “Sophisti-
cates,” and “Nudniks.” A caveat is in order at the outset: Each of the
categories inevitably generalizes, and the lines are murky. Still, for our
modest purposes here—understanding what makes nudniks unique—
the rough categorization works. Figure 1 schematically illustrates this
classification.
44. Nudnik, https://en.wiktionary.org/wiki/nudnik (last updated Oct. 14, 2019).
45. Internet jokes, while ephemeral, capture public sentiment, and so it is telling of wider
public reaction that a common recent ‘meme’ involves nudniks, and derides them for being privi-
leged and entitled. See, e.g., “Speak to the Manager” Haircut, KNOWYOURMEME (2015), https://
know-yourmeme.com/memes/speak-to-the-manager-haircut (last visited Nov. 27, 2019). For the
maltreatment of nudniks in the marketing literature and more generally, see LEON G. SCHIFF-
MAN & JOSEPH L. WISENBLIT, CONSUMER BEHAVIOR 44 (11th ed. 2015).
Electronic copy available at: https://ssrn.com/abstract=3568768

<<PAGE_BREAK>>

\\jciprod01\productn\D\DPL\69-2\DPL206.txt unknown Seq: 13 21-APR-20 11:48
2020] CONSUMER ACTIVISM 245
FIGURE 1: Species in the Homo Consumerus Genus
Sophisticates Shoppers
Passivists
Nudniks
Passivists are the largest group of consumers—these are those con-
sumers who tend to engage with products only at a basic level, taking
minimal action both when shopping for products and when problems
arise. In selecting products, passivists engage in a rudimentary price
and term comparison. When problems with the product arise (e.g., a
small overcharge, late shipping), they will not always notice, or note
the problem but do little about it. The most action a passivist would
take in response to service failure is refraining from purchasing the
product again or complaining in a way that does not entail much ef-
fort, such as asking the service representative about the issue.
The marketing literature has long documented that most consumers
are passivists.46 Marketing scholar Professor Richard Oliver summa-
rizes the typical consumer behavior by stating that “[c]onsumers do
not do anything, in the main, in response to consumption.”47 The 2006
Retail Customer Dissatisfaction Study indeed found that only six per-
46. SCHIFFMAN & WISENBLIT, supra note 45, at 421 (“Research indicates that only a few un-
satisfied customers actually complain.”); Jean-Charles Chebat et al., Silent Voices: Why Some
Dissatisfied Consumers Fail to Complain, 7 J. SERV. RES. 328 (2005); Clay M. Voorhees et al., A
Voice From the Silent Masses: An Exploratory and Comparative Analysis of Noncomplainers, 34
J. ACAD. MARK. SCI. 514, 514 (2006) (“The majority of dissatisfied customers fail to complain
. . . .”); TECH. ASSISTANCE RESEARCH PROGRAM INST. & U.S. OFFICEOF CONSUMER AFFAIRS,
CONSUMER COMPLAINT HANDLINGIN AMERICA: AN UPDATE STUDY (1979) (finding that 96%
do not complain); Stephen S. Tax & Stephen W. Brown, Recovering and Learning From Service
Failure, 40 MGMT. REV. 75, 75–88 (1998) (finding that 90% do not complain).
47. RICHARD L. OLIVER, SATISFACTION: A BEHAVIORAL PERSPECTIVE ON THE CONSUMER
385 (2d ed. 2015).
Electronic copy available at: https://ssrn.com/abstract=3568768

<<PAGE_BREAK>>

\\jciprod01\productn\D\DPL\69-2\DPL206.txt unknown Seq: 14 21-APR-20 11:48
246 DEPAUL LAW REVIEW [Vol.69:233
cent of consumers who experienced a problem voiced it to the firm.48
These rates increased somewhat when the value of the good was
higher, but the base rates of consumers who take action rarely ex-
ceeded ten percent.49
The paucity of active consumers is not surprising.50 Standing up for
one’s rights comes at an immediate cost. It involves social discord and
may require a considerable investment of time and effort.51 Activism
may be followed by social opprobrium. The time involved in com-
plaining can also be quite substantial; we leave it as an exercise for the
reader to estimate how long it would take to resolve a technical issue
with her cable company. The benefits of taking such action, by con-
trast, are uncertain: The seller may not yield to the consumer’s de-
mands, and even if the seller relents, the value of such remedial action
may not be significant. On net, the value of an uncertain replacement
of a faulty product can be easily outweighed by the certain investment
of time and effort.52 In a study of 149 dissatisfied consumers who did
not complain, the consumers explained their inaction as follows:
shortage of time was the leading reason (~21%), followed by lack of
responsiveness on part of sellers (~20%), and consumer personality
factors (some simply do not like the confrontation involved in com-
plaining) (~17%).53
Nudniks, in contrast, are active. They become “crusading consum-
ers” whenever their transactional expectations are defied, even when
most others would have decided that the costs of fighting sellers are
not worth the expected benefits. It may be time to interject with a
note on terminology. While consumer passivism is often labelled “ra-
tional,” we wish to avoid labeling consumer complaining as “irra-
tional.” A nudnik who serially complains does not necessarily act
irrationally. A consumer suing for a small overcharge can be cast as
irrational if one reduces rationality to the pursuit of material cost-ben-
48. Beware of Dissatisfied Consumers: They Like to Blab, MARKETING (Mar. 8, 2006), https://
knowledge.wharton.upenn.edu/article/beware-of-dissatisfied-consumers-they-like-to-blab/ (cit-
ing WHARTON BUS. SCH. & VERDE GRP., RETAIL CUSTOMER DISSATISFACTION STUDY (2006)).
49. John Goodman, Basic Facts on Customer Complaint Behavior and the Impact of Service on
the Bottom Line, 8 COMPETITIVE ADVANTAGE 1, 1–5 (1999).
50. John W. Huppertz, Firms’ Complaint Handling Policies and Consumer Complaint Voicing,
24 J. CONSUMER MARKETING. 428, 428 (2007).
51. See generally Robin M. Kowalski, Complaints and Complaining: Functions, Antecedents,
and Consequences, 119 PSYCHOL. BULL. 179 (1996) (examining how different personality types
experience the lodging of complaints); Marsha L. Richins, A Multivariate Analysis of Responses
to Dissatisfaction, 15 J. ACAD. MARKETING SCI. 24 (1987).
52. For a review of the marketing literature on the costs and benefits of complaints, see Hup-
pertz, supra note 50, at 429–30.
53. Voorhees et al., supra note 46, at 519.
Electronic copy available at: https://ssrn.com/abstract=3568768

<<PAGE_BREAK>>

\\jciprod01\productn\D\DPL\69-2\DPL206.txt unknown Seq: 15 21-APR-20 11:48
2020] CONSUMER ACTIVISM 247
efit analysis. But if one sees the nudnik’s preferences as consisting of
broader concerns, from spite to altruism to all other human motiva-
tions that are in-between, then labeling his actions irrational no longer
fits. For our purposes, it is immaterial what label one gives to their
behavior, so long as it is clear that nudniks defy the standard account
of rational apathy.
Nudniks are not the only type of active consumers. “Shoppers” pre-
sent another category:54 those consumers that the informed minority
theory envisions, who shop around, read contracts, and compare
among products based on price, quality, and the terms of the con-
sumer agreement. A shopper, for example, will not fly with a certain
airline if she reads on the website that this airline is not willing to offer
compensation for delays; avoid a car dealership if the contract does
not provide warranties; or will not sign up for a credit card if the
agreement shows cash advance fees that are too high. In other words,
for the shopper, the terms of the contract are the product. Nudniks, in
contrast, are not necessarily committed to studiously comparing
among sellers. A nudnik can form her transactional expectations
based on the same sources that most other consumers use—negotia-
tions with the seller, representations, advertisements, market norms,
and so on.55
Shoppers exert pressure ex ante, before the purchase; nudniks exert
pressures ex post, after the purchase. If a seller includes an unfavora-
ble term in the fine print, such as denying refunds for defective prod-
ucts, this term may end up costing the seller consumers who are
shoppers, as they will switch to a more consumer-friendly competitor.
Nudniks (like passivists) may not be as sensitive to the inclusion of
such terms, if only because they may not read the fine print. On the
other hand, a seller who actually enforces the term—e.g., denying the
nudnik a refund for a broken printer—risks invoking the nudnik’s
wrath. Herein lies another distinction. The shoppers’ mode of action is
exit: they do not engage with sellers who offer inferior terms. By con-
trast, the nudnik’s mode of action is more elaborate, and consists of a
variety of voice strategies, both private and public.56
54. Economic theories of search behavior focus on shoppers. Sara Fisher Ellison, Price Search
and Obfuscation: An Overview of the Theory and Empirics, in HANDBOOKONTHE ECONOMICS
OF RETAILINGAND DISTRIBUTION287 (2016).
55. These broader transactional expectations may sometimes become part of the contract it-
self—through tools of interpretation that focus on oral representations, trade customs, past deal-
ings, etc. See supra note 8. But that is not always the case (think, for example, of the effect of the
parol evidence rule). See RESTATEMENT(SECOND) OF CONTRACTS §213; U.C.C. §1-303.
56. We elaborate on nudniks’ different modes of activism in Arbel & Shapira, Theory of the
Nudnik, supra note 9.
Electronic copy available at: https://ssrn.com/abstract=3568768

<<PAGE_BREAK>>

\\jciprod01\productn\D\DPL\69-2\DPL206.txt unknown Seq: 16 21-APR-20 11:48
248 DEPAUL LAW REVIEW [Vol.69:233
The last category of consumers is sophisticates. These are the con-
sumers who take advantage of the most favorable terms of the trans-
action, strategize their use of the product to derive the most value,
and file lawsuits when they expect a large judgment.57 The sophisti-
cates are typified by higher levels of literacy, a better understanding of
legal concepts, and easier access to legal representation. The sophisti-
cate is one to know which credit card to use in each transaction when
choosing among a dozen that are tightly packed in her wallet, when to
make a claim on her insurance policy, and how to maximize the value
of her miles.58 Sophisticates are not just better at consuming, they are
also better at identifying profitable lawsuits. The sophisticate can tell
when her contractual rights are violated, the value of filing a lawsuit
or a complaint, and the most effective route to use.
The sophisticates are like nudniks, in a sense that they are “private
enforcers” in the market. But, unlike nudniks, sophisticates enforce
only when a cold cost-benefit calculation says it pays to do so. In their
enforcement actions, sophisticates are in a sense like bounty hunters.
They seek personal profit from vindicating their legal rights. A classic
example is the serial class action plaintiff who actively seeks wrongs so
as to file profitable lawsuits. In China, consumer protection laws gave
birth to “counterfeit hunters”, who purchase counterfeits just so that
they can file a complaint to the regulator and collect a reward under
the rules there.59 Indeed, policy makers sometimes leverage bounty
hunters to help with private enforcement of issues of public import—
think, for example, on the use of private rewards in qui tam claims.60
Sophisticates and nudniks are therefore birds of a different feather.
Sophisticates will complain or sue only when they are within their le-
gal right to do so and when it pays to complain. Nudniks complain
because it is in their blood. They do not like to be treated unfairly.
They believe that sellers should keep promises and will not stop until
the issue is rectified, regardless of a cold cost-benefit analysis of what
it would take to keep fighting. Sophisticates focus on the product or
57. A famous example is John Leonard, a consumer of Pepsi who found an apparent loophole
in their promotion offering—a harrier jet estimated at $22 million for anyone who could collect
700,000 points. As points were purchasable at a rate of cent/point, that meant that an investment
of $700,000 would net a profit of $21.3 million. Leonard v. Pepsico, Inc., 88 F. Supp. 2d 116,
(S.D.N.Y. 1999), aff’d, 210 F.3d 88 (2d Cir. 2000).
58. For example, the authors have, on average, 20 credit cards. One of the authors only has
one card.
59. Sui-Lee Wee, Though Awash in Fakes, China Rethinks Counterfeit Hunters, N.Y. TIMES,
Nov. 30, 2016.
60. See David Freeman Engstrom, Public Regulation of Private Enforcement: Empirical Anal-
ysis of DOJ Oversight of Qui Tam Litigation Under the False Claims Act, 107 NW. L. REV. 1689,
1690 (2013) (noting the shift “toward private lawsuits as a regulatory tools”).
Electronic copy available at: https://ssrn.com/abstract=3568768

<<PAGE_BREAK>>

\\jciprod01\productn\D\DPL\69-2\DPL206.txt unknown Seq: 17 21-APR-20 11:48
2020] CONSUMER ACTIVISM 249
contract: They will use the product optimally, as in using balance
transfers to roll payments and avoid interest payments, and will file
class actions when they think a favorable settlement or judgment is
likely. The nudniks, on the other hand, are more likely to take action
vis-a`-vis the seller; when they feel the seller mistreated them, they will
complain, bring a lawsuit, report to the regulator, and so on.
Another way to put it: Sophisticates operate based on the fine print,
while nudniks do just fine without the print. The sophisticates act
upon contractual rights they know they have; nudniks upon broad
transactional expectations.61 To illustrate, think about a restaurant
that notes in its terms and conditions a disclaimer that the chef holds
full discretion over how to cook the meat and will not replace a dish.
If the restaurant serves an overcooked steak, the irate nudnik will de-
mand to have it replaced and it will comfort her little even if the res-
taurant’s general counsel reads her the contractual disclaimer.
Meanwhile, the sophisticate will sit and angrily chew, recalling the ex-
clusion in Article 7, subsection (3).
An important distinction for our purposes is that the nudnik’s ac-
tions are more likely to generate positive spillovers than the sophisti-
cate’s actions. When sophisticates use products optimally, they tend to
extract private benefits. In fact, sophistication often leads to negative
spillovers and cross-subsidies from less sophisticated consumers.62
Even when sophisticates file lawsuits, or even class-actions, the private
profit motive suggests that they internalize a larger share of the value
of their activities. An even more important distinction stems from the
sophisticates’ dependence on the exogenous cost-benefit of private
enforcement. To illustrate, consider the example of the class action
plaintiff. Recent developments in American law, and specifically the
wave of mandatory arbitration clauses, severely limit the scope of col-
lective action, making it extremely difficult to benefit from bringing
them.63 In this environment, the bounty hunters who face an insur-
61. The idea that consumers make choices based on background knowledge, not deriving di-
rectly from the contract, was recently advanced by Ayres and Schwartz: “Consumers also learn
about the deals they make from visiting firms, their experience with similar deals, discussions
with friends, their observation of other consumers’ purchasing choices, and reading consumer
reports.” Ayres & Schwartz, supra note 35, at 550–51.
62. See, e.g., Xavier Gabaix & David Laibson, Shrouded Attributes, Consumer Myopia, and
Information Suppression in Competitive Markets, 121 Q. J. ECON. 505, 519 (2006) (analyzing
cross-subsidies between sophisticated and unsophisticated consumers).
63. See AT&T Mobility v. Concepcion, 563 U.S. 333, 352 (2011) (holding that the Federal
Arbitration Act preempts state power to limit class-action waivers); Zachary D. Clopton, Class
Actions and Executive Power, 92 N.Y.U. L. REV. 878, 880 (2017) (“The private-enforcement
class action faces strong ‘headwinds’ in the form of class certification, subject-matter jurisdiction,
and arbitration.”); Roy Shapira, Mandatory Arbitration and the Market for Reputation, 99 B.U.
Electronic copy available at: https://ssrn.com/abstract=3568768

<<PAGE_BREAK>>

\\jciprod01\productn\D\DPL\69-2\DPL206.txt unknown Seq: 18 21-APR-20 11:48
250 DEPAUL LAW REVIEW [Vol.69:233
mountable hurdle in collecting their bounty will stop hunting. By con-
trast, nudniks may still be irritated enough and have a strong sense of
commitment to make things right that they will file an individual law-
suit, attempt to enlist the help of journalists or report to the regulator.
In such scenarios, the positive spillovers from nudnik actions are even
more impactful.
To be sure, the distinction between sophisticates and nudniks is not
always clear. Consider for example the case of “gripe sites.”64 When
the Partingtons ran into issues with their contractor, Stantons and
Sons Contracting, they opened a blog hosted under danstantonissue
.com, where they detailed their negative experiences.65 Similarly, a
disappointed customer who bought an improperly installed fence from
Lowes opened the blog Lowes-Sucks.com.66 In both examples, the
gripe sites share key features of nudnik-based activism: a small con-
sumer resisting seller misbehavior and instead of doing nothing about
it (as most consumers would), going to great lengths to fight the mis-
behavior seller publicly.67 Yet many other gripe sites exist,68 and some
of them are used to blackmail companies and do not represent au-
thentic consumer sentiments.69 The operator of the website may be
solely motivated by the desire to receive payment from the company
to take down the website. Operators of the latter type of gripe sites
can be perceived as “trolls”; or, in our framework, and given that the
profit-motive seemingly drives them, as cynical sophisticates.
B. Nudniks in Action: Motivating Examples
We illustrate nudniks’ modes of activism and the role they play in
consumer markets with a few motivating examples.70 The examples
L. REV. 873 (2019) (arguing that the rise of mandatory arbitration clauses dilutes the effective-
ness of market discipline).
64. See generally Rachael Braswell, Consumer Gripe Sites, Intellectual Property Law, and the
Use of Cease-and-Desist Letters to Chill Protected Speech on the Internet, 17 FORDHAM INTELL.
PROP. MEDIA & ENT. L.J. 1241 (2007).
65. Dan Stanton, Contractor Issue, BLOGSPOT, http://danstantonissue.blogspot.com/; see also
Bruce Mohl, Constructive Criticism, BOSTON GLOBE(Sept. 9, 2007), http://archive.boston.com/-
business/technology/articles/2007/09/09/constructive_criticism/.
66. Jacqui Cheng, Intellectual Property Laws Abused in Question to Shutdown Lowes-sucks
.com, ARS TECHNICA (Sept. 26, 2007). In many of the gripe site cases, the seller claims trade-
mark infringement, but such claims are rarely successful.
67. See Felix T. Wu, Collateral Censorship and the Limits of Intermediary Immunity, 87 NOTRE
DAME L. REV. 293, 306 (2011) (noting the public-service orientation of gripe sites).
68. See Peter Johnson, Can You Quote Donald Duck?: Intellectual Property in Cyberculture,
13 YALE J.L. & HUMAN. 451, 478 (2001).
69. Wu, supra note 67, at 304.
70. We discuss some of these examples in greater detail in Arbel & Shapira, Theory of the
Nudnik. We also include some graphics and other illustrations in the companion website.
Electronic copy available at: https://ssrn.com/abstract=3568768

<<PAGE_BREAK>>

\\jciprod01\productn\D\DPL\69-2\DPL206.txt unknown Seq: 19 21-APR-20 11:48
2020] CONSUMER ACTIVISM 251
we use here are admittedly representative of only a small segment of
nudnik activities in the real world: we use examples that become pub-
licly salient, while most of nudnik activities happens away from the
limelight. Think for example about the consumer who consistently
writes detailed negative Yelp reviews whenever the seller disappoints,
posting rants on products’ Facebook pages, submitting letters to the
Better Business Bureau or complaints to the regulator, and so on.71 In
most cases, we will not hear about this nudnik’s activities. Still, the
publicly-salient examples we use are helpful in a sense that they tease
out certain recurring themes in nudnik-based activism.
A classic example of a nudnik in action comes from Harvard Busi-
ness School Professor Ben Edelman. In 2014, Professor Edelman or-
dered takeout from a local restaurant, Sichuan Garden.72 When he
reviewed the check, he found that he was overcharged $1 for each of
the four items ordered.73 Edelman wrote a message on the restau-
rant’s website and followed up with a detailed email, noting the $4
overcharge and asking for a clarification.74 The owner responded by
noting that the website prices have “been out of date” for quite some
time relative to the restaurant menu.75 Edelman then sought a com-
pensation of $12 for the overcharge, citing the Massachusetts Unfair
and Deceptive Trade Practices Act, which permits treble damages in
certain cases.76 The owner refused, Edelman reported the incident to
the regulator and the parties continued corresponding until the story
leaked to the media. The public response was highly negative, but the
Yonathan Arbel, Theory of the Nudnik—Battle of the Forms, BLOG (Feb. 1, 2019), http://battleof
theforms.com/theory-of-the-nudnik/ [hereinafter Arbel, Battle of the Forms].
71. To clarify: the emphasis here is on “consistently.” The reader who wonders if she would be
considered a nudnik in our framework because she once posted a review on Yelp or TripAdvisor
can ask herself this simple question: how often do I fight sellers when I am dissatisfied with the
product or service. If I frequently take action when sellers disappoint, I am a nudnik (nothing
wrong with it!). If I once wrote a negative review because I was so upset and needed to air out
the frustration, chances are I am not really a serial consumer crusader.
72. See Hilary Sargent, Ben Edelman, Harvard Business Professor, Goes to War over $4 Worth
of Chinese Food, BOSTON.COM (Dec. 9, 2014), https://www.boston.com/culture/restaurants/2014/
12/09/ben-edelman-harvard-business-school-professor-goes-to-war-over-4-worth-of-chinese-
food.
73. Id.
74. Id.
75. Id. For some other examples on a companion website, see Arbel, Battle of the Forms,
supra note 70.
76. MASS. GEN. LAWS. ch. 93A, §11, declared unconstitutional by Rev-Lyn Contracting Co. v.
Patriot Marine, LLC, 760 F. Supp. 2d 162 (D. Mass. 2010).
Electronic copy available at: https://ssrn.com/abstract=3568768

<<PAGE_BREAK>>

\\jciprod01\productn\D\DPL\69-2\DPL206.txt unknown Seq: 20 21-APR-20 11:48
252 DEPAUL LAW REVIEW [Vol.69:233
negativity was directed at Edelman and not at the overcharging res-
taurant. His behavior was portrayed as petty and privileged.77
The overwhelmingly negative public response fails to appreciate the
essential public service Edelman provided—namely, deterring
overcharging. Anecdotally, when we called the restaurant, five years
after the story broke and replicated the original order, we found the
pricing to be accurate: The online menu matched the actual prices
down to the penny. Edelman’s insistence here may strike some as “ir-
rational,” as the opportunity cost of the time Edelman—a well-paid
Harvard Business Professor and a sought-after consultant—spent on
fighting the overcharge easily dwarfed the $12 he was ostensibly after.
Yet if it were not for people like Edelman who go through the trouble,
restaurants would have a much easier time systematically overcharg-
ing the rest of us.78
Another example came in 2011, when Molly Katchpole, a 22-year-
old customer of Bank of America noticed an upcoming change in the
bank’s fee structure.79 The bank was about to add a $5 charge to cer-
tain debit-card users, a right the bank had under its contract with its
customers.80 Molly not only noticed the upcoming change, she decided
to fight back against it.81 She started an online petition, where she
wrote: “[T]his change will hit low income customers the worst - in-
cluding people like me, a recent college graduate working two part-
time jobs . . . . At some point, we’ve got to say enough is enough.”82
To promote her petition, she used social media in combination with
traditional media—she reached out to an ABC reporter who filmed a
segment about her petition.83 Her call resonated with many others and
the petition quickly garnered over 300,000 signatures.84 Soon after,
the bank announced that it would abandon its plan to add this charge.
The Katchpole example illustrates how nudniks pay attention to as-
pects of the seller behavior that many do not see; how they become
active when they feel wronged even when most of us would remain
77. Elizabeth Barber, A Harvard Professor Launched an Epic Rant Over an Extra $4 on his
Chinese Takeout Bill, TIME (Dec. 10, 2014), http://time.com/3627282/harvard-professor-chinese-
takeout-ben-edelman/.
78. Telephone Conversation with Victoria Moffa, Research Assistant (Mar. 1, 2019).
79. Molly Katchpole, Tell Bank of America: No $5 Debit Card Fees, CHANGE.ORG (Nov. 1,
2011), https://www.change.org/p/tell-bank-of-america-no-5-debit-card-fees.
80. Id.
81. Id.
82. Id.
83. Matt Gutman & Susanna Kim, BofA Site Problems Persist; Customers Petition Company,
ABC NEWS (Oct. 5, 2011), https://abcnews.go.com/Business/bank-america-customers-launch-
petition-debit-card-fee/story?id=14665531.
84. See Katchpole, supra note 79.
Electronic copy available at: https://ssrn.com/abstract=3568768

<<PAGE_BREAK>>

\\jciprod01\productn\D\DPL\69-2\DPL206.txt unknown Seq: 21 21-APR-20 11:48
2020] CONSUMER ACTIVISM 253
passive; and how the nudnik’s activism can draw others, normally pas-
sive consumers, into action and bring change in market behavior.
Another example of a high impact strategy is that of the Canadian
country singer, Dave Carroll. On his flight with United Airlines, his
favorite 710 Taylor guitar was broken due to mishandling by the
ground crew.85 Upset with the company’s indifference, he posted a
song on YouTube called “United Breaks Guitars,” which quickly went
viral with over 19 million views.86 The story was soon reported by the
mass media as well.87 By one estimate, the incident led to a decline of
over ten percent in the company’s stock price.88 Consequently, United
backed down and offered monetary compensation.89
In 2017, British Airways lost Hasan Syed’s father’s luggage in an
international flight to Paris. Syed took his grievance to social media,
where he tweeted: “Don’t fly with @British_Airways. They can’t keep
track of your luggage.”90 This tweet had a twist. Syed paid $1,000 to
Twitter to have this tweet promoted to as many followers of British
Airways as possible.91 Over a short period of time, his tweet was seen
by over 70,000 users.92 His tweet received considerable media atten-
tion and was dubbed as the first instance of “complaintvertising.”93
Soon after his campaign, British Airways sent him a special apologetic
message, located the bag, hand-delivered it to his dad in Paris, and
issued a public apology.94
85. UNITED BREAKS GUITARS, https://www.davecarrollmusic.com/songwriting/united-breaks-
guitars/?v=7516fd43adaa (last visited Nov. 27, 2019).
86. Sonsofmaxwell, United Breaks Guitars, YOUTUBE (July 6, 2009), https://www.youtube
.com/-watch?v=5YGc4zOqozo.
87. DAVID DUNNE, ROTMAN, UNITED BREAKS GUITARS CASE, https://3gz8rn1ntxn33t9p221
v8-mlgtsq-wpengine.netdna-ssl.com/wp-content/uploads/United-Breaks-Guitars-Case-Jan-11-10-
21.pdf.
88. Eddie Wrenn, The Sweet Music of Revenge: Singer Pens YouTube Hit After United Air-
lines Breaks His Guitar . . . and Shares Plunge 10%, DAILY MAIL (July 24, 2009), https://www
.dail-ymail.co.uk/news/article-1201671/Singer-Dave-Carroll-pens-YouTube-hit-United-Airlines-
breaks-guitar—shares-plunge-10.html.
89. Did Dave Carroll Lose United Airlines 4180m?, THE ECONOMIST (July 24, 2009), https://
www.economist.com/gulliver/2009/07/24/did-dave-carroll-lose-united-airlines-180m.
90. @HVSVN, TWITTER (Sept. 3, 2013, 3:46 PM), https://twitter.com/HVSVN/status/375026
96-3347304449.
91. Id.; @Kforesti, TWITTER (Sept. 4, 2013, 9:08 AM), https://twitter.com-/Kforesti/status/3752
89284276006912.
92. @Kforesti, supra note 91.
93. ANGRY TRAVELER PAYS BIG BUCKS FOR TWEETS, CNN MONEY, https://money.cnn.com/
vid-eo/news/2013/09/04/n-british-air-twitter-war-mclaughlin.cnnmoney/index.html [hereinafter
CNN MONEY]; Jason King, Complainvertising: Word of Mouth’s Evil Twin, HUFFPOST (Oct. 23,
2013, 1:14 PM), https://www.huffingtonpost.com/jasonking/complainvertising-word-of_b_4143-
073.html (last updated Dec. 6, 2017).
94. CNN MONEY, supra note 93; King, supra note 93.
Electronic copy available at: https://ssrn.com/abstract=3568768

<<PAGE_BREAK>>

\\jciprod01\productn\D\DPL\69-2\DPL206.txt unknown Seq: 22 21-APR-20 11:48
254 DEPAUL LAW REVIEW [Vol.69:233
There are various indications that these acts of consumer activism
have not only improved things for the specific complaining customer,
but also led to a broader change in sellers’ policies. When Katchpole’s
petition gained traction, Bank of America quickly retracted its policy.
After the Carroll video broke out, United Airlines promised to
change its customer service policy accordingly and asked permission
to use the video in its internal training seminars (one trusts as an ex-
emplar of what not to do).95 The ripple effects, interestingly, were felt
much more broadly, and Carroll reports that several other companies
licensed his video as well for their internal training seminars.96
The nudnik’s activism is often part of repeat behavior. Recall Pro-
fessor Edelman’s example;97 it turns out that Professor Edelman had
previously complained about various other restaurants around Bos-
ton.98 When his discount coupon was not accepted at a sushi restau-
rant, he threatened that he would write to the Boston Licensing Board
to have their business license revoked.99 Katchpole’s campaign against
Bank of Americas was not her last; she also fought against a planned
“convenience fee” by Verizon Wireless.100 The company retracted its
policy in less than twelve hours.101
The public reaction to nudniks is often negative. When Edelman
complained about Sichuan Garden over $12, many mocked him for
being petty, privileged, and ruthless.102 Even the marketing literature
treats nudniks quite unfavorably.103 An introductory textbook in mar-
keting, for example, calls them “terrorists,” that “companies must
take measures to get rid of.”104
95. Broken Guitar Song Gets Airline’s Attention, CBC NEWS (July 8, 2009, 3:00 PM), https://
www.cbc.ca/news/entertainment/broken-guitar-song-gets-airline-s-attention-1.802741 (last up-
dated July 8, 2009).
96. DAVE CARROLL, UNITED BREAKS GUITARS: THE POWEROF ONE VOICEINTHE AGEOF
SOCIAL MEDIA 81 (2013).
97. See supra Introduction.
98. Hilary Sargent, There’s More: Edelman Did This Before, And Worse, BOSTON.COM (Dec.
10, 2014), https://www.boston.com/culture/restaurants/2014/12/10/theres-more-edelman-did-this-
before-and-worse.
99. Id.
100. Minda Zetlin, Meet Fee-Fighting Vigilante Molly Katchpole, DEBTHELPER.COM (Jan. 19,
2012), https://www.debthelper.com/blog/2012/01/meet-fee-fighting-vigilante-molly-katchpole/.
101. Id.
102. Nathan J. Robinson, Stop Eviscerating the Harvard Professor Who Threatened to Sue a
Chinese Restaurant Over $4. He Has a Point, The NEW REPUBLIC (Dec. 13, 2014), https://newer-
public.com/article/120558/ben-edelman-harvard-prof-angry-over-4-overcharge-has-point (“By
now even Ben Edelman thinks Ben Edelman is fairly despicable . . . . The consensus is that he’s a
cheap, entitled bully and that the immigrant restaurant owner is a hapless victim.”).
103. See, e.g., Jagdip Singh, A Typology of Consumer Dissatisfaction Response Styles, 66 J.
RETAILING 57 (1990).
104. SCHIFFMAN & WISENBLIT, supra note 45, at 44.
Electronic copy available at: https://ssrn.com/abstract=3568768

<<PAGE_BREAK>>

\\jciprod01\productn\D\DPL\69-2\DPL206.txt unknown Seq: 23 21-APR-20 11:48
2020] CONSUMER ACTIVISM 255
In summary, we see in these examples how nudniks have an idio-
syncratic cost structure, which leads them to take action—sometimes
quite radical—in instances where most consumers would remain
quiet. Potentially attributable to their unique cost structure, public re-
ception of nudniks is not always favorable. The public mocks them
partly because they are different. Yet it is precisely because they are
different that nudniks can solve the collective action problems that
plague all other consumers. Nudniks take action when most of us do
not. And their action can lead to substantial changes in consumer
markets—even when nudniks pursue the enforcement of rights not
formally grounded in the contract.
C. Why do Nudniks Prevail where the Informed Minority Fails?
The theory of the crusading minority sidesteps the issues that
plague the informed minority theory along three key dimensions: (1)
nudnik-based activism is not predicated on financial cost-benefit anal-
ysis, and so is less susceptible to changes in the market environment;
(2) nudnik-based activism is not predicated on reading and compre-
hending contracts; and, (3) nudnik-based activism is not predicated on
the existence of a critical mass of similarly minded activists.
The first factor concerns the cost of being an active consumer. Both
shoppers and sophisticates are active because it pays for them to do
so. They shop around, read contracts, and examine reviews because it
allows them to find the best deals on the market, use the product opti-
mally, or find profitable lawsuit opportunities. But this makes their
activism contingent and unreliable when the costs of becoming active
rise. When the costs of becoming engaged increase, sophisticates and
shoppers stop being involved. They will read, negotiate, and sue less.
Nudniks, by contrast, operate mostly based on motivations that are,
in a sense, internal. They possess certain idiosyncratic personality
traits and beliefs that compel them to sink their teeth in and not let go
when they feel wronged, regardless of the financial cost-benefit analy-
sis. Elinor Ostrom argued that group norms are often enforced by a
subset of individuals within the group who are “willing punishers”:
those for whom fighting wrongs comes naturally (even at a personal
cost—think about approaching an able-bodied person parking at a
disabled parking spot to scold him).105 While some may view this as-
pect of nudnik behavior as irrational or impetuous, for the nudnik it is
the right thing to do—you do not let people get away with violating
105. Elinor Ostrom, Collective Action and the Evolution of Social Norms, 14 J. ECON. PERSP.
137, 142 (2000).
Electronic copy available at: https://ssrn.com/abstract=3568768

<<PAGE_BREAK>>

\\jciprod01\productn\D\DPL\69-2\DPL206.txt unknown Seq: 24 21-APR-20 11:48
256 DEPAUL LAW REVIEW [Vol.69:233
their promises. To be sure, there are limits to nudnik activism too.
Presumably, when the costs of complaining, enlisting the help of the
media, or filing a lawsuit are especially high, they will deter even the
nudniks (or at least some of them) from voicing their concerns pub-
licly. Our point here is therefore not absolute but rather relative: An
increase in the costs of becoming involved is more likely to deter
other types of consumers than it is to deter nudniks.
This difference in responding to the costs of activism makes nudniks
a better fit as active players in today’s consumer markets, relative to
shoppers, sophisticates, and obviously passivists. In today’s markets,
disclosures and boilerplate terms are copied and reproduced at almost
zero marginal cost, leading to an explosion of contractual data.106 The
increase in the length and complexity of contracts will most directly
impact shoppers, but less so the nudnik. The limitations on class ac-
tions and the trend towards individual arbitration pose the greatest
risk for legally active sophisticates, but not necessarily nudniks.107
Even companies’ increasing efforts to limit complaints have a limited
impact on nudniks, who tend to find a way.108
The same idiosyncratic motivations lead nudniks to produce reputa-
tional information, as in posting detailed negative reviews online or
sharing stories with other consumers, even when the costs of such ac-
tivities dwarf any direct benefit. Note that most users of online plat-
forms consult reviews but do not post them. The operation of these
reputation markets is predicated on the few who do invest in posting
informative reviews, even when it does not pay to do so. In other
words, the fact that nudniks are driven by internal motivations and
not external cost-benefit analysis helps to solve not just the problems
that plague the informed minority theory, but also the problems that
plague the reputational discipline theory.
The second key distinction is that nudniks can affect change even
without thoroughly reading and comprehending contracts. Nudniks
frequently assert claims based on broader transactional expectations,
that is, what rights they believe they should have, regardless of what
the contract stipulates. As legal scholars have started to acknowledge,
consumers often form transactional expectations that are based not
106. To reiterate our point from Part I.B: Recent market trends, concerning the rise in con-
sumer disclosure and the explosion of online contracts, privacy policies, and End User License
Agreements all put increasing demands on the already-overwhelmed minority of readers. BEN-
SHAHAR & SCHNEIDER, supra note 32, at 94–101.
107. See supra note 63 and accompanying text. R
108. Amy J. Schmitz, Remedy Realities in Business-to-Consumer Contracting, 58 ARIZ. L.
REV. 213, 233–38 (2016) (detailing companies’ efforts to make it increasingly harder for consum-
ers to complain).
Electronic copy available at: https://ssrn.com/abstract=3568768

<<PAGE_BREAK>>

\\jciprod01\productn\D\DPL\69-2\DPL206.txt unknown Seq: 25 21-APR-20 11:48
2020] CONSUMER ACTIVISM 257
necessarily on the specific contract and its fine print, but rather on
previous transactions, a general sense of fairness, and market
norms.109 When there is a mismatch between consumer expectations
and the contract, most consumers will not fight the company. Nudniks
will. When a cable company fails to arrive on time, the nudnik may
post a negative review online, even if the fine print actually provides
the company the right to delay appointments with no prior notice.110
Ironically, the reading of the contract might lead sophisticates to be
less active, as they will find the cable company’s actions permissible
under the contract.111
Reacting to transactional expectations, rather than the language of
the contract, makes nudnik-based activism more relevant in today’s
consumer markets relative to informed minority-based activity. While
the volume and complexity of contractual information has increased,
making it less likely that consumers will read and comprehend their
contractual rights, consumers have been developing an increasingly
richer set of transactional expectations. Consumers nowadays experi-
ence more market interactions and are exposed to more merchants
and dealing styles (think online shopping comparisons). This develop-
ment broadens and sharpens their ability to compare products and
sense what a viable market norm looks like. Indeed, one notable cus-
tomer service report stated that “the digitally empowered customer
[has led to] customer expectations soaring” and “54% of respondents
say they have higher expectations for customer service today than
they had one year ago.”112 This is to say that in today’s consumer mar-
kets, consumers read contracts less but expect from the seller more. In
such an environment, activism based on breached expectations after
109. Ayres & Schwartz, supra note 35.
110. As others have noted, such claims can be quite effective, even if not grounded in the four
corners of the contract. See, e.g., Lucian A. Bebchuk & Richard A. Posner, One-Sided Contracts
in Competitive Consumer Markets, 104 MICH. L. REV. 827, 830 (2006) (arguing that “reputa-
tional considerations” may “induce the seller to treat the buyer fairly even when such treatment
is not contractually required”); Jason Scott Johnston, The Return of the Bargain: An Economic
Theory of How Standard Form Contracts Enable Cooperative Negotiation Between Businesses
and Consumers, 104 MICH. L. REV. 857, 858 (2006) (“In practice, acting through its agents, a firm
will often provide benefits to consumers who complain beyond those that its standard form obli-
gates it to provide . . . .”). See also Clayton P. Gillette, Rolling Contracts as an Agency Problem,
2004 WIS. L. REV. 679 (2004).
111. The problem is especially acute when contract terms are misleading and unenforceable,
yet consumers tend to view them as binding. See Furth-Matzkin, supra note 21 (finding the com-
mon inclusion of unenforceable terms in residential agreements).
112. 2017 STATE OF GLOBAL CUSTOMER SERVICE REPORT, MICROSOFT (2017), https://
info.micros-oft.com/rs/157-GQE-382/images/EN-CNTNT-Report-DynService-2017-global-state-
customer-service.pdf.
Electronic copy available at: https://ssrn.com/abstract=3568768

<<PAGE_BREAK>>

\\jciprod01\productn\D\DPL\69-2\DPL206.txt unknown Seq: 26 21-APR-20 11:48
258 DEPAUL LAW REVIEW [Vol.69:233
the fact is more relevant than activism based on reading the terms of
contract in advance.
Finally, a critical mass of nudniks is not necessarily needed to affect
change; a single nudnik may be enough. For the informed minority
theory, size matters: If the subset of readers is not sufficiently large,
sellers would not have sufficient incentives to adapt the firm’s offering
to win over these comparison shoppers. Firms would simply ignore
this tiny segment of the market.
Nudniks work differently. They put reputational and legal sanctions
in motion. For this reason, their power comes not necessarily from
numbers. One Ben Edelman was enough to stop the restaurant’s prac-
tice of overcharging. A single Dave Caroll can create a public rela-
tions crisis of large proportions. Just one lawsuit of an aggrieved Bank
of America customer resulted in a multi-million-dollar award in puni-
tive damages.113 To be sure, a single nudnik would not always be
enough—indeed, sometimes even many nudniks’ complaints will not
move the seller. The point is that under certain conditions, a single
nudnik’s fight can draw the attention of many others—a fact that is
appreciated by crisis management firms.
Recent changes in consumer markets have therefore made nudnik-
based activism relatively more impactful. The increase in contract
length and complexity and the rise of class action waivers have made
non-nudnik activists (and the informed minority theory) less relevant.
At the same time, the internet and in particular social media have
increased the ability of a single nudnik’s fight to bring a seller to its
knees.114 Posting a negative review online increases the dissemination
potential, the permanence, and the ease of accessibility of the damn-
ing information about the seller. Everyone searching for that seller in
the future can run into the nudnik’s detailed concern with the seller’s
underperformance. In other words, changes in the information envi-
ronment have boosted the nudnik’s signal and ability to shame firms
into meeting market norms.
113. See, e.g., Sundquist v. Bank of Am., N.A., 566 B.R. 563, 620 (Bankr. E.D. Cal. 2017), va-
cated in part sub nom. In re Sundquist, 580 B.R. 536, 556 (Bankr. E.D. Cal. 2018) (ordering $45
million in punitive damages against bank). Punitive damages can lure consumers into action—
especially sophisticates—but the point is that for nudniks, the financial payment is not the pri-
mary motive.
114. See generally Matthew S. O’Hern & Lynn R. Kahle, The Empowered Customer: User-
Generated Content and the Future of Marketing, 18 GLOBAL ECON. & MGMT. REV. 21 (2013)
(arguing that the user-generated content on social media “represents a profound shift of power
from firms to consumers”).
Electronic copy available at: https://ssrn.com/abstract=3568768

<<PAGE_BREAK>>

\\jciprod01\productn\D\DPL\69-2\DPL206.txt unknown Seq: 27 21-APR-20 11:48
2020] CONSUMER ACTIVISM 259
D. Why and How Sellers Accommodate Nudniks’ Concerns
To further underscore how nudniks bring about market-wide
changes in behavior, let us explore the question of how and why sell-
ers respond to nudniks. When nudniks have legally cognizable claims,
the mechanism is fairly straightforward. The pressure comes from
nudniks’ complaints to the regulator, the filing of lawsuits, or the re-
fusal to pay until the issue is settled. All of these actions impose direct
costs on firms, and the threat of these costs can deter seller misbehav-
ior ex ante.
Less intuitively, sellers respond to nudniks even when the latter as-
sert claims based on transactional expectations that are not grounded
in the four corners of the contract.115 While firms are not legally obli-
gated to appease the nudnik in such cases, they often have reputa-
tional incentives to do so. A nudnik that posts a negative review
online, or talks with a reporter or a consumer organization may cause
more significant damage to the firm than any single lawsuit.116 Recall
how Molly Katchpole fought Bank of America for something that was
within the bank’s contractual rights—changing its fee structure.117 An-
other example is the 2017 incident whereby United Airlines evicted a
paying passenger from the flight to accommodate another passen-
ger.118 Even though the airline company’s contract with the passenger
stipulated that it can de-board him, treating a consumer that way
seemed, in the eyes of United’s various stakeholders, as uncalled for,
unfair, and bad business.119 The incident led to a swift and significant
115. For a broad and attentive treatment of these issues, see also Shmuel I. Becher & Tal Z.
Zarsky, Minding the Gap, 51 CONN. L. REV. 69 (2019).
116. Even complaints to the regulator may be based on violation of consumer expectations;
whether or not the regulator would respond to such complaints is a different matter.
117. See supra notes 61–64 and accompanying text.
118. Christina Zdanowicz & Emanuella Grinberg, Passenger Dragged Off Overbooked United
Flight, CNN TRAVEL (Apr. 10, 2018, 8:13 AM), https://www.cnn.com/2017/04/10/travel/passen
ger-removed-united-flight-trnd/index.html; Erin McCann, United’s Apologies: A Timeline, N.Y.
TIMES (Apr. 14, 2017), https://www.nytimes.com/2017/04/14/business/united-airlines-passenger-
doctor.html (recounting the various apologies issues. At first, the CEO noted that the “re-ac-
commodat[ion]” of the passenger was according to “established procedures”—a claim that was
not repeated in future apologies).
119. CONTRACT OF CARRIAGE DOCUMENT r. 25, UNITED, https://www.united.com/ual/en/us/
fly/co-ntract-of-carriage.html (last updated Nov. 7, 2019). For an example of the public response,
see Alex Abad-Santos, Why United Airlines Can Get Away With Treating Its Customers Like
Garbage, VOX.COM (Apr. 11, 2017, 12:30 PM), https://www.vox.com/culture/2017/4/11/15246632/
united-airlines-drag-man-off-plane (“Even if United was well within its rights . . . in bumping the
Chicago passenger from his flight, most people can agree that its public explanation in both cases
wasn’t a good look.”). See also David A. Hoffman, Relational Contracts of Adhesion, 85 U. CHI.
L. REV. 1395, 1401–02 (2018) (noting the potential reputational fallout of enforcing certain terms
against consumers).
Electronic copy available at: https://ssrn.com/abstract=3568768

<<PAGE_BREAK>>

\\jciprod01\productn\D\DPL\69-2\DPL206.txt unknown Seq: 28 21-APR-20 11:48
260 DEPAUL LAW REVIEW [Vol.69:233
decline in passengers’ willingness to fly United.120 In general, the
reputational effects of asserting contractual rights narrowly can be
devastating from the firm’s perspective. Such potential reputational
effects may be enough to drive firms to conform to consumers’ supra-
contractual expectations.121
The mere background threat of nudnik activity—the “shadow of the
nudnik”—can be enough to affect change. A seller that deals with a
large number of consumers and cannot identify in advance who will be
a nudnik,122 faces a choice. The seller could maintain its level of con-
tractual performance and address nudniks once they reveal them-
selves as such, hoping to be able to buy them off before they draw
negative attention to the firm’s behavior. Alternatively, the seller
could raise its level of contractual performance across the board, so
that not even nudniks would have something to complain about.
At least until recently, there were good reasons for firms to choose
the latter option and improve their contractual performance across all
consumers. The alternative—waiting until you realize you are dealing
with a nudnik—is simply too risky.123 If the firm only reaches a
nudnik after she aired her grievances online, the negative review al-
ready has a life of its own and the firm’s potential future consumers
may read it and decide to go elsewhere.124 Similarly, if a firm only
approaches a nudnik after she filed a lawsuit, then even if the firm
paid her enough to get her to settle, the mere filing may leave enough
120. A poll of nearly 2,000 individuals reported a sharp decline in willingness to fly with
United Airlines following the incident. Kevin Quealy, How Much Would You Put Up With to
Avoid United Airlines?, N.Y. TIMES(Apr. 17, 2017), https://www.nytimes.com/2017/04/17/upshot/
how-much-would-people-put-up-with-to-avoid-united-airlines.html.
121. The incident led to a “marked decrease” in the rate of bumping passengers, from 0.62 per
10,000 to 0.44, the lowest rate in decades. U.S. DEP’T OF TRANSP., AIRLINE BUMPING RATE
LOWEST IN DECADES, TRANSPORTATION.GOV (Sept. 7, 2017), https://www.transportation.gov-/
briefing-room/dot6417.
122. We relax this assumption in Arbel & Shapira, showing that when sellers can identify who
is a nudnik before the consumer even makes a purchase (assisted by new predictive analytics
tools), the prospect of market discipline takes a hit. Theory of the Nudnik, supra note 9.
123. Our analysis here diverges from that of Professor Amy Schmitz in one important aspect.
Professor Schmitz highlights the inefficiencies and unfairness (in terms of cross-subsidies) that
follows when firms discriminate in favor of active consumers and against passivists. See generally
Amy J. Schmitz, Access to Consumer Remedies in the Squeaky Wheel System, 39 PEPP. L. REV.
279 (2012) [Schmitz, Access to Consumer Remedies]. We believe that sellers’ ability to discrimi-
nate after the fact is limited and may come too late once one accounts for the way reputational
channels operate.
124. The existence might also alert disgruntled consumers to the existence of a systemic issue,
encouraging them to complain as well. The legitimizing power of a trailblazing complaint is seen
most powerfully in the context of complaints of sexual misconduct.
Electronic copy available at: https://ssrn.com/abstract=3568768

<<PAGE_BREAK>>

\\jciprod01\productn\D\DPL\69-2\DPL206.txt unknown Seq: 29 21-APR-20 11:48
2020] CONSUMER ACTIVISM 261
breadcrumbs for others to pick up on.125 As one of us documents else-
where, journalists often use lawsuit filings as a source for follow-up
investigative projects that hold defendants to account.126 Moreover,
paying the nudnik off to silence her tends to be more difficult after the
nudnik had already filed a lawsuit.127
*
Focusing on the small subset of crusading consumers holds the
promise of understanding how market governance works in an age
when only few take the trouble to read the fine print. Sellers have
strong incentives to respond to nudniks for reasons that are both legal
and reputational. And if sellers are unable to identify nudniks in ad-
vance, nudniks’ activism would prompt sellers to improve their level
of service for all consumers. To be sure, nudniks are not omnipotent,
and we cannot expect them to fix all (or even most) ills in consumer
markets. Our claim here is more modest: Nudniks represent an impor-
tant force in the marketplace that has remained understudied and
should receive more attention from legal scholars and policymakers.
We now turn to consider the limits to nudnik-based activism, and how
the magnitude of their social contribution varies greatly across
markets.
III. LIMITATIONS OF NUDNIK-BASED CONSUMER GOVERNANCE
Our argument thus far has been straightforward: Instead of focusing
on a minority of consumers who read and negotiate terms before the
purchase, legal scholars and policymakers should pay greater atten-
tion to a minority of crusading consumers who take action when sell-
ers do not meet their transactional expectations. This Part introduces
nuance. Nudnik-based behavior is not always socially beneficial. Some
nudniks complain frivolously. Their transactional expectations may be
unrealistic and untethered. Some complaints only reflect the nudniks’
idiosyncratic preferences. Such behavior does not contribute to effec-
tive seller deterrence, but rather imposes costs and hurts the function-
ing of consumer markets. Any theory of nudnik-based activism should
therefore attempt to identify the cross-sectional variation—the condi-
125. See generally Roy Shapira, Law as Source: How the Legal System Facilitates Investigative
Journalism, 37 YALE L. POL’Y REV. 153 (2018) (detailing how legal breadcrumbs lead to investi-
gative reports).
126. Id.
127. This is the result of, among others, the larger leverage plaintiffs have after sinking some
of the costs of litigation. See generally Lucian A. Bebchuk & Alon Klement, Negative Expected-
Value Suits, inELGAR ENCYCLOPEDIAOF LAWAND ECONOMICS (2d ed. 2009).
Electronic copy available at: https://ssrn.com/abstract=3568768

<<PAGE_BREAK>>

\\jciprod01\productn\D\DPL\69-2\DPL206.txt unknown Seq: 30 21-APR-20 11:48
262 DEPAUL LAW REVIEW [Vol.69:233
tions under which nudniks are more or less likely to bring positive
change in seller behavior.
One concern with nudniks is distributional. As the old adage goes,
“[t]he squeaky wheel gets the grease.”128 Applied here, the concern is
that sellers will reward only the noisy consumers. More accurately, the
concern is twofold: (1) that sellers will reward noisy consumers at the
expense of other consumers and, importantly, (2) that the noisy con-
sumers tend to be the “haves” rather than the “have-nots.”129 In other
words, to assess the social value of nudnik-based activism we have to
ask who gets what and at whose expense. But such distributional con-
cerns about nudnik-based activism should not be overstated, for the
following three factors.
First, to the extent these concerns are valid, they are not unique to
nudnik-based activism but rather apply equally, or even more force-
fully, to other forms of consumer activism. Consider the sophisticates,
who pursue legal actions for personal gain or find ways to optimally
use the products, or the shoppers who shop around for the best deals.
Consumers in both of these categories are likely to be more privileged
or sophisticated (by definition) than the rest of the consumer body
and extract private benefits—sometimes at the expense of others.
Second and more specifically to nudniks, it is hardly evident that
nudniks are overly privileged. While future empirical research is
needed on this issue, we can already point out studies in the consumer
complaint behavior literature, showing that there actually exists great
heterogeneity among serial complainers: nudniks cut across cultural,
economic, and social dimensions.130
Finally, even if we assume that nudniks are the privileged ones,
does it matter? If nudniks squeak loud enough, they can affect mar-
ket-wide changes that benefit the entire consumer body, including the
relatively less well off. The squeaky wheel can alert us all to the possi-
bility that there is a problem with a given seller or a product. And
providing this service may sometimes actually require privilege. To il-
128. Schmitz, Access to Consumer Remedies, supra note 123, at 280.
129. Id. at 290. See also Lauren E. Willis, Performance-Based Consumer Law, 82 U. CHI. L
REV. 1309, 1326 (2015); Arthur Best & Alan R. Andreasen, Consumer Response to Unsatisfac-
tory Purchases: A Survey of Perceiving Defects, Voicing Complaints, and Obtaining Redress, 11
LAW & SOC’Y REV. 701, 723 (1977) (finding that complaints underrepresent poor consumers and
racial minorities).
130. Some of the empirical research does suggest that, on average, serial complainers tend to
be more educated and affluent. But much more empirical research is needed before we can
make the leap to argue against nudniks in the name of distributional concerns. See, e.g., Michelle
A. Morganosky & Hilda M. Buckley, Complaint Behavior: Analysis by Demographics, Lifestyle,
and Consumer Values, 14 NA – ADVANCESIN CONSUMER RES. 223–26 (1987).
Electronic copy available at: https://ssrn.com/abstract=3568768

<<PAGE_BREAK>>

\\jciprod01\productn\D\DPL\69-2\DPL206.txt unknown Seq: 31 21-APR-20 11:48
2020] CONSUMER ACTIVISM 263
lustrate, recall the Ben Edelman example of going on a crusade
against an overcharge of $4. Perhaps it can be said that only someone
with sufficient financial security can spend so much time correspond-
ing over a $4 overcharge as a matter of principle.131
Another oft-mentioned concern with nudniks is their motivations.
The public, and sometimes even judges, tend to focus on nudniks’ sup-
posed motivations and cast them negatively as vengeful and petty.
Granted, some consumer crusaders are motivated by spite. But we do
not view spite as a strong argument against nudnik-behavior. In fact,
spite may be a virtue in this context.
Spite drives nudniks to be “willing punishers”—those who contrib-
ute to solve consumer collective action problems.132 While all consum-
ers may suffer from late deliveries or missed appointments by a seller,
each consumer sees the costs of a public fight with the seller as dwarf-
ing whatever benefit she might get from a refund. Spite allows
nudniks to transcend such cold cost-benefit calculation and motivate
public action that would provide a valuable service to all other con-
sumers. In this sense, punishing a misbehaving seller out of spite could
be considered “other-regarding” by the nudnik.133 In fact, there is a
certain irony in treating spiteful nudniks negatively: Why not cast the
majority’s silence in the face of seller violations as a selfish, disinter-
ested attitude towards their fellow consumers? Consider for example
how most economic models of market discipline invoke the rhetoric of
“consumer sharing” (with its positive connotations), to denote in-
stances where one consumer learns about a product failure, and im-
mediately shares the information with her fellow consumers. In
reality, the overwhelming majority of consumers do not share. They
do nothing. If spite or pettiness or obsession makes nudniks de facto
share information with others, then so be it. The only concern should
be with whether the information nudniks generate is valuable to
others or not.
There is a broader point at play here. Legal scholars and policymak-
ers should focus less on what drives nudniks and more on the social
impact that nudniks generate. Focus more on the outputs and less on
the inputs. Even if nudniks are after revenge, material compensation,
validation from others, or satisfying their own sense of entitlement,
131. Unfortunately, it would seem that one has to have sufficient social capital to feel legiti-
mized to complain and to have their complaints taken seriously.
132. See Ostrom, supra note 105.
133. SeeLYNN STOUT,CULTIVATING CONSCIENCE: HOW GOOD LAWS MAKE GOOD PEOPLE
13–15 (2011) (describing “other-regarding behavior” as actions that express “concern for some-
one or something beyond one’s own material interests.”).
Electronic copy available at: https://ssrn.com/abstract=3568768

<<PAGE_BREAK>>

\\jciprod01\productn\D\DPL\69-2\DPL206.txt unknown Seq: 32 21-APR-20 11:48
264 DEPAUL LAW REVIEW [Vol.69:233
this should not matter too much, as long as nudniks generate positive
spillovers for other consumers.
This brings us to the third and most important issue with nudniks’
behavior: representativeness. The biggest question when evaluating
nudniks’ social impact is whether nudniks’ preferences and concerns
are representative of the preferences and concerns of other, non-
nudnik consumers. Some nudniks may complain about esoteric as-
pects of seller behavior that are inconsequential to other consumers.
A particular issue is that some serial complainers may be “trolls,” that
is, individuals who make spurious arguments for no other reason than
to evoke a reaction from their target. They seek attention rather than
improvement. For such troll-based activism, the social contribution is
limited, and the negative treatment these troll-nudniks will receive in
the courtroom and the court of public opinion is justified.
We start our response to the “unrepresentative” argument by not-
ing that such a critique is not unique to nudnik-based activism. The
critique rather applies to other types of active consumers as well. A
sophisticate filing a class action may be hunting a “bounty,” even if
the underlying cause is only technical and they were not really
harmed. Indeed, we noted the example of counterfeit hunters in
China who go out of their way to find fake products to buy, so that
they can later complain that they bought a fake product.134 Whenever
one introduces a bounty (a profit-motive), one raises the risk of nega-
tive-value behavior on part of the hunters. There is actually reason to
believe that such negative-value behavior will be more common
among non-nudniks; but more research is needed before reaching de-
finitive conclusions.
As for nudniks, the data there is limited, and future research is
much needed. Yet the existing literature contains a few indications
that lead us to believe that the “unrepresentative” concern is grossly
overstated. Elsewhere we synthesized findings from the consumer
complaining behavior literature, indicating that serial complainers
often operate in good faith and implicate broader consumer inter-
est.135 For example, we pointed out studies establishing a link between
seller behavior and consumer complaining—better service leads to
fewer complaints. Sellers who want to avoid the wrath of nudniks are
able to do so by offering a better product. Another finding is that
serial complainers are more likely to be loyal to a seller who rectifies
134. See Sui-Lee Wee, Though Awash in Fakes, China Rethinks Counterfeit Hunters, N.Y.
TIMES (Nov. 30, 2016), https://www.nytimes.com/2016/11/30/business/china-fakes-counterfeit-
hunters.html.
135. Arbel & Shapira, Theory of the Nudnik, supra note 9.
Electronic copy available at: https://ssrn.com/abstract=3568768

<<PAGE_BREAK>>

\\jciprod01\productn\D\DPL\69-2\DPL206.txt unknown Seq: 33 21-APR-20 11:48
2020] CONSUMER ACTIVISM 265
past issues. Again, this stylized fact of consumer complaining behavior
suggests a positive dynamic: It is not that serial complainers are only
after making a seller’s life miserable. If consumers perceive the seller
as making a genuine effort to satisfy their expectations, they will pay
the seller back by continuously purchasing from her. To reiterate, we
acknowledge that we cannot offer here conclusive proof on the repre-
sentativeness of nudniks’ expectations, or the ratio of valid-to-frivo-
lous complaints. Still, these findings are at least suggestive that
nudniks’ interests are correlated with those of other consumers.
Another reason to not overstate the concern with idiosyncratic ex-
pectations is that sellers do not remain passive. Sellers can, and often
do, employ various tools to defend themselves from “bad” nudniks
with unwarranted complaints. For example, sellers can avoid unrealis-
tic buyers’ expectations through salient and repeated communication.
To illustrate, consider how stores that do not accept certain modes of
payment frequently communicate this fact clearly to the consumer in
advance, with large and visible signs, despite the absence of any legal
duty to do so. Consider also the large signs one often encounters with
limitations, disclaimers, and special conditions on how meals are non-
returnable, sales are final, or seats on a flight are tentative. In other
words, sellers can reduce the risk of unrealistic consumer expectations
by modifying consumer expectations in advance. This is a feature of
nudnik-based consumer governance, rather than a bug in the system.
If there are hidden aspects of the transaction that consumers care
about, advertising them in a salient manner helps both parties deter-
mine in advance if the transaction is mutually advantageous. The
background threat of nudniks attacking sellers for violating their ex-
pectations incentivizes sellers to mitigate with the gap between trans-
actional expectations and the actual transaction.
Yet another reason to not overstate the costs of bad nudnik behav-
ior is the involvement of other, non-nudnik consumers. Nudniks’ com-
plaints create a reputational sanction only to the extent that other
consumers learn about, share, and act upon the information they re-
ceived from nudniks. These other consumers are not clueless; they can
decide for themselves whether the nudnik’s complaint raises a valid
issue or not. Dave Carroll’s “United Breaks Guitars” hurt United not
just because of Dave’s singing talent, but probably also because it res-
onated with other United consumers, hitting on a widely-shared frus-
tration with how airline companies treat luggage. If Dave would have
written a song about how Amazon does not deliver on time, we sus-
pect that his complaint would not have gone viral, because most con-
sumers have a positive experience with Amazon shipments.
Electronic copy available at: https://ssrn.com/abstract=3568768

<<PAGE_BREAK>>

\\jciprod01\productn\D\DPL\69-2\DPL206.txt unknown Seq: 34 21-APR-20 11:48
266 DEPAUL LAW REVIEW [Vol.69:233
To illustrate with another infamous example, consider the case of
Taylor Chapman. When Chapman did not receive a receipt at her last
visit to Dunkin’ Donuts, she sought to avail herself of the “free-donut-
if-we-don’t-give-you-a-receipt” policy.136 She recorded an exchange
where she demanded—using expletives and blatantly racist and sexist
remarks—that the store manager will provide her with a free meal.137
Chapman posted the exchange on social media, and it received exten-
sive exposure (over a million views), yet the result was not a reputa-
tional fallout for Dunkin’ Donuts, but rather a hit to Chapman’s own
reputation.138 Unlike with the United Airlines example, Dunkin’
Donuts did not experience a drop in stock price or in consumers’ will-
ingness to purchase.
To reiterate, we readily acknowledge that some nudnik complaints
are frivolous. But there is reason to believe that nudniks’ net social
impact is positive and that they fill in an important gap in the market-
place. It is therefore imperative to not dismiss the contribution of
nudniks because they may strike some as spiteful, selfish, or idiosyn-
cratic. Instead, we should strive to continue studying the conditions
under which nudniks are more or less valuable to market discipline.
CONCLUSION
Where does consumer governance come from? How do consumer
markets maintain norms of behavior? Legal institutions are not the
only ones deterring seller misbehavior; market mechanisms deter, too.
Understanding the effectiveness of market forces is key for legal
scholars and policymakers, as these forces set the outer limits on the
need for legal intervention. Yet, the legal literature has overly focused
on one type of market mechanism, namely, an informed minority,
which is seemingly less relevant in today’s world. This Essay suggests
switching focus to a different mechanism, namely, a minority of cru-
sading consumers—a small subset of consumers who go to great
lengths to complain publicly about seller misbehavior, and in the pro-
cess draw others’ attention and put in motion reputational sanctions.
Directing attention to the nudnik phenomenon is a first step toward
understanding consumer governance in today’s world. But it is just
136. Tsg600, Taylor Chapman Dunkin Donuts Rant, YOUTUBE (June 10, 2013), https://www
.youtube.com/watch?v=juLHmG76P4Q [hereinafter Dunkin Donuts Rant].
137. Id.
138. See, e.g., Joe Patrice, Aspiring Lawyer’s Insane Rant at Dunkin’ Donuts Staff, ABOVETHE
LAW (June 12, 2013, 10:10 AM), https://abovethelaw.com/2013/06/aspiring-lawyers-insane-rant-
at-dunkin-donuts-staff/; Dunkin Donuts Rant, supra note 136 (generating 1,084,248 views, 586
‘likes’ and 17,000 ‘dislikes’ as of Nov. 28, 2019).
Electronic copy available at: https://ssrn.com/abstract=3568768

<<PAGE_BREAK>>

\\jciprod01\productn\D\DPL\69-2\DPL206.txt unknown Seq: 35 21-APR-20 11:48
2020] CONSUMER ACTIVISM 267
that: a step. Other necessary steps include understanding how sellers
react to nudniks, and how the legal system affects the interactions be-
tween sellers and nudniks.139 While much future research is still
needed, the existing evidence from the consumer complaining behav-
ior literature makes us comfortable enough to risk ending on a gener-
alization: Nudniks are the unsung heroes of consumer markets.
139. We develop these issues in Arbel & Shapira, Theory of the Nudnik, supra note 9.
Electronic copy available at: https://ssrn.com/abstract=3568768

<<PAGE_BREAK>>

\\jciprod01\productn\D\DPL\69-2\DPL206.txt unknown Seq: 36 21-APR-20 11:48
268 DEPAUL LAW REVIEW [Vol.69:233
Electronic copy available at: https://ssrn.com/abstract=3568768

---

## ssrn-3681083: SLICING DEFAMATION BY CONTRACT
Year: 2020
Authors: Yonathan Arbel
Source: papers/ssrn-3681083/paper.txt

SLICING DEFAMATION BY CONTRACT

Commented [A1]: SLICES AND LUMPS:
DIVISION AND AGGREGATION IN LAW AND LIFE (2019)

Electronic copy available at: https://ssrn.com/abstract=3681083

<<PAGE_BREAK>>

2 Chicago Law Review Online 2020
Commented [A2]:
Commented [A3]:
Commented [A4]:
Commented [A5]: Daniel Hemel and Ariel Porat, Free Speech
and Cheap Talk, J. LEG. ANALYSIS (Forthcoming, 2019); Yonathan
A. Arbel and Murat Mungan, The Case Against Expanding
Defamation Laws, ALABAMA L. REV. (Forthcoming, 2019);
Yonathan A. Arbel & Murat Mungan, Regulating Speech with
Bayesian Audiences, Alabama Working Paper 3452662 (2019).
Electronic copy available at: https://ssrn.com/abstract=3681083

<<PAGE_BREAK>>

Commented [A6]:
Commented [A7]:
Commented [A8]:
Commented [A9]:
Electronic copy available at: https://ssrn.com/abstract=3681083

<<PAGE_BREAK>>

4 Chicago Law Review Online 2020
Commented [A10]:
Commented [A11]:
Commented [A12]:
Electronic copy available at: https://ssrn.com/abstract=3681083

<<PAGE_BREAK>>

Commented [A13]:
Commented [A14]:
Commented [A15]:
Commented [A16]:
Commented [A17]:
Commented [A18]:
Commented [A19]:
Electronic copy available at: https://ssrn.com/abstract=3681083

<<PAGE_BREAK>>

6 Chicago Law Review Online 2020
Commented [A20]:
Commented [A21]:
Commented [A22]:
Commented [A23]:
Commented [A24]:
Electronic copy available at: https://ssrn.com/abstract=3681083

<<PAGE_BREAK>>

Commented [A25]:
Commented [A26]:
Commented [A27]:
Electronic copy available at: https://ssrn.com/abstract=3681083

<<PAGE_BREAK>>

8 Chicago Law Review Online 2020
Commented [A28]: Carlill v. Carbolic Smoke Ball Co. 1 Q.B.
256 (1893)
Commented [A29]:
Commented [A30]:
Commented [A31]:
Commented [A32]:
Commented [A33]:
Electronic copy available at: https://ssrn.com/abstract=3681083

<<PAGE_BREAK>>

Commented [A34]:
Electronic copy available at: https://ssrn.com/abstract=3681083

<<PAGE_BREAK>>

10 Chicago Law Review Online 2020
Commented [A35]:
Electronic copy available at: https://ssrn.com/abstract=3681083

<<PAGE_BREAK>>

Commented [A36]:
Electronic copy available at: https://ssrn.com/abstract=3681083

---

## ssrn-3740356: \\jciprod01\productn\G\GWN\90-1\GWN102.txt unknown Seq: 1 17-FEB-22 12:20
Year: 2022
Authors: Yonathan Arbel
Source: papers/ssrn-3740356/paper.txt

\\jciprod01\productn\G\GWN\90-1\GWN102.txt unknown Seq: 1 17-FEB-22 12:20
Contracts in the Age of Smart Readers
Yonathan A. Arbel* & Shmuel I. Becher**
ABSTRACT
What does it mean to have machines that can read, explain, and evaluate
contracts? Recent advances in machine learning have led to a fundamental
breakthrough in machine language models, portending a profound shift in the
ability of machines to process text. Such a shift has far-reaching consequences
for diverse areas of law, which are predicated on, and justified by, the exis-
tence of information barriers. Our object here is to provide a general frame-
work for evaluating the legal and policy implications of employing language
models as “smart readers”—tools that read, analyze, and assess contracts, dis-
closures, and privacy policies.
Synthesizing state-of-the-art developments, we identify four core capabili-
ties of smart readers. Based on real-world examples produced by new ma-
chine-learning models, we demonstrate that smart readers can: simplify
complex legal language; personalize the contractual presentation to the user’s
specific sociocultural identity; interpret the meaning of contractual terms; and
benchmark and rank contracts based on their quality.
Nevertheless, the implications of smart readers are more complex than
initially meets the eye. Although smart readers can overcome traditional infor-
mation barriers and empower parties, they rely on black-box models that so-
phisticated parties can exploit. Smart readers can close some of the gaps in
access to justice, but they also introduce concerns about contractual bias and
discrimination. And even though smart readers can improve term trans-
parency, they might lead judges and policymakers to relax their guard
prematurely.
The current body of doctrine and scholarship is ill equipped to address
both the prospects and risks of smart reader technology. This Article narrows
this gap. It maps the necessary theoretical, policy, and doctrinal adaptations to
the age when machines can automate the reading of contracts.
* Associate Professor, University of Alabama School of Law.
** Professor of Law, Victoria University of Wellington; J.S.D., LL.M., Yale University.
We are grateful for helpful comments and suggestions made by Ben Alarie, Chris Bradley,
Matt Bruckner, Tony Casey, Shahar Dillbary, Meirav Furth-Matzkin, Gwern Branwen, Dave
Hoffman, Joasia Luzak, Rory Van Loo, Tess Wilkinson-Ryan, Eyal Zamir, Stephan Stolz, and
Tal Zarsky, as well as to participants in the AALS Section on Contracts (2021), the Law of
Consumer Markets Seminar at Boston University (2021), the Australasian Consumer Law
Roundtable (2020), the Exeter Law School: The Centre for European Legal Studies (2020), and
the Haifa University Faculty Workshop (2021). We appreciate the outstanding research assis-
tance provided by Marcus Armband, William Brand, and William Britton.
February 2022 Vol. 90 No. 1
83
Electronic copy available at: https://ssrn.com/abstract=3740356

<<PAGE_BREAK>>

\\jciprod01\productn\G\GWN\90-1\GWN102.txt unknown Seq: 2 17-FEB-22 12:20
84 THE GEORGE WASHINGTON LAW REVIEW [Vol. 90:83
TABLE OF CONTENTS
INTRODUCTION................................................. 84 R
I. SMART READERS: TECHNOLOGY AND CAPABILITIES.... 94 R
A. Simplification ....................................... 95 R
B. Personalization...................................... 99 R
C. Construction ........................................ 104 R
D. Benchmarking ...................................... 106 R
II. SMART READER UPTAKE AND (NO)
READING THEORIES .................................... 109 R
III. SMART READERS: IMPLICATIONS........................ 114 R
A. Matching, Search Costs, and Market Competition ... 115 R
B. Errors and Adversarial Attacks ..................... 118 R
C. Access to Justice .................................... 124 R
D. Compliance and Overcompliance ................... 126 R
E. Discrimination and Personalization ................. 127 R
F. Nudging with Smart Readers........................ 131 R
IV. REGULATING CONTRACTS IN THE AGE OF
SMART READERS ....................................... 133 R
A. The Challenge to Consumer Protection.............. 133 R
B. Courts and Agencies ................................ 136 R
C. Regulatory and Doctrinal Responses ................ 137 R
1. Allocation of Error Costs....................... 137 R
2. The Duty to Read .............................. 140 R
3. The Problem of Adversarial Attacks............ 141 R
4. Bias and Discrimination ........................ 143 R
CONCLUSION ................................................... 146 R
INTRODUCTION
Consider an individual who is about to purchase a tablet device.
Tucked inside the boilerplate is the following clause:
Electronic copy available at: https://ssrn.com/abstract=3740356

<<PAGE_BREAK>>

\\jciprod01\productn\G\GWN\90-1\GWN102.txt unknown Seq: 3 17-FEB-22 12:20
2022] CONTRACTS IN THE AGE OF SMART READERS 85
12. Controlling Law and Severability. This License will be gov-
erned by and construed in accordance with the laws of the State
of California, excluding its conflict of law principles. This Li-
cense shall not be governed by the United Nations Convention
on Contracts for the International Sale of Goods, the applica-
tion of which is expressly excluded. If you are a consumer based
in the United Kingdom, this License will be governed by the
laws of the jurisdiction of your residence. If for any reason a
court of competent jurisdiction finds any provision, or portion
thereof, to be unenforceable, the remainder of this License shall
continue in full force and effect.1
There are good reasons for the individual—a buyer, an employee,
a tenant, or a lessee—to care which law governs the transaction, as it
affects their procedural and substantive rights.2 However, reading the
boiler plate is cognitively taxing, emotionally draining, and time inten-
sive.3 Moreover, reading is not enough: one also needs to understand.
What does “controlling law” mean? What is “severability”? Does it
matter that California law governs the contract?
The typical response of many individuals to these challenges is
simple: ignore the text altogether.4 Such a response, however, under-
mines the meaning of informed consent. Moreover, anticipating this
response, firms may strategically insert one-sided clauses and poten-
tially add bloat and complexity to their contracts to further discourage
1 APPLE, SOFTWARE LICENSE AGREEMENTS: SINGLE USE LICENSE ¶ 12, https://
www.apple.com/legal/sla/docs/iOS112.pdf [https://perma.cc/S7J7-C323].
2 States differ greatly in the quality of their bundle of consumer protection laws and some
consumer organizations rank them. See, e.g., CAROLYN CARTER, NAT’L CONSUMER L. CTR.,
CONSUMER PROTECTION IN THE STATES (2018), https://www.nclc.org/images/pdf/udap/udap-re-
port.pdf [https://perma.cc/L63Y-DMQV].
3 See, e.g., Melvin Aron Eisenberg, Text Anxiety, 59 S. CAL. L. REV. 305, 309 (1986)
(arguing that consumers find reading dense texts of form contracts a daunting task); Robert A.
Hillman & Jeffrey J. Rachlinski, Standard-Form Contracting in the Electronic Age, 77 N.Y.U. L.
REV. 429, 436 (2002) (highlighting “the costs of reading, interpreting, and comparing standard
terms”).
4 See, e.g., Yannis Bakos, Florencia Marotta-Wurgler & David R. Trossen, Does Anyone
Read the Fine Print? Consumer Attention to Standard-Form Contracts, 43 J. LEGAL STUD. 1, 3
(2014) (finding that consumers rarely read end-user license agreements); see also Ian Ayres &
Alan Schwartz, The No-Reading Problem in Consumer Contract Law, 66 STAN. L. REV. 545, 546
(2014) (“People rarely read the forest of trees that are harvested and mailed in the form of credit
card and cell phone contracts, insurance policies, gym membership agreements, or mutual fund
prospectuses.”); RESTATEMENTOF CONSUMER CONTS. §3 reporters’ notes, at 63 (AM. L. INST.,
Tentative Draft 2019) [hereinafter DRAFT RESTATEMENT 2019] (“The standard contract terms
are invisible to most consumers . . . .”).
Electronic copy available at: https://ssrn.com/abstract=3740356

<<PAGE_BREAK>>

\\jciprod01\productn\G\GWN\90-1\GWN102.txt unknown Seq: 4 17-FEB-22 12:20
86 THE GEORGE WASHINGTON LAW REVIEW [Vol. 90:83
reading.5 Courts, legislators, and agencies are trying to hedge some of
the negative results of this dynamic but have had limited success.6
This dismal equilibrium is now facing disruption. Advances in
language models—a branch of artificial intelligence (“AI”)—have
given rise to a novel technology: “smart readers.”7 Using a smart
reader, a prospective buyer can pull out her phone, scan the clause
above, and click “explain.” The smart reader offers this succinct
summary:8
The human-machine interaction, however, does not need to end
here. If the specific user prefers the use of concrete examples rather
than abstract statements, she can click “example”:9
5 See, e.g., Melvin Aron Eisenberg, The Limits of Cognition and the Limits of Contract, 47
STAN. L. REV. 211, 241 (1995) (“Form insurance contracts, for example, typically include thirty,
forty, or more terms. Moreover, the meaning and effect of the preprinted provisions will very
often be inaccessible to laypersons.”); Russell Korobkin, Bounded Rationality, Standard Form
Contracts, and Unconscionability, 70 U. CHI. L. REV. 1203, 1239–44 (2003) (explaining that firms
will “race to the bottom” with respect to the quality of nonsalient contract terms); see also Ste-
phen J. Choi, Mitu Gulati & Robert E. Scott, Variation in Boilerplate: Rational Design or Ran-
dom Mutation?, 20 AM. L. & ECON. REV. 1 (2018) (documenting the existence of inertia and
encrustation of legal terms in commercial contracts); Lauren E. Willis, Performance-Based Con-
sumer Law, 82 U. CHI. L. REV. 1309, 1317–21 (2015) (exploring strategic manipulations of con-
tractual text). But see David A. Hoffman, Relational Contracts of Adhesion, 85 U. CHI. L. REV.
1395, 1421–41 (2018) (investigating instances where firms deliberately create consumer-friendly
contracts).
6 See, e.g., MARGARET JANE RADIN, BOILERPLATE: THE FINE PRINT, VANISHING RIGHTS,
ANDTHE RULEOF LAW 8–12 (2013) (arguing that consumer contracts erode consumer rights and
allow firms to create their own legal universe); W. David Slawson, Standard Form Contracts and
Democratic Control of Lawmaking Power, 84 HARV. L. REV. 529, 529 (1971) (submitting that
consumer contract terms are “almost universally unfair”); see also Jean Braucher, Unfair Terms
in Comparative Perspective: Software Contracts, inCOMMERCIAL CONTRACT LAW: TRANSATLAN-
TIC PERSPECTIVES 339, 339 (Larry A. DiMatteo et al. eds., 2013) (“[M]ost policymakers, regula-
tors, and scholars concede that there often can be no real assent to mass-market standard terms,
but then balk at meaningful solutions to address market failure.”); Ethan J. Leib, What is the
Relational Theory of Consumer Form Contract?, inREVISITINGTHE CONTRACTS SCHOLARSHIP
OF STEWART MACAULAY 259, 259 (Jean Braucher et al. eds., 2013) (“One of the most puzzling
and embarrassing facts about contract law and contracts scholarship in the United States is that
neither has found a consistent way to treat the real contracts of our lives: standardised consumer
form contracts.”).
7 See infra Part I for a discussion of the technology.
8 Screenshot of smart reader explanation [1] (on file with authors).
9 Screenshot of smart reader explanation [1] (on file with authors).
Electronic copy available at: https://ssrn.com/abstract=3740356

<<PAGE_BREAK>>

\\jciprod01\productn\G\GWN\90-1\GWN102.txt unknown Seq: 5 17-FEB-22 12:20
2022] CONTRACTS IN THE AGE OF SMART READERS 87
With these clarifications in hand, the user now wants to under-
stand the meaning of “severability.” She clicks on the term, and the
smart reader responds:10
Feeling that she has a sufficient grasp of the contract, the user
now wants to know more about the accompanying privacy policy. She
clicks “benchmark”:11
The score allows her to assess the overall strength of the policy in
a glimpse. Critically, the smart reader also offers an industry mean
score and comparisons to competitors who offer better terms. Taken
together, the smart reader not only provides an understanding of the
fine print but also of the market and the alternatives it offers.
To better see the practical import of smart readers, consider the
textbook staple of Williams v. Walker-Thomas Furniture Co.12 Ms.
Williams, a mother of seven living on social benefits, entered a rent-
10 Content produced via https://play.aidungeon.io/main/home [https://perma.cc/DV9Q-
S47L].
11 PrivacyCheck: Overview, CHROME WEB STORE, https://chrome.google.com/webstore/
detail/privacycheck/poobeppenopkcbjejfjenbiepifcbclg/related?hl=en]-US [https://perma.cc/
8KVM-3HTE].
12 350 F.2d 445 (D.C. Cir. 1965).
Electronic copy available at: https://ssrn.com/abstract=3740356

<<PAGE_BREAK>>

\\jciprod01\productn\G\GWN\90-1\GWN102.txt unknown Seq: 6 17-FEB-22 12:20
88 THE GEORGE WASHINGTON LAW REVIEW [Vol. 90:83
to-own agreement for a stereo set.13 The agreement stated that the
store held title to goods sold until paid in full.14 It also contained the
following clause, described by the court as “rather obscure”:15
[T]he amount of each periodical installment payment to be
made by [purchaser] to the Company under this present lease
shall be inclusive of and not in addition to the amount of each
installment payment to be made by [purchaser] under such pri-
or leases, bills or accounts; and all payments now and hereafter
made by [purchaser] shall be credited pro rata on all outstand-
ing leases, bills and accounts due the Company by [purchaser]
at the time each such payment is made.
If Ms. Williams had a smart reader on her phone,16 she could
have tapped it to receive the following output:17
This output marks the consequences of the cross-collateral agree-
ment in relatively simple terms. Although it is not perfect—and does
not make the term any less one-sided—it marks a distinct improve-
ment over the original language. Empowered by a better understand-
ing of the transaction, shoppers may search for a better deal in
another store or avoid the purchase altogether.18
13 Id. at 447–48.
14 Id. at 447.
15 Id. (clarifying that the meaning “of this rather obscure provision was to keep a balance
due on every item purchased until the balance due on all items, whenever purchased, was liqui-
dated”); see also Tess Wilkinson-Ryan, A Psychological Account of Consent to Fine Print, 99
IOWA L. REV. 1745, 1759 (2014) (describing the term as “so opaque that it would be unreasona-
ble to expect parties without advanced education to understand the financial risk”).
16 For a discussion of the availability of smart phones among low-income individuals, see
infra note 170 and accompanying text. R
17 Screenshot of smart reader explanation [2] (on file with authors).
18 See Russell Korobkin, A “Traditional” and “Behavioral” Law-and-Economics Analysis
of Williams v. Walker-Thomas Furniture Company, 26 U. HAW. L. REV. 441, 452 (2004) (“There
is no reason to believe that Williams lacked the choice of shopping elsewhere.”). In infra Section
III.A we develop the point that even in markets where choice is limited, empowering consumers
can have dynamic competitive effects.
Electronic copy available at: https://ssrn.com/abstract=3740356

<<PAGE_BREAK>>

\\jciprod01\productn\G\GWN\90-1\GWN102.txt unknown Seq: 7 17-FEB-22 12:20
2022] CONTRACTS IN THE AGE OF SMART READERS 89
We did not write these examples, nor did any other human, for
that matter. Rather, the examples are taken from a recently released
version of a language model called GPT-3.19 Remarkably, we used a
weak version of this model, and we did not use fine-tuning or op-
timization. The only caveat—and one to keep in mind throughout the
Article—is that we cherry-picked the examples.20 Nevertheless, an
app’s ability to respond intelligently to queries about an unfamiliar
legal text is a clear technological breakthrough.
This Article aims to analyze the capabilities of smart readers,
evaluate their significance for consumer and contract law, and illumi-
nate some of the hidden benefits and risks they carry. 21 In the pro-
cess, it joins contemporary conversations in law and technology by
illuminating several key questions: Can the reading of disclosures, pri-
vacy policies, and consumer contracts be automated? What does the
growing transparency in agreements mean for markets, firms, and in-
dividuals? Can we think of assent as a technological challenge rather
than an ethical one? What does consumer adoption of the technology
tell us about our theories of consumer behavior? And what remains of
the case for pro-consumer regulation if reading is automated?
We investigate these questions in four Parts. Part I offers a com-
prehensive analysis of smart readers’ capabilities. Using concrete ex-
amples, smart readers are shown to be effective in the
(1) simplification and summary of the text; (2) personalization of text
to the specific readers’ characteristics; (3) construction of the meaning
of the contract; and (4) benchmarking of contracts by assigning them a
score relative to the competition. To be sure, these high-tech capabili-
ties have their low-tech counterparts. Lawyers and consultants would
gladly perform these services for their clients, but the difference is in
the cost, speed, and accessibility.22 Between a lawyer and a
smartphone, only the latter fits in the pocket.
With any technology, a critical question is whether individuals
will choose to use it, and it cannot be merely assumed that adoption
will be broad, swift, or inclusive. Part II grapples with this question,
19 For more information on GPT-3, see infra notes 39–45 and accompanying text. R
20 See infra Section III.B.
21 Our analysis complements a separate technological development, that of AI assistants—
such as Alexa or Siri—who execute transactions on behalf of the consumer. The development of
assistants and their market implications were analyzed at depth in Rory Van Loo, Digital Market
Perfection, 117 MICH. L. REV. 815 (2019).
22 See RONALD L. BURDGE, UNITED STATES CONSUMER LAW: ATTORNEY FEE SURVEY
REPORT 2017–2018, at 26 (2019) (claiming that “the average hourly rate for the typical Con-
sumer Law attorney in the United States is $345”).
Electronic copy available at: https://ssrn.com/abstract=3740356

<<PAGE_BREAK>>

\\jciprod01\productn\G\GWN\90-1\GWN102.txt unknown Seq: 8 17-FEB-22 12:20
90 THE GEORGE WASHINGTON LAW REVIEW [Vol. 90:83
with mindful awareness of the notorious track record of many predic-
tions on technological adoption.23 On the one hand, there is a com-
mon intuition that consumers are averse to reading, in any form. On
this intuition, even if smart readers prove effective and affordable, up-
take would be limited. On the other hand, users have shown deep
interest in technologies that facilitate transactional information: con-
sumers quickly adapted to online reviews, which they voraciously con-
sume.24 Moreover, smart readers have already proven their mettle in
the field: sophisticated hedge funds have unleashed their proprietary
smart readers on firm disclosures and entrusted them with making
trading decisions—in the billions of dollars.25 These and other consid-
erations discussed in Part II demonstrate that the technology is suffi-
ciently mature to warrant serious attention today.
That said, the prospect that smart readers might fail is intriguing
in and of itself. Invoking the notion of Wittgenstein’s Ruler,26 we pro-
pose that lukewarm adoption should invite deep reflection on the va-
lidity of theories that set to explain reading gaps. After all, many of
our theories are anchored in the semantic complexity, length, and
formatting of the form—and smart readers address these issues di-
rectly. Most provocatively, lax demand may suggest that average con-
sumers do not share the sentiment of some commentators, in that they
23 See, e.g., The 22 Worst Tech Predictions of All Time, HERO LABS (Aug. 1, 2019), https://
www.hero-labs.com/blog/the-22-worst-tech-predictions-of-all-time/ [https://perma.cc/UZ6M-
X8GZ] (“‘The automobile is a fad, a novelty. Horses are here to stay.’ . . . ‘Remote shopping,
while entirely feasible, will certainly flop. It has no chance of success.’ Time Magazine,
1966. . . . ‘I don’t know . . . there just aren’t that many videos I want to watch.’ Steve Chen,
founder of YouTube . . . 2005. . . . ‘There is no chance of the iPhone ever gaining significant
market share’. Steve Ballmer, CEO of Microsoft, 2007.”); see also Van Loo, supra note 21 (high- R
lighting the difficulty and need to craft legal responses for early-stage technologies).
24 See Yonathan A. Arbel, Reputation Failure: The Limits of Market Discipline in Con-
sumer Markets, 54 WAKE FOREST L. REV. 1239, 1289 (2019) (noting the history and rapid accept-
ance of online reviews). As noted there, consumers not only read star averages, but also written
reviews. This demonstrates that consumers have at least some appetite for learning about trans-
actions through reading.
25 Sean Cao, Wei Jiang, Baozhong Yang & Alan L. Zhang, How to Talk when a Machine Is
Listening: Corporate Disclosure in the Age of AI 1 (Nat’l Bureau of Econ. Rsch., Working Paper
No. 27950, 2020) (“A substantial amount of buying and selling of shares are triggered by recom-
mendations made by robots and algorithms which process information with machine learning
tools and natural language processing kits.”); Adam Satariano & Nishant Kumar, The Massive
Hedge Fund Betting on AI, BLOOMBERG (Sept. 27, 2017, 12:00 AM), https://www.bloomberg.
com/news/features/2017-09-27/the-massive-hedge-fund-betting-on-ai [https://perma.cc/8CZ4-
VVYU].
26 See LUDWIG WITTGENSTEIN, REMARKSONTHE FOUNDATIONSOF MATHEMATICS 21–28
(G.H. Von Wright et al. eds., G.E.M. Anscombe trans., rev. ed. 1978) (“Am I always measuring
the table; am I not sometimes checking the ruler?”); infra note 102 and accompanying text. R
Electronic copy available at: https://ssrn.com/abstract=3740356

<<PAGE_BREAK>>

\\jciprod01\productn\G\GWN\90-1\GWN102.txt unknown Seq: 9 17-FEB-22 12:20
2022] CONTRACTS IN THE AGE OF SMART READERS 91
do not feel the risk of boilerplate is similar to “lay[ing one’s] head into
the mouth of a lion.”27
Part III examines the social implications of smart readers. Even
with limited adoption, smart readers can have broad market effects,
plausibly jumpstarting term competition in dormant markets. But
along with their many salutary effects, smart readers also carry signifi-
cant risks. These include discrimination, bias, and errors—risks that
further merit taking this technology seriously. One novel concern we
address is that of adversarial attacks by sophisticated firms.28 Adver-
sarial attacks are a growing concern among computer scientists, who
define them as the intentional insertion of “malicious inputs modified
to yield erroneous model outputs.”29 The effects of these attacks are
far reaching and will become a pressing concern in many areas where
AI-based models are deployed.
Finally, Part IV examines the legal implications of smart readers.
Many consumer protection measures use the lack of reading and un-
derstanding of contracts as their fulcrum.30 For example, in an impor-
tant recent article, Robin Bradley Kar and Margaret Jane Radin
argued that boilerplate aspects of a transaction are “no longer con-
tract” because they drive a wedge between the parties’ shared under-
standing, inviting deception.31 Indeed, reading and understanding
27 KARL N. LLEWELLYN, THE COMMON LAW TRADITION: DECIDING APPEALS 362–71
(1960).
28 The closest discussion we are aware of is Van Loo, supra note 21, at 841–43, who consid- R
ers the possibility that sellers will change product attributes strategically to make comparison
shopping harder for AI agents. Even outside of contract law, the concept is rarely addressed.
The only other legal articles known to us that deal with adversarial examples are Gary Marchant
& Rida Bazzi, Autonomous Vehicles and Liability: What Will Juries Do?, 26 B.U. J. SCI. & TECH.
L. 67, 76 (2020) (mentioning adversarial examples in passing); and Andrew D. Selbst, Negligence
and AI’s Human Users, 100 B.U. L. REV. 1315, 1350–54 (2020) (explaining the challenge posed
by adversarial attacks to conventional tort law).
29 Nicolas Papernot, Patrick McDaniel, Ian Goodfellow, Somesh Jha, Z. Berkay Celik &
Ananthram Swami, Practical Black-Box Attacks Against Machine Learning, in PROCEEDINGSOF
THE 2017 ACM ASIA CONFERENCEON COMPUTERAND COMMUNICATIONS SECURITY506, 506
(2017), https://dl.acm.org/doi/pdf/10.1145/3052973.3053009 [https://perma.cc/X485-4DPA].
30 See Ayres & Schwartz, supra note 4, at 549 (“Consumer protection law responds to the R
doctrine by attempting to induce firms to create a real opportunity for consumers to read.”); see
also DRAFT RESTATEMENT 2019, supra note 4, at 1 (“Consumer contracts present a fundamental R
challenge . . . arising from the asymmetry in information, sophistication, and stakes between the
parties . . . .”).
31 Robin Bradley Kar & Margaret Jane Radin, Pseudo-Contract and Shared Meaning
Analysis, 132 HARV. L. REV. 1135, 1140 (2019); see also Todd D. Rakoff, Contracts of Adhesion:
An Essay on Reconstruction, 96 HARV. L. REV. 1173, 1176, 1242, 1250–55, 1258 (1983) (sug-
gesting that nonnegotiated, nonsalient boilerplate terms “ought to be considered presump-
tively . . . unenforceable”); LLEWELLYN, supra note 27 (arguing that consumers cannot R
meaningfully express specific assent to nonnegotiated terms); Friedrich Kessler, Contracts of Ad-
Electronic copy available at: https://ssrn.com/abstract=3740356

<<PAGE_BREAK>>

\\jciprod01\productn\G\GWN\90-1\GWN102.txt unknown Seq: 10 17-FEB-22 12:20
92 THE GEORGE WASHINGTON LAW REVIEW [Vol. 90:83
barriers are central themes in the new, proposed Restatement of Con-
sumer Contracts, as well as in many cases and statutes.32 Part IV asks
what remains of this fulcrum if smart readers can offer a technological
solution to the reading problem. At the very least, the rise of smart
readers will change the terms of engagement between laissez-faire ad-
vocates and social reformers. It then considers the doctrinal adapta-
tions necessary to adapt contract doctrine to smart readers.
The Article joins a few important contemporary conversations.
First, the debates on barriers to the reading and understanding of con-
tracts are evergreen but recently became urgent given the imminent
vote on the new Restatement of Consumer Contracts. One central is-
sue in the debate is the weight that should be given to consent to on-
line terms and conditions.33 The possibility of smart readers shifts the
terms of the debate and may lead to a greater focus on market condi-
tions and alternatives, than on term ignorance.
A second growing set of conversations concerns the relationship
between AI, discrimination, inequality, and access to justice. Scholars
hesion—Some Thoughts About Freedom of Contract, 43 COLUM. L. REV. 629, 632 (1943) (stating
the weaker party’s assent to standard contracts “is but a subjection more or less voluntary”);
Arthur Allen Leff, Contract as Thing, 19 AM. U. L. REV. 131, 143 (1970) (arguing that contracts
of adhesion are “not the product of a cooperative process, but the creation (essentially) of only
one of the parties”); Lewis A. Kornhauser, Comment, Unconscionability in Standard Forms, 64
CALIF. L. REV. 1151, 1162 (1976) (arguing that the majority of standardized terms “are candi-
dates for non-enforcement”); Edith R. Warkentine, Beyond Unconscionability: The Case for Us-
ing “Knowing Assent” as the Basis for Analyzing Unbargained-for Terms in Standard Form
Contracts, 31 SEATTLE U. L. REV. 469, 472 (2008) (arguing that consumers’ assent to form con-
tracts “is a fiction”); cf. RADIN, supra note 6 (criticizing the current legal regime and highlighting R
the need to tackle the harmful effects of harsh boilerplate terms).
32 See, e.g., DRAFT RESTATEMENT 2019, supra note 4. We return to this issue in more detail R
infra Section IV.A.
33 See Letter from Letitia James, N.Y. Att’y Gen., et al. to Members of Am. L. Inst. (May
14, 2019) (on file with the N.Y. Off. of the Att’y Gen.), https://ag.ny.gov/sites/default/files/letter_
to_ali_members.pdf [https://perma.cc/K7UE-4D2Y] (a letter from twenty-three attorneys gen-
eral, critiquing the Draft reporter’s stance that a lax approach to mutual assent should be
adopted because consumers do not read or understand form contracts); Dee Pridgen, ALI’s
Restatement of the Law of Consumer Contracts: Perpetuating a Legal Fiction?, 32 LOY. CON-
SUMER L. REV. 540 (2020); Ian MacDougall, Soon You May Not Even Have to Click on a Web-
site Contract to Be Bound by Its Terms, PROPUBLICA (May 20, 2019, 1:17 PM), https://
www.propublica.org/article/website-contract-bound-by-its-terms-may-not-even-have-to-click
[https://perma.cc/822W-PT6G]; Melvin Eisenberg, The Proposed Restatement of Consumer Con-
tracts, if Adopted, Would Drive a Dagger Through Consumers’ Rights, YALE J. ON REG.: NOTICE
& COMMENT (Mar. 20, 2019) (censuring the Draft because its approach to terms is “farcical,” as
“[f]orm contract terms are normally obscure, legalistic, or both”), https://www.yalejreg.com/nc/
the-proposed-restatement-of-consumer-contracts-if-adopted-would-drive-a-dagger-through-con-
sumers-rights-by-melvin-eisenberg/ [https://perma.cc/8EYG-P6HV]; see also infra notes 212–21 R
and accompanying text.
Electronic copy available at: https://ssrn.com/abstract=3740356

<<PAGE_BREAK>>

\\jciprod01\productn\G\GWN\90-1\GWN102.txt unknown Seq: 11 17-FEB-22 12:20
2022] CONTRACTS IN THE AGE OF SMART READERS 93
are becoming growingly aware of the potential for bias and discrimi-
nation when algorithms make decisions.34 The Article meets these
conversations by showcasing that AI can contribute to positive change
when used to empower consumers. Smart readers can narrow gaps in
access to justice mostly through the channel of access to lawyering-
like services. They can also raise awareness of disparate treatment by
benchmarking individual offerings. At the same time, gaps in digital
inclusion and discrimination based on whether an individual uses a
smart reader can themselves exacerbate inequality.
Finally, there is a growing interest today among agencies, courts,
and digital platforms in adopting AI technologies to improve the regu-
latory and adjudicative process.35 Smart readers are a powerful addi-
tion to this arsenal because they allow easy benchmarking of industry-
wide practices and effective screening of abusive practices on a large
scale. Courts can employ smart readers to replicate the way individu-
als access the contract in question, thus improving the interpretative
process. The technology also allows for easy implementation of
“corpus linguistics”—a newly proposed technique of ascertaining
meaning by consulting actual modes of usage.36
Smart readers are here. As with any technology, they create win-
ners and losers. Whether or how the potential of smart readers will be
realized depends not only on the technology but also on the legal en-
vironment that interacts with it. With further improvements rapidly
coming, it is thus high time to prepare for an age where machines can
read contracts.
34 The literature on that issue is quickly growing. For examples of important contributions,
see Sandra G. Mayson, Bias In, Bias Out, 128 YALE L.J. 2218 (2019); Deborah Hellman, Measur-
ing Algorithmic Fairness, 106 VA. L. REV. 811 (2020); and Benjamin H. Barton & Deborah L.
Rhode, Access to Justice and Routine Legal Services: New Technologies Meet Bar Regulators, 70
HASTINGS L.J. 955 (2019).
35 See, e.g., DAVID FREEMAN ENGSTROM, DANIEL E. HO, CATHERINE M. SHARKEY &
MARIANO-FLORENTINO CUE´LLAR, GOVERNMENTBY ALGORITHM: ARTIFICIAL INTELLIGENCEIN
FEDERAL ADMINISTRATIVE AGENCIES (2020), https://www-cdn.law.stanford.edu/wp-content/
uploads/2020/02/ACUS-AI-Report.pdf [https://perma.cc/4KTS-PHWD]; Alicia Solow-
Niederman, Administering Artificial Intelligence, 93 S. CAL. L. REV. 633 (2020); Rory Van Loo,
Rise of the Digital Regulator, 66 DUKE L.J. 1267, 1324 (2017); Richard M. Re & Alicia Solow-
Niederman, Developing Artificially Intelligent Justice, 22 STAN. TECH. L. REV. 242 (2019) (ex-
ploring “robo-judging”).
36 Stephen C. Mouritsen, Contract Interpretation with Corpus Linguistics, 94 WASH. L.
REV. 1337 (2019); Omri Ben-Shahar, Data Driven Contract Interpretation: Discovering “Plain
Meaning” Through Quantitative Methods, JOTWELL (June 13, 2018), https://con-
tracts.jotwell.com/data-driven-contract-interpretation-discovering-plain-meaning-through-quan-
titative-methods/ [https://perma.cc/32CF-ZXT7].
Electronic copy available at: https://ssrn.com/abstract=3740356

<<PAGE_BREAK>>

\\jciprod01\productn\G\GWN\90-1\GWN102.txt unknown Seq: 12 17-FEB-22 12:20
94 THE GEORGE WASHINGTON LAW REVIEW [Vol. 90:83
I. SMART READERS: TECHNOLOGY AND CAPABILITIES
We start our discussion by mapping and illustrating the core capa-
bilities of smart readers. Smart readers are built on machine learning
language models, and we particularly rely on a recent model known as
GPT-3. After offering a brief introduction of the technology, we con-
sider its capabilities. In discussing these capabilities, we try to navigate
the problem that the technology is quickly evolving. Yet, specific ex-
amples are needed to ground the discussion. We find a middle ground
here by mapping core capabilities while using concrete examples from
an existing model. As we rely on current technology to produce the
examples, the reader will do well to consider our examples to be a
lower bound on future technological capabilities.37
Rather than focusing on technical detail, let us provide an intui-
tive sense of how the language models that power smart readers see
the world. At the core, a language model is a statistical representation
of human language. The model is the product of a machine-learning
process, which scours texts and learns to detect statistical patterns. An
important observation is that the language model does not learn to
read; it learns to see patterns. Although a native English speaker
would intuitively know to say, “great old green dragons” but not “old
green great dragons,” they would find it difficult to explain that logic
to a machine. A machine learning algorithm would simply learn that
the former phrase is 8.4 times more likely than the latter.38
One of the latest language models is called GPT-3.39 Produced by
the San Francisco-based nonprofit OpenAI,40 this language model was
trained on an immense collection of data, the smallest part being the
37 Within the time frame of writing this Article, Google has already produced an even
more ambitious language model, six times in parameter the size of GPT-3. Compare Tom B.
Brown et al., Language Models Are Few-Shot Learners, ARXIV (July 22, 2020), https://arxiv.org/
abs/2005.14165 [https://perma.cc/5ZDM-R8KT] (noting the GPT-3 model has 175 billion param-
eters), with William Fedus, Barret Zoph & Noam Shazeer, Switch Transformers: Scaling to Tril-
lion Parameter Models with Simple and Efficient Sparsity, ARXIV (Jan. 11, 2021), https://
arxiv.org/abs/2101.03961v1 [https://perma.cc/SS64-XZNY] (noting the Google model has up to a
trillion parameters).
38 The example is based on MARK FORSYTH, THE ELEMENTSOF ELOQUENCE (2013).
39 See Brown et al., supra note 37. The technical approach is described in Alec Radford, R
Jeffrey Wu, Rewon Child, David Luan, Dario Amodei & Ilya Sutskever, Language Models are
Unsupervised Multitask Learners, OPENAI (Feb. 14, 2019) https://d4mucfpksywv.cloudfront.net/
better-language-models/language_models_are_unsupervised_multitask_learners.pdf [https://
perma.cc/V9X5-HLJ4]. For an accessible account, see, for example, Jay Alammar, How GPT3
Works—Visualizations and Animations, JAY ALAMMAR (July 27, 2020), http://jalam-
mar.github.io/how-gpt3-works-visualizations-animations/ [https://perma.cc/9FEK-L9C6].
40 About, OPENAI, https://openai.com/about/ [https://perma.cc/GDG5-MBD7].
Electronic copy available at: https://ssrn.com/abstract=3740356

<<PAGE_BREAK>>

\\jciprod01\productn\G\GWN\90-1\GWN102.txt unknown Seq: 13 17-FEB-22 12:20
2022] CONTRACTS IN THE AGE OF SMART READERS 95
entirety of Wikipedia.41 Based on its statistical analysis of these
sources, the model can produce convincing articles, poetry, horoscope
columns, a summary of movie plots in emojis,42 and even write some
not-too-bad comedy scripts.43 None of this is based on our notion of
understanding text; the model simply predicts which words should fol-
low the user’s initial input. The model’s capabilities captured the im-
agination of both technologists and laypeople.44 Perhaps most
illustrative is the reaction of the philosopher of mind David Chalmers,
who called it “one of the most interesting and important AI systems
ever produced.”45
With this in mind, let us now examine the four key capabilities of
smart readers in the context of consumer contracts.
A. Simplification
It comes as little surprise to most that contracts feature complex,
long, and uninviting text. Judges, lawyers, policymakers, academics,
and laypeople share this intuition and routinely complain about it.46
There is broad agreement that contracts are hard to read because of
41 The model is trained on “45TB of compressed plaintext” which includes all of
Wikipedia and other (much larger) databases. Brown et al., supra note 37, at 8–9. R
42 For a collection of examples (including failed ones), see Gwern Branwen, GPT-3 Crea-
tive Fiction, GWERN (Sept. 28, 2020), https://www.gwern.net/GPT-3 [https://perma.cc/9YTA-
2RBA] (describing movie plots in emojis, including “Matrix: ‘ ’; The Hunger Games:
‘ ’”).
43 See Arram Sabeti, Why GPT-3 Is Good for Comedy, or: Don’t Ever Do an AMA on
Reddit, ARRAM (July 22, 2020), https://arr.am/2020/07/22/why-gpt-3-is-good-for-comedy-or-red-
dit-eats-larry-page-alive/ [https://perma.cc/W5N3-6BG8].
44 See, e.g., Karen Hao, These Weird, Unsettling Photos Show that AI is Getting Smarter,
MIT TECH. REV. (Sept. 25, 2020) (“Of all the AI models in the world, OpenAI’s GPT-3 has most
captured the public’s imagination.”); Amir HajiRassouliha, What Can GPT-3 Do to Accelerate
Conversational AI and Digital Human Innovation?, UNEEQ DIGIT. HUMS. (Sept. 1, 2020) (“The
incredible deep learning skills of GPT-3 have captured the imagination of the technology
community . . . .”).
45 David Chalmers, GPT-3 and General Intelligence, DAILY NOUS (July 30, 2020, 3:02 PM),
https://dailynous.com/2020/07/30/philosophers-gpt-3/ [https://perma.cc/H2EZ-4DT8].
46 See, e.g., Eisenberg, supra note 3; Korobkin, supra note 5, at 1233 (noting that form R
terms are often “hard to read, hard to understand, and hard to compare . . . .”); Jeffrey Davis,
Protecting Consumers from Overdisclosure and Gobbledygook: An Empirical Look at the Sim-
plification of Consumer-Credit Contracts, 63 VA. L. REV. 841 (1977); Michael I. Meyerson, The
Efficient Consumer Form Contract: Law and Economics Meets the Real World, 24 GA. L. REV.
583 (1990); John Fry, Comic, CARTOONSTOCK, https://www.cartoonstock.com/cartoon?
searchID=CS116580 [https://perma.cc/GC6R-M7D6] (capturing this sentiment in a comic where
a manager speaks to his attorney, saying “These new Terms and Conditions you’ve drafted for us
are extremely long and overly complex—our customers are never going to be able to understand
them. Well done Jones!”).
Electronic copy available at: https://ssrn.com/abstract=3740356

<<PAGE_BREAK>>

\\jciprod01\productn\G\GWN\90-1\GWN102.txt unknown Seq: 14 17-FEB-22 12:20
96 THE GEORGE WASHINGTON LAW REVIEW [Vol. 90:83
their semantic difficulty,47 length,48 formatting,49 and legalese.50 For ex-
ample, one study of popular online consumer form contracts found
that these contracts were written at a level that matches academic
articles.51
The problem of complexity can be mitigated, if not defeated, by
the simplification of text. When done properly, simplification can alert
the reader to obligations that would otherwise be hidden in the pro-
lix.52 Smart readers are increasingly adept at the task of reducing text
complexity. They do so by summarizing text, lowering language regis-
ter, shortening text length, simplifying sentence structure, transform-
ing formatting, and eliminating nonessential content.53 To illustrate,
consider a lessee confronting the following clause in the lease
agreement:
47 See, e.g., Uri Benoliel & Shmuel I. Becher, The Duty to Read the Unreadable, 60 B.C. L.
REV. 2255 (2019) (measuring the linguistic complexity of online consumer contracts); Michael L.
Rustad & Thomas H. Koenig, Wolves of the World Wide Web: Reforming Social Networks’ Con-
tracting Practices, 49 WAKE FOREST L. REV. 1431, 1475 (2014) (studying the linguistic complexity
of social network contracts); Florencia Marotta-Wurgler & Robert Taylor, Set in Stone? Change
and Innovation in Consumer Standard-Form Contracts, 88 N.Y.U. L. REV. 240 (2013) (docu-
menting the complexity of end-user license agreements).
48 See Aleecia M. McDonald & Lorrie Faith Cranor, The Cost of Reading Privacy Policies,
4 I/S: J.L. & POL’Y FOR INFO. SOC’Y 543, 563 (2008) (finding that it would take the average
consumer 244 hours—which equals 30.5 standard workdays—to read the privacy policies they
encounter online annually).
49 See Yonathan A. Arbel & Andrew Toler, ALL-CAPS, 17 J. EMPIRICAL LEGAL STUD.
862, 874 (2020) (finding in a large sample of consumer contracts that 77% included at least one
paragraph in all-caps).
50 See, e.g., Eisenberg, supra note 5, at 242; Hillman & Rachlinski, supra note 3, at 446, R
448, 479 (noting the difficulty posed by legal jargon).
51 See Benoliel & Becher, supra note 47. R
52 Reformatting can render the fine print less fine by displaying easier to read fonts, in-
creasing spacing, and removing all-caps and other difficult formatting choices. On the failure of
capitalization to improve readability, see Arbel & Toler, supra note 49. R
53 See, e.g., Louis Martin, Angela Fan, E´ric de la Clergerie, Antoine Bordes & Benoıˆt
Sagot, Multilingual Unsupervised Sentence Simplification, ARXIV (May 1, 2020), https://arxiv.org/
pdf/2005.00352v1.pdf [https://perma.cc/89MS-47AD] (defining text simplification as “reducing
the complexity of the . . . text while retaining its original meaning”).
Electronic copy available at: https://ssrn.com/abstract=3740356

<<PAGE_BREAK>>

\\jciprod01\productn\G\GWN\90-1\GWN102.txt unknown Seq: 15 17-FEB-22 12:20
2022] CONTRACTS IN THE AGE OF SMART READERS 97
8. EVICTION: If the TENANT does not pay the rent within
five (5) days of the date when it is due, the TENANT may be
evicted. The LANDLORD may also evict the TENANT if the
TENANT does not comply with all of the terms of this Lease,
or for any other causes allowed by law. If evicted, the TENANT
must continue to pay the rent for the rest of the term. The
TENANT must also pay all costs, including reasonable attorney
fees, related to the eviction and the collection of any moneys
owed to the LANDLORD, along with the cost of re-entering,
re-renting, cleaning and repairing the PREMISES. Rent re-
ceived from any new tenant during the remaining term of this
lease will be applied by the LANDLORD to reduce rent only,
which may be owed by the TENANT.54
By scanning this text, the smart reader responds with the follow-
ing output:55
The output features shorter sentences, and the language is easier to
parse than the original. It also employs the second person, avoids capi-
talized text, and uses contractions. Critically, it does all of that while
largely preserving the meaning of the original clause. Although a mat-
ter of judgment, we find the output much easier to parse.
54 Yonathan Arbel, Lease Agreement, BATTLE OF THE FORMS (Feb. 9, 2021, 3:16 PM),
https://baggleoftheforms.com/wp-content/uploads/2021/02/leade_residential.pdf [https://
perma.cc/SVC6-L4GV].
55 Screenshot of smart reader explanation [3] (on file with authors).
Electronic copy available at: https://ssrn.com/abstract=3740356

<<PAGE_BREAK>>

\\jciprod01\productn\G\GWN\90-1\GWN102.txt unknown Seq: 16 17-FEB-22 12:20
98 THE GEORGE WASHINGTON LAW REVIEW [Vol. 90:83
Another more nuanced example is the following clause in an em-
ployment contract. As before, the original text included in the frame is
the input. It is then followed by the smart reader’s output.56
5. At Will Employment. The Board and [Employee] expressly
agrees that the employment relationship between the Board
and [the Employee] shall be considered at will. [Employee] may
terminate employment with the Board at any time, with or
without cause, and with or without prior notice. The Board may
terminate the employment of [Employee] at any time, with or
without cause, and with or without prior notice. This At Will
Employment Contract supercedes any contrary Board policies,
procedures, and/or statements of any kind or nature whatsoev-
er. In the event of conflict between any Board policy or proce-
dure and this paragraph, the provisions of this paragraph shall
govern.57
This explanation is remarkable for several reasons. First, despite
its simplicity, it captures the meaning quite well. Second, it is a bit
longer than the original, but it may nevertheless be more readable
because of its humorous, flippant tone.58 Third, it uses many illustra-
56 Screenshot of smart reader explanation [4] (on file with authors).
57 At Will Employment Contract, LAW INSIDER (Feb. 4, 2004), https://www.lawinsider.com/
contracts/242DHQfPUwj [https://perma.cc/W97X-L5ZL].
58 As suggested to us by Professor David Hoffman, humor degrades over time. This is a
challenge to firms who wish to adopt a lighter tone in their contracts but less so to smart readers.
We asked the smart reader for another output, and it produced the following:
You’re in the hospital, and you work at starbucks [sic]. . . . There’s a new policy at
Starbucks. All baristas must wear green lipstick. You don’t like green lipstick and
you feel like the policy is ridiculous, so you refuse to wear it. Your boss fires you for
Electronic copy available at: https://ssrn.com/abstract=3740356

<<PAGE_BREAK>>

\\jciprod01\productn\G\GWN\90-1\GWN102.txt unknown Seq: 17 17-FEB-22 12:20
2022] CONTRACTS IN THE AGE OF SMART READERS 99
tive examples, which give the reader a vivid sense of the import of the
clause. Fourth, it contains significant legal errors, most worryingly
portraying racial discrimination as legal.59
Text summary is a process involving what data scientists call
“lossy compression.”60 That is, it runs the risk of losing some of the
original meaning of the text in the same way that summarizing Ulysses
as two men who spend a day walking around Dublin does.61 Yet, form
contracts are not literary masterpieces, and, in our context, such a
concern can be easily overstated. Given the high degree of contractual
bloat, considerable degree of text can be eliminated without risking
loss of meaning.62
In essence, smart readers do not merely summarize the text or
rephrase it. Rather, they take a liberal approach to the text and can
render dense paragraphs quite accessible, if not entertaining. In terms
of capability, then, smart readers can solve a host of issues related to
the linguistic complexity of contracts. As the following sections show,
despite being useful and impressive in many ways, simplification is
probably the least exciting part of smart readers.
B. Personalization
Individuals understand the world in different ways owing to their
inherent disposition, circumstances, upbringing, culture, idiom and
language, cognitive ability, and socioeconomic status.63 As all teachers
know, the same materials require fundamentally different presenta-
not following the dress code. . . . That’s when you remember the At Will Employ-
ment contract you signed when you started.
Screenshot of smart reader explanation [5] (on file with authors).
59 See Civil Rights Act of 1964, Pub. L. No. 88-32, 78 Stat. 241 (codified in scattered sec-
tions of 28, 42, 52 U.S.C.); Fair Housing Act of 1968, 42 U.S.C. §§3601–3619. This is an impor-
tant risk that should be recognized throughout the Article, and we return to it infra Sections
III.E, IV.C.4.
60 See Lossy Compression, PCMAG, https://www.pcmag.com/encyclopedia/term/lossy-com-
pression [https://perma.cc/U95W-F5WY].
61 See generally Anna Ga´t (@TheAnnaGat), TWITTER(July 4, 2020, 7:33 PM), https://twit-
ter.com/TheAnnaGat/status/1279559029614874627 [https://perma.cc/D267-AK98] (prompting
other Twitter users to “describe your favorite NOVEL as boring as possible”).
62 The idea of contractual bloat is not without controversy. Precision is an important part
of the legal craft and precision may necessitate accounting for a large number of contingencies.
At the same time, the structure of incentives asymmetrically favors bloat: firms can discourage
reading and lawyers can add fees or save costs by reusing old forms. See generally Claire A. Hill,
Why Contracts Are Written in “Legalese,” 77 CHI.-KENT L. REV. 59 (2001) (discussing the history
of form contracts and their persistence).
63 See All in the Mind with Sana Qadar, WEIRD Psychology, ABC RADIO NAT’L (Oct.
18, 2020), https://www.abc.net.au/radionational/programs/allinthemind/weird-psychology/
12766212 [https://perma.cc/NS2W-SQ85].
Electronic copy available at: https://ssrn.com/abstract=3740356

<<PAGE_BREAK>>

\\jciprod01\productn\G\GWN\90-1\GWN102.txt unknown Seq: 18 17-FEB-22 12:20
100 THE GEORGE WASHINGTON LAW REVIEW [Vol. 90:83
tions to different audiences. The same problem is relevant in con-
sumer contracts, where a one-size-fits-all approach to disclosure
frequently fails. An obvious example is recent immigrants, some of
whom have less than a full command of the English language.
But the differences go much deeper. Research in psychology
shows, for example, that some individuals process information better
when it is presented in abstract terms, and others when it is grounded
in examples.64 Despite these challenges, the uniform approach to dis-
closure is thought to be unavoidable, given the cost of personalizing
contracts on the firm side.65
Although regulators understand the need to personalize con-
tracts, they rarely require it of firms. The challenge personalization
poses to firms appears almost intractable because adapting contracts
to each specific consumer’s cognitive skills is arguably prohibitively
costly, difficult, and information intensive.66 In the rare occasions
where regulators set requirements on the presentation of contractual
text, such as in the case of the Schumer Box,67 the imaginary audience
is some more-or-less average reader, who has a more-or-less average
command of the English language, cognitive ability, and cultural
literacy.68
But what if the personalization can be made, not on the business
side, but on the consumer side? Like hearing aids that adjust the vol-
ume of speech to the specific needs of the listener, smart readers of-
fer—for the first time—the ability to make such adaptations on the
consumer side. Smart readers can tailor textual presentation to be
highly sensitive to a specific user. For instance, it can consider her
cultural expectations, linguistic abilities, and cognitive needs.
64 See Beichen Liang & Joseph Cherian, Cross-Cultural Differences in the Effects of Ab-
stract and Concrete Thinking on Imagery Generation and Ad Persuasion, 22 J. INT’L CONSUMER
MKTG. 187, 188 (2010).
65 With the advent of big data, there is a growing optimism about the power to personalize
contracts and contract rules. See, e.g.,Ariel Porat & Lior Jacob Strahilevitz, Personalizing De-
fault Rules and Disclosure with Big Data, 112 MICH. L. REV. 1417 (2013). For a discussion of the
risks of personalization see infra Section III.E.
66 See infra Section III.E.
67 12 C.F.R. §226.5 (2021) (requiring firms to clearly disclose the costs of credit cards and
specifically prescribing such disclosure to ensure unity among different credit cards issuers).
68 See, e.g., Heinz W. Kirchner, 63 F.T.C. 1282, 1290 (1963) (“An advertiser cannot be
charged with liability in respect of every conceivable misconception . . . among the foolish or
feeble-minded.”); Am. Home Prods. Corp., 98 F.T.C. 136, 371 (1981), aff’d, 695 F.2d 681 (3d Cir.
1982) (relying on what “would reasonably have been understood by consumers”); Bristol-Myers
Co., 102 F.T.C. 21, 320 (1983), aff’d, 738 F.2d 554 (2d Cir. 1984) (“[A]ds must be judged by the
impression they make on reasonable members of the public.”).
Electronic copy available at: https://ssrn.com/abstract=3740356

<<PAGE_BREAK>>

\\jciprod01\productn\G\GWN\90-1\GWN102.txt unknown Seq: 19 17-FEB-22 12:20
2022] CONTRACTS IN THE AGE OF SMART READERS 101
Consider the former example of an at-will clause. This time, how-
ever, the reader is Luis, a recent immigrant from a Spanish-speaking
country. His specific output will be:69
This output is not just a translation. Beyond presenting it in the
right language, from Luis’s perspective, the smart reader also simpli-
fies the contract and makes it more accessible to his specific needs.70
Linguistic personalization easily accommodates the needs of those
who may be comfortable with English but prefer simpler words,
shorter sentences, more explanations, or concrete examples.
Another example comes from the choice of law clause presented
above. As the reader may recall, the original term reads:71
12. Controlling Law and Severability. This License will be gov-
erned by and construed in accordance with the laws of the State
of California, excluding its conflict of law principles. This Li-
cense shall not be governed by the United Nations Convention
on Contracts for the International Sale of Goods, the applica-
tion of which is expressly excluded. If you are a consumer based
in the United Kingdom, this License will be governed by the
laws of the jurisdiction of your residence. If for any reason a
court of competent jurisdiction finds any provision, or portion
thereof, to be unenforceable, the remainder of this License shall
continue in full force and effect.
69 Screenshot of smart reader explanation [6] (on file with authors).
70 There is a great deal of linguistic diversity among Spanish speakers, so this example only
captures one layer of heterogeneity. On the complexity of translating the legal term “at-will”
from a Chilean perspective, see Carlos Herna´ndez Contreras, Origen y Evolucio´n del Despido
(At-will Employment) en Los Estados Unidos de Norteame´rica, inESTABILIDADENEL EMPLEO
141, 142 (2017) http://www.derecho-trabajo.cl/wp-content/uploads/2019/02/EstabilidadEnElEm-
pleo2.pdf [https://perma.cc/6L6L-WGCX]. For further discussion of dialects, see infra text ac-
companying note 74. R
71 APPLE, supra note 1, ¶ 12.
Electronic copy available at: https://ssrn.com/abstract=3740356

<<PAGE_BREAK>>

\\jciprod01\productn\G\GWN\90-1\GWN102.txt unknown Seq: 20 17-FEB-22 12:20
102 THE GEORGE WASHINGTON LAW REVIEW [Vol. 90:83
When the user asks the smart reader to adapt it to a young per-
son, it produces the following output:
The smart reader offers a lucid explanation. It has short and di-
rect sentences, clearly identified “characters,” and a logical narrative.
We believe this specific choice of language would be very accessible to
young adults, markedly more than the original. This does not resolve
the problem of understanding what California law entails, but at least
it offers an initial grasp of the clause and questions that need to be
asked.
Alternatively, consider the following example of a sixteen-year-
old who tries to understand what luggage he can bring with him on his
trip. Scanning the airline ticket terms and conditions, he comes across
the following clause:72
C. Excess and Oversize/Overweight Baggage Limits and
Charges
1. Except as otherwise provided in the terms of this Con-
tract of Carriage or by law, articles transported as Checked
Baggage may not exceed the Maximum Outside Linear Dimen-
sions of 115 linear inches (292 cm) or a maximum weight of 99.9
pounds (45.3 kg).
2. UA may, in its sole discretion, change, consider or make
exceptions to its Excess or Oversize/Overweight Baggage policy
(e.g., to the number, size, weight, type and/or applicable service
charges).
3. Charges apply for Excess and Oversize/Overweight Bag-
gage, in addition to applicable Baggage service charges(s) re-
quired to be paid pursuant to UA’s general Baggage Allowance
policy. These charges apply each way (i.e., based on a one-way
trip) and are cumulative (i.e., Baggage that is excess and also
oversized and/or overweight will be subject to both Excess Bag-
gage and Oversize/Overweight Baggage charges).
This time, the smart reader responds with the following output:
72 Contract of Carriage Document, UNITED (Nov. 8, 2021), https://www.united.com/ual/en/
us/fly/contract-of-carriage.html#tcm:76-6640 [https://perma.cc/6YMY-SR85].
Electronic copy available at: https://ssrn.com/abstract=3740356

<<PAGE_BREAK>>

\\jciprod01\productn\G\GWN\90-1\GWN102.txt unknown Seq: 21 17-FEB-22 12:20
2022] CONTRACTS IN THE AGE OF SMART READERS 103
Beyond its simplification and summary of the text, the output
uses a choice of words that would be easy for a teenager to process.
Rather than talking about excess fees and service charges, the output
simply notes that the airline will “charge you extra money.” Using
straightforward language that focuses on direct implications would be
easily recognizable by most teenagers. The reader also explains the
idea of cumulative charges in a highly intuitive way: it uses a concrete
example of a bag that is too large and too heavy. The examples
ground the abstract fee model in a concrete object, making it easier to
grasp. Such personalization is a powerful solution for people who have
not developed abstract conceptual reasoning or for those who dislike
it.73
Another capability of personalization is quite subtle. Consider
the dialectical differences within subgroups, such as “regionalisms.”
For simplicity, the following example uses a noncontractual clause
spoken by a hypothetical Alabamian and asks the model to adapt it to
a Bostonian:74
“I was fixin to tell y’all about how the other day I ran out of
maters and taters. I parked my car cattycorner from the store.
Inside I saw some boiled goobers and slaw that was fit as a
fiddle but because I didn’t have a bag to tote it all, I used a
buggy.”
This example is particularly interesting because private dictiona-
ries are a sore problem in contract law. What is a judge to do when the
73 The reader might notice that the answer does not capture the content of clause C.2.
While there is always a cost to omitting text—lossy compression—we believe most human read-
ers would likely focus on the other clauses as well.
74 Screenshot of smart reader explanation [7] (on file with authors).
Electronic copy available at: https://ssrn.com/abstract=3740356

<<PAGE_BREAK>>

\\jciprod01\productn\G\GWN\90-1\GWN102.txt unknown Seq: 22 17-FEB-22 12:20
104 THE GEORGE WASHINGTON LAW REVIEW [Vol. 90:83
parties use Peerless to refer to two different ships?75 What is a
chicken: a young chicken or an older stewing chicken?76 Must a seller
of four-inch square studs deliver studs that are four inches by four
inches?77 If a New Yorker orders Coke from an Alabamian, must the
latter provide Coca Cola or would other types of carbonated drinks be
permitted?78 Personalization inches parties toward shared
dictionaries.
A last feature of personalization is that it can be intersectionally
rich—such as providing custom output to an elderly woman from rural
Louisiana. If a consumer is both young and Spanish speaking, it will
be trivial to first take the airline ticket and have it processed for a
young reader, and then take the resulting output and process it for a
Spanish-speaking person. The range of mix-and-match possibilities is
broad indeed.
In sum, personalization offers a textual adaptation that is be-
spoke to the needs of the specific reader. Critically, the adaptation is
made on the consumer side. It therefore saves firms the challenge of
acquiring information about every customer’s specific needs and
adapting their disclosures accordingly. Personalization can mitigate
the problem of private dictionaries between contracting parties, even
if it does not entirely solve it.
C. Construction
To understand a legal text, one needs more than mastery of the
language. The classic distinction between interpretation and construc-
tion reflects this idea. As used by Arthur Corbin,79 construction is the
act of extracting the legal significance of contractual terms—a process
that goes beyond the parsing of words. In the scholarship, the con-
struction function is mostly employed in the context of judges ap-
proaching texts. Yet, it is worth recognizing that parties and their
lawyers also construct legal text, even if they do so less authoritatively.
75 See Raffles v. Wichelhaus (1864) 159 Eng. Rep. 375. One innovative solution is to give
both parties the option to enforce their understanding of the contract. See Benjamin Alarie,
Mutual Misunderstanding in Contract, 46 AM. BUS. L.J. 531, 533–34 (2009).
76 See Frigaliment Importing Co. v. B.N.S. Int’l Sales Corp., 190 F. Supp. 116 (S.D.N.Y.
1960).
77 See Abramov v. Home Depot, Inc., No. 17-cv-1860, 2018 WL 1252105, at *5 (N.D. Ill.
2018) (dismissing the plaintiff’s claims, even though the boards were only 3.5” by 3.5” inches).
78 See POPVS SODA, https://popvssoda.com [https://perma.cc/R8UD-H5UH].
79 For Arthur Corbin’s view of the distinction, see Gregory Klass, Interpretation and Con-
struction in Contract Law 13 (Jan. 19, 2018), https://papers.ssrn.com/sol3/pa-
pers.cfm?abstract_id=2913228 [https://perma.cc/LD7W-7T4Y].
Electronic copy available at: https://ssrn.com/abstract=3740356

<<PAGE_BREAK>>

\\jciprod01\productn\G\GWN\90-1\GWN102.txt unknown Seq: 23 17-FEB-22 12:20
2022] CONTRACTS IN THE AGE OF SMART READERS 105
Using a smart reader, the consumer can ask specific follow-up
questions about the meaning of the text. Suppose, for example, that a
person is about to buy a car. The contract with the dealership states
that the car is bought “as is.” The term itself is not semantically com-
plex, but its legal meaning may well elude the buyer. Indeed, courts
frequently grapple with cases where car buyers had a fundamentally
different understanding of the term from that intended by the dealer-
ship.80 Does an “as is” clause preclude returning the car if it turns out
later that the engine has a major defect? Can the buyer demand reim-
bursement if the seller did not disclose material problems? Does “as
is” include all types of defects or problems, known and unknown at
the time of purchase?81
Inputting the “as is” clause to the smart reader results in the fol-
lowing output:82
The output explains the legal consequences of buying a car “as
is.”83 The smart reader maps the legal concept of “as is” to its legal
consequences straightforwardly, the way a lawyer might. Impressively,
the smart reader achieves this while also simplifying and personalizing
the contract by using the second person, contractions, and repetition.
Another example of construction is a credit agreement that con-
tains, among its many clauses, this one: “You will be in default
if: . . . (7) you permanently reside outside the United States.”84 This
clause, while linguistically simple, can still raise challenges. Would a
trip abroad trigger this clause? Does the consumer risk their credit
80 See Scott J. Burnham, The Parol Evidence Rule: Don’t Be Afraid of the Dark, 55 MONT.
L. REV. 93, 126 (1994).
81 Curtis v. Bill Byrd Auto., Inc., 579 So. 2d 590 (Ala. 1990) (holding that despite an as-is
clause, the dealership had a duty to disclose negative information known to it).
82 Screenshot of smart reader explanation [8] (on file with authors).
83 We again meet the constraint that simplification is “lossy.” Car sales are also regulated
by state laws—in particular, lemon laws—and the enforceability of contractual clauses is subject
to a variety of defenses (most pertinently, fraud).
84 CAPITAL ONE, CUSTOMER AGREEMENT 4, https://www.capitalone.com/media/doc/
credit-cards/BR281646_M112863_CA358_LetterSize.pdf [https://perma.cc/PRY9-3D66].
Electronic copy available at: https://ssrn.com/abstract=3740356

<<PAGE_BREAK>>

\\jciprod01\productn\G\GWN\90-1\GWN102.txt unknown Seq: 24 17-FEB-22 12:20
106 THE GEORGE WASHINGTON LAW REVIEW [Vol. 90:83
score if they stay overseas with their family for a few weeks? To re-
solve this, the consumer can simply ask the smart reader:85
“Laura, if I travel to England for one week to visit my
grandmother, would I be in default?”
This answer is accurate, though construction is a far more com-
plex task than interpretation. Indeed, there is often little agreement
among lawyers regarding the meaning of a specific clause, and judges
frequently differ in their construction of legal texts. This means that
we cannot expect smart readers to offer authoritative construction in
the near future; but at the same time, even if limited, the smart
reader’s construction might not be far from the accuracy of a reasona-
ble lawyer. It is also worth remembering what H.L.A. Hart once ob-
served: penumbral cases of interpretation may be “the daily diet of
the law schools,” but they are not the majority of cases.86 Many mun-
dane questions, such as “can I sublet my apartment?” do not require a
great deal of legal mastery if the contract explicitly prohibits sub-
leases. This capability, however, also raises questions regarding the
unauthorized practice of law.87
D. Benchmarking
Arguably, the most powerful capability of smart readers is that of
benchmarking. Smart readers can assign a contract a score or stars
based on how it compares with other contracts in the market.
Comparison shopping is an information-intensive activity, as buy-
ers often care about a great variety of factors. These may include
price, quality, design, environmental impact, delivery, the product’s
lifespan, seller’s reputation, and—importantly—the contract terms.
Consequently, effective comparison shopping involves considerable
search costs and cognitive effort.88 The consumer needs to amass the
85 Screenshot of smart reader explanation [9] (on file with authors).
86 H.L.A. HART, Positivism and the Separation of Law and Morals, in ESSAYS IN JURIS-
PRUDENCEAND PHILOSOPHY 49, 72 (1983).
87 For a review of the surrounding issues, see generally Frank Pasquale, A Rule of Persons,
Not Machines: The Limits of Legal Automation, 87 GEO. WASH. L. REV. 1 (2019). See also Bar-
ton & Rhode, supra note 34 (calling for lax regulatory approach to online technologies that R
increase access to justice).
88 See, e.g., Rory Van Loo, Helping Buyers Beware: The Need for Supervision of Big Retail,
Electronic copy available at: https://ssrn.com/abstract=3740356

<<PAGE_BREAK>>

\\jciprod01\productn\G\GWN\90-1\GWN102.txt unknown Seq: 25 17-FEB-22 12:20
2022] CONTRACTS IN THE AGE OF SMART READERS 107
information, process it, and draw comparisons. Even the mundane
purchase of toilet paper involves comparisons that exponentially grow
in complexity.89 It is little wonder that psychologists find a phenome-
non of choice overload, which might lead to analysis paralysis.90
Benchmarking offers a cost-effective solution to this problem.
One early (in machine learning timescale) example was in 2014. Re-
searchers from Columbia University built a machine learning model
that classifies and ranks privacy policies.91 The model proved highly
accurate in identifying whether the policy includes terms such as ad
tracking, encryption of information, or profiling.92 Based on this anal-
ysis, the model was able to state whether a contract included uncom-
mon terms. For example, a profiling term was present in 52% of
agreements, whereas 74% of contracts limited the duration of reten-
tion of private information.93 Taking this approach a step further, the
researchers developed the means to score privacy agreements based
on the inclusion or exclusion of certain terms. This way, the model was
able to scan a privacy policy and assign it a grade of “A,” “B,” or “C,”
as the case may be.94
Such benchmarking capabilities have recently been deployed. In
2021 researchers from the University of Texas at Austin released
“PrivacyCheck,” a browser extension that provides a free and on-de-
mand ranking of privacy policies.95 Built on machine learning algo-
rithms,96 Figure 1 below illustrates the operation of this tool, which
163 U. PA. L. REV. 1311, 1327 (2015) (“The high cost of acquiring information on hundreds of
mass retail items among thousands of choices across different stores leads most consumers to
make decisions with limited comparative information.”).
89 Furthermore, for the consumer to be able to systematically aggregate all the relevant
information, each of the product’s attributes should be given a relative weight and mark, which
together will lead to a combined overall score. This is also known as the “weighted adding strat-
egy.” See generally, e.g., James R. Bettman, Mary Frances Luce & John W. Payne, Constructive
Consumer Choice Processes, 25 J. CONSUMER RSCH. 187 (1998) (applying this strategy to con-
sumer-related decisions).
90 See generally Justin Beneke, Are Consumers Really Bewildered by Overchoice? An Ex-
perimental Approach to the Tyranny of “Too Much,” 21 J. FOOD PRODS. MKTG. 90, 97 (2015);
BARRY SCHWARTZ, THE PARADOXOF CHOICE (2004).
91 Sebastian Zimmeck & Steven M. Bellovin, Privee: An Architecture for Automatically
Analyzing Web Privacy Policies, in PROCEEDINGSOFTHE 23RD USENIX SECURITY SYMPOSIUM
1 (2014).
92 Id. at 7–9.
93 Id. at 8–9.
94 Id.
95 PrivacyCheck: Overview, supra note 11.
96 RAZIEH NOKHBEH ZAEEM, SAFA ANYA, ALEX ISSA, JAKE NIMERGOOD, ISABELLE
ROGERS, VINAY SHAH, AYUSH SRIVASTAVA & K. SUZANNE BARBER, UNIV. TX. AUSTIN CTR.
FOR IDENTITY, PRIVACYCHECKV2: A TOOLTHAT RECAPS PRIVACY POLICIESFOR YOU 1 (2020),
Electronic copy available at: https://ssrn.com/abstract=3740356

<<PAGE_BREAK>>

\\jciprod01\productn\G\GWN\90-1\GWN102.txt unknown Seq: 26 17-FEB-22 12:20
108 THE GEORGE WASHINGTON LAW REVIEW [Vol. 90:83
evaluates the policy’s compliance with twenty different privacy
questions.
FIGURE 1. PRIVACYCHECK INTERFACE
As Figure 1 illustrates, the model offers a clear overall score of
the privacy policy that the consumer reviews (65%) relative to the
mean score of privacy policies in that specific market (54%). It offers
a breakdown of some of the reasons for the score and, importantly,
provides website links to competitors who offer better privacy
policies.
The score provided by the smart reader is similar to the star rank-
ing commonly shown next to products online. It would be possible to
augment product searches with this additional metric; it will not re-
quire much cognitive effort for consumers to incorporate such a met-
https://identity.utexas.edu/sites/default/files/2020-10/PrivacyCheck%20v2%20A%20Tool
%20that%20Recaps%20Privacy%20Policies%20for%20You.pdf [https://perma.cc/T7W7-
BUEC].
Electronic copy available at: https://ssrn.com/abstract=3740356

<<PAGE_BREAK>>

\\jciprod01\productn\G\GWN\90-1\GWN102.txt unknown Seq: 27 17-FEB-22 12:20
2022] CONTRACTS IN THE AGE OF SMART READERS 109
ric in their decision-making process. Star rankings do not always tell
the entire story, and many consumers seek written reviews.97 The
smart reader offers the possibility of an explanation as to the reason
beyond the scoring, which the consumer can weigh for themselves.
The smart reader can also direct the consumer to competitors
who offer better terms. In markets where sellers offer different terms,
such a tool can effectively mobilize consumers to the seller with the
best contract. Benchmarking accuracy may improve over time, as
smart readers become common. The greater database of contracts
could offer more fine-tuned assessments. Thus, benchmarking can
streamline many aspects of comparison shopping.
Of all four capabilities, benchmarking is at the most nascent
stage. The scoring of terms requires some tricky judgments, and at
times there will be ample room to contest any specific judgment. In-
deed, ranking contracts is difficult for humans,98 and we are still far
from smart readers that can rival the ability of a seasoned lawyer to
rank contracts.99 Inaccurate benchmarking does not, however, pro-
duce meaningless information—despite the difficulty and inaccuracy
involved in ranking firms, consumers and regulators often rely on
reputational scores.100 As emphasized throughout this Article, what
we should have in mind in assessing the utility of smart readers is not
some abstract notion of accuracy, but rather the realistic alternative.
Even an imperfect benchmarking tool can offer considerable improve-
ments if consumers do not read contracts and simply rely on their er-
ror-prone intuitive judgment.
II. SMART READER UPTAKE AND (NO) READING THEORIES
The capabilities of smart readers harbor great promise, yet this
potential matters little if consumers do not adopt the technology. The
principal purpose of this Part is to tackle the question of consumer
97 See generally Arbel, supra note 24 (discussing common failure mode in reviews and R
other forms of reputational information).
98 For more on this, see Shmuel I. Becher, A “Fair Contracts” Approval Mechanism: Rec-
onciling Consumer Contracts and Conventional Contract Law, 42 U. MICH. J.L. REFORM 747,
765–67 (2009) (explaining why grading contracts is a challenging task).
99 See infra Section III.B (discussing errors and adversarial examples).
100 See FTC, THE “SHARING” ECONOMY: ISSUES FACING PLATFORMS, PARTICIPANTS &
REGULATORS 32 (2016), https://www.ftc.gov/system/files/documents/reports/sharing-economy-is-
sues-facing-platforms-participants-regulators-federal-trade-commission-staff/p151200_ftc_staff_
report_on_the_sharing_economy.pdf [https://perma.cc/KC3N-68AW] (“[A] seller’s favorable
reputation can provide important leverage for regulators seeking to ensure consumers are pro-
tected when shopping online.”); Arbel, supra note 24, at 1262–85 (exploring reputational R
failures).
Electronic copy available at: https://ssrn.com/abstract=3740356

<<PAGE_BREAK>>

\\jciprod01\productn\G\GWN\90-1\GWN102.txt unknown Seq: 28 17-FEB-22 12:20
110 THE GEORGE WASHINGTON LAW REVIEW [Vol. 90:83
uptake.101 On one level, uptake will be a function of the maturity of
the technology and its implementation. On a deeper level, uptake im-
plicates a deeper question, namely, why is it that consumers do not
read contracts today? Surveying the literature, we map five classes of
theories that set out to explain the reading gap. These theories predict
different levels of uptake, some more optimistic than others, and we
shall argue below that even limited uptake can have broad market
implications.
Invoking the concept of Wittgenstein’s Ruler, this Part also aims
to learn something about the theories themselves. Famously, Wittgen-
stein argued that when one measures the table with a ruler, one is also
using the table to measure the ruler.102 By the same token, if, despite
theoretical predictions, uptake proves limited, this will provide a
meaningful lesson about our theories, their scope, and their validity.
Perhaps the ruler is broken.
On the technology side, uptake critically depends on its quality
and cost. It is also important to consider more prosaic factors of user
interface and user experience (“UI/UX”), which can make or break a
technology.103 Although these factors are currently unknown, there
are several reasons to believe that smart readers will be both effective
and affordable.104 First, current models of smart readers already pro-
duce impressive examples. Second, the rapid pace of improvements in
the field reinforces this optimism.105 Third, sophisticated firms already
stake billions of dollars on the outputs of their proprietary smart read-
101 See also infra Section IV.C (considering uptake by courts and agencies).
102 WITTGENSTEIN, supra note 26. R
103 See, e.g., Shruti Gupta, An Analysis of UI/UX Designing with Software Prototyping
Tools, in CROWDSOURCING AND PROBABILISTIC DECISION-MAKING IN SOFTWARE ENGINEER-
ING: EMERGING RESEARCHAND OPPORTUNITIES 134 (Varun Gupta ed., 2020); Advent Tuban,
How UI/UX Design Can Make or Break Your Application, TECH. RIVERS (June 30, 2020), https:/
/technologyrivers.com/blog/how-ui-ux-make-or-break-your-application/ [https://perma.cc/VS5T-
DSYW].
104 In terms of user interface, the range of options is broad: a smart reader can be a browser
extension, a mobile app connected to the camera, a dedicated device, a service hosted on a
website, or an augmented reality extension.
105 See Danny Hernandez & Tom B. Brown, Measuring the Algorithmic Efficiency of Neu-
ral Networks, ARXIV (2020), https://arxiv.org/pdf/2005.04305.pdf [https://perma.cc/SYX8-
Q3GA]; see also Jared Kaplan et al., Scaling Laws for Neural Language Models, ARXIV (2020),
https://arxiv.org/pdf/2001.08361.pdf [https://perma.cc/23Q4-MCL2] (finding that language mod-
els “improve[] smoothly” as more compute becomes available, implying that large accuracy gains
are likely). An important commentator argues that based on model architecture alone, the next
iterations of GPT-3 are likely to yield considerable improvements. Branwen, supra note 42. R
Electronic copy available at: https://ssrn.com/abstract=3740356

<<PAGE_BREAK>>

\\jciprod01\productn\G\GWN\90-1\GWN102.txt unknown Seq: 29 17-FEB-22 12:20
2022] CONTRACTS IN THE AGE OF SMART READERS 111
ers.106 These considerations suggest that a high degree of effectiveness
is possible.
The question of cost is somewhat harder because it requires us to
consider the monetization of the technology. On the cost side, the de-
velopment of the model is certainly high, but the costs of “com-
pute”—computational resources—are in exponential decline. Indeed,
variants of GPT-2 were made publicly available for free.107 If develop-
ers license smart readers to users, the cost depends on the developers’
business strategy. Most developers of mobile apps seem to pursue a
low-cost, broad-adoption strategy. Thus, low cost is feasible.108 An-
other business model is providing a free-to-use license and monetizing
the collection of consumer information. Firms may also pay develop-
ers in return for the promotion of their products, thus creating a natu-
ral conflict of interests. And we might also expect a mixed model,
where a basic app is freely available, but premium features are only
available to paying customers. Each of these strategies creates its own
problems. Still, it is fairly plausible to see how the app can become
affordable. Ultimately, if the last hurdle to the adoption of smart read-
ers is cost, policymakers can always choose to employ the lever of
subsidies.
While we think effectiveness and affordability are plausibly solva-
ble problems, a more troubling question is whether consumers want to
use smart readers. Answering this question requires some understand-
ing of the theories that explain why consumers do not read their con-
tracts in the first place. Below we briefly describe five prominent
theories and examine their implications for uptake.
(1) Readability theories posit that consumers do not read because
of the linguistic complexity of contracts.109 From this perspective,
smart readers offer a powerful and direct solution. Smart readers can
summarize, explain, and make the text accessible with a push of a but-
ton. The presentation can be made graphically pleasing, and the use of
106 See Cao et al., supra note 25 (documenting the extensive use of smart readers by firms R
as part of algorithmic trading).
107 OpenAI runs an open-source platform and has made variants of GPT-2, including the
largest version, available on its website. See Irene Solaiman, Jack Clark & Miles Brundage, GPT-
2: 1.5B Release, OPENAI (Nov. 5, 2019), https://openai.com/blog/gpt-2-1-5b-release/ [https://
perma.cc/L7ZG-X3FA].
108 For example, in September 2021, approximately 75% of mobile apps in the Android
mobile store cost $3 or less. L. Ceci, Paid App Price Distribution In the Google Play Store as of
September 2021, STATISTA (Oct. 1 2021), https://www.statista.com/statistics/271109/average-
price-android-apps/ [https://perma.cc/7YSL-4QDG].
109 See supra notes 46–51 and accompanying text. R
Electronic copy available at: https://ssrn.com/abstract=3740356

<<PAGE_BREAK>>

\\jciprod01\productn\G\GWN\90-1\GWN102.txt unknown Seq: 30 17-FEB-22 12:20
112 THE GEORGE WASHINGTON LAW REVIEW [Vol. 90:83
humor may render the experience of reading contracts more enter-
taining. This theory predicts high levels of consumer uptake.
(2) Transactional expectations theory holds that reading is not
productive because the text is a weak predictor of the parties’ rights.110
It does not matter what the contract says as much as what the contract
“does.” Consumers come to transactions with developed expectations
of their contours—informed by experience, seller representations, me-
dia coverage, and reputational information. When a term in the fine
print violates these expectations, firms are reluctant to enforce it for
reputational considerations, and courts may refuse to enforce it as
well.111 Thus, the written word is not necessarily a good predictor of
the allocation of rights and duties under the contract.
Proponents of the transactional expectations theory would likely
predict limited uptake. However, consumers may still want to consult
a smart reader in transactions where they do not have settled expecta-
tions, where the potential for error is large, or where the stakes are
high. The adoption of smart readers will thus likely be domain
specific.
(3) Rational apathy theory holds that reading is not cost-effec-
tive.112 Although consumers bear the cost of reading with certainty,
actual contractual issues are only remote probabilities in the future. If
there is a limited ability to negotiate terms or few competing sellers,
reading is a losing proposition.113
Given the focus on cost, this theory predicts at least a certain de-
gree of uptake. As smart readers reduce the cost of processing infor-
mation, they should affect both the intensive and extensive margin—
that is, more consumers reading contracts, with each consumer read-
110 See Yonathan A. Arbel & Roy Shapira, Theory of the Nudnik: The Future of Consumer
Activism and What We Can Do to Stop It, 73 VAND. L. REV. 929, 955 (2020); Ayres & Schwartz,
supra note 4, at 550–51. R
111 See Arbel & Shapira, supra note 110, at 956; Shmuel I. Becher & Tal Z. Zarsky, Minding R
the Gap, 51 CONN. L. REV. 69, 78 (2019); Lucian A. Bebchuk & Richard A. Posner, One-Sided
Contracts in Competitive Consumer Markets, 104 MICH. L. REV 827, 830 (2006).
112 As Professor Epstein puts it: “[I]t seems clear that most consumers—of whom I am
proudly one—never bother to read these terms anyhow.” Richard A. Epstein, Contract, Not
Regulation: UCITA and High-Tech Consumers Meet Their Consumer Protection Critics, inCON-
SUMER PROTECTIONINTHE AGEOFTHE ‘INFORMATION ECONOMY’ 205, 227 (Jane K. Winn ed.,
2006); see also Eisenberg, supra note 5, at 241–43. Reportedly, Judge Posner did not read his R
home equity loan boilerplate. See Debra Cassens Weiss, Judge Posner Admits He Didn’t Read
Boilerplate for Home Equity Loan, ABA J. (June 23, 2010, 1:37 PM), https://
www.abajournal.com/news/article/judge_posner_admits_he_didnt_read_boilerplate_for_home_
equity_loan/ [https://perma.cc/LYC6-HAWU].
113 See, e.g., Hillman & Rachlinski, supra note 3, at 436 (“[C]ompetitors usually employ
comparable terms.”).
Electronic copy available at: https://ssrn.com/abstract=3740356

<<PAGE_BREAK>>

\\jciprod01\productn\G\GWN\90-1\GWN102.txt unknown Seq: 31 17-FEB-22 12:20
2022] CONTRACTS IN THE AGE OF SMART READERS 113
ing more terms. At the very least, scoring should be an attractive fea-
ture because the cost of checking the score is comparable to the cost
of reviewing online reputational information. At least in markets with
competing sellers, a steep reduction in reading costs will lead to con-
sumer uptake.
(4) Cognitive biases theories hold that various biases make con-
sumers irrationally avoid reading contracts. Some possibilities that can
drive such an aversion include unrealistic optimism about the rarity of
product defects, feelings of being locked into the transaction by the
stage in which the contract is presented, or an erroneous projection of
one’s understanding of the transaction on all other parties.114
Smart readers would make little difference for the most intransi-
gently optimistic or information-averse consumers. Nonetheless, for
their more levelheaded peers, as detailed below, the technology can
help overcome some of their cognitive frailties.115 According to these
theories, one therefore might expect uptake at least among those con-
sumers who are “sophisticatedly unsophisticated”—that is, those who
recognize their limitations.
(5) Social norms theories suggest that reading is limited due to
situational and relational considerations. Examining documents too
closely may communicate distrust toward the counterparty, skepticism
about the transaction, or signal one’s intention to act noncoopera-
tively.116 In the consumer context, one might feel social pressure
against reading if it delays others waiting in line117 or may paint one as
being difficult—a nudnik.118
114 See, e.g., Eisenberg, supra note 5, at 240–43 (grounding fine print ignorance in R
“bounded rationality, optimistic disposition, [and] systematic underestimation of risks”); Oren
Bar-Gill, Seduction by Plastic, 98 NW. U. L. REV. 1373 (2004) [hereinafter Bar-Gill, Seduction by
Plastic]; Shmuel I. Becher, Behavioral Science and Consumer Standard Form Contracts, 68 LA.
L. REV. 117, 167 (2007); Lawrence Solan, Terri Rosenblatt & Daniel Osherson, False Consensus
Bias in Contract Interpretation, 108 COLUM. L. REV. 1268 (2008) (arguing that individuals have
an inflated sense of how ordinary their interpretation really is); see also OREN BAR-GILL, SE-
DUCTIONBY CONTRACT (2012) [hereinafter BAR-GILL, SEDUCTIONBY CONTRACT].
115 See infra Section III.F.
116 See, e.g., Hillman & Rachlinski, supra note 3, at 448 (“Consumers will feel uncomforta-
ble suddenly indicating distrust to the reassuring agent by studying terms covering unlikely
events.”); Debra Pogrund Stark & Jessica M. Choplin, A License to Deceive: Enforcing Contrac-
tual Myths Despite Consumer Psychological Realities, 5 N.Y.U. J.L. & BUS. 617, 671 (2009) (“[I]t
will often be uncomfortable for consumers to double-check [sellers] verbal statements. . . . [It] is
in essence like calling the person a liar.”).
117 See Becher, supra note 114, at 157 (“[O]ther customers display nervousness (or even R
impatience) toward those exceptional buyers who insist on reading . . . .”).
118 See Arbel & Shapira, supra note 110, at 931 (“[N]udniks are often derided as petty and R
vindictive.”); Amy J. Schmitz, Access to Consumer Remedies in the Squeaky Wheel System, 39
Electronic copy available at: https://ssrn.com/abstract=3740356

<<PAGE_BREAK>>

\\jciprod01\productn\G\GWN\90-1\GWN102.txt unknown Seq: 32 17-FEB-22 12:20
114 THE GEORGE WASHINGTON LAW REVIEW [Vol. 90:83
On this view, uptake results are likely to be mixed. The greatest
uptake is expected when consumers are in private settings, such as
when they purchase a product online. Nevertheless, even in public set-
tings, one might expect some uptake. The use of smart readers on
one’s phone is less salient and less obtrusive to the flow of the transac-
tion than the careful perusing of a stack of documents. That said, the
use of smart readers may be limited when the buyer is in closer prox-
imity to the seller or when the buyer is in social settings that discour-
age it.
* * * * *
Overall, there are competing theoretical predictions regarding
the rate and scope of adoption of smart readers. Taken together, these
theories sketch a realistic scenario with at least modest adoption. At
the same time, Wittgenstein’s Ruler remains in the background.119 We
will have learned something important even if uptake proves low. In
this scenario, readability theories will likely suffer the greatest blow,
given the weight they put on the difficulty of reading as an explana-
tion for consumer behavior. But this scenario is also of import to ra-
tional apathy theories. If consumers care so little about, say, privacy
policies that they do not bother even checking the score on their app,
this should bear on the debate surrounding the privacy paradox and
privacy regulation.120 And if consumers do not use smart readers even
in the privacy of their homes, that will signal an important lesson for
those holding a social theory of the reading problem. For now, how-
ever, we shall leave these questions open and instead assume some
degree of adoption and focus on the broader market implications of
smart readers in this scenario.
III. SMART READERS: IMPLICATIONS
We emphasized throughout that it is difficult to predict uptake,
and that there are interesting lessons to be learned if consumers turn
their backs to this technology. Here we seek to understand the impli-
cations of the technology assuming a modest level of adoption. As we
PEPP. L. REV. 279, 296 (“As an initial matter, American culture generally frowns on complainers
and calls on consumers to maintain a ‘[s]tiff upper lip.’” (quoting Jerry Plymire, Complaints as
Opportunities, 5 J. SERVS. MKTG. 61, 61–62 (1991))).
119 WITTGENSTEIN, supra note 26. R
120 For a comprehensive review of the debate, see Daniel J. Solove, The Myth of the Pri-
vacy Paradox, 89 GEO. WASH. L. REV. 1 (2021). Professor Solove denies the paradox and argues
that there is little to be learned from consumer’s behavior in specific cases, given that the value
of privacy is more general.
Electronic copy available at: https://ssrn.com/abstract=3740356

<<PAGE_BREAK>>

\\jciprod01\productn\G\GWN\90-1\GWN102.txt unknown Seq: 33 17-FEB-22 12:20
2022] CONTRACTS IN THE AGE OF SMART READERS 115
show, smart readers hold great promise and commensurate risk even
under this restrictive assumption.121
A. Matching, Search Costs, and Market Competition
Smart readers increase term transparency, making it easier for
consumers to read and understand their contracts.122 Greater term
transparency will have both micro and macro effects. On the micro-
level, we would expect to see a much better fit of matching between
consumers and contract terms. As consumers become more aware of
the terms offered by different sellers, they also become better posi-
tioned to select the contracts that fit their preferences.123 Better
matching naturally increases the surplus from the transaction. Term
transparency also reduces search costs—the costs of acquiring infor-
mation about products and their accompanying contracts—thus re-
sulting in further welfare gain.124
More ambitious is the macro-level effect. By cutting down on
search costs, smart readers can jumpstart market-wide competition for
contract terms. Some argue that in perfectly competitive markets,
firms are expected to offer the most efficient terms,125 the same way
they will sell the most efficient product configuration.126 However, this
prediction can fail if consumers are unaware of terms because then
there will be little demand pressure to offer better ones. Indeed, when
consumers are ignorant of the terms of their contracts, competition
121 Our analysis considers each element in isolation, but as Professor Bradley observed, one
should account for the entire, interdependent ecosystem of consumer protection. See Christo-
pher G. Bradley, The Consumer Protection Ecosystem: Law, Norms, and Technology, 97 DENV.
L. REV. 35 (2019).
122 See supra Part II.
123 Under the surface, there are distributional concerns if access to smart readers is not
equally shared by consumers. We return to this point infra Section IV.C.
124 See Eisenberg, supra note 5, at 243. R
125 See, e.g., George L. Priest, A Theory of the Consumer Product Warranty, 90 YALE L.J.
1297, 1307–08 (1981) (“[I]magine that all products are manufactured under conditions of perfect
competition, so that each characteristic of a product—including warranty terms—serves to opti-
mize the welfare of some dominant class of consumers.”); Alan Schwartz & Louis L. Wilde,
Imperfect Information in Markets for Contract Terms: The Examples of Warranties and Security
Interests, 69 VA. L. REV. 1387, 1392 (1983) (“[W]hen a market is in competitive equilibrium,
firms provide goods and contract terms at the lowest possible cost consistent with the continued
existence of these firms.”).
126 See, e.g., Korobkin, supra note 5, at 1206 (“Terms that govern the contractual relation- R
ship between buyers and sellers are attributes of the product in question, just as are the product’s
price and its physical and functional characteristics.”); see also Douglas G. Baird, The Boilerplate
Puzzle, 104 MICH. L. REV. 933, 941 (2006); Arthur Allen Leff, Contract as a Thing, 19 AM. U. L.
REV. 131, 142–43 (1970).
Electronic copy available at: https://ssrn.com/abstract=3740356

<<PAGE_BREAK>>

\\jciprod01\productn\G\GWN\90-1\GWN102.txt unknown Seq: 34 17-FEB-22 12:20
116 THE GEORGE WASHINGTON LAW REVIEW [Vol. 90:83
can make things worse: firms that offer inferior terms can charge
lower prices and corner the market.127
The informed minority theory salvages the efficiency of market
terms even in situations where the majority of consumers are unaware
of them.128 The key insight is that even a minority of informed con-
sumers can exert sufficient demand pressure to force an efficient
equilibrium.
The informed minority was originally developed in the context of
consumers who read contracts. It was therefore seen like it suffered a
lethal blow by the accumulation of empirical data that shows that ac-
tual readership rates are very low.129 Smart readers may still breathe
new life into this theory, or at least a more modest version of it. If
consumers rarely read the contract in full today, they might be willing
to read a simplified version of it with a smart reader. It may even be
enough to form a substantial minority if consumers only scan the con-
tract score assigned to it by the reader. Thus, even modest adoption of
smart readers can result in broad market changes.
To see how these dynamics resolve, take privacy policies. Today,
perhaps only few consumers read and understand them. Let us take as
given that firms react to consumer ignorance by offering one-sided
127 See Bar-Gill, Seduction by Plastic, supra note 114, at 1373 (“[C]ompetitive forces com- R
pel sellers to take advantage of consumers’ weaknesses.”); Korobkin, supra note 5, at 1206 R
(“Ironically, the consequence of market forces in a world of boundedly rational buyer decision-
making is that contracts will often include terms that are socially inefficient, leave buyers as a
class worse off . . . .”). See generally Xavier Gabaix & David Laibson, Shrouded Attributes,
Consumer Myopia, and Information Suppression in Competitive Markets, 121 Q.J. ECON. 505
(2006) (arguing that information shrouding techniques can persist in competitive markets).
128 The firm is pressured to offer all consumers a standard form contract because it cannot
identify in advance which consumer belongs to the informed minority. When this is not the case,
an undesirable separating equilibrium can emerge. See discussion infra Section IV.C.
129 See Eyal Zamir, Contract Law and Theory: Three Views of the Cathedral, 81 U. CHI. L.
REV. 2077, 2102–03 (2014) (“[O]utside of the law-and-economics community, most people would
quite confidently say . . . that hardly a soul reads standard-form contracts.”); Yonathan A. Arbel
& Roy Shapira, Consumer Activism: From the Informed Minority to the Crusading Majority,69
DEPAUL L. REV. 233, 241 (2020) (“Exhibit A: Schwartz himself seems to believe that nobody
reads contracts these days.”); Bakos et al., supra note 4 (providing empirical evidence few users R
read end-user license agreements). Other studies find somewhat higher reading rates, and it is
arguable whether they can sustain informed minority equilibria. See, e.g., Shmuel I. Becher &
Esther Unger-Aviram, The Law of Standard Form Contracts: Misguided Intuitions and Sugges-
tions for Reconstruction, 8 DEPAUL BUS. & COM. L.J. 199, 206 (2010) (presenting surveys indi-
cating that most consumers are not likely to read typical consumer contracts ex ante); Robert A.
Hillman, Rolling Contracts, 71 FORDHAM L. REV. 743, 747 n.18 (2002) (noting that only 24% of
law students surveyed “indicated that they read the terms of rolling contracts”); Jeff Sovern, The
Content of Consumer Law Classes III, 22 J. CONSUMER & COM. L. 2, 4 (2018) (surveying con-
sumer law professors of whom a majority (57%) “rarely or never” read consumer contracts).
Electronic copy available at: https://ssrn.com/abstract=3740356

<<PAGE_BREAK>>

\\jciprod01\productn\G\GWN\90-1\GWN102.txt unknown Seq: 35 17-FEB-22 12:20
2022] CONTRACTS IN THE AGE OF SMART READERS 117
terms, and there is little variety of policies in the market. Once con-
sumers start using smart readers and particularly their benchmarking
capabilities, firms might witness a change in market behavior. There
would be some migration of consumers toward firms with better pri-
vacy policies, even if these policies are still far from what consumers
desire. Importantly, smart readers do not need to be perfectly accu-
rate for this to happen. Even if smart readers only give a general sense
of which privacy policies are better, they might be effective. Once
firms recognize increasing demand pressure, they will respond by of-
fering increasingly better terms.
Such market dynamics depend on competition, but some markets
are dominated by a monopolist or an oligopoly. One response is that
consumer empowerment can also affect monopolists, as greater
awareness can lead consumers to reduce demand, lobby regulators for
change, and enlist watchdogs and consumer organizations. Another
response concerns market dynamics. Consider, for example, the mar-
ket for search engines, and suppose a monopolistic firm that infringes
on consumer privacy dominates it. Assume also that consumers care
about their privacy but do not read privacy policies. A potential en-
trant to this market will worry that, even if it offers better privacy
policies, it will be difficult to attract users because few read the pri-
vacy policy. In contrast, in a world where consumers use smart read-
ers, it will be significantly easier for an entrant with better policies to
establish themselves and attract users. Even limited adoption of im-
perfect readers in imperfect markets can drive positive changes.
So far, we linked term transparency to the informed minority ar-
gument and its ability to pressure sellers into offering better contract
terms. There are, however, three additional ways in which term trans-
parency may pressure firms to revise their contracts. First, equipped
with smart readers, consumer watchdogs, consumer organizations,
nudniks, and the media may be better able to identify and highlight
egregiously imbalanced terms.130 This ex post threat may incentivize
firms to offer efficient contracts ex ante.131 Second, smart reader capa-
bilities may allow regulators to pay more attention to the terms of-
fered in their respective industries, thus allowing regulators to exert
tighter supervision. To ward off the regulator, firms sometimes offer
130 See Arbel & Shapira, supra note 129, at 252–53. R
131 See Paul R. Kleindorfer, What If You Know You Will Have to Explain Your Choices to
Others Afterwards? Legitimation in Decision Making, inTHE IRRATIONAL ECONOMIST72, 72–73
(Erwann Michel-Kerjan & Paul Slovic eds., 2010).
Electronic copy available at: https://ssrn.com/abstract=3740356

<<PAGE_BREAK>>

\\jciprod01\productn\G\GWN\90-1\GWN102.txt unknown Seq: 36 17-FEB-22 12:20
118 THE GEORGE WASHINGTON LAW REVIEW [Vol. 90:83
improved terms.132 Finally, the spotlight effect suggests that the higher
salience attributed to contract terms may draw social censure or
greater moral introspection, thus producing pressure on the individu-
als who draft and authorize contracts to offer more favorable terms.133
B. Errors and Adversarial Attacks
The conceit of the discussion so far is that all the examples used
were cherry-picked. Such a selection is necessary to develop a sense of
tomorrow’s capabilities today. However, cherry-picking does run the
risk of exaggerating the power and accuracy of the technology. Smart
readers will make errors, and this Section considers three types of er-
rors that can stymie their operation: isolated errors; correlated errors;
and errors due to manipulations, known as adversarial attacks.
Due to technological limitations, we expect smart readers to
make many errors in their interpretation of legal texts. At the same
time, humans also make mistakes, and lawyers are humans too.134 Ma-
chines have an important advantage in this regard: in contrast to fickle
humans, machine models are indefatigable and do not experience the
dread of ennui when faced with endless contracts. Evaluating the
prospect of mistakes should thus begin by evaluating the relative fre-
quency of error between humans and machines.135
Fortunately, computer scientists devote considerable attention to
creating benchmarks that compare human and computer performance
on various tasks. Based on these benchmarks, AI models appear
nearly on par with humans on a variety of specific tasks, and the gap is
132 See, e.g., James Fallows Tierney, Contract Design in the Shadow of Regulation, 98 NEB.
L. REV. 874, 874–75 (2020) (arguing that firms may adopt high-quality terms in order to avoid
regulation).
133 Thomas Gilovich, Victoria Husted Medvec & Kenneth Savitsky, The Spotlight Effect in
Social Judgment: An Egocentric Bias in Estimates of the Salience of One’s Own Actions and
Appearance, 78 J. PERSONALITY & SOC. PSYCH. 211, 214 (2000); George Loewenstein, Cass R.
Sunstein & Russell Golman, Disclosure: Psychology Changes Everything, 6 ANN. REV. ECON.
391, 404 (2014).
134 See Lana Birbrair, To Be Happy Lawyers (and Human Beings), Eight Rules for Law
Students To Live By, HARV. L. TODAY (May 6, 2015), https://today.law.harvard.edu/to-be-happy
-lawyers-and-human-beings-eight-rules-for-law-students-to-live-by/ [https://perma.cc/3V45-
4WRB] (suggesting that law students can become both “happy lawyers and human beings” (em-
phasis added) (quoting statement by Professor Bruce Bromley)).
135 One common critique of AI models is that they are inscrutable, so it is hard to under-
stand the reasoning behind decisions. However, as Professors Casey and Niblett remind us, the
operations of the human brain also elude us, and some proffered reasons for action are nothing
more than post hoc rationalizations. Anthony J. Casey & Anthony Niblett, A Framework for the
New Personalization of Law, 86 U. CHI. L. REV. 333, 355–56 (2019).
Electronic copy available at: https://ssrn.com/abstract=3740356

<<PAGE_BREAK>>

\\jciprod01\productn\G\GWN\90-1\GWN102.txt unknown Seq: 37 17-FEB-22 12:20
2022] CONTRACTS IN THE AGE OF SMART READERS 119
closing rapidly.136 One such benchmark is the PIQA test, where one is
presented with a goal and has to choose among two strategies to ac-
complish it.137 For example, if the goal is to separate the egg white
from the yolk using a water bottle, the question will be whether
squeezing or pushing the bottle is more likely to achieve the goal. The
PIQA test is easy for humans, who score roughly 95% on it.138 Never-
theless, the challenge it poses for machines appears insurmountable,
as it requires goal-oriented reasoning and an intricate understanding
of physical reality. Is scooping egg white best done by vacuum or an
exertion of force? Surprisingly, language models perform extraordina-
rily well on the PIQA test and achieve 82.8% accuracy.139 At the time
of writing this, a new model was said to perform with 90% accuracy on
this test, although the evidence is not complete.140 Other examples
that compare human and state-of-the-art (“SOTA”) AI abilities in-
clude abductive reasoning (human: 93%, SOTA: 90%),141 common
sense inference (96% v. 94%),142 open book responses based on a set
of facts (92% v. 87%),143 and analysis of social motivations (88% v.
83%).144 By the time this Article goes to print, many of these compari-
sons will look dated: SOTA will improve, but the human benchmark
will not.
Still, we should be careful not to overstate the accuracy of smart
readers. Reading, evaluating, and benchmarking contracts are open-
ended tasks that require domain-specific knowledge. None of the
136 The game of Go was long thought to be impervious to machines, until world champion
Lee Sedol was defeated by Google DeepMind’s AI program, AlphaGo, in 2016. Christopher
Moyer, How Google’s AlphaGo Beat a Go World Champion, ATLANTIC(Mar. 28, 2016), https://
www.theatlantic.com/technology/archive/2016/03/the-invisible-opponent/475611/ [https://
perma.cc/DWW8-F3X9].
137 See generally Yonatan Bisk, Rowan Zellers, Ronan Le Bras, Jianfeng Gao & Yejin
Choi, PIQA: Reasoning about Physical Commonsense in Natural Language, ARXIV (Nov. 26,
2019), https://arxiv.org/pdf/1911.11641.pdf [https://perma.cc/E8X7-GU6H].
138 PIQA Leaderboard, YONATAN BISK: PIQA, https://yonatanbisk.com/piqa/ [https://per
ma.cc/BJ9Q-WMKE].
139 Id.
140 Submission Details: UNICORN Model, ALLEN INST. FOR AI: LEADERBOARD, https://
leaderboard.allenai.org/physicaliqa/submission/bsd309pbvhc9b55n46fg [https://perma.cc/6UVN-
EJVS].
141 aNLI Leaderboard, ALLEN INST. FOR AI: LEADERBOARD, https://leaderboard.allenai.
org/anli/submissions/public [https://perma.cc/WBL7-MRNE].
142 HellaSwag Leaderboard, ALLEN INST. FOR AI: LEADERBOARD, https://leader
board.allenai.org/hellaswag/submissions/public [https://perma.cc/DCT6-BVV4].
143 OpenBookQA, ALLEN INST. FOR AI: LEADERBOARD, https://leaderboard.allenai.org/
open_book_qa/submissions/public [https://perma.cc/779D-XFRY].
144 Social IQA, ALLEN INST. FOR AI: LEADERBOARD, https://leaderboard.allenai.org/
socialiqa/submissions/public [https://perma.cc/P634-2RKA].
Electronic copy available at: https://ssrn.com/abstract=3740356

<<PAGE_BREAK>>

\\jciprod01\productn\G\GWN\90-1\GWN102.txt unknown Seq: 38 17-FEB-22 12:20
120 THE GEORGE WASHINGTON LAW REVIEW [Vol. 90:83
benchmarks today evaluate language models on performance in this
domain. Based on our experience using the models, we expect a large
degree of error in the near future and a nontrivial improvement within
a relatively short time.
Critically, smart readers are useful even if they are not as accu-
rate as their human counterparts, so long as they have a cost, consis-
tency, and accessibility advantage over the alternatives. We already
noted how, despite the potential for occasional error, firms stake bil-
lions of dollars on investment analyses produced by smart readers.145
Moreover, if errors are random—the smart reader sometimes inter-
prets a term as pro-consumer, other times as pro-seller—we might still
expect smart readers to exert a macro-level effect on term competi-
tion. This is because random errors tend to cancel each other out on
average, and, in large markets, firms would respond to average effects.
A more pernicious problem is correlated errors, where smart
readers systematically misread or misinterpret certain contracts or
contract terms in specific ways. For instance, smart readers may sys-
tematically ignore arbitration clauses or interpret waiver clauses as
imposing liability on sellers. In light of the black-box nature of lan-
guage models, it is hard to anticipate the areas in which correlated
mistakes will emerge. But given that such models rely on detecting
statistical patterns, correlated errors become a distinct possibility.
An important mitigating factor in this context is the gradual
adoption of smart readers. If smart readers prove highly unreliable,
individuals will not use them. Instead, they will rely on the (error-
prone) default of either not reading, skimming the document, consult-
ing a lawyer in exceptionally important transactions, or using external
cues and heuristics.146 The scope of harm resulting from errors, al-
though still real, is bounded by consumers’ gradual adoption of the
technology. It is probable that consumers will first use smart readers
in situations where the stakes are sufficiently high to make it worth-
while to use a smart reader, but not too high to make mistakes too
145 See Cao et al., supra note 25 (documenting the extensive use of smart readers by firms R
as part of algorithmic trading).
146 Of course, using heuristics, cues, and intuitions to evaluate the quality of contract terms
is often likely to result in erroneous decision making and inefficiencies. See, e.g., BAR-GILL,
SEDUCTION BY CONTRACT, supra note 114 (explaining how consumers’ optimism and myopia R
may facilitate inefficient terms in various consumer markets); Jeff Sovern, Elayne E. Greenberg,
Paul F. Kirgis & Yuxiang Liu, “Whimsy Little Contracts” with Unexpected Consequences: An
Empirical Analysis of Consumer Understanding of Arbitration Agreements, 75 MD. L. REV. 1, 2
(2015) (reporting survey results that “suggest a profound lack of understanding about the exis-
tence and effect of arbitration agreements among consumers”).
Electronic copy available at: https://ssrn.com/abstract=3740356

<<PAGE_BREAK>>

\\jciprod01\productn\G\GWN\90-1\GWN102.txt unknown Seq: 39 17-FEB-22 12:20
2022] CONTRACTS IN THE AGE OF SMART READERS 121
costly. It will thus take some time before consumers use smart readers
as a substitute for lawyers, but a much shorter time before they start
using them as a substitute for not reading at all—especially if plat-
forms like Amazon and Yelp start integrating a contract score into
their listings.
Even more pernicious than correlated errors are adversarial at-
tacks by interested firms.147 In essence, an adversarial attack is a
method of exploiting the statistical nature of machine learning mod-
els. It is defined as the use of “malicious inputs modified to yield erro-
neous model outputs.”148 Put simply, they are “optical illusions for
machines.”149 The essential idea is that by presenting an ever-so-
slightly modified version of the contract—what is known as an adver-
sarial example—one can mislead smart readers into parsing the agree-
ment in ways that are desirable to the attacker. Critically, as noted
recently by Google and Open AI machine intelligence researchers,
adversarial examples can “often transfer from one model to another,
allowing attackers to mount black-box attacks without knowledge of
the target model’s parameters.”150
To illustrate the problem, Figure 2 demonstrates how a firm can
manipulate the interpretation of an image—or text—by including sub-
tle noise. The reader is welcome to attempt to identify any difference
between the two images.151
147 See Selbst, supra note 28. R
148 Nicolas Papernot, Patrick McDaniel, Ian Goodfellow, Somesh Jha, Z. Berkay Celik &
Ananthram Swami, Practical Black-Box Attacks Against Machine Learning, ARXIV (Mar. 19,
2017), https://arxiv.org/pdf/1602.02697.pdf [https://perma.cc/J57Y-49PH].
149 Ian Goodfellow, Nicolas Papernot, Sandy Huang, Rocky Duan, Pieter Abbeel & Jack
Clark, Attacking Machine Learning with Adversarial Examples, OPENAI (Feb. 24, 2017), https://
openai.com/blog/adversarial-example-research/ [https://perma.cc/PR3K-ALV2].
150 Alexey Kurakin, Ian J. Goodfellow & Samy Bengio, Adversarial Machine Learning at
Scale, ARXIV (Feb. 11, 2017), https://arxiv.org/pdf/1611.01236.pdf [https://perma.cc/XNN9-
VCKP]; see also Mazaher Kianpour & Shao-Fang Wen, Timing Attacks on Machine Learning:
State of the Art, in I ADVANCESIN INTELLIGENT SYSTEMSAND COMPUTING 111, 123 (Yaxin Bi et
al. eds., 2020) (noting the difficulty of dealing with the “near infinite number of possible attacks”
and the relative quickness of developing new attacks).
151 Goodfellow et al., supra note 149. R
Electronic copy available at: https://ssrn.com/abstract=3740356

<<PAGE_BREAK>>

\\jciprod01\productn\G\GWN\90-1\GWN102.txt unknown Seq: 40 17-FEB-22 12:20
122 THE GEORGE WASHINGTON LAW REVIEW [Vol. 90:83
FIGURE 2. ADVERSARIAL EXAMPLE OF A PANDA BEAR
The image on the left is the original image of a panda bear that
the model quickly and correctly identifies as a panda. The unscrupu-
lous firm, however, can add what seems like random noise to the orig-
inal image, producing the one on the right. To the human eye, both
images are identical. To the model the difference is stark: the image
on the right is not a panda but a gibbon monkey.152 Alternatively, con-
sider the adversarial attack in Figure 3.
FIGURE 3. ADVERSARIAL EXAMPLE OF A STOP SIGN
To the naked eye, the image appears to be of a stop sign marred
by stickers—a common occurrence in the modern urban landscape. To
the digital eye, however, the difference is vast. The algorithm will con-
fidently identify the sign as a right turn sign.153
152 Id.
153 See Kevin Eykholt, Ivan Evtimov, Earlence Fernandes, Bo Li, Amir Rahmati, Chaowei
Xiao, Atul Prakash, Tadayoshi Kohno & Dawn Song, Robust Physical-World Attacks on Deep
Learning Visual Classification, ARXIV (Apr. 10, 2018), https://arxiv.org/pdf/1707.08945.pdf
[https://perma.cc/2LV4-ZX5E].
Electronic copy available at: https://ssrn.com/abstract=3740356

<<PAGE_BREAK>>

\\jciprod01\productn\G\GWN\90-1\GWN102.txt unknown Seq: 41 17-FEB-22 12:20
2022] CONTRACTS IN THE AGE OF SMART READERS 123
What would adversarial attacks look like in the context of written
contracts? It is hard to give a clear example precisely because these
attacks trick the human reader. To give some sense of the problem, we
construct an example—but we caution that real-life attacks will be far
more subtle and would make our example look like an innocent party
trick. With that said, consider the two versions of the short contractual
clause appearing in the table below.
A TEXTUAL ADVERSARIAL ATTACK
Version 1 Version 2
The sellers waive all liability re- The sellers waive all liability re-
sulting from defects in the prod- sulting from defects in the prod-
uct. uct.
Both versions seem to say the same thing: the sellers wave liabil-
ity. But to the smart reader, they are nothing alike. In the first column,
the sellers waive liability; in the second, they assume liability. What
drives this difference in interpretation? Before we divulge our
method, we invite the reader to contemplate a judge trying to under-
stand whether this is an innocent smart reader error or a deliberate
manipulation. Here, we used a rudimentary attack: We added tiny 1pt
text in light gray between the words “sellers” and “waive” that reads
“don’t.” A consumer relying on the smart reader may be misled to
believe that the seller offers warranties, but when the time comes to
hold the seller accountable, the seller will point to the viewable text,
which clearly exempts the seller from liability.154 Note, the seller is not
relying on the hidden text, but on the text that is also visible to the
court. It is the consumer who would need to explain the source of the
error. Whatever one thinks of the difficulty of identifying our manipu-
lation, real-life adversarial attacks will be orders of magnitude harder
to detect.
It is natural to misperceive unfamiliar risks and view them as re-
mote. This is particularly problematic with adversarial attacks, given
both their unintuitive statistical nature and the fact that they have not
received much treatment in legal scholarship so far. But in a sense,
adversarial attacks are familiar. As the history of conspicuous disclo-
sure illustrates, they have low-tech counterparts. Once lawmakers
adopted the rule that certain terms will only be enforced if they ap-
154 See infra Section IV.C.3. Detection of such attacks can be extremely difficult, and the
seller may be able to regard the AI’s smart reader’s mistake as an innocent error.
Electronic copy available at: https://ssrn.com/abstract=3740356

<<PAGE_BREAK>>

\\jciprod01\productn\G\GWN\90-1\GWN102.txt unknown Seq: 42 17-FEB-22 12:20
124 THE GEORGE WASHINGTON LAW REVIEW [Vol. 90:83
pear conspicuously, firms quickly discovered how to produce a docu-
ment that would appear conspicuous to the court but will not, in fact,
increase consumer awareness.155 The solution is to capitalize exces-
sively long paragraphs of text, thus allowing firms to meet the rule
without incurring its cost. Although a clear-eyed analysis would sug-
gest that capitalization of this nature is unlikely to improve under-
standing,156 this attack proved efficacious with the courts, who
routinely enforce such clauses.157
Adversarial attacks are risky precisely because they are unfamil-
iar and hard to detect.158 It will be exceedingly difficult to detect such
attacks in practice because a sophisticated seller can use multiple
methods that appear innocuous, such as altering font size, font color
and shade, register, document margins, spacing, and the order of
words in the sentence. In the event of litigation, sellers can easily
frame smart reader error as a problem with the technology and defend
contractual design choices as a legitimate exercise of drafting discre-
tion. The courts’ slow response to ALL-CAPS urges caution concern-
ing this new technological risk.159
C. Access to Justice
Access to the legal system is unequally distributed. One hurdle in
this context is the cost of attorneys and the legal process.160 Another is
that the stakes of litigation are different for one-time players and re-
peat players, granting the latter an advantage.161 There are a variety of
other social barriers to justice,162 including the so-called “legal
155 See Arbel & Toler, supra note 49, at 866–72 (reviewing the history of legislation requir- R
ing the use of capital letters and conspicuous disclosure).
156 See OFFICEOF INV. EDUC. & ASSISTANCE, SEC, A PLAIN ENGLISH HANDBOOK: HOW
TO CREATE CLEAR SEC DISCLOSURE DOCUMENTS 72 (1998) (suggesting that text should not be
written in all-caps); see also Arbel & Toler, supra note 49, at 875–83 (providing experimental R
evidence suggesting the failure of all-caps); In re Bassett, 285 F.3d 882, 886 (9th Cir. 2002)
(“[T]here is nothing magical about capitals. . . . Lawyers who think their caps lock keys are
instant ‘make conspicuous’ buttons are deluded.”).
157 See Arbel & Toler, supra note 49, at 877–78, 878 n.88. R
158 See infra Section IV.C.3.
159 See Arbel & Toler, supra note 49, at 871. R
160 See BURDGE, supra note 22, at 26 (“[T]he average hourly rate for the typical Consumer R
Law attorney in the United States is $345 . . . .”); Edward L. Rubin, Trial by Battle. Trial by
Argument., 56 ARK. L. REV. 261, 288 (2003).
161 See generally Marc Galanter, Why the “Haves” Come Out Ahead: Speculations on the
Limits of Legal Change, 9 LAW & SOC’Y REV. 95 (1974).
162 See, e.g., Myriam Gilles, Class Warfare: The Disappearance of Low-Income Litigants
from the Civil Docket, 65 EMORY L.J. 1531 (2016) (explaining that limiting class actions may
have a particular adverse effect on marginalized and low-income consumers).
Electronic copy available at: https://ssrn.com/abstract=3740356

<<PAGE_BREAK>>

\\jciprod01\productn\G\GWN\90-1\GWN102.txt unknown Seq: 43 17-FEB-22 12:20
2022] CONTRACTS IN THE AGE OF SMART READERS 125
deserts” that affect rural America.163 This raises deep concerns about
the ability of vulnerable consumers to learn about their rights and pro-
tect them.164
One path to increase consumers’ access to justice is to subsidize
the legal process through free lawyering services and reduced fees and
costs.165 Under this proposal, free or reduced-cost lawyers could assist
consumers in learning about their legal rights and enforcing them.
This solution, however, faces a critical flaw: it fails to scale. The cost of
providing subsidized access to a meaningful share of the consumer
body appears prohibitive.166
Smart readers can relieve some of this pressure by providing on-
demand know-your-rights services.167 Consider again the example of
Ms. Williams, who entered a cross-collateral rent-to-own agree-
ment.168 Given that the court itself called the relevant clause “ob-
scure,”169 it is safe to assume that many consumers would lack a
critical understanding of the operation of cross-collateral agreements.
Now suppose that Ms. Williams had a smart reader installed on her
phone—after all, most people in poverty own smartphones today.170
163 See, e.g., Lisa R. Pruitt, Amanda L. Kool, Lauren Sudeall, Michele Statz, Danielle M.
Conway & Hannah Haksgaard, Legal Deserts: A Multi-State Perspective on Rural Access to Jus-
tice,13 HARV. L. & POL’Y REV. 15 (2018) (analyzing the problem of rural access to justice); see
also Ann M. Eisenberg, Distributive Justice and Rural America, 61 B.C. L. REV. 189, 193 (2020)
(proposing a general narrative according to which the “rural story” raises questions of fair allo-
cation of benefits and burdens).
164 See generally Schmitz, supra note 118, at 290 (detailing business practices and consum- R
ers contracting behaviors that “work[] to advantage the most powerful and desirable consumers,
thereby fostering contractual discrimination and widening the gap between the consumer ‘haves’
and ‘have-nots’”).
165 For presentation and critique of participation-based solutions to the access to justice
problem, see Yonathan A. Arbel, Adminization: Gatekeeping Consumer Contracts, 71 VAND. L.
REV. 121, 157–71 (2018).
166 See id. at 159–60.
167 This capability can either complement or substitute away from various proposals to pro-
tect consumers through consumer education. See, e.g.,Schmitz, supra note 118, at 319; Meirav R
Furth-Matzkin & Roseanna Sommers, Consumer Psychology and the Problem of Fine-Print
Fraud, 72 STAN. L. REV. 503, 543 (2020).
168 See supra notes 12–16 and accompanying text. R
169 See supra note 15 and accompanying text. R
170 As of 2021, smartphones are in use by 76% of low-income adults. Emily A. Vogels,
Digital Divide Persists Even As Americans with Lower Incomes Make Gains in Tech Adoption,
PEW RSCH. CTR., (June 22, 2021), https://www.pewresearch.org/fact-tank/2019/05/07/digital-di-
vide-persists-even-as-lower-income-americans-make-gains-in-tech-adoption/ [https://perma.cc/
B6ZU-UMF3]. However, there is still a persistent digital divide among consumer groups. See
infra Section IV.C.2.
Electronic copy available at: https://ssrn.com/abstract=3740356

<<PAGE_BREAK>>

\\jciprod01\productn\G\GWN\90-1\GWN102.txt unknown Seq: 44 17-FEB-22 12:20
126 THE GEORGE WASHINGTON LAW REVIEW [Vol. 90:83
The app would have alerted her to the risk of the contract, explained
the relevant terms, and perhaps directed her to competitors.171
The expected low cost and convenience of smart readers would
enable many consumers to get better information about their legal
rights without the need for an attorney. Of course, smart readers are
not likely to be as good as lawyers, at least not in the short to medium
term. At the same time, there is some evidence that lawyers’ advice
can be racially biased.172 More generally, if the realistic alternative to
smart readers is not a lawyer but one’s own faculties, smart readers
can be a source of succor for many individuals who currently find jus-
tice inaccessible.
D. Compliance and Overcompliance
Smart readers can greatly increase compliance on both the seller
and the consumer side. A party, however well-meaning, will not be
able to comply with terms of which they are unaware. To the extent
that smart readers can facilitate awareness, comprehension, and recall
of contractual terms, they could increase overall compliance. This, in
turn, may minimize the risk of an inadvertent breach of contract. It
may also reduce the chances of contractual conflicts and disputes
more generally.
This benefit may be significant in cases when a party is trying to
refresh herself quickly on some aspects of the contract—say, whether
she can sublease their apartment or cancel a subscription before the
end of the trial period. This feature is also useful in cases where the
consumer wants to remind the seller of the latter’s obligations. With a
clearer understanding of their contractual rights, consumers can, for
instance, more easily demand that the seller repair a defective laptop
or offer compensation in the case of late delivery.
There is a risk, however, that smart readers may also inadver-
tently lead to overcompliance. Empirical studies show that many form
contracts include illegal and unenforceable terms.173 Despite their
unenforceability, such clauses seem to exert a considerable effect on
171 See supra note 16 and accompanying text. R
172 See Jean Braucher, Dov Cohen & Robert M. Lawless, Race, Attorney Influence, and
Bankruptcy Chapter Choice, 9 J. EMPIRICAL LEGAL STUD. 393, 412 (2012) (finding, in a vignette
study, that lawyers tend to advise Chapter 13 bankruptcy more often when the hypothetical
debtors have typical African American names).
173 See, e.g., Meirav Furth-Matzkin, On the Unexpected Use of Unenforceable Contract
Terms: Evidence from the Residential Rental Market, 9 J. LEGAL ANALYSIS 1 (2017); Meirav
Furth-Matzkin, The Harmful Effects of Unenforceable Contract Terms: Experimental Evidence,
70 ALA. L. REV. 1031, 1038–39 (2019) [hereinafter Furth-Matzkin, The Harmful Effects].
Electronic copy available at: https://ssrn.com/abstract=3740356

<<PAGE_BREAK>>

\\jciprod01\productn\G\GWN\90-1\GWN102.txt unknown Seq: 45 17-FEB-22 12:20
2022] CONTRACTS IN THE AGE OF SMART READERS 127
individuals who erroneously suppose they are binding: a recent study
found that noncompete clauses are equally effective in states that en-
force them and states that do not.174 Based on various studies, it seems
that laypeople generally take contracts too seriously:175 they errone-
ously assume that contract terms are strictly enforced176 and do not
consider that certain terms may be unenforceable.177 Some scholars
also argue that consumers attach moral significance to the written
word of the contract, believing that there is a duty to comply with
terms even if they are otherwise unenforceable.178 The emerging pic-
ture is therefore one where consumers often overestimate the validity
and import of contractual terms.
One unappreciated implication of this body of research is that
some degree of reading may be harmful. If consumers give terms that
are “clearly vulnerable to challenge . . . an unwarranted level of defer-
ence,” then perhaps reading does more harm than good.179 This re-
search suggests that disclosure can be risky, and, on this view, smart
readers may further induce excessive levels of compliance that can
harm consumers.180
E. Discrimination and Personalization
Traditionally, scholars “viewed standard form contracts unfavora-
bly and personalized contracts favorably.”181 Algorithmic personaliza-
174 See Evan Starr, J.J. Prescott & Norman Bishara, The Behavioral Effects of (Unenforce-
able) Contracts, 36 J.L. ECON. & ORG. 633, 655 (2020).
175 See generally Tess Wilkinson-Ryan & David A. Hoffman, The Common Sense of Con-
tract Formation, 67 STAN. L. REV. 1269 (2015) (exploring lay understanding of contract
formation).
176 See, e.g., Tess Wilkinson-Ryan, The Perverse Consequences of Disclosing Standard
Terms, 103 CORNELL L. REV. 117, 164–65 (2017) (finding that the mere stipulation of policies
and rules in standard terms leads laypeople to view them as more legitimate and enforceable).
177 See, e.g., Dennis P. Stolle & Andrew J. Slain, Standard Form Contracts and Contract
Schemas: A Preliminary Investigation of the Effects of Exculpatory Clauses on Consumers’ Pro-
pensity to Sue, 15 BEHAV. SCIS. & L. 83 (1997) (highlighting the chilling effect that exculpatory
terms may have on consumers); see also Furth-Matzkin & Sommers, supra note 167, at 541 (dis- R
cussing the business practice of making verbal promises that are negated in the fine print).
178 See, e.g., Furth-Matzkin, The Harmful Effects, supra note 173, at 1058–59; Wilkinson- R
Ryan, supra note 15, at 1748; Wilkinson-Ryan, supra note 176, at 121–22. R
179 Wilkinson-Ryan, supra note 176, at 172. Wilkinson-Ryan considers a situation where the R
consumer agrees ex ante and only consults the terms ex post.
180 Id. at 121 (warning that accessible terms might be counterproductive to consumers be-
cause readable terms can be seen as more legitimate, even if they are one-sided and unfair). A
related concern is that courts will assume greater opportunity to read the text. See infra Section
IV.C.2.
181 Arbel & Shapira, supra note 110, at 985. R
Electronic copy available at: https://ssrn.com/abstract=3740356

<<PAGE_BREAK>>

\\jciprod01\productn\G\GWN\90-1\GWN102.txt unknown Seq: 46 17-FEB-22 12:20
128 THE GEORGE WASHINGTON LAW REVIEW [Vol. 90:83
tion of contracts, however, flipped the locus of suspicion.182 Today,
scholars are increasingly aware that with big data, sellers can offer
personalized contracts that target vulnerable consumers with a high
degree of precision.183 In the past, redlining was done crudely based
on zip codes as a proxy for race.184 Personalized contracts allow sellers
to redline with a pencil rather than a sharpie.
Smart readers offer some redress. When a consumer is offered
unusual terms, perhaps because of their race or ethnicity, the smart
reader can benchmark that for them. For instance, if a lender offers a
marginalized consumer a high-interest rate, the smart reader can alert
the consumer via an output such as: “it is unusual to pay such high
interest in loan agreements.” Such a service can empower consumers
to act, and the possibility of this action might itself deter firms from
engaging in such practices in the first place.
This potential, however, should not be overstated. First, effective
benchmarking requires finding a relevant comparison group against
which to compare. However, as personalization grows, so does the va-
riety of contracts, so it is increasingly harder to define such a group.
Second, even if benchmarking detects disparate treatment, there is
only so much the individual consumer can do to address systemic so-
cial issues. The complexity of algorithmic decision making will often
allow firms to veil discrimination behind other seemingly neutral
factors.185
In another important sense, there is too little personalization.
When firms draft contracts, they normally only account for the needs
and characteristics of a hypothetical “reasonable consumer,” which
literature suggests is presumed white, educated, and male.186 Firms
have little incentive to improve on this standard, as meeting it will
182 Id.; see also David A. Hoffman, From Promise to Form: How Contracting Online
Changes Consumers, 91 N.Y.U L. REV. 1595, 1634–42 (2016) (detailing concerns with strategic
contract personalization). For a discussion of the origin of the hostility to standard terms, see
LLEWELLYN, supra note 27, at 362–71. R
183 See, e.g., Matthew Adam Bruckner, The Promise and Perils of Algorithmic Lenders’ Use
of Big Data, 93 CHI.-KENT L. REV. 3 (2018); Anya E.R. Prince & Daniel Schwarcz, Proxy Dis-
crimination in the Age of Artificial Intelligence and Big Data, 105 IOWA L. REV. 1267 (2020).
184 Bruckner, supra note 183, at 29. R
185 See Andrew D. Selbst & Solon Barocas, The Intuitive Appeal of Explainable Machines,
87 FORDHAM L. REV. 1085 (2018) (discussing the inscrutability and nonintuitive nature of al-
gorithmic models); Prince & Schwarcz, supra note 183, at 1257 n.29. R
186 See Amy H. Kastely, Out of the Whiteness: On Raced Codes and White Race Conscious-
ness in Some Tort, Criminal, and Contract Law, 63 U. CIN. L. REV. 269, 293–94 (1994); Lu-in
Wang, Negotiating the Situation: The Reasonable Person in Context, 14 LEWIS & CLARK L. REV.
1285 (2010); Lavie v. Procter & Gamble Co., 129 Cal. Rptr. 2d 486, 498 (Cal. Ct. App. 2003).
Electronic copy available at: https://ssrn.com/abstract=3740356

<<PAGE_BREAK>>

\\jciprod01\productn\G\GWN\90-1\GWN102.txt unknown Seq: 47 17-FEB-22 12:20
2022] CONTRACTS IN THE AGE OF SMART READERS 129
ensure enforcement by the courts even if the specific consumer is
atypical.187 Moreover, regulators are limited in their ability to regulate
firms’ activities. Demanding personalization is expensive, and regula-
tors are generally wary about practices that distinguish among con-
sumers based on race-adjacent considerations.188
Smart readers are remarkable because they offer a user-side solu-
tion to this problem. The model responds to the user’s needs, utilizing
the information provided by consumers to their benefit. This allows
the smart reader to meet granular consumer needs. Recall the exam-
ples above, illustrating how smart readers can tailor a message to a
person from a specific region of the United States or an immigrant
from a different country.189 We also noted that the technology could
personalize outputs in a way that can be intersectionally rich, thus ad-
dressing the needs of people who belong to several social subgroups.
Although regulators and courts are wary of firms personalizing con-
tracts based on consumers’ demographics, they could relax their guard
when such personalization comes from, and serves the interest of, the
consumer.
Just as smart readers can alleviate some forms of discrimination,
they can exacerbate others. A specific concern is that firms will dis-
criminate among consumers based on their propensity to use smart
readers. If firms can identify savvy customers who use smart readers
in advance, they can offer them better contracts. These terms will not
be equally extended to those consumers who are less likely to read the
contract. In fact, firms may purposefully offer these nonreading con-
sumers inferior terms. In this scenario, smart readers would lead to
regressive cross-subsidies among consumer groups moving money
from poor consumer groups, who will receive low-quality terms, to
richer and more sophisticated ones, who will receive improved
terms.190
187 See, e.g., Freeman v. Time, Inc., 68 F.3d 285, 289 (9th Cir. 1995) (“[T]he reasonable
person standard is well ensconced in the law in a variety of legal contexts in which a claim of
deception is brought.” (quoting Haskell v. Time, Inc., 857 F. Supp. 1392, 1398 (E.D. Cal. 1994)));
cases cited supra note 68; see also Russell N. Laczniak & Sanford Grossbart, An Assessment of R
Assumptions Underlying the Reasonable Consumer Element in Deceptive Advertising Policy, 9 J.
PUB. POL’Y & MKTG. 85, 86 (1990) (noting that courts use the word reasonable to describe
consumers who are commonly competent and knowledgeable).
188 See Civil Rights Act of 1964, 42 U.S.C. §2000a(a) (“All persons shall be entitled to the
full and equal enjoyment of the goods, services, facilities, privileges, advantages, and accommo-
dations of any place of public accommodation . . . without discrimination or segregation on the
ground of race, color, religion, or national origin.”).
189 See supra Section I.B.
190 See Meirav Furth-Matzkin, The Distributive Impacts of Nudnik-Based Activism, 74
Electronic copy available at: https://ssrn.com/abstract=3740356

<<PAGE_BREAK>>

\\jciprod01\productn\G\GWN\90-1\GWN102.txt unknown Seq: 48 17-FEB-22 12:20
130 THE GEORGE WASHINGTON LAW REVIEW [Vol. 90:83
This discriminatory dynamic is predicated on the firms’ ability to
distinguish among consumers based on their actual use, or propensity
to use, smart readers. On this point, a growing industry offers scoring
services, metrics, and proxies that rank consumers on a variety of
dimensions.191 Some of these services identify in advance consumers
who are assertive, problematic, or less profitable.192 Firms embed such
metrics in their operations to determine whom to target for advertis-
ing campaigns, how long each consumer should wait on the line when
calling the company, and how much effort to exert in retaining a spe-
cific consumer.193 It is a small leap to see firms identifying consumers
based on who has, for example, installed a smart reader on their
phone or used it recently.
Perhaps consumers themselves would resolve part of this prob-
lem. Disadvantaged consumers may realize that they can get better
treatment by mimicking their better-served peers and downloading a
smart reader to their phone. Still, this solution is limited. The unin-
formed consumers need to be aware of the inferior treatment they
receive, which will require some understanding of the contract at
hand. Then consumers need to make the causal link between this in-
ferior treatment and the characteristic that made them a target for
such treatment. In the age of big data, many factors could affect how
vendors treat consumers.194 Such mimicking strategies are not even
available if there is a deeper, systematic reason that distinguishes be-
tween smart reader users and nonusers. If nonusers are, for example,
technophobes, elderly, do not own a smartphone (like one of the au-
thors), or if there are digital inclusion disparities among subgroups,
simple mimicry will not bridge this gap.195
VAND. L. REV. EN BANC 469, 471 (2021) (arguing that firms favor nudniks at the expense of
other consumer groups); Natasha Sarin, Making Consumer Finance Work, 119 COLUM. L. REV.
1519, 1529–30 (2019) (arguing for regulation against regressive cross subsidies, independently of
social welfare).
191 Arbel & Shapira, supra note 110, at 960–65. R
192 Id. at 962–63.
193 Id.
194 See Prince & Schwarcz, supra note 183; see also Arbel, supra note 165, at 148 (arguing R
that the black-box nature of algorithms can discourage gaming).
195 We noted above that many poor people in the United States own a smartphone. See
supra note 170. That said, access to technology often benefits the haves, and the concepts of R
digital inclusion and digital divide are richer and nuanced. See, e.g., Anique Scheerder, Alexan-
der van Deursen & Jan van Dijk, Determinants of Internet Skills, Uses and Outcomes. A System-
atic Review of the Second- and Third-Level Digital Divide, 34 TELEMATICS & INFORMATICS 1607
(2017).
Electronic copy available at: https://ssrn.com/abstract=3740356

<<PAGE_BREAK>>

\\jciprod01\productn\G\GWN\90-1\GWN102.txt unknown Seq: 49 17-FEB-22 12:20
2022] CONTRACTS IN THE AGE OF SMART READERS 131
F. Nudging with Smart Readers
Behavioral biases and cognitive constraints are said to undermine
the ability of consumers to make prudent decisions.196 To counter
some of these biases, behavioralists often recommend using various
nudges that improve the decision-making environment.197 There are
many different types of biases, and although smart readers do not ad-
dress all of them, they do seem well poised to tackle a few major
types. These include (1) cognitive overload, (2) myopia and risk dis-
counting, and (3) price-related manipulations.
Cognitive overload describes the phenomenon where the quan-
tity and presentation of information saturate the receiver’s processing
capacity.198 Consumer contracts contribute to a sense of cognitive
overload through their contractual bloat, high degree of complexity,
unfamiliar formatting, repetitive styling, and long contingency lists.199
The concern here is not so much that the consumer will not read the
contract per se, but rather that reading will prove futile given the ex-
pected cognitive overload.
When an individual experiences a cognitive overload, they strive
to remove it by resorting to simple heuristics, deferring decision mak-
ing, or arbitrarily cutting down the decision space.200
196 For a succinct discussion, see supra Part II. Both the relevance of biases and the way to
treat them are contentious issues. See, e.g., Todd J. Zywicki, The Behavioral Economics of Be-
havioral Law & Economics, 5 REV. BEHAV. ECON. 439 (2018) (offering a critique).
197 The term “nudge” became famous following the influential book by RICHARD H. THA-
LER & CASS R. SUNSTEIN, NUDGE: IMPROVING DECISIONS ABOUT HEALTH, WEALTH, AND HAP-
PINESS (2008). The concept of nudging has been vastly discussed, developed, employed, and
criticized. See generally, e.g., Daniel E. Ho, Fudging the Nudge: Information Disclosure and Res-
taurant Grading, 122 YALE L.J. 574 (2012) (arguing that the nudge of restaurant sanitation grad-
ing suffers from serious flaws); Cass R. Sunstein, Nudges That Fail, 1 BEHAV. PUB. POL’Y 4
(2017) (delineating reasons that may lead a nudge to fail and providing three possible responses
for such a failure); Lauren E. Willis, When Nudges Fail: Slippery Defaults, 80 U. CHI. L. REV.
1155 (2013) (arguing that often policy nudges in the form of defaults are unlikely to be effective).
198 Jonathan M. Landers & Ralph J. Rohner, A Functional Analysis of Truth in Lending, 26
UCLA L. REV. 711, 722 (1979) (disclosures can “overwhelm[] [the consumer] by the aggregate
mass of words and figures” and thus lead the consumer to ignore the disclosure); see Martin J.
Eppler & Jeanne Mengis, The Concept of Information Overload: A Review of Literature from
Organization Science, Accounting, Marketing, MIS, and Related Disciplines, 20 INFO. SOC’Y 325,
326 (2004).
199 Eric Posner argues that businesses sometimes offer pay-now-terms-later contracts in or-
der to protect the consumer from cognitive overload. Eric A. Posner, ProCD v Zeidenberg and
Cognitive Overload in Contractual Bargaining, 77 U. CHI. L. REV. 1181 (2010).
200 See David M. Grether, Alan Schwartz & Louis L. Wilde, The Irrelevance of Information
Overload: An Analysis of Search and Disclosure, 59 S. CAL. L. REV. 277 (1986) (arguing that in
the presence of information overloads, consumers satisfice preferences rather than optimize);
Electronic copy available at: https://ssrn.com/abstract=3740356

<<PAGE_BREAK>>

\\jciprod01\productn\G\GWN\90-1\GWN102.txt unknown Seq: 50 17-FEB-22 12:20
132 THE GEORGE WASHINGTON LAW REVIEW [Vol. 90:83
Consequently, a large body of research shows that cognitive over-
load results in poor judgment, lower accuracy, and “[g]reater toler-
ance of error.”201 Sellers of timeshares, for instance, are notorious for
exploiting this phenomenon by bombarding prospective buyers with
information and imposing artificially strict deadlines (“this discount
will go away in 20 minutes”).202
Smart readers can help address cognitive overload by reducing
the intensity of information. They can do so directly by summarizing
text or, even better, giving it a simple score. They can also reduce the
overload indirectly by adapting the presentation, changing the format-
ting and styling of the text, increasing the contrast and size of the
print, and using bullet points.203
Term optimism and myopia reflect the human tendencies to be-
lieve the contract is more favorable than it actually is and undervalue
future loss or risks.204 Smart readers can offer a useful intervention by
exploiting a countervailing bias. Consumers are said to “attach dispro-
portionately high weight to salient attributes.”205 If that is true, the
smart reader may be able to counter optimism and myopia by making
salient issues that would otherwise be latent, such as return policies
and warranties. Such focus can make potential transactional problems
more salient and draw consumers’ awareness to the relevant risk.
Smart readers can also help with price partitioning and other
price manipulations. Sellers often partition prices by displaying the
price of a product across several categories of surcharges, such as han-
Landers & Rohner, supra note 198, at 722–25 (arguing that in the presence of cognitive overload R
consumers will ignore disclosure).
201 See Peter Gordon Roetzel, Information Overload in the Information Age: A Review of
the Literature from Business Administration, Business Psychology, and Related Disciplines with a
Bibliometric Approach and Framework Development, 12 BUS. RSCH. 479, 502 (2019).
202 See Gretchen Morgenson, The Timeshare Hard Sell Comes Roaring Back, N.Y. TIMES
(Jan. 22, 2016), https://www.nytimes.com/2016/01/24/business/diamond-resorts-accused-of-using-
hard-sell-to-push-time-shares.html [https://perma.cc/7RRA-ASLX]. Indeed, the Federal Trade
Commission warns against acting impulsively or under pressure when considering a timeshare
transaction, while highlighting the importance of a “cooling-off period”. See Timeshares, Vaca-
tion Clubs, and Related Scams, FTC CONSUMER INFO., https://www.consumer.ftc.gov/articles/
0073-timeshares-and-vacation-plans [https://perma.cc/RGU8-MLMK].
203 Food labeling is one important domain in which regulators attempt to reduce cognitive
overload by employing “smart disclosures” and interpretive labeling. See, e.g., Oren Bar-Gill,
Smart Disclosure: Promise and Perils, 5 BEHAV. PUB. POL’Y 238 (2021); Shmuel I. Becher,
Hongzhi Gao, Alana Harrison & Jessica C. Lai, Hungry for Change: The Law and Policy of
Food Health Labeling, 54 WAKE FOREST L. REV. 1305 (2019).
204 See Ayres & Schwartz, supra note 4 (discussing the problem of term optimism); BAR- R
GILL, SEDUCTIONBY CONTRACT, supra note 114. R
205 Pedro Bordalo, Nicola Gennaioli & Andrei Shleifer, Salience and Consumer Choice, 121
J. POL. ECON. 803, 803 (2013).
Electronic copy available at: https://ssrn.com/abstract=3740356

<<PAGE_BREAK>>

\\jciprod01\productn\G\GWN\90-1\GWN102.txt unknown Seq: 51 17-FEB-22 12:20
2022] CONTRACTS IN THE AGE OF SMART READERS 133
dling, shipping, and convenience fees. Some studies show that con-
sumers tend to underestimate the total transaction cost when firms
engage in price partitions.206 Other price manipulations include
presenting unround prices such as $2.95 or $299.99.207 If smart readers
can examine the transaction as a whole and present the final price,
rounded, they can help overcome such manipulations.
Whether smart readers will successfully debias consumers is hard
to know without testing. Over time, academics and private consumer
organizations may seek to develop such nudges and test their efficacy
in the field. At this stage, suffice it to highlight that smart readers offer
a new channel of intervention in consumer decision making.
IV. REGULATING CONTRACTS IN THE AGE OF SMART READERS
Smart readers can have a large impact on the market, even if
adoption is only modest. Some of this impact is benign—increasing
access to justice or jumpstarting term competition. But some of this
impact may be deleterious, such as the case of adversarial attacks and
discrimination. Traditionally, the common law has been slow to re-
spond to technological advances. Although a wait-and-see regulatory
approach may be sensible in many domains, several issues do require
preparation and deliberation.208
In what follows, Section A explores the broader theoretical con-
sequences of smart readers for the future of regulation of consumer
contracts. Section B briefly considers how courts and agencies may
use smart readers. Section C closes by examining four categories of
specific doctrinal adaptations and responses to smart readers.
A. The Challenge to Consumer Protection
Scholars offer various justifications for interventions in consumer
contracts: fairness, market failures, paternalism, choice architecture,
and empowerment—to name a few.209 Among these, the no-reading
206 See Eric A. Greenleaf, Eric J. Johnson, Vicki G. Morwitz & Edith Shalev, The Price
Does Not Include Additional Taxes, Fees, and Surcharges: A Review of Research on Partitioned
Pricing, 26 J. CONSUMER PSYCH. 105, 108–11 (2016).
207 For further analysis, see Kenneth C. Manning & David E. Sprott, Price Endings, Left-
Digit Effects, and Choice, 36 J. CONSUMER RSCH. 328 (2009), and Manoj Thomas & Vicki
Morwitz, Penny Wise and Pound Foolish: The Left-Digit Effect in Price Cognition, 32 J. CON-
SUMER RSCH. 54 (2005).
208 See Van Loo, supra note 21, at 821 (“The task of financial stability regulators and schol- R
ars is not necessarily to predict the next crisis, or even to make the case that any trigger is likely
to cause a crisis. . . . Instead, the task is to improve risk monitoring, which includes minimizing
theoretical blind spots.”).
209 The literature on consumer contracts is vast. As an illustration of the general disagree-
Electronic copy available at: https://ssrn.com/abstract=3740356

<<PAGE_BREAK>>

\\jciprod01\productn\G\GWN\90-1\GWN102.txt unknown Seq: 52 17-FEB-22 12:20
134 THE GEORGE WASHINGTON LAW REVIEW [Vol. 90:83
problem stands out as the most common one.210 Its appeal lies in its
ability to unite fairness-minded scholars, libertarians, and welfarists,
as all are concerned with assent under conditions of informational
asymmetry.211 Many pro-consumer interventions are thus couched in
the no-reading problem.
Smart readers suggest a new way of thinking about the no-read-
ing problem. Rather than an ethical issue that justifies legal interven-
tion, lack of reading may be a technological challenge that is
increasingly solved. Thinking about the problem in this way offers
some new insights on persistent legal issues.
To take a particularly important example, consider the recent de-
bate around the Draft Restatement of Consumer Contracts.212 In
2012, the American Law Institute announced a restatement project of
the law of consumer contracts.213 Scholars still debate the resulting
draft on various dimensions.214 Although the debate is far from set-
tled, it clarified that both sides consider contract reading a fundamen-
tal problem that justifies legal intervention.215 The Reporters note, for
ment toward the proper approach to consumer contracts see, for example, RADIN, supra note 6; R
Omri Ben-Shahar, Regulation Through Boilerplate: An Apologia, 112 MICH. L. REV. 883 (2014);
Margaret Jane Radin, What Boilerplate Said: A Response to Omri Ben-Shahar (and a Diagnosis)
(Univ. Mich. Pub. L. & Legal Theory Rsch., Paper Series, Paper No. 392, L. & Econ. Rsch.
Paper Series, Paper No. 14-007, 2014), https://papers.ssrn.com/sol3/papers.cfm?abstract_id=
2401720 [https://perma.cc/ST65-EA7A].
210 See generally Ayres & Schwartz, supra note 4. R
211 Oren Bar-Gill, The Behavioral Economics of Consumer Contracts, 92 MINN. L. REV.
749 (2008); Richard A. Epstein, The Neoclassical Economics of Consumer Contracts, 92 MINN. L.
REV. 803 (2008).
212 DRAFT RESTATEMENT 2019, supra note 4. See discussion supra note 33, for the debate. R
213 DRAFT RESTATEMENT 2019, supra note 4, at xiii. R
214 See, e.g., Gregory Klass, Empiricism and Privacy Policies in the Restatement of Con-
sumer Contract Law, 36 YALE J. ON REG. 45 (2019); Adam J. Levitin, Nancy S. Kim, Christina L.
Kunz, Peter Linzer, Patricia A. McCoy, Juliet M. Moringiello, Elizabeth A. Renuart & Lauren
E. Willis, The Faulty Foundation of the Draft Restatement of Consumer Contracts, 36 YALE J. ON
REG. 447 (2019); see also Mark E. Budnitz, The Restatement of the Law of Consumer Contracts:
The American Law Institute’s Impossible Dream, 32 LOY. CONSUMER L. REV. 369 (2020); Nancy
S. Kim, Ideology, Coercion, and the Proposed Restatement of the Law of Consumer Contracts, 32
LOY. CONSUMER L. REV. 456 (2020).
215 DRAFT RESTATEMENT 2019, supra note 4, §2 cmt. 1 (“This Section . . . operates in a R
reality in which consumers are . . . unlikely to read and exercise meaningful informed consent to
the non-core standard contract terms.”). In a separate publication, the Restatement drafters
note, for example, that “[t]he proliferation of lengthy standard-term contracts, mostly in digital
form, makes it practically impossible for consumers to scrutinize the terms and evaluate them
prior to manifesting assent.” See Oren Bar-Gill, Omri Ben-Shahar & Florencia Marotta-Wurgler,
The American Law Institute’s Restatement of Consumer Contracts: Reporters’ Introduction, 15
EUR. REV. CONT. L. 91, 92 (2019). The drafters further state that “[b]ecause of the imbalance
between businesses and consumers, the application of contract law’s general rules of mutual
assent alone are not likely to level the playing field.” Id. at 93.
Electronic copy available at: https://ssrn.com/abstract=3740356

<<PAGE_BREAK>>

\\jciprod01\productn\G\GWN\90-1\GWN102.txt unknown Seq: 53 17-FEB-22 12:20
2022] CONTRACTS IN THE AGE OF SMART READERS 135
example, that “lengthy standard forms” are “unlikely to [be] read” by
consumers,216 and that it is “irrational and infeasible” for consumers to
read such contracts.217 On this basis, the Reporters offered a liberal
approach to striking down boilerplate.218 But because the Draft also
proposed a relatively relaxed approach to formation, it was criticized
for “jettison[ing] meaningful assent to contract.”219
Beyond the general approach, reading problems also bear on spe-
cific arrangements in the Draft. In particular, the Draft takes a narrow
approach to merger clauses:
Because consumers are not likely to notice, read, or under-
stand the effect of such merger clauses, they do not control
the conclusion of whether the standard contract terms consti-
tute a partially or completely integrated agreement, and thus
do not preclude a finding that the standard contract terms do
not constitute the parties’ final expression of a particular
matter.220
If smart readers can offer a technological solution to the problem
of reading, what remains of these justifications? As smart readers
grow in sophistication and accuracy, they raise doubts as to whether
the Draft and other legal measures are future-proof.221 Indeed, if
smart readers reach this stage, it may be more effective to focus regu-
latory efforts on increasing adoption rates than to set mandatory rules
and enforcement mechanisms. To be sure, even if smart readers can
solve the reading problem, they will not necessarily address other
market and reputational failures, so they do not necessarily portend
216 DRAFT RESTATEMENT 2019, supra note 4, at 3. R
217 Id. at 1.
218 Id. §5 cmt. 1 (“Because consumers rarely read or review the non-core, standard con-
tract terms . . . the doctrine of unconscionability is a primary tool against the inclusion of intoler-
able terms in the consumer contract.”).
219 Levitin et al., supra note 214, at 452. A previous version of the Restatement termed this R
tradeoff as a “Grand Bargain.” Id.
220 DRAFT RESTATEMENT 2019, supra note 4, §8 illus. 3. R
221 For example, the so-called “Schumer Box” requires credit card companies to disclose in
an accessible, unified, and transparent way the costs of a credit card. See 12 C.F.R. §226.5
(2020). Another key example is the disclosure of nutritional information on packed food, which
is prescribed in great detail. See 21 U.S.C. §343; 21 C.F.R. §101.9 (2020) (implementing regula-
tions). In the context of warranties, the Magnuson-Moss Warranty Act, 15 U.S.C. §§2301–2312,
mandates that a supplier who offers any warranty may not disclaim any implied warranties. Id.
§2308. The Act was enacted because of the concern that “[t]he bold print giveth and the fine
print taketh away.” H.R. REP. NO. 93-1107, at 24 (1974). Likewise, it has also been noted that
“[t]here is substantial evidence that at the time of the sale the purchaser of a major appliance
does not understand the nature and extent of the protection provided by the manufacturer’s
warranty or of the obligation under the warranty of the manufacturer or of the retailer.” Id. at
27–28.
Electronic copy available at: https://ssrn.com/abstract=3740356

<<PAGE_BREAK>>

\\jciprod01\productn\G\GWN\90-1\GWN102.txt unknown Seq: 54 17-FEB-22 12:20
136 THE GEORGE WASHINGTON LAW REVIEW [Vol. 90:83
the end of pro-consumer legal measures. Still, to the extent smart
readers can effectively address the no-reading problem, the current
reliance on reading as a source of justification might become dated in
the coming years.
B. Courts and Agencies
Throughout the analysis, we focused on consumers utilizing smart
readers. Although we can only adumbrate the point, it is also worth
shifting focus and considering how courts and agencies may benefit
from smart readers.222
Some commentators recently expressed dissatisfaction with stan-
dard interpretative approaches, arguing that courts rely too heavily on
introspection and classic dictionaries to identify the “plain meaning”
of text.223 Although dictionaries record definitions, they abstract im-
portant clues about the true meaning of a word from linguistic context
and frequency of usage. One proposal in this context is the incorpora-
tion of “corpus linguistics” into legal interpretation—i.e., examining
linguistic usage data obtained from the processing of large corpora of
texts. Although this approach shows promise in producing greater
awareness to nuances of meaning, it can be unwieldy to use, especially
by judges not trained in linguistic methodologies.
Smart readers—and language models more generally—make the
implementation of such interpretative approaches straightforward, ob-
jective, and predictable. Rather than having a human judge read
through thousands of instances of how parties use a given term, a lan-
guage model can assign probabilities. It can say, hypothetically, that
the term “chicken” is used 78% of the time in the context of the gen-
eral genus, 21% of the time in the context of a broiler, and only 1% in
the context of a stewing chicken.224 When the frequency of use is at
issue, such data can become pivotal. Smart readers make the task
much more structured and accurate.
Agencies can also productively employ smart readers. They can
use them to sift through the contracts commonly used in a given sector
and identify problematic terms. For instance, if the agency seeks to
police privacy terms, it can set its smart readers to process current
privacy policies and flag offensive, suspicious, or irregular terms. Al-
222 Regulators and agencies are increasingly considering the adoption of digital tools to
solve policy problems. See supra note 35 and accompanying text. R
223 See Mourtisen, supra note 36, at 1340. R
224 See Frigaliment Importing Co. v. B.N.S. Int’l Sales Corp., 190 F. Supp. 116 (S.D.N.Y.
1960). The statistics used here are hypothetical.
Electronic copy available at: https://ssrn.com/abstract=3740356

<<PAGE_BREAK>>

\\jciprod01\productn\G\GWN\90-1\GWN102.txt unknown Seq: 55 17-FEB-22 12:20
2022] CONTRACTS IN THE AGE OF SMART READERS 137
though smart readers will not be perfectly precise, the agency can still
conserve significant resources by channeling its limited resources to
flagged terms.225
C. Regulatory and Doctrinal Responses
The questions we discussed so far were, in a sense, at the whole-
sale level—considering the broad implications of smart readers. At
the retail level, questions remain on the fitness of doctrine developed
over the centuries to the age of smart readers. In this Section, we con-
sider the ability of doctrine, courts, and agencies to protect consumers
from related risks and properly develop contract law.
1. Allocation of Error Costs
Because smart readers will make mistakes,226 and because con-
sumers may suffer harm from relying on these mistakes, it is impor-
tant to critically consider the expected response of standard common
law doctrines to such mistakes. For concreteness, consider a buyer
who purchases a television because the smart reader made them erro-
neously believe that the seller offers hassle-free returns; a park visitor
who is misled by the smart reader into believing that the park owner is
responsible for injuries in the park; or a worker mistakenly foregoing
his employee status and agreeing to be an independent contractor.
Tentatively assume that these mistakes are innocent—that is, they
arise from a smart reader error, and the drafter is acting in good
faith.227 What should the law do in such cases? How should the risk of
error be allocated between the contracting parties? Can the consum-
ers successfully argue that their assent was compromised due to the
reliance on the smart reader?
Smart reader error may implicate the company that produced it,
under either a contract theory or tort liability for defective products.
Realistically, however, recourse against the producer is likely to be
very limited. One reason is the high likelihood of liability waivers in
the license agreements. Another is that courts may shy away from as-
signing liability in such cases in an attempt to encourage the develop-
ment of smart readers.
Instead of the producer, the disappointed buyer may seek to
reach the seller. Here as well, standard doctrines seem to offer little in
225 See Arbel, supra note 165, at 147–51 (exploring the use of AI in detecting suspicious R
cases).
226 See supra Section III.B.
227 On the possibility of bad faith errors, see infra Section IV.C.3.
Electronic copy available at: https://ssrn.com/abstract=3740356

<<PAGE_BREAK>>

\\jciprod01\productn\G\GWN\90-1\GWN102.txt unknown Seq: 56 17-FEB-22 12:20
138 THE GEORGE WASHINGTON LAW REVIEW [Vol. 90:83
the way of redress. The doctrine of mistake involves a wrong belief
regarding a basic assumption of the contract that has a material ef-
fect.228 The difficulty is that courts resist applying this doctrine to mis-
taken beliefs regarding the content of the contract itself.229 A different
kind of difficulty arises in the case of misrepresentation,230 as the
drafting party is not the source of the mistaken understanding, and the
smart reader cannot be easily understood to be that party’s agent.231
This leaves the doctrine of misunderstanding, which does involve
divergent interpretations of the contract.232 But misunderstanding is
too weak of a hook to hang anything valuable.233 Courts avoid finding
misunderstandings using tools of interpretation234 and through the lib-
eral application of the duty to read.235 This general difficulty is ampli-
fied in the context of smart readers, as the source of the mistaken
understanding may be the language model, rather than the contract.236
This specific difficulty can be overcome only if the seller has reason to
know of such a misunderstanding.237 Overall, then, standard doctrines
228 RESTATEMENT (SECOND) OF CONTS. §151 (AM. L. INST. 1981) (“A mistake is a belief
that is not in accord with the facts.”).
229 See, e.g., Eric Rasmusen & Ian Ayres, Mutual and Unilateral Mistake in Contract Law,
22 J. LEGAL STUD. 309, 310 (1993) (“[J]udicial excuse for either unilateral or mutual mistake is
relatively rare . . . .”).
230 See generally RESTATEMENT (SECOND) OF CONTS. §164 (AM. L. INST. 1981) (explaining
when misrepresentation makes a contract voidable).
231 26 RICHARD A. LORD,WILLISTONON CONTRACTS §69:14 (4th ed. 2021).
232 RESTATEMENT (SECOND) OF CONTS. §20 cmt. c (AM. L. INST. 1981). For recent applica-
tions of the doctrine to invalidate contracts, see Cont’l Warranty, Inc. v. Warner, 108 F. Supp. 3d
250, 254 (D. Del. 2015), and Brooks v. Rosebar, 210 A.3d 747, 752 (D.C. 2019).
233 See Daniel P. O’Gorman, The Restatement (Second) of Contracts’ Reasonably Certain
Terms Requirement: A Model of Neoclassical Contract Law and a Model of Confusion and In-
consistency, 36 U. HAW. L. REV. 169, 199 (2014) (“[M]ost misunderstandings in fact will not
result in indefiniteness in law.”).
234 See, e.g., RESTATEMENT (SECOND) OF CONTS. §20 reporter’s note (AM. L. INST. 1981)
(distinguishing between “problem[s] of interpretation of key terms and the much less common
question whether” there was a misunderstanding).
235 See, e.g., Anderson v. Equitable Life Assurance Soc. of the U.S., 248 F. Supp. 2d 584,
590–91 (S.D. Miss. 2003) (“Mississippi law creates a duty on contracting parties to read their
contracts, and imputes the knowledge of that contract to the parties. . . . The court will generally
not consider prior oral agreements, misunderstandings between the parties, or any other form of
parol evidence.”). One exception is Cappalli v. BJ’s Wholesale Club, Inc., 904 F. Supp. 2d 184
(D.R.I. 2012). Here the court concluded that because the contract had conflicting terms in it, the
misunderstanding could not have been resolved by the reading of the contract. Id. at 191–92.
236 According to RESTATEMENT (SECOND) OF CONTS. §20(2) (AM. L. INST. 1981), courts
can enforce the contract as understood by the innocent party, if the other party had reason to
know of the misunderstanding.
237 See id. This rule of “negligent manifestation of assent,” id. §20 cmt. d, is rarely used.
For one example, see Pope v. Gap, Inc., 961 P.2d 1283, 1287 (N.M. Ct. App. 1998).
Electronic copy available at: https://ssrn.com/abstract=3740356

<<PAGE_BREAK>>

\\jciprod01\productn\G\GWN\90-1\GWN102.txt unknown Seq: 57 17-FEB-22 12:20
2022] CONTRACTS IN THE AGE OF SMART READERS 139
would allocate the entirety of the risk of smart reader error to the
consumer.
A deeper question is whether sellers should be made responsible
for harms resulting from smart readers.238 The answer to this question
depends on several factors. To begin, if the smart reader provides a
mistaken output, then it may be that the consumer’s most effective
redress should come from the producer of the smart reader. In auton-
omous driving, for example, there has been a similar push to move
from personal liability for the accident to producer’s liability for faulty
autonomous driving technology.239 Assigning liability to the producer
is appealing in the sense that it can encourage producers to improve
their products or properly warn users. On the other hand, such solu-
tions can stunt development in the field and place barriers to entry.
Additionally, producer liability rules can increase the cost of smart
readers and chill adoption rates, thus depressing the positive spillovers
of smart readers.240
Assuming the buyer has no recourse against the producer of the
smart reader, the allocation of responsibility between the buyer and
the seller becomes a question of who is in a better position to avoid
the “legal accident” of contractual misunderstanding. On the one
hand, the consumer may appear to be ideally situated: the consumer is
the party that harbors a misunderstanding and thus can solve it by
reading the contract. The scholarship around the no-reading problem,
however, suggests that this may be a facile assumption and that the
consumer’s ability to prevent the accident is limited.241 On the other
hand, sellers can control the risk of an accident through proactive dis-
closures, at least of key terms. Still, sellers are also not ideally situated
to prevent the accident, as they do not choose the app, have no con-
trol over how or when the consumer uses it, and are not privy to its
outputs.
Overall, we do not find a compelling reason why the law should
assign liability exclusively to one side of the transaction. This leads us
238 For an investigation of the allocation of risks for error codes, see Shaanan Cohney &
David A. Hoffman, Transactional Scripts in Contract Stacks, 105 MINN. L. REV. 319 (2020).
239 See, e.g., Alexander B. Lemann, Autonomous Vehicles, Technological Progress, and the
Scope Problem in Products Liability, 12 J. TORT L. 157 (2019) (arguing that the relative safety of
autonomous vehicles should not suggest that their manufacturers are immune from potential
liability when their faults cause injury).
240 As noted in supra Section III.B, positive spillovers are expected even when AI smart
readers are fairly inaccurate. Insistence on accuracy through tort liability for mistakes may thus
be disadvantageous.
241 See supra Part II.
Electronic copy available at: https://ssrn.com/abstract=3740356

<<PAGE_BREAK>>

\\jciprod01\productn\G\GWN\90-1\GWN102.txt unknown Seq: 58 17-FEB-22 12:20
140 THE GEORGE WASHINGTON LAW REVIEW [Vol. 90:83
to consider loss allocation rules, which are key in the case of hard to
prevent accidents. Here, we think the common law solution to the no-
reading problem is instructive. Courts assign liability for most of the
terms to consumers, but sellers can enforce certain special terms only
if they are conspicuously disclosed. This logic can be transferable to
the context at hand by requiring sellers to disclose key terms in a
“smart reader-friendly” manner as a condition for their enforcement.
We can facilitate such a solution by adapting the meaning of conspicu-
ous to the age of smart readers; by a stronger version of the contra
proferentem rule; or by reviving the mostly defunct duty to warn
under section 211 of the Restatement (Second) of Contracts.242 Over-
all, the goal should be to navigate the incentives of both parties while
minimizing the costs of errors.
2. The Duty to Read
If smart readers are cheap and accessible, courts may find it natu-
ral to expect consumers to use them. Based on this expectation, courts
may expand the doctrine of the duty to read. Such a move can be
premature.
Courts have long imposed a misnamed “duty” to read con-
tracts.243 Under this rule, courts will enforce the terms of an unread
contract as long as the consumer had a proper opportunity to read the
contract terms.244 Courts assume that the duty encourages consumers
to read terms and avoid strategic claims of unread terms.245 The con-
cern here, however, is that courts and legislatures will come to exces-
sively rely on smart readers by expanding the duty to read. Once
smart readers become common, courts might make increasingly strong
242 RESTATEMENT (SECOND) OF CONTS. §211(3) (AM. L. INST. 1981) (“Where [a] party has
reason to believe that [another] party manifesting . . . assent [to a standard form] would not do
so if he knew that the writing contained a particular term, the term is not part of the agree-
ment.”); see also Kar & Radin, supra note 31, at 1202. R
243 See, e.g., Ayres & Schwartz, supra note 4, at 548 n.10 (citing case law applying the duty R
to read in the context of consumer contracts); Wayne R. Barnes, Toward a Fairer Model of
Consumer Assent to Standard Form Contracts: In Defense of Restatement Subsection 211(3), 82
WASH. L. REV. 227, 230 (2007); Charles L. Knapp, Is There a “Duty to Read”?, 66 HASTINGS L.J.
1083, 1085 (2015).
244 See, e.g., Rustad & Koenig, supra note 47, at 1453 (“U.S. courts have expanded the duty R
to read . . . to the world of electronic boilerplate . . . .”).
245 See Omri Ben-Shahar, The Myth of the ‘Opportunity to Read’ in Contract Law, 5 EUR.
REV. CONT. L. 1, 7 (2009) (“Rather, [the duty] is a method to shift the burden of information
acquisition to the passive party.”); Korobkin, supra note 5, at 1269 (“If buyers could preserve the R
right to challenge ex post any contract term of which they were unaware ex ante, they would
have a perverse incentive to avoid learning the content of all terms.”).
Electronic copy available at: https://ssrn.com/abstract=3740356

<<PAGE_BREAK>>

\\jciprod01\productn\G\GWN\90-1\GWN102.txt unknown Seq: 59 17-FEB-22 12:20
2022] CONTRACTS IN THE AGE OF SMART READERS 141
assumptions on the ability of the specific consumer to read and under-
stand the contract.
A few considerations ground the possibility of premature expan-
sion of the duty to read. First, firms and other repeat players may
advocate the courts to adopt such a policy. The technology is already
sufficiently impressive to mislead an inexperienced person into believ-
ing that it is more effective than it actually is. Second, courts have not
demonstrated technological acuity and agility in the context of brow-
sewraps and clickwraps, still struggling to articulate clear rules two
decades after these have become household issues.246 Third, courts
and legislators may be tempted to use the duty to read strategically as
a means of encouraging the adoption of smart readers.
If there is a wide gap between judicial expectations and techno-
logical or consumer realities, such judicial insistence will backfire.
Having a more muscular duty to read without a commensurate en-
hancement in the actual reading and understanding of contracts can
prove deleterious. Most worryingly, if access to smart readers is un-
equally distributed so that only certain classes of consumers benefit
from them, such a judicial shift can lead to regressive cross-subsidies
that exacerbate inequalities.247
In conclusion, we urge courts and policymakers to resist attempts
to jump the gun and prematurely expand the duty to read. We recog-
nize that this will somewhat diminish the incentive to use smart read-
ers. Nevertheless, we consider this a fairly small price to pay for
gradual development and a more informed policy.
3. The Problem of Adversarial Attacks
Adversarial attacks are a slippery problem. Detection is likely to
be exceedingly difficult. Both the panda and stop sign examples
demonstrated how ever-so-slight manipulation of pixels could mislead
a sophisticated AI model.248 In the context of contracts and other writ-
ten documents, such attacks can wear a dizzying array of forms. These
may include deliberate manipulation of the spacing, font choice, the
order of words in a sentence, font size and color, choice of synonyms,
register, and document margins to trick AI models into producing a
246 See, e.g., Budnitz, supra note 214, at 415 (“[D]ue to developments in technology, the R
environment where online consumer transactions occur is in constant flux.”).
247 See, e.g., Mark Lloyd, The Digital Divide and Equal Access to Justice, 24 HASTINGS
COMMC’NS & ENT. L.J. 505, 527–30 (2002) (explaining that unequal access to technology could
lead to exacerbated inequalities in the justice system).
248 See supra Section III.B.
Electronic copy available at: https://ssrn.com/abstract=3740356

<<PAGE_BREAK>>

\\jciprod01\productn\G\GWN\90-1\GWN102.txt unknown Seq: 60 17-FEB-22 12:20
142 THE GEORGE WASHINGTON LAW REVIEW [Vol. 90:83
desirable outcome. Humans can hardly be trusted to detect such ma-
nipulations, so one might hope that smart readers can be trained for
this purpose. But this is precisely the problem. Detecting manipula-
tion may require judgment about the correct classification of the con-
tract, which is what the models lack.
Beyond the problem of detection, proving that a given error is
deliberate will be extremely difficult. Thus, even if one suspects that
firms calculate the choice of font and spacing, proving that this was
made to deliberately confuse smart readers will require strong evi-
dence. Contract drafters have broad latitude over the design of their
agreements, and, in practice, drafters employ different designs for rea-
sons that are entirely innocuous.249
The economic theory of enforcement suggests a solution to the
problem of hard-to-detect violations: the use of large fines and puni-
tive damages that compensate for the possibility that violations will go
undetected.250 Unfortunately, it will be difficult to apply these pre-
scriptions to adversarial attacks. Contract law is averse to the use of
punitive damages,251 and tort-based theories of fraud will also be lim-
ited.252 Beyond the problem of detection and proof, there are also
practical limitations on the feasible size of penalties that can be effec-
tively levied. Perhaps fraud-based challenges can provide some deter-
rence, especially against large firms, but they are not likely to provide
a comprehensive solution.
249 See, e.g., Hoffman, supra note 5 (discussing firms who use accessible and humorous R
language alongside more formal and traditional form contract terms).
250 See A. Mitchell Polinsky & Steven Shavell, The Economic Theory of Public Enforce-
ment of Law, 38 J. ECON. LITERATURE 45, 67 (2000). The DRAFT RESTATEMENT 2019, supra
note 4, §6, suggests making terms entered through deceptive acts unenforceable, reflecting the R
common law’s standard of misrepresentation. See RESTATEMENT (SECOND) OF CONTS. §164
(AM L. INST. 1981). This remedy, however, offers little in the way of deterrence if violations are
hard to detect.
251 See, e.g., O’Gilvie v. United States, 519 U.S. 79 (1996); Honda Motor Co. v. Oberg, 512
U.S. 415 (1994); 5 ARTHUR LINTON CORBIN, CORBINON CONTRACTS§1077 (1964); 11 WILLIS-
TONON CONTRACTS 209 (W. Jaegered., 3d ed. 1968); RESTATEMENT (SECOND) OF CONTS. §355
(AM. L. INST. 1981) (“Punitive damages are not recoverable for a breach of contract unless the
conduct constituting the breach is also a tort for which punitive damages are recoverable.”);
U.C.C. §1-305 cmt. 1 (AM. L. INST. & NAT’L CONF. COMM’RSON UNIF. STATE L. 2020) (stating
that contractual remedies “do not include consequential or special damages, or penal damages”).
But see Timothy J. Sullivan, Punitive Damages in the Law of Contract: The Reality and the Illu-
sion of Legal Change, 61 MINN. L. REV. 207 (1977) (arguing that punitive damages are more
common in contract law than it seems).
252 See William S. Dodge, The Case for Punitive Damages in Contracts, 48 DUKE L.J. 629
(1999) (reporting that thirty-nine states do not allow punitive damages for contract breach unless
the plaintiff can establish the existence of an independent tort).
Electronic copy available at: https://ssrn.com/abstract=3740356

<<PAGE_BREAK>>

\\jciprod01\productn\G\GWN\90-1\GWN102.txt unknown Seq: 61 17-FEB-22 12:20
2022] CONTRACTS IN THE AGE OF SMART READERS 143
Another possible solution is burden-shifting based on statistical
indicia of wrongdoing. When courts are faced with clear signs of
wrongdoing but with limited ability to prove it, they use doctrines
such as res ipsa loquitur to shift the burden of proof.253 If it turns out
that a contract leads a sample of smart readers to the wrong interpre-
tation, courts can shift the burden to the defendant. It will then be the
defendant who would have to prove that such errors are not inten-
tional, or they will be liable to meet the interpretation suggested by
the consumer.
Though having some initial appeal, this solution is also not with-
out difficulty. The problem is that smart readers will always have some
degree of technical errors that are not due to the drafter, but rather to
the state of technology. Making sellers liable for smart reader errors
imposes a considerable cost on them, though their ability to avoid it is
limited because they have little to say concerning the design and im-
plementation of smart readers.
One last approach is ongoing regulatory monitoring, for instance,
by the Consumer Financial Protection Bureau or the Federal Trade
Commission.254 Enforcement agencies could utilize their systems of
smart readers to identify instances in which document style and
formatting raise suspicion of strategic manipulation. To be sure, this
will also not be a perfect solution, because adversarial examples can
be invisible to smart readers as well. Regardless, it is a step toward
resolving a recognizably slippery problem, and it has the merit of in-
viting consumer organizations and enforcement agencies to be active
in this domain.
4. Bias and Discrimination
Firms wield broad latitude in personalizing the content and
formatting of contracts, though limited exceptions on some forms of
discrimination exist.255 This leeway reflects a long-held view that treats
253 See generally J. Shahar Dillbary, The Case Against Collective Liability, 62 B.C. L. REV.
391, 392 (2021). A more creative approach is Professor Lahav’s concept of a so-called “knowl-
edge remedy.” Lahav suggests that in some cases where causality is hard to prove, courts would
order the defendant to fund research that would determine causality. See Alexandra D. Lahav,
The Knowledge Remedy, 98 TEX. L. REV. 1361, 1387 (2020).
254 These two agencies have different regulatory approaches. See Rory Van Loo, Regula-
tory Monitors: Policing Firms in the Compliance Era, 119 COLUM. L. REV. 369, 393–95 (2019).
255 See, e.g., Civil Rights Act of 1964 §§701–718, 42 U.S.C. §§2000e–2000e-17 (prohibiting
discrimination, among other things, on the basis of race, religion, sex, and national origin); Equal
Credit Opportunity Act §§1002.1–1002.16, 15 U.S.C. §§1691–1691f; Fair Housing Act
§§800–818, 42 U.S.C. §§3601–3619; see also Americans with Disabilities Act of 1990
§§101–514, 42 U.S.C. §§12101–12213 (prohibiting discrimination on the basis of disability).
Electronic copy available at: https://ssrn.com/abstract=3740356

<<PAGE_BREAK>>

\\jciprod01\productn\G\GWN\90-1\GWN102.txt unknown Seq: 62 17-FEB-22 12:20
144 THE GEORGE WASHINGTON LAW REVIEW [Vol. 90:83
standard form contracts with suspicion and personalized agreements
favorably. The emergence of big data and personalization at scale
should flip this presumption on its head.256
Today, firms can tailor contracts to specific consumers that can be
highly harmful. A particular concern for our purposes arises if firms
choose to offer consumers who use smart readers better terms than
terms offered to consumers who do not use them. We noted how such
disparate treatment could lead to regressive cross-subsidies among the
consumer groups. An even more pressing concern arises if the propen-
sity to use smart readers is correlated with race or other social charac-
teristics. All in all, such discrimination can eliminate the positive
spillovers of smart readers.257
One possible route to addressing this discrimination is through
the various laws prohibiting unfair and deceptive acts and practices.258
At the federal level, an unfair practice is one that “is likely to cause
substantial injury to consumers which is not reasonably avoidable by
consumers themselves and not outweighed by countervailing benefits
to consumers or to competition.”259 The common standard at the state
level is the one outlined in FTC v. Sperry & Hutchinson Co., which
includes an examination as to “whether the practice . . . causes sub-
stantial injury to consumers.”260 The argument here would be that cer-
tain personalization practices cause a “substantial injury” to those
consumers who receive inferior terms that they cannot reasonably
avoid, which are not outweighed by other benefits. The problem is
that commentators debate whether market segmentation ever meets
this standard.261
An alternative is to consider this practice deceptive. Offering in-
ferior terms to consumers who are most likely to be ignorant about
them may be deemed deceptive. This is especially so, if these consum-
ers have developed expectations based on the treatment received by
256 See supra notes 181–84 and accompanying text. R
257 See supra Section III.E.
258 15 U.S.C. §45 (empowering the Federal Trade Commission to prevent certain unfair
and deceptive acts). Entities regulated by the Consumer Financial Protection Bureau are subject
to 12 U.S.C. §5531 (“[p]rohibiting unfair, deceptive, or abusive acts or practices”). At the state
level, there are differences in scope but “[e]very state . . . prohibit[s] deceptive practices, and
many . . . also prohibit unfair and unconscionable practices.” ADAM J. LEVITIN, CONSUMER
FINANCE: MARKETSAND REGULATION 81 (2018).
259 15 U.S.C. §45(n).
260 405 U.S. 233, 244 n.5 (1972). See generally LEVITIN, supra note 258, at 82–83. R
261 See Dennis D. Hirsch, That’s Unfair! Or Is It? Big Data, Discrimination and the FTC’s
Unfairness Authority, 103 KY. L.J. 345, 353–57 (2014–2015) (arguing that the segmentation based
on big data can constitute an unfair practice); cf. Bruckner, supra note 183, at 42–47. R
Electronic copy available at: https://ssrn.com/abstract=3740356

<<PAGE_BREAK>>

\\jciprod01\productn\G\GWN\90-1\GWN102.txt unknown Seq: 63 17-FEB-22 12:20
2022] CONTRACTS IN THE AGE OF SMART READERS 145
users who employ smart readers.262 The standard here is less demand-
ing and may be supported by a showing of a misleading material omis-
sion.263 Nonetheless, even this argument requires establishing the
existence of an actual misperception, and proof of this may not always
be available.
We recognize that limiting the freedom of contract raises difficul-
ties. Personalization serves many benign purposes, and we do not con-
sider a blanket prohibition desirable. But in the particular case of
smart reader-based discrimination, there are pressing concerns about
potential racial discrimination, regressive cross-subsidies, and the
elimination of positive spillovers. Admittedly, the balance of these
considerations is a matter of values as much as it is a matter of empir-
ics. At best, we can raise these issues to public awareness and hope
that future research and debate will shed more light on the way the
law should treat this kind of discrimination. However, we feel confi-
dent in saying that this complex issue comes with a deadline. Once
firms start collecting data on smart reader usage and tailor treatment
on this basis, it will not be easy to undo the results. Here again, an
ounce of precaution now is worth a pound of cure later.
262 FTC POLICY STATEMENT ON DECEPTION (Oct. 14, 1983), https://www.ftc.gov/system/
files/documents/public_statements/410531/831014deceptionstmt.pdf [https://perma.cc/8LWQ-
FSR8] (“In some circumstances, the Commission can presume that consumers are likely to reach
false beliefs . . . because of an omission.”).
263 Id. (agency’s interpretation); see also LEVITIN, supra note 258, at 81–82. R
Electronic copy available at: https://ssrn.com/abstract=3740356

<<PAGE_BREAK>>

\\jciprod01\productn\G\GWN\90-1\GWN102.txt unknown Seq: 64 17-FEB-22 12:20
146 THE GEORGE WASHINGTON LAW REVIEW [Vol. 90:83
CONCLUSION264
264 Written by GPT-3. Screenshot [10] (on file with authors).
Electronic copy available at: https://ssrn.com/abstract=3740356

---

## ssrn-4021605: A Status Theory of Defamation Law
Source: papers/ssrn-4021605/paper.txt

A Status Theory of Defamation Law
Yonathan A. Arbel∗
Alabama Working Paper Series, 4021605, Comments welcome!
Defamation law occupies a privileged position in our constitutional order.
Despite grave First Amendment concerns, courts around the country routinely
muzzle speech to protect good-name interests. Yet, to a growing movement of
reformers, this protection is still too weak. With calls reverberating across the
political spectrum—emanating from the President, the Supreme Court, scholars,
and pundits—there is a growing pressure to reshape defamation law. In all of
this, one crucial question remains unanswered: what is the purpose of defamation
law?
The most sustained attempts to answer this basic question vacillate between
three purposes: protection of honor, dignity, or property. Helpful as they are,
these attempts ultimately fail to explain the particular doctrinal architecture of
defamation law or to offer a clear vision as to its future design. They leave us
bereft of a general understanding in a time of great need. What these accounts
lack is what sociologists such as Weber and Veblen have long understood. We
care about our good name so much not because it represents our property or
even dignity, but because it captures a fundamental human need: social status.
This Article demonstrates that a status theory of defamation law offers a more
appealing framework—descriptively, functionally, and normatively—than our
current menu of explanatory options. Descriptively, status theory is shown to
untangle intricate doctrinal knots, rendering them sensible, indeed, necessary.
Functionally, status theory reveals the downstream effects of decisions in
particular cases: how they promote certain status norms while unraveling others.
Normatively, status theory decloaks the judicial role in defamation cases, exposes
it to critical scrutiny, and offers concrete guidance in hard cases.
Status theory has immediate practical importance. This is demonstrated in
the context of bigoted defamation cases where the prevailing intellectual fog
allowed judges to render decisions that either embraced bigoted status hierarchies
or whitewashed them. Status theory exposes the faulty logic underlying these
decisions. It offers modern judges a sound footing to reach the right decisions in
bigoted defamation cases. And most critically, status theory furnishes judges and
legislators with a tool to dismantle bigoted racial and ethnic hierarchies.
∗ Associate Professor of Law, University of Alabama, School of Law. I benefitted from the
wisdom and intellectual generosity of John Acevedo, Shahar Dillbary, Deepa Das Acevedo, Bryan
Fair, Brian Galle, John Goldberg, Patrick Goold, Tara Grove, Alon Harel, Daniel Hemel, Scott
Hirst, Paul Horwitz, Yotam Kaplan, Ron Krotoszynski, Ben McMichael, Alan Miller, Robert Post,
Adrian Segura, Roy Shapira, Steve Shavell, Max Stearns, Henry Smith, Nina Varsava, and Kathy
Zeiler. I appreciate the feedback of participants in the Alabama Law Junior Scholars Workshop,
Boston University Faculty Workshop, Harvard Law School Private Law Luncheon, Hebrew
University Law & Economics Seminar, and The Constitutional Law & Economics Workshop.
William Brand, Angelica Mamani, Kayla Ryan, and Boston Topping provided invaluable research
assistance.
Electronic copy available at: https://ssrn.com/abstract=4021605

<<PAGE_BREAK>>

ARBEL, A STATUS THEORY OF DEFAMATION LAW 2/51
Introduction ...............................................................................................3
Status and Defamation Law ......................................................................10
1. Defamation Law in Search of Meaning: The Interpretative Gap ....10
2. Status Theory: An Introduction .....................................................16
3. A Status Interpretation of Defamation Law ....................................20
Defamation Law and Status Games ..........................................................23
1. Status Games .................................................................................24
2. Defamation Law as a Regulator of Status Games............................27
3. The Judicial Role in Defamation cases ...........................................30
4. Which Status Games are Worth Protecting? ..................................31
5. Regulating Status Games: Legitimacy and Institutional Capacity ...33
Case Studies ..............................................................................................39
1. Racist and Bigoted Speech .............................................................39
2. Collaborators & Snitches ...............................................................42
3. Female Sexual Autonomy ..............................................................44
Conclusion ...............................................................................................47
Technical Appendix ..................................................................................48
Electronic copy available at: https://ssrn.com/abstract=4021605

<<PAGE_BREAK>>

ARBEL, A STATUS THEORY OF DEFAMATION LAW 3/51
INTRODUCTION
The pursuit of social status is a fundamental aspect of human behavior.1
Within all social communities, individuals strive to occupy elevated positions in
the social hierarchy for reasons that cannot be reduced to economic advantage or
material gain. A high social status promises the deference and esteem of one’s
peers, while low status subjects one to indifference and contempt. 2 These social
goods are so important that individuals expend copious amounts of energy, time,
and material resources competing in “status games”—social competitions where
status is gained and lost.3 Our choice of clothes, accent, books, movies, social
milieu, and even our gait and pitch4 are all moves played in these eternal status
games.5 Status games, the name notwithstanding, involve little frivolity—they
are played with utmost earnestness. As sociologists Park and Burgess observe,
“men work for wages … [but] they will die to preserve their status.”6
1 John C. Harsanyi, A Bargaining Model for Social Status in Informal Groups and Formal
Organizations, 11 SYST. RES. 357, 357 (1966) (“Apart from economic payoffs, social status (social
rank) seems to be the most important incentive and motivating force of social behavior.”);
Cameron Anderson et al., Who Attains Social Status? Effects of Personality and Physical
Attractiveness in Social Groups, 81 J PERSONALITY & SOC. PSY. 116, 116 (2001) (“Striving for
status has been proposed as a primary and universal human motive.”).
Lawyers are familiar with an understanding of status distinct from the sociological one
developed here. Henry Maine’s famous thesis—the move from status to contract—invokes status
as a legally established social station (e.g., lord, tenant) or a bundle of legally assigned rights and
duties (e.g., a minor, naturally born citizen, first born). HENRY MAINE, ANCIENT LAW: ITS
CONNECTION WITH THE EARLY HISTORY OF SOCIETY AND ITS RELATION TO MODERN IDEAS 101
(1861). See generally Katharina Isabel Schmidt, Henry Maine’s “Modern Law”: From Status to
Contract and Back Again?, 65 AM. J. COMP. L. 145 (2017).
2 See CECILIA L. RIDGEWAY, STATUS: WHY IS IT EVERYWHERE? WHY DOES IT MATTER? 150
(2019) (defining status as “a social ranking of people, groups, and objects in terms of the social
esteem, honor, and respect associated with them.”).
3 See Roger D. Congleton, Efficient Status Seeking: Externalities, and the Evolution of Status
Games, 11 J. ECON. BEHAV. ORG. 175 (1989); Thomas Quint & Martin Shubik, Games of Status,
3 J. PUB. ECON. THEORY 349 (2002). In a recent influential account, Pulitzer-winning journalist
Isabel Wilkerson argued for the existence of a caste-like static social hierarchy in the United States,
based around race and ethnicity, alongside the merit-based status games. ISABEL WILKERSON,
CASTE: THE ORIGINS OF OUR DISCONTENT (2020).
4 See, e.g., Juan David Leongómez et al., Perceived Differences in Social Status Between
Speaker and Listener Affect the Speaker’s Vocal Characteristics, PLOS ONE, 12(6) (2017).
5 For an effective introduction to the allocation of status in the modern United States, see
Scott Alexander, Staying Classy, SLATESTARCODEX (Jan. 30, 2016), https://perma.cc/J55D-
Q3A2. See also PAUL FUSSELL, CLASS: A GUIDE THROUGH THE AMERICAN STATUS SYSTEM
(1983); Scott Alexander, Right is the New Left, SLATESTARCODEX (Apr. 22, 2014),
https://perma.cc/P6WP-W7FV.
6 ROBERT PARK & ERNEST W. BURGESS, INTRODUCTION TO THE SCIENCE OF SOCIOLOGY,
30 (1921). An earlier statement of this idea is found in Proverbs 22:1: “A good name is more
desirable than great riches.” The importance of status is consistent with the findings of Bezanson,
who found that only twenty percent of plaintiffs in defamation lawsuits reported being motivated
by compensation. Randall P. Bezanson, Libel Law and the Realities of Libel Litigation: Setting the
Record Straight, 71 IOWA L. REV. 226 (1985). Note, however, that these numbers should be
weighed against the unknown rates in other types of lawsuits. See Randall P. Bezanson, The Libel
Suit in Retrospect: What Plaintiffs Want and What Plaintiffs Get, 74 CAL. L. REV. 789 (1986).
Electronic copy available at: https://ssrn.com/abstract=4021605

<<PAGE_BREAK>>

ARBEL, A STATUS THEORY OF DEFAMATION LAW 4/51
Status pursuits account for a large degree of human behavior; but unlike their
economic counterpart—wealth maximization—they have been largely neglected
in legal scholarship. There is even a certain sense of taboo around explicit
discussions of status and class.7 But neglecting social status has serious
implications, given the role status plays in human motivation, welfare, and
prosperity. Nowhere is the omission of status considerations more pressing than
in the context of defamation law, where loss of status captures the very essence
of the harm resulting from defamatory statements—or so this Article will argue.
This Article advances a status theory of defamation law.8 Defamation law is a
branch of tort law that sanctions published false communications of fact that
harm their target’s good name.9 Beyond this basic understanding, confusion
abounds. The doctrine is oft described as being full of “anomalies and absurdities
for which no legal writer ever has had a kind word.”10 Commentators commonly
decry our understanding of this tort, its function, and logic, decrying the
“unsatisfying present morass.”11
Partly an interpretative project, this Article argues that a large part of the
morass can be cleared up if defamation law is read through the prism of status
theory.12 Thinking of defamation law as the law of status illuminates the doctrine
in a favorable, logical, and coherent light. Indeed, status proves so potent at
explaining the doctrinal architecture of this tort that this Article can claim little
in the way of novelty. It seems that an unarticulated notion of social status was
present in this tort throughout its long history—and that the morass is simply
the result of jurists looking at the doctrine through the wrong prism.13
Beyond the doctrinal and analytical clarity offered by status theory, the theory
also packs a normative punch. Under the conventional view, stated lucidly in
Gertz v. Welch, “The legitimate state interest underlying the law of libel is the
compensation of individuals for the harm inflicted on them by defamatory
7 Joan C. Williams, Marina Multhaup, & Sky Mihyalo, Why Companies Should Add Class
to Their Diversity Discussions, HARV. BUS. REV. (Sept 5, 2018) (“[I]n the United States, talking
about class is taboo.”).
8 In following with the modern trend, this Article uses defamation law to capture both libel
and slander. See ROBERT D. SACK, SACK ON DEFAMATION: LIBEL, SLANDER, AND RELATED
PROBLEMS § 2:3, at XX (3d ed. 2009) [hereinafter SACK ON DEFAMATION].
9 DAN B. DOBBS ET AL., HORNBOOK ON TORTS § 37.1, at 936 (2d ed. 2015); RESTATEMENT
(SECOND) OF TORTS § 558 (AM. L. INST. 1977) [hereinafter RESTATEMENT OF TORTS].
10 WILLIAM PROSSER, HANDBOOK OF THE LAW OF TORTS, 737 (4th ed. 1971).
11 Sheldon W. Halpern, Of Libel, Language, and Law: New York Times v. Sullivan at Twenty-
Five, 68 N.C. L. Rev. 273, 313 (1990)
12 As developed infra Part I.3, status theory rationalizes requirements of publicity, measure of
harm, and the very definition of defamation as a “communication” that “tends to … lower [a
person] in the estimation of the community or to deter third persons from associating … with
him.” RESTATEMENT OF TORTS, supra note 9, at § 559.
13 This statement must be qualified because the reason why status is worth protecting
implicates concerns with dignity and property-like claims. The difference being that in status
theory, these values explain elements of the theory rather than exhausting it.
Electronic copy available at: https://ssrn.com/abstract=4021605

<<PAGE_BREAK>>

ARBEL, A STATUS THEORY OF DEFAMATION LAW 5/51
falsehood.”14 The compensatory view casts defamation law in a passive, reactive
role where it only reacts to transgressions. In so doing, it completely misses the
things that defamation law does and can do. Just as trademark protection
encourages investments in research, quality assurance, and innovation, so does
the protection of our personal ‘brands’ through defamation law affect the choices
we make about our own brands.15 Defamation law affects the extent to which
people devote themselves to specific status pursuits as well as the choice of which
status games they play. This neglected behavioral effect is of key social
importance and opens a door to social reformers—not only those interested in
defamation or freedom of speech—to attain social policies through defamation
law.16
There is little exaggeration in the observation that the fate of societies is
determined by the type of status competitions its members play.17 The
Renaissance, the great rebirth, owes as much to the genius of Da Vinci and
Michelangelo as it does to the status ambitions of wool traders like the de’
Medici.18 Societies flourish when its members compete for status through
patronage of the arts, scholarship, philanthropy, and political reform, they enrich
and nurture society. But societies can also wither and flag when its members
pursue status through duels, foot binding, big-game hunting, street racing,
birthright privileges, and ethnic hierarchies..19 Herein lies the normative punch
of defamation law: it helps us realize the ways our legal norms affect the status
games that individuals play. Judges do more than redress harms, they create
norms of behavior. Misunderstanding the effects of defamation law can entrench
deeply problematic status games.
The growing dissatisfaction with defamation law reveals the need for a deeper
understanding of defamation law. Recently, Justices Thomas and Gorsuch have
each called to retreat from modern federal balances and return to state regulation
of defamation law.20 Both Presidents Biden and Trump voiced unhappiness
with the degree of accountability for speech communicated in social and
traditional media.21 Scholars of opposing ideological persuasions believe that
14 Gertz v. Robert Welch, Inc., 418 U.S. 323, 342(1974).
15 Davidson Heath & Christopher Mace, The Strategic Effects of Trademark Protection, 33
REV. FINANC. STUD. 1848 (2020).
16 See infra notes 246-251 and accompanying text.
17 The first murder in the bible is the product of status envy among two brothers, Genesis 4.
Matters went downhill from there. William C. Wohlforth, Unipolarity, Status Competition, and
Great Power War, 61 WORLD POL. 28 (2008) (developing a status theory of war).
18 See generally FRANS JOHANSSON, THE MEDICI EFFECT (2006).
19 Liam Stack, Big Game Hunting Is Also Big Business for Wealthy Few, N.Y. TIMES (Aug.
10, 2015), https://perma.cc/NDC2-4WLQ.
20 Berisha v. Lawson, cert denied, 594 U. S. ____ (2021) (Thomas, Gorsuch JJ., dissenting);
McKee v. Cosby, cert denied, 139 S. Ct. 675, 682 (2019) (Thomas, J., concurring).
21 Rachel Lerman, Social Media Liability Law is Likely to Be Reviewed under Biden, WASH.
POST (Jan. 18, 2021); Michael M. Grynbaum, Trump Renews Pledge to ‘Take a Strong Look’ at
Electronic copy available at: https://ssrn.com/abstract=4021605

<<PAGE_BREAK>>

ARBEL, A STATUS THEORY OF DEFAMATION LAW 6/51
reform is necessary.22 Pundits across the political spectrum call for reform.23 In
the midst of all this debate, a new Restatement project is underway.24 Yet, for all
their zeal, reformers fail to articulate a clear purpose for defamation law, placing
them on the horns of the Cheshire Cat dilemma: “If you don't know where you
want to go, then it doesn't matter which path you take.”25
The value of status theory to reformers can be concretely demonstrated by
tackling one of the most intricate challenges in defamation law: bigoted
defamation. These are thorny cases where a statement is only derogatory in the
eyes of members of a bigoted community—to which the plaintiff belongs.
Prototypical historical cases are white people claiming defamation because they
were alleged to be black; a Christian, a Jew; straight men, gay; or “chaste”
women, promiscuous.26 To be sure, none of these statements should be
defamatory, but the conventional approach has led courts to deeply problematic
decisions in these cases.
The problem with the conventional approach is that by focusing on redressing
harm to good name interests, it created the mirage that courts only react to harm
rather than define and enforce norms of behavior. This has led to deeply
problematic decisions. In 1888, a white person in Louisiana was alleged to be
black. The court held that allegations of this nature are defamatory (although
never the reverse). Instead of assuming responsibility for their racially-charged
holding, the judges used the conventional approach as cover. The judges
portrayed themselves as disinterested social scientists who are “concerned with
[the] social conditions simply as facts,” thus “under the social habits, customs
and prejudices prevailing in Louisiana, it cannot be disputed that charging a
Libel Laws, N.Y. TIMES (Jan. 10, 2018), https://perma.cc/M2XJ-JW8M; Donald J. Trump
(@realDonaldTrump), TWITTER (Sept. 5, 2018, 6:33 AM).
22 For a few examples, see Cass R. Sunstein, Falsehoods and the First Amendment, 33 HARV.
J.L. & TECH. 387, 389 (2020) (arguing that “New York Times Co. v. Sullivan … looks
increasingly anachronistic”); Cristina Tilley, (Re)categorizing Defamation, 94 TUL. L. REV. 435
(2020); Glenn Reynolds, Rethinking Libel for the Twenty-First Century, 87 TENN. L. REV. 465,
465 (2020) (calling for reform and noting that even left-leaning academics recognize the existence
of a problem); JUSTIN HENDERSON, THE TORTS PROCESS, 856 (9th ed. 2020) (“Recent years have
seen growing dissatisfaction with … the law of defamation.”); David A. Anderson, Is Libel Law
Worth Reforming?, 140 U. PA. L. REV. 487, 550 (1991) (“The present law of libel is a failure.”).
23 See, e.g., Bruce Fein, End the First Amendment Sanctuary for Fake News, THE AMERICAN
CONSERVATIVE (Feb. 27, 2019, 1:00 PM), https://perma.cc/CUL8-LC34; Paul Schindler,
Hoylman Said Stronger Law Would Protect Lincoln Project’s Ivanka-Jared Billboards, GAY CITY
NEWS (Oct. 29, 2020), https://perma.cc/KUD9-L9QN.
24 RESTATEMENT (THIRD) OF TORTS: DEFAMATION AND PRIVACY (AM. L. INST. 2019).
25 LEWIS CARROLL, ALICE IN WONDERLAND (1865).
26 For the era in American law when such statements were considered per se defamatory see,
e.g., Eden v. Legare 1 S.C.L. 171 (1791).
Electronic copy available at: https://ssrn.com/abstract=4021605

<<PAGE_BREAK>>

ARBEL, A STATUS THEORY OF DEFAMATION LAW 7/51
white man with being a [black person] is calculated to inflict injury and
damage.”27
Belatedly and inconsistently, judges sought to reverse their historical
positions, but the focus on harm only stunted and perverted progress. To hold
that bigoted statements are not defamatory required denying the existence of the
kind of harm the courts have traditionally ‘found.’ Courts thus began engaging
in the pretense that bigotry spontaneously combusted. The dissonance this
position creates verges on the absurd, as illustrated by a 1977 case where a court
pronounced that calling the plaintiff by a three-letter word used against gay men
was not harmful due to “the changing temper of the times.” A determination
that was seemingly unperturbed by pervasive discriminatory social attitudes that
were even legally formalized in most states.28
This patchwork around harm, and the pretense that bigotry was vanquished,
does society no favor. Until we have eradicated homophobia, anti-Semitism,
racism, misogyny, and other social ills, bigoted defamation may well inflict harm
to the plaintiff’s status privilege within their own bigoted community.29 Denying
this harsh fact does little to remedy the problem and may even perpetuate it.30
Status theory allows courts to reach the right outcomes without engaging in
artifice. Bigoted defamation lawsuits should be rejected not because there was no
harm to a status privilege; they should be rejected because the privilege itself was
attained in a deeply illegitimate status game.31 Under status theory, it is
appropriate and necessary for courts to deny lawsuits that build on status attained
in racist status games, for the simple reason that finding for the plaintiff would
entrench these games.32
27 Spotorno v. Fourichon, 4 So. 71, 71 (La. 1888). For an overview of how defamation law
supported racial hierarchies in the South, see John C. Watson, Defamation by a Racial
Misidentification: A Study of the Social Tort, 4 RUTGERS RACE & L. REV. 77 (2002). See also
Cheryl I. Harris, Whiteness as Property, 106 HARV. L. REV. 1707, 1713-18 (1993) (discussing
racial “passing” and racial status privileges). For further discussion, see infra Part II.
28 Moricoli v. Schwartz, 361 N.E.2d 74 (Ill. App. Ct. 1977). It was not until 2003 that the
Supreme Court ruled sodomy laws unconstitutional. Lawrence v. Texas, 539 U.S. 558 (2003).
29 See, e.g., Thomason v. Time-Journal, Inc., 379 S.E.2d 551, 553 (Ga. Ct. App. 1989)
(denying a libel lawsuit by a woman alleged to be black because “peculiarities of taste found in
eccentric groups cannot form the basis for a finding of libelous inferences.”). The same year,
twenty-nine percent of white respondents answered that they support laws against interracial
marriage and twenty-one percent said they would not vote for a black candidate. See Maria Krysan
& Sarah Patton Moberg, Trends in Racial Attitudes, UNIV. ILL SYS.: INST. GOV’T & PUB. AFFS.
(Aug. 25, 2016), https://igpa.uillinois.edu/programs/racial-attitudes.
30 Palmore v. Sidoti, 466 US 429 (1984) (recognizing the existence of prejudice but also the
dangers of a narrow harm-based approach).
31 As Wilkerson argues, Jim Crow era hierarchies had given status privileges to poor whites at
the expense of African Americans, and the dismantling of these laws upset these privileges.
WILKERSON, supra note 3, at 178-90.
32 See Norwood v. Harrison, 413 U.S. 455, 470 (1973) (“Invidious private discrimination …
has never been accorded affirmative constitutional protections.”). Notably, Courts are not
compelled to deny harm in other areas of tort law. See Mitchell v. Cent. Vt. Ry. Co., 158 N.E.
Electronic copy available at: https://ssrn.com/abstract=4021605

<<PAGE_BREAK>>

ARBEL, A STATUS THEORY OF DEFAMATION LAW 8/51
Status theory emphasizes the first order relevance of status games to judicial
determinations. But it does not expand the judicial role so much as expose it.
Courts already pick and choose among status games when they decide cases,
although their decisions are cloaked in a rhetoric of “objective” determinations
of harm to social standing.33 This fiction produces a welter of confused
jurisprudence, unprincipled decision-making, and obfuscation of the judicial
role in regulating status. By explicitly considering the relevance of status games
to defamation law, we can start to develop a vocabulary that allows us to
recognize the role of the courts, evaluate their institutional capacity to make such
determinations, and guide future decision-making. Perhaps most fundamentally,
understanding the importance of regulating status games justifies the privileged
position defamation occupies in our constitutional order, which allows it to
defeat First Amendment rights.
The argument follows four arcs, with the second one being its crux. The first
articulates the theory of status and its relevance to defamation law.34 A central
point is that much of defamation doctrine can be understood as responding to
implicit social status concerns. Despite that, we—members of the legal
community—have been struggling to understand the doctrine, because we were
trying to fit the square peg of status in the round holes of dignity, property, or
honor. These concepts guided our thinking for too long and have limited our
ability to see the tort for what it is.
The second arc draws attention to the way status is produced: status games.35
It starts by exploring status games, their ubiquity, and social effects. Status games
are directly tied to human flourishing and withering, and the key point
developed here is that defamation law affects the selection of status games.36 This
point was well understood by the gentry of England, who used defamation law
to punish untoward behavior against the nobility as a means of upholding the
existing social order.37 What changed since then was not the function of
defamation law but the ethos of allocation, moving from pedigree and social
station to a democratic, merit-based allocation. Even without understanding
their effects, legal determinations in defamation cases inevitably regulate status
336 (Mass. 1927) (authorizing the operation of trains despite the noise of train whistles because of
the broader, positive social effects of the activity).
33 While the rhetoric is couched in objective determinations, the decisions themselves are
highly normative. See Lyrissa B. Lidsky, Defamation, Reputation, and the Myth of Community,
71 WASH. L. REV. 1, 9 (1996) (criticizing the use of objective language). Commentators debate
the use of a more empirical or a more normative standard. See infra notes 246-250 and
accompanying text.
34 See infra Part I.
35 See infra Part II.
36 For an early and prescient statement of this idea, see THOMAS STARKIE, A TREATISE ON
THE LAW OF SLANDER, LIBEL, SCANDALUM MANGATUM, AND FALSE RUMOURS, 4 (1813).
37 Jeremy Waldron, Dignity and Defamation - The Visibility of Hate, 123 HARV. L. REV.
1596, 1602 (2009).
Electronic copy available at: https://ssrn.com/abstract=4021605

<<PAGE_BREAK>>

ARBEL, A STATUS THEORY OF DEFAMATION LAW 9/51
games. This leads to the claim that courts should openly acknowledge their role,
demystify the doctrine, and develop principled strategies.
The third arc applies these ideas to three case studies involving different types
of bigoted defamation cases.38 The case studies help show how a robust
understanding of status theory is productive not only in understanding the
doctrinal architecture of defamation law but also in deciding cases and crafting
policy.
The thrust of the argument is that defamation law has ex-ante effects on
behavior. Judges should acknowledge these effects and use them to decide cases.
This is in contrast to the contemporary view which places an almost exclusive
emphasis on remedying harm.39 The last arc takes the modern view in its own
terms and offers a critical analysis, arguing that harm considerations are far less
compelling than traditionally understood. Many of the private harms defamatory
remarks cause tend to disappear once we take a more holistic social perspective.
In fact, under some conditions, defamatory remarks may improve society. The
exact contours of the argument are somewhat technical, but the argument is not
that we should encourage defamation, only that the focus on harm is
overstated.40 If defamation law is to be justified, it must be on other grounds:
specifically, its broader, downstream effects on status games.
This is perhaps an ambitious project, but much of the argument draws on an
established and mature literature in sociology and economics. It is also deeply
grounded in defamation doctrine and ideas many judges have sought to express
over the years. Importantly, status theory does not mean to exhaust (and is
certainly incapable of exhausting) all that defamation law does. It very clearly
leaves out the economic domain of defamation law. Nor does status theory
render previous accounts obsolete. Ultimately, despite many differences along
the way, the Article’s ultimate conclusions hew closely to Robert Post’s
magisterial analysis from the 1980s, emphasizing “civility norms” which can be
thought of as cousins of status games.41 Thus, a status theory of defamation is
not a complete break from the orthodoxy. It is best read as a refinement of old
ideas, inchoate but ever present throughout the evolution of this tort. It is hoped
that by grounding defamation law more firmly and more openly in the realities
in which it operates, the Article points the way toward more responsive,
principled, and better reform of a troubled area of the law.
38 See infra Part III.
39 To be sure, the traditional view is not entirely ex-post factum—it does recognize
downstream effects on the chilling of speech.
40 See infra Part I.
41 See Robert C. Post, The Social Foundations of Defamation Law: Reputation and the
Constitution, 74 CAL. L. REV. 691 (1986). I am bound by reasons of exposition to draw a line that
is too bright between social status and dignity and status, but the nexus is deep and tight.
Electronic copy available at: https://ssrn.com/abstract=4021605

<<PAGE_BREAK>>

ARBEL, A STATUS THEORY OF DEFAMATION LAW 10/51
STATUS AND DEFAMATION LAW
That the law accords defamation law a privileged position is clear—it
regularly overrides First Amendment values. What is deeply unclear is what
justifies this privileged position, a confusion that was described as lying in the
midst of an “intellectual wasteland.”42 This Part opens with a friendly critique of
our modern understanding of defamation law. It offers a comprehensive critique
of the concepts we use to justify defamation law, arguing that they lack in the
Dworkian fit and justification—they are at odds with doctrine and are not
particularly appealing. This critique is nonetheless friendly, because there are
grains of truth in the way we think about defamation law. Thus, this Part
continues with an introduction of status theory and shows how it offers a strong,
and in my view, compelling, doctrinal fit.
1. Defamation Law in Search of Meaning: The Interpretative Gap
Initially, the answer seems obvious. The state’s interest in regulating
defamatory speech lies in the protection of an individual’s good name from harm.
43 Many Supreme Court decisions consider this answer self-evident. For instance,
in Rosenblatt v. Baer, the Court explained the purpose of defamation law as
implementing the state’s “pervasive and strong interest in preventing and
redressing attacks upon reputation.”44 In his concurrence, Justice Stewart
famously added that the right to protection of reputation “reflects no more than
our basic concept of the essential dignity and worth of every human being.”45
Later, in Gertz v. Welch, the Court framed defamation as a simple measure of
evincing the “legitimate state interest” of “compensation of individuals for the
harm inflicted on them by defamatory falsehood.”46
Four decades ago, Robert Post offered his seminal account of defamation law,
where he powerfully argued that the state’s interest in protecting reputation is
actually quite mystifying.47 It is far from clear what reputation even means, or
why the state is so committed to protecting it—at the expense of First
Amendment rights no less. The simplistic account offered by the courts offers no
42 Post, supra note 41, at 691.
43 See, e.g., Bustos v. A & E Television Networks, 646 F.3d 762, 764 (10th Cir. 2011) (“In
American law, defamation is … about protecting a good reputation honestly earned.”); Bruning
v. Carroll Cmty. Sch. Dist., No. C04-3091-MWB, 2006 WL 1234822 at *14 (N.D. Iowa 2006)
(“The gravamen or gist of an action for defamation is damage to the plaintiff's reputation.”); Jessica
L. Chilson, Unmasking John Doe: Setting A Standard for Discovery in Anonymous Internet
Defamation Cases, 95 VA. L. REV. 389, 396 (2009) (“The law of defamation … was formulated
to limit the right of free expression to protect reputation.”).
44 Rosenblatt v. Baer, 383 U.S. 75, 86 (1966).
45 Id. at 92 (Stewart, J., concurring).
46 Gertz v. Robert Welch, Inc., 418 U.S. 323, 341 (1974); see also United States v. Alvarez,
567 U.S. 709, 734 (2012).
47 See Post, supra note 41, at 692 (“Reputation, however, is a mysterious thing.”); Id. at 740
(“Reputation is not a single idea.”).
Electronic copy available at: https://ssrn.com/abstract=4021605

<<PAGE_BREAK>>

ARBEL, A STATUS THEORY OF DEFAMATION LAW 11/51
explanation of what makes defamation law unique; no guidance on the
boundaries of the doctrine; and, troublingly, no way to assess whether
defamation law achieves its goals. To understand the compelling state interest in
regulating defamation, we must dig deeper.
Post did not just diagnose the problem, he also offered a systematic
exploration of the values that good name interests protect.48 Based on an
investigation of defamation law’s evolution, Post concluded that it involved three
fundamental values: honor, property, and dignity.49 The state’s interest in
protecting good name is, at bottom, an attempt to protect these values.
Post’s clear-eyed analysis of the court’s vague terminology proved highly
influential. Many modern commentators found it intuitive to think about good
name interests through the prism of dignity or honor, while also acknowledging
the economic valence of good name interests that are reminiscent of property.
Thus, the tripartite understanding of defamation law was established.
Despite its ecumenical approach and broad acceptance in the profession, this
theory leaves a number of important questions open. This is not entirely
surprising: Post’s analysis was conceived as a descriptive investigation of concepts
inherent in the common law, 50 rather than an attempt to settle internal
incoherencies.51 Still, the gaps in our modern understanding of defamation law
were never systematically analyzed. If reformers wish to avoid the Cheshire cat’s
dilemma, it is critical that they understand what is broken with our modern
understanding of defamation law.52 The rest of this section attempts to offer an
answer.
Take first the concept of honor. Honor is defined by Post as an unearned
quality arising strictly out of one’s social station, normally assigned at birth—for
instance, King or Lord.53 The problem here is straightforward: this
understanding of honor appears largely obsolete by modern standards.54 There
is no continued social interest in upholding social rank gained by pedigree or
heritage.55 And in terms of doctrinal fit, challenges to honor may well be based
48 See generally Post, supra note 41.
49 Id. at 693.
50 Id. at 696 (“This Article will attempt simply to identify and analyze the concepts, and to
demonstrate their influence on common law defamation.”).
51 Id. at 697-99.
52 See supra notes 7-23 and accompanying text.
53 See Post, supra note 41, at 699-707.
54 James Q. Whitman, Enforcing Civility and Respect: Three Societies, 109 YALE L.J. 1279,
1283 (2000) (describing “honor, a concept regarded by most Americans as almost laughable”).
This point, however, should not be overstated. Paul Horwitz offers a competing account based on
a richer definition of the concept that is relevant today. Paul Horwitz, Honour, Oaths, and the
Rule of Law, 32 CANADIAN J. L. & JURISPRUDENCE, 389 (2019). Moreover, it would seem like
some of the elements of honor have metamorphosed into the idea of status. See, e.g., RIDGEWAY,
supra note 2 (“Status is based on differences in esteem, honor, and respect.”).
55 See infra notes 193-197 and accompanying text.
Electronic copy available at: https://ssrn.com/abstract=4021605

<<PAGE_BREAK>>

ARBEL, A STATUS THEORY OF DEFAMATION LAW 12/51
on opinions (‘you are a coward’), or truth (reminding publicly of a shameful
affair)—but this is not the scope of defamation law.
The property view, despite being widely shared,56 is no less problematic. The
idea here is that good name—or, more commonly in this context, good will—is
a valuable asset, one that the law protects just as it protects any other property
interest. The metaphor of property (for status is not a tangible good)57 has initial
plausibility because it is undoubtedly true that one can amass good will through
personal exertion, which resonates with Lockean ideas of property.58 It is also
true that good will has a value that the market can price.59 However,
consideration reveals that even if we can set aside the racial undertones of the
property metaphor,60 these considerations do not make good name into
property. 61
Good will is a shorthand for the good will of others. I can own a widget, you
can own land, but no one can own the good will of other people.62 It matters
little that the market can price good will: if all the kids start trading a specific
type of sports cards, the stock market will immediately react by an increase in
the price of the company that sells them, resulting in a new price accurate to two
decimal points. But no investor can claim they own this new trend, and if the
children lose interest overnight, all the investors can do is swear their luck—not
bring suit. Successful movie stars have surely invested much into their public
image, and their image definitely carries a clear financial value. But if the
vicissitudes of public taste lead fans to admire a new star, the complaints of the
forgotten star will be met with a mix of embarrassment and compassion. Even
doctrinally, the property view is off the mark. In Paul v. Davis the Supreme
56 See, e.g., Joseph Blocher, Reputation as Property in Virtual Economies, 118 YALE L.J.
POCKET PART 120, 120 (2009), http://thepocketpart.org/2009/01/19/blocher.html; Richard A.
Epstein, Was New York Times v. Sullivan Wrong?, 53 U. CHIC. L. REV. 782, 800-01 (1986);
David S. Ardia, Reputation in a Networked World: Revisiting the Social Foundations of
Defamation Law, 45 HARV. CIV. RTS.-CIV. LIBERTIES L. REV. 261, 290 (2010) (“The … most
dominant[] conception of reputation embodied in American defamation law is that of reputation
as property.”); Ronald J. Krotoszynski Jr., Fundamental Property Rights, 85 GEO. L.J. 555 (1997).
57 See Nick Emler, Gossip, Reputation, and Social Adaptation, GOOD GOSSIP 135 (R. F.
Goodman & A. Ben-Ze’ev eds., 1994) (“[R]eputations do not exist except in the conversations
that people have about one another.”).
58 JOHN LOCKE, TWO TREATISES ON GOVERNMENT, Book II Chapter V. (Bartleby.com, Inc.
2010) (1690), https://perma.cc/4LD7-XDK5).
59 David E. Vance, Return on Goodwill, 26 J. APPLIED BUS. RSCH. 93 (2010).
60 See generally Harris, supra note 27 (discussing the relationship between racial status and
property).
61 See Post, supra note 41, at 693-700. The most compelling defense of the property view is
Krotoszynski, supra note 56, at 591-607, who tracks state constitutions, scholarly attitudes, and
various substantive arguments. A key difference is that his emphasis is on questions of
constitutional classification for due process purposes. Id. at 598.
62 The value of goodwill attributed to one spouse may well be split evenly upon dissolution
of the marriage—but the court clearly cannot command that the public hold each partner in half
regard. See, e.g., In re Marriage of Lukens, 558 P.2d 279, 283 (Wash. Ct. App. 1976) (ordering
the spouses to share the value of goodwill).
Electronic copy available at: https://ssrn.com/abstract=4021605

<<PAGE_BREAK>>

ARBEL, A STATUS THEORY OF DEFAMATION LAW 13/51
Court expressly held that harm to reputation is markedly different than harm to
reputation for the purposes of the Fourteenth Amendment.63 Ultimately, our
opinion on other people belong to us, not them.64
Dignity is the strongest candidate of the three. 65 Most modern jurists would
probably instinctively link defamation to dignity, and in foreign jurisdictions
where dignity has a more established legal basis, it has been proffered as the
explicit basis for defamation law.66 Given its pervasiveness and persuasiveness, it
is worth offering a more sustained critique of dignity than we have provided for
property or honor. The short of it is that the dignity view has problems of fit and
justification that were mostly undiagnosed so far and thus the dignity view
cannot support, explain, or justify the American law of defamation. But despite
the intensity of the critique, I must emphasize that I ultimately consider dignity
to be relevant even under status theory, even if in a more limited role.
Under the modern understanding of dignity, the notion of dignity is inherent
to our person, regardless of what we do or what others think of us. Our dignity
is innate. Even if the meaning of dignity is socially influenced and culturally
constructed, dignity is ultimately an individualistic concept.67 In the words of
political scientist Sharon Krause, “Dignity … is a fixed status that attaches to all
persons. Everyone has dignity and has it in the same measure inherently, which
means independently of one’s particular conditions and actions. Dignity
conceived in this way is impossible to lose.”68
This is not how defamation works. The very idea animating defamation law
is that good name is very much something that can be lost. Dignity, according
to some, is “impossible to lose.” Even odder, we are all endowed with dignity,69
but defamation law considers some people libel-proof, i.e., incapable of suffering
cognizable harm from defamation.70 We can further see that good name is not a
63 Paul v. Davis, 424 U.S. 693, 701 (1976) (“the interest in reputation asserted in this case is
neither "liberty" nor "property" guaranteed against state deprivation without due process of law.”).
See also Siegert v. Gilley, 500 U.S. 226, 233-35 (1991). The property view is also inconsistent
with the common law rule that defamation lawsuits do not survive the death of the defamed. See
Menefee v. CBS, Inc., 329 A.2d 216, 221 (Penn. 1974).
64 Anything can be given property-like protection, from abstract patent rights to sunlight and
the stars. The question here is what can be said to belong to us.
65 The dignity view has been highly influential. See, e..g., W.J.A. v. D.A., 43 A.3d 1148,
1159 (N.J. 2012) (“That defamation is a ‘dignitary tort,’ is not a matter of dispute.”).
66 For Israel, see 5 HCJ 6126/94. Szenes v. Broadcasting Authority at §27 (Chief Justice
Barak).
67 Oliver Sensen, Human Dignity in Historical Perspective: The Contemporary and
Traditional Paradigms, 10 EUR. J. POL. THEORY 71 (2011). For Post’s response, see infra note 78
and accompanying text. I also return to the limits of the dignity conception in the context of hate
speech, see infra notes 276-282 and accompanying text.
68 SHARON R. KARUSE, LIBERALISM WITH HONOR, 15 (2002).
69 Rosenblatt v. Baer, 383 U.S. 75, 92 (1966) (Stewart, J., concurring) (Arguing that
defamation law is rooted in “our basic concept of the essential dignity and worth of every human
being”).
70 Cardillo v. Doubleday & Co., 518 F.2d 638, 639 (2d Cir. 1975) (holding that a “habitual
criminal” was libel proof). SACK ON DEFAMATION, supra note 8, at § 2:4.18. See infra note 132.
Electronic copy available at: https://ssrn.com/abstract=4021605

<<PAGE_BREAK>>

ARBEL, A STATUS THEORY OF DEFAMATION LAW 14/51
proxy for dignity when individuals bring claims that show clear dignitary harms,
but are bereft of any harm to good name. Such ‘naked’ dignitary harms suits are
summarily rejected by the courts.71
The dignity view also misunderstands the essence of defamation law. The tort
is all but individualistic: it is called, after all, a social tort.72 Accordingly, the
common law’s definition of defamation is deeply rooted in the reactions of
others,73 focusing only on expressions that tend to expose an individual social
aversion.74 This definition is social, and while it has dignitary undertones, those
seem epiphenomenal. Similarly, defamation law incorporates a fragmented view
of social standing, where people occupy different social positions in different sub-
communities.75 This is quite distinct from the immutable dignity we carry in our
pocket wherever we go. Ultimately, one must reach the following conclusion:
dignity is personal; defamation is social.76
Dignity also clashes with some of the most central aspects of the doctrine:
publication, falsity, and the fact/opinion distinction.77 To the dignity view, the
requirement that statements be published appears alien. While public pillory is
hurtful, we can surely be demeaned and debased in private.78 Why stop, then, at
public statements? Likewise, why require that the statement be false? If anything,
true aspersions are more hurtful to our dignity because the truth about our faults
is harder to dismiss or rationalize. More than anything, it is unprincipled from a
71 See, e.g., Kimmerle v. New York Evening Journal, 186 N.E. 217, 217-218 (N.Y. 1933)
(holding that plaintiff’s “own [highly negative] reaction … has no bearing”); see also Whitman,
supra note 54, at 1297 (studying the actionability of naked insults in Germany).
72 See John C. Watson, Defamation by a Racial Misidentification: A Study of the Social Tort,
4 RUTGERS RACE & L. REV. 77, 104 (2002) (“Defamation has been called the sociological tort.”);
DAVID ROLPH, REPUTATION , CELEBRITY AND DEFAMATION LAW, 5 (2016). See also Kimmerle,
186 N.E. at 218 (stating that defamation only consists of “the reaction of others”).
73 See, e.g., Cox, 761 P.2d at 561 (“The tort of defamation protects only reputation. A
publication is not defamatory simply because it is nettlesome or embarrassing to a plaintiff, or even
because it makes a false statement about the plaintiff.”).
74 Id. (describing defamation as exposing an individual “to public hatred, shame, obloquy,
contumely, odium, contempt, ridicule, aversion, ostracism, degradation, or disgrace, … and [may]
deprive one of their confidence and friendly intercourse in society.”; see also Celle v. Filipino Rep.
Enters., Inc., 209 F.3d 163, 177 (2d Cir. 2000).
75 See infra Section I.2 (discussion of the status aspects of defamation law).
76 Sensen, supra note 67, at 71 (“[S]cholars who [study the ontological value of dignity]
consider the value to be a non-relational property.”). Status, in contrast, is deeply relational. See
infra Appendix.
77 See infra Section I.3.
78 Post contends that the publication requirement is justified once one recognizes that private
degradation will only have “equivocal significance:” is it the target or the speaker who acted
improperly? Post, supra note 41, at 711. This is unconvincing. One can suffer deep trauma from
derogatory behaviors—discrimination, verbal abuse, harassment, etc.—that are completely private.
See, e.g., Rosa E. Brooks, Dignity and Discrimination: Toward a Pluralistic Understand of
Workplace Harassment, 88 GEO. L.J. 1 (1999). While I disagree with Post here, I do not find
James Whitman’s critique of Post persuasive either. Whitman argues that Post’s account fails until
“he can demonstrate that there are American norms of civility.” Whitman, supra note 54, 1383-
1384, note 353. American law is overflowing with norms of civility and deference. See infra II.3.
Electronic copy available at: https://ssrn.com/abstract=4021605

<<PAGE_BREAK>>

ARBEL, A STATUS THEORY OF DEFAMATION LAW 15/51
dignity perspective to exempt opinions.79 Human dignity does not become
immune to vituperative remarks if they are not based on hard facts. It also doesn’t
help the dignity view that the remedy is money. As Post himself notes, money is
arguably beside the point, because the “plaintiff’s dignity is rehabilitated” by the
court’s “authoritativ[e] determin[ation].”80 Worse, apologies are not recognized
as a defense.81
Finally, we arrive at how courts actually decide cases, where we find that—
from the perspective of dignity—defamation is inexplicably both under- and
over-inclusive. Overinclusive because courts deem defamatory many statements
that have little to do with dignity and much to do with commercial interests,
revealingly lacking any requirement that the target will be personally offended.82
Underinclusive because statements and insults that are deeply vituperative,
demeaning, racist, or pose an affront to one’s core identity are deemed non-
defamatory.83 It is hard to conjure an image more debasing than the one litigated
in Hustler v. Falwell, but the Supreme Court did not find it defamatory.84 And
when it comes to damages, one treatise explains that “the orthodoxy has been
that the law of defamation exists not to provide compensation for emotional
disturbance but to remedy a wrongful disruption in the “relational interest” that
an individual has in maintaining personal esteem in the eyes of others.” The focus
on relational harm when determining damages, rather than the degree of
personal insult, is in tension with a dignity-based view.85
79 See Gertz v. Robert Welch, Inc., 418 U.S. 323, 417 (1974) (“Under the First Amendment
there is no such thing as a false idea … but there is no constitutional value in false statements of
fact.”); Milkovich v. Lorain J. Co., 497 U.S. 1, 12 (1990); RESTATEMENT OF TORTS, supra note
9, at § 566.
80 Post, supra note 41, 42, at 638. See also Pierre N. Leval, The No-Money, No-Fault Libel
Suit: Keeping “Sullivan” in Its Proper Place, 101 HARV. L. REV. 1287 (Proposing the award of
judgments without compensation).
81 See generally Jane E. Kirtley, Getting to the Truth: Fake News, Libel Laws, and “Enemies
of the American People,” 43 HUMAN RIGHTS Magazine 4, https://perma.cc/DJK8-W6XX.
82 See, e.g., Dun & Bradstreet, Inc. v. Greenmoss Builders, Inc., 472 U.S. 749 (1985) (Powell,
J., plurality opinion) (stating that a false report of corporate bankruptcy is defamatory); Blake v.
Ann-Marie Giustibelli, P.A., 182 So. 3d 881, 883–84 (Fla. Dist. Ct. App. 2016) (affirming
$350,000 in damages for online defamatory reviews of attorney services). Such interests are best
seen as reputational concerns (rather than social status).
83 Political affiliation is often seen as a core part of an individual’s identity. Yet, false
allegations of political affiliation are not defamatory. See, e.g. Cox v. Hatch, 761 P.2d 556, 562
(Utah 1988), Frinzi v. Hanson, 140 N.W.2d 259, 262 (Wis. 1966). Many would consider
allegations that they are dead to be an affront to their dignity; but these statements are not
defamatory, see, e.g., Cardiff v. Brooklyn Eagle, 75 N.Y.S.2d 222, 224 (Sup. Ct. 1947); Decker
v. Princeton Packet, Inc., 561 A.2d 1122 (N.J. 1989).
84 Hustler Magazine, Inc. v. Falwell, 485 U.S. 46 (1988) (holding that a cartoon of a minister
“engaged in a drunken incestuous rendezvous with his mother in an outhouse” is not defamatory
because it was not understood as describing facts). The false light doctrine allows recovery for
emotional injuries resulting from publications that are not necessarily false. See Braun v. Flynt,
726 F.2d 245, 247 (5th Cir. 1984).
85 See DOBBS, supra note 9, AT § 9:26. See also Smith v. Durden, 2012-NMSC-010, 276
P.3d 943 (N.M. 2012).; Richie v. Paramount Pictures Corp., 544 N.W.2d 21, 28 (Minn. 1996).
Electronic copy available at: https://ssrn.com/abstract=4021605

<<PAGE_BREAK>>

ARBEL, A STATUS THEORY OF DEFAMATION LAW 16/51
Perhaps some sophisticated refinement of the idea of dignity might answer
these challenges. Indeed, status theory does not make dignity irrelevant. But I
think it is fair to question whether dignity is a natural fit here, keeping our eyes
open to other alternatives. After all, the human preoccupation with good name
is older than our legal understanding of dignity and has been the subject of
intense research by sociologists and economists. There is voluminous literature
in these disciplines, utilizing a variety of methodological tools, which closely
study the meaning and importance of good name. The challenges faced by the
standard classification suggest that there is a potential for great profit in learning
from these schools of thought.
2. Status Theory: An Introduction
Given the uncertainty about the values that underlie defamation law, the only
sound premise, shared by all, is that defamation law protects good name interests.
The most promising way forward, then, is to understand what these interests are.
A core insight found in sociology and economics is that good name reflects
two distinct but interrelated human pursuits—reputation and status.86 The
overly simplistic way to introduce them is to think about reputation as an
economic concept, a measure of the desirability of transacting with its subject.
Status is a social concept, a measure of the desirability of affiliating, befriending,
or socializing with its subject. The nation’s leading surgeon has good reputation;
the President has high status. Both values are of deep, sometimes mortal,
importance to individuals, and together they explain a large part of the law of
defamation.
Thus, it should be clear at the outset that status theory is not meant as an
exclusive interpretation of defamation law. Defamation law, I believe, cares
about both social status and reputation, and while these two concepts are often
intertwined, they possess different core meanings. Having wrestled with the
concept of reputation elsewhere,87 I will only make here brief remarks about
reputation and instead focus on exploring the theory of status.88
The concept of status emerges from an old tradition in sociology, dating back
to at least Weber.89 Sociologists define status as “the prestige accorded to
86 The legal literature uses inconsistent terminology and does not offer a holistic framework
that clearly distinguishes between them. See, e.g., Randall P. Bezanson, The Libel Tort Today, 45
WASH. & LEE L. REV. 535, 537 (1988) (calling status “community reputation”).
87 See Yonathan A. Arbel & Murat Mungan, The Case Against Expanding Defamation Law,
71 ALA. L. REV. 453 (2019); Yonathan A. Arbel, The Protection of Reputation in Defamation
Law, work-in-progress (on file with author).
88 There are important and deep ties between status and reputation. See DAVID ROLPH,
REPUTATION, CELEBRITY AND DEFAMATION LAW, 3-6 (2008).
89 Economists have considered the role of status, dating back at least to Adam Smith. ADAM
SMITH, THE THEORY OF MORAL SENTIMENTS 112-13 (D.D. Raphael & A.L. Macfie eds.,
Clarendon Press 1976) (1759). Yet, the role of status is often overshadowed by more tractable and
simple models of human behavior. See Richard H. McAdams, Relative Preferences, 102 YALE L.J.
1, 10-14 (1992).
Electronic copy available at: https://ssrn.com/abstract=4021605

<<PAGE_BREAK>>

ARBEL, A STATUS THEORY OF DEFAMATION LAW 17/51
individuals because of the abstract positions they occupy rather than because of
immediately observable behavior.”90 Status arises organically in social groups—
from the small fraternity to the modern complex society—91 and reflects a social
hierarchy within the group; a pecking order.92 Possessing status is a matter of
great importance to individuals, and satiates what psychologists and sociologists
believe to be a basic human desire.93 Various studies show that “status difference
determines the observable power and prestige within the group.”94 95With status
comes “deference behavior”-—that is, “compl[iance] with that individual’s
wishes, desires, and suggestions . . . unaccompanied by threat or coercion.”96
Status matters in some unexpected ways. Within the aircrew positions of a B-
26 bomber, there is a clear military hierarchy: pilots rank over navigators who
rank over gunners. Interestingly, this military hierarchy, based on operational
considerations, carries over also to purely social settings, where researchers find
that pilots’ opinions are given a dominant role at the expense of gunners.97 In
science, a distinct domain, one finds that high-status scientists will attract many
more citations for similar ideas than their low-status peers.98 While status is often
sought for its own ends, high status also opens doors in market settings by giving
high-status individuals greater access to opportunities and capital. 99 It is not just
90 Roger V. Gould, The Origins of Status Hierarchies: A Formal Theory and Empirical Test,
107 AM. J. SOCIOL. 1143, 1147 (2002). This definition helps distinguish between status and
reputation.
91 Id. at 1143 (2002) (Social differentials have a “near-universality…across a wide range of
scales and contexts, actors are sorted into social positions that carry unequal rewards, obligations,
and expectations.”); see also Bernardo A. Huberman, Christoph H. Loch & Ayse Önçüler, Status
as a Valued Resource, 67 SOC. PSYCH. Q. 103–114 (2004) (finding a strong preference for status
in an experiment across five cultures); Jessica Kiski, Hongling Xie, & Ingrid R. Olson,
Understanding Social Hierarchies: The Neural and Psychological Foundations of Status
Perception, 10 SOC. NEUROSCIENCE 527 (2015) (“A wealth of evidence indicates social hierarchies
are endemic, innate, and most likely, evolved to support survival within a group-living context.”).
92 The commonly used term ‘pecking order’ reflects a real phenomenon which showcases the
ubiquity of status and status games, as chicken direct most of their pecks at lower status fowls. A.
M. Guhl, The Social Order of Chickens, 194 SCI. AM. 42 (1956).
93 See SMITH, supra note 89, at 336 (“The desire of being believed, the desire of persuading,
of leading, and directing other people, seems to be one of the strongest of all our natural desires.”).
94 Joseph Berger, Bernard P. Cohen & Morris Zelditch, Jr., Status Characteristics and Social
Interaction, AM. SOCIO. REV. 241, 243 (1972).
95 Joan C. Williams, Marina Multhaup, & Sky Mihyalo, Why Companies Should Add Class
to Their Diversity Discussions, Harv. Bus. Rev. (Sept 5, 2018) (“[I]n the United States, talking
about class is taboo”).
96 Cameron Anderson, John A. D. Hildreth & Laura Howland, Is the Desire for Status a
Fundamental Human Motive? A Review of the Empirical Literature, 141 PSYCH. BULL. 574, 575
(2015). See also JOEL M. PODOLNY, STATUS SIGNALS 14 (2005).
97 Id. at 241-42.
98 Robert K. Merton, The Matthew Effect in Science, 159 SCI. 56 (1968); see also Michael
Sauder, Freda Lynn & Joel M. Podolny, Status: Insights from Organizational Sociology, 38 ANN.
REV. SOCIO. 267 (2012). On biased citation practices in law, see Richard Delgado, The Imperial
Scholar: Reflections on a Review of Civil Rights Literature, 132 PENN. L. REV. 561 (1984).
99 Sauder, Lynn & Podolny, supra note 98, at 272-73; PODOLNY, supra note 96, at 27-29
Electronic copy available at: https://ssrn.com/abstract=4021605

<<PAGE_BREAK>>

ARBEL, A STATUS THEORY OF DEFAMATION LAW 18/51
that high-status signals merit;100 it is also that having high status makes
everyone’s evaluations of you more favorable.101 For instance, prestigious law
firms can charge higher prices, and one wonders how much of that is attributable
to higher quality.102
Lawyers, and future lawyers in particular, may find special interest and
concern in learning that interview invitations to elite law firms are highly
influenced by status markers. “[E]mployers discriminate on the basis of status
characteristics,” write Rivera and Tilcsik, who find that adding a high-status
marker to a student’s resume—being on the sailing team or listening to classical
music—results in a significantly higher rate of interview invitations than listing
low status markers—being on the track and field team or enjoying country
music.103
As to why individuals, firms, and countries compete for status, sociologists
propose three possibilities.104 First, individuals may pursue status instrumentally
to achieve those material advantages just noted.105 Second, individuals may seek
status as a terminal value simply because having status is pleasurable and losing
it is painful.106 Consistently, psychologists find that “[p]eople’s emotional state,
their short-term moods and long-term happiness, often depend on their ranking
in comparison with others.”107 Lastly, the pursuit of status may also be explained
by evolutionary adaptations to collaboration in group settings, a view supported
by the ubiquity of competition for status within the animal kingdom.108
Let us pause to briefly consider the interrelated concept of reputation. Much
like status, reputation is also a communal concept. It is aggregated information
regarding the quality of a person, service, or product based on past experience.
(“[S]tatus lowers the transaction costs associated with the exchange between buyer and seller.”);
Michael Jensen, Bo Kyung Kim & Heeyon Kim, The Importance of Status in Markets: A Market
Identity Perspective, STATUS IN MGMT. AND ORG. 87, 87 (2010).
100 Huberman, Loch & Önçüler, supra note 91, at 105 (reporting a "strong theoretical basis
as well as empirical support for the fact that status signals competence [and] provides access to
power and resources").
101 Gould, supra note 90, at 1158.
102 Brian Uzzi & Ryon Lancaster, Embeddedness and Price Formation in the Corporate Law
Market, 69 AM. SOCIO. R. 319, 341 (2004) (finding in the market for corporate legal services that
“status has an effect on prices that is independent of the quality of the firm”).
103 Lauren A. Rivera & András Tilcsik, Class Advantage, Commitment Penalty, 81 AM. SOC.
REV. 1115, at 1122 (2016).
104 See RIDGEWAY, supra note 2, at 20-47 (arguing that status serves to coordinate cooperation
within groups).
105 See, e.g., PODOLNY, supra note 96, at 30 (“[H]igher-status actors will be able to offer
goods of a given quality at a lower cost.”).
106 Anderson, Hildreth, & Howland, supra note 96, at 591-93. (reviewing diverse literature
and finding that status pursuits appear to be a fundamental human desire with important effects
on wellbeing); see also Huberman, Loch & Önçüler, supra note 91, at 104.
107 Richard H. McAdams, Relative Preferences, 102 YALE L. J. 1, 31 (1992).
108 Joey T. Cheng & Jessica L. Tracy, Toward a Unified Science of Hierarchy: Dominance
and Prestige are Two Fundamental Pathways to Human Social Rank, THE PSYCHOLOGY OF
SOCIAL STATUS 3 (2014).
Electronic copy available at: https://ssrn.com/abstract=4021605

<<PAGE_BREAK>>

ARBEL, A STATUS THEORY OF DEFAMATION LAW 19/51
109 Barring reputation failures, 110 one could expect higher quality from a product
that has good reviews. 111 The common observation that a firm or brand “has” a
good reputation means that many share a favorable expectation of its quality.112
I think it is easiest to think of reputation as a prediction, although I am also
partial to political scientist Robert Axelrod’s calling reputation “a shadow of the
future.”113 It follows quite naturally why reputation is valuable: it allows its
subject to capitalize on it.114
In reality, there is often overlap between the distinct concepts of status and
reputation, so it is understandable why the literature conflated them.115 It is
especially easy to mistake them in a society that has an ethos of meritocratic
allocation of status, where supposedly those admired are the most competent.116
Still, even twins are different people. While reputation measures quality, status
measures relative social standing; while reputation is mostly an instrumental
value, status is ta least partly a terminal one; and while one builds reputation by
accumulating positive reviews of past experiences, status is earned through the
accumulation of ‘deference behavior.’117 Quality is key to reputation, but
secondary to status. The late sociologist Roger Gould went as far as showing that
109 See RICHARD A. POSNER, THE ECONOMICS OF JUSTICE 272 (1981) (“A person’s
reputation is other people’s valuation of him as a trading, social, marital, or other kind of partner.
It is an asset of potentially great value which can be damaged both by false and by true
defamation.”); Yonathan Arbel, Reputation Failure: The Limits of Market Discipline in Consumer
Markets, 54 WAKE FOREST L. REV. 1239, 1255 (2019) (“reputational information is like a poll” as
it “helps consumers predict their own experiences based on the distribution and valence of
experiences of past consumers”). See also Roy Shapira, Reputation Through Litigation: How the
Legal System Shapes Behavior by Producing Information, 91 WASH. L. REV. 1193, 1203–04
(2016).
110 See generally Arbel, supra note 109 (exploring factors leading to reputation failures in
markets).
111 See Simon Board & Moritz Meyer-Ter-Vehn, Reputation for Quality, 81
ECONOMETRICA 2381, 2381 (2013) (defining reputation “as the market’s belief about …
quality”); Benjamin Klein & Keith B. Leffler, The Role of Market Forces in Assuring Contractual
Performance, 89 J. POL. ECON. 615, 616 (1981).
112 The statement that a brand enjoys a good reputation is intelligible, but it would be highly
confusing from a perspective of honor, property, or dignity.
113 ROBERT AXELROD, THE EVOLUTION OF COOPERATION 126 (1984).
114 See Benjamin Klein & Keith B. Leffler, The Role of Market Forces in Assuring
Contractual Performance, 89 J. POL. ECON. 615, 616 (1981).
115 See Olav Sorenson, Status and Reputation: Synonyms or Separate Concepts?, 12 STRATEG.
ORG. 62, 63 (2014). Economists have frequently conflated the two meanings by redefining status
as a measure of quality. See, e.g., Michael Jensen, Bo Kyung Kim & Heeyon Kim, The Importance
of Status in Markets: A Market Identity Perspective, STATUS MANAGEMENT ORG. 87–117 (2010).
The distinction developed here maps into a distinction in trademark law, which considers brands
as either informational signals of quality or markers of prestige. See Shahar J. Dillbary, Famous
Trademarks and the Rational Basis for Protecting Irrational Beliefs, 605 GEO. MASON L. REV.
605, 610-15 (2011).
116 See generally RIDGEWAY, supra note 2, at 6-7 (offering a merit based view of status
allocation). Podolny posits that status is also a predictor of quality in market relations used to
complement gaps in reputational information. PODOLNY, supra note 96, at 18.
117 See, e.g., Sauder, Lynn & Podolny, supra note 98, at 268.
Electronic copy available at: https://ssrn.com/abstract=4021605

<<PAGE_BREAK>>

ARBEL, A STATUS THEORY OF DEFAMATION LAW 20/51
“it is possible for a stable system of ranked social positions to emerge
endogenously in the absence of underlying variation in individual attributes.”118
Another difference is that it would be relatively easy for an outsider to evaluate
the reputation of various agents based on the demand for their services. However,
an outsider will find it difficult to track and quantify the allocation of status,
which manifests in non-market behavior.119 And even the internal experience is
different: reputation is about what we expect to get and status is what we should
get.120
A final point about status is that it is a relative property. We see that in the
way we talk about high status, as opposed to good reputation. There is no high
status without low status: leaders imply followers; cool kids, nerds; upper-class,
lower-class; patricians, plebeians; Brahmins, Sudras; gold medals, bronze medals;
and Ivy League schools, exposed-brick schools. We always measure status relative
to others.121 But reputation is different. Because reputation is a prediction of
future quality, it is not impossible for all the restaurants in a given area to enjoy
a high reputation for the quality of their food.122 This is not to say that reputation
is not competitive—every firm would like to be the only one with a high
reputation—but only to illustrate the different dynamics that sociologists and
economists attach to status and reputation.123
3. A Status Interpretation of Defamation Law
This brief introduction to status theory cannot do justice to such a mature
theory, but if we are willing to accept some sacrifice of nuance, we can test the
pudding by its eating. What follows is an attempt to read defamation law
through the lens of status theory. The analysis has no ambition of explaining all
of defamation law. Nor need it. Status theory could be valuable if it can
persuasively explain a fair portion of the law in a coherent manner—or, at least,
if it can do so better than our existing accounts of dignity, honor, or property.
The nexus between status and defamation law is first observed in the rhetoric
surrounding the doctrine. The Supreme Court endorsed a description of
defamation law as protecting individuals from loss of “standing in the
118 Gould, supra note 90, at 1149.
119 The difficulty of tracking status may explain defamation law’s liberal allowance of recovery
of presumed damages. See Dun & Bradstreet, Inc. v. Greenmoss Builders, Inc., 472 U.S. 749, 760
(1985) (quoting PROSSER, supra note 10, at 765) (“[P]roof of actual damage will be impossible in
a great many cases where, from the character of the defamatory words and the circumstances of
publication, it is all but certain that serious harm has resulted in fact.”); see also SACK ON
DEFAMATION, supra note 8, at § 2:4.2. Insiders develop a quick and intuitive sense of internal
social hierarchies, which they share among themselves with regularity.
120 The ‘should’ here is sociologically, not morally, normative. On the norms guiding the
attainment of status. See infra 0.1.
121 See, e.g., Jensen, Kim, & Kim, supra note 115, at 91 (“[S]tatus is best defined as a position
in a social system.”).
122 Cf. ROY SHAPIRA, LAW AND REPUTATION 120 (2020).
123 See infra Appendix.
Electronic copy available at: https://ssrn.com/abstract=4021605

<<PAGE_BREAK>>

ARBEL, A STATUS THEORY OF DEFAMATION LAW 21/51
community,”124 a telling reference to the social aspect of the tort. Consistently,
the common definition of defamatory expressions refers to statements that
expose individuals to “hatred, contempt, ridicule, or obloquy, or which cause[]...
any person to be shunned or avoided.”125 This is status-laden language, clearly
geared towards the social effects of statements.126 Some commentators have
likewise explained the need for monetary compensation in defamation cases in
the need to rehabilitate a “relational interest” that defamation jeopardizes.127
Dignity theory was criticized for its lax doctrinal fit. Let us measure how status
theory fares on this measure. Consider, first, the publication requirement. For
dignity theories, this requirement raises difficulty, because even private
statements can be extremely demeaning. In contrast, such a requirement is
inescapable if the value protected is social status. Unlike dignity, social status
cannot be lost in private. One can only lose status by being viewed negatively in
the eyes of others.128 The mechanisms of status loss render publication a non-
negotiable prerequisite.
We can also derive from first principles the community judgment
requirement. The measure of whether any given statement is defamatory is its
reception in the community. As Justice Holmes put it, statements are only
defamatory if they would “hurt the plaintiff in the estimation of an important
and respectable body of the community.”129 This requirement is puzzling if one
views dignitary harm as the crux of defamation. Why limit recovery to harm in
the eyes of the community and not, say, in the eyes of a loved one?130 And why
should it matter if those people are respectable or not? But from a status
perspective, these requirements are natural. Status only emerges within social
communities, and the existence of harm requires a change in the views of their
124 Gertz v. Robert Welch, Inc., 418 U.S. 323, 350 (1974).
125 ROBERT H. PHELPS & E. DOUGLAS HAMILTON, LIBEL: RIGHTS, RISKS, RESPONSIBILITIES
6 (1966); see also Phelan v. May Dep't Stores Co., 819 N.E.2d 550, 553 (Mass.
2004) (quoting Stone v. Essex Cty Newspapers, Inc., 330 N.E.2d 161, 165 (Mass. 1975))
(defining defamation as a statement that “would tend to hold the plaintiff up to scorn, hatred,
ridicule or contempt”).
126 W. PAGE KEETON ET AL., PROSSER AND KEETON ON THE LAW OF TORTS § 111, at 771
(5th ed. 1984) (citing “personal disgrace”) [hereinafter PROSSER AND KEETON]; Kimmerle v. New
York Evening J., 186 N.E. 217 (N.Y. 1933) (“[I]nduce an evil opinion of one in the minds of
right-thinking persons, and to deprive one of their confidence and friendly intercourse in
society.”).
127 RODNEY A. SMOLLA, 1 THE LAW OF DEFAMATION 18 (2d ed. 2020) (citing LEON GREEN,
CASES ON INJURIES TO RELATIONS 193-276 (1940)).
128 RIDGEWAY, supra note 2, at 65. Likewise, emotional pain and suffering are considered
‘parasitic’ on other harms and cannot exist by themselves.
129 Peck v. Tribune, 214 U.S. 185 (1909); see also RESTATEMENT OF TORTS, supra note 9, at
§559 cmt. e. (“[T]he communication would tend to prejudice [the victim] in the eyes of a
substantial and respectable minority.”); Mycroft v. Sleight, 90 L. J. K. B. 883 (1921) (“[I]n the
minds of ordinary, just and reasonable citizens.”).
130 Lidsky, supra note 33, at 19 (“[I]f the single individual who finds the statement defamatory
is the plaintiff's spouse or boss, the plaintiff will receive no recovery despite the very real and
substantial nature of his injury.”).
Electronic copy available at: https://ssrn.com/abstract=4021605

<<PAGE_BREAK>>

ARBEL, A STATUS THEORY OF DEFAMATION LAW 22/51
members. And the more respect and status audience members possess, the more
impactful the statement can be on one’s status.131
We can also revisit the libel-proof doctrine. Being libel proof means that one’s
standing is so low that no harm is visited by a defamatory allegation.132 From a
dignity perspective, such a doctrine is inexplicable, as all individuals have equal
dignity.133 But from a status perspective, it would make sense that those on the
lowest social rung are not losing much status from defamation.134 While one may
not be “dignity proof,” being status proof is entirely plausible (albeit tragic).
Finally, the most important and nuanced aspect of defamation doctrine is the
inveterate requirement that the statement is false, a requirement that long
predates modern concepts of free speech.135 From a dignity- or honor-based
perspective, this limitation is clearly puzzling.136 If anything, the humiliation a
person suffers from derogatory remarks is greater when those remarks prove true.
From a status perspective, however, the falsity requirement is a natural
corollary.137 The meaning of this requirement will be clarified once status games
are introduced; it is enough, for now, to note that status games’ integrity requires
some arbitration of which claims are false and which are not.138 After all, if a
person claims a status privilege on the basis of her honesty or piety, then it is
essential that others could truthfully expose her dishonesty or impiety.139
Majority of commentators today converge on a dignity of defamation law.
Beyond the Supreme Court itself, 140 a prominent exemplar is legal philosopher
Jeremey Waldron who espouses a full-throated dignity-based view of defamation
131 See, e.g., PODOLNY, supra note 96, at 15 (“[R]eceiving deference from a high-status actor
generally has a greater impact on one’s own status than receiving deference from a low-status
individual.”). The torts of intentional infliction of harm and breach of privacy are designed to
address cases that do not fit within this category. See David A. Logan, Tort Law and the Central
Meaning of the First Amendment, 51 U. PITT. L. REV. 493, 524 (1990).
132 Cardillo v. Doubleday & Co., 518 F.2d 638, 639 (2d Cir. 1975) (holding that a
“habitual criminal” was libel proof). SACK ON DEFAMATION, supra note 8, at § 2:4.18.
133 See supra notes 71-81 and accompanying text.
134 This is consistent with the mitigation of damages for individuals with low-status, as they
presumably suffer a lesser status harm. The reverse is true for individuals with high standing.
SMOLLA, supra note 127, at § 13.17(“Evidence that the plaintiff already has a bad reputation is
admissible in mitigation of damages.”); Mike Steenson, Presumed Damages in Defamation Law,
40 WM. MITCHELL L. REV. 1492, 1504 (2014).
135 Originally, as the law of libel was concerned with preserving the peace, it did not concern
itself with the veracity of allegations. See generally Van Vechten Veeder, The History and Theory
of the Law of Defamation, 8 COLU. L. REV. 546 (1903).
136 See Post, supra note 41, at 705-06.
137 For an early statement of the truth defense, see 3 WILLIAM BLACKSTONE, COMMENTARIES
*433-34.
138 In the context of bigoted defamation, our goal is to disrupt the underlying status game,
which is why the law does not regulate the veracity or mendacity of statements. See infra Part II.
139 See infra Part III.1.
140 Gertz v. Robert Welch, Inc., 418 U.S. 323, 342(1974) (quoting Rosenblatt v. Baer, 383
U.S. 75, 92 (1966) (Stewart, J., concurring)).
Electronic copy available at: https://ssrn.com/abstract=4021605

<<PAGE_BREAK>>

ARBEL, A STATUS THEORY OF DEFAMATION LAW 23/51
law.141 Another is defamation law expert Professor Lyrissa Lidsky, who argued
that “[b]y protecting reputation, defamation law safeguards the dignity of
citizens.”142 Beyond these leading voices, examples abound;143 in fact, despite the
voluminous literature on the topic, it is hard to locate different views who
challenge the dominance of the dignity or property view of defamation.
Despite its dominance, the dignity view faces difficult challenges. The
discussion above was sufficient, I hope, to illustrate how many difficult doctrinal
requirements that confound dignity, property, and honor interpretations appear
logical, even necessary, when viewed from the lens of status theory. The
publication requirement, the use of monetary compensation, the categories of
per-se libel, the indifference to naked dignitary harms, are but some of the
features that are easily interpretable from within the status perspective.
I would conjecture that the goodness of fit between theory and doctrine
suggests is not coincidental. Courts and commentators may have employed a
proto-theory of status for a long time, even if they lacked the theoretical
vocabulary to articulate it clearly. In fact, many of Post’s original ideas also fit
comfortably within this framework, suggesting theoretical consilience. Thus,
while status theory claims greater explanatory power, it does not claim much in
the way of novelty. At best, it is a refinement of older ideas and concepts that are
already present in the law. If it earns its interpretative keep, it is by expounding
these ideas clearly and parsimoniously.
DEFAMATION LAW AND STATUS GAMES
Interpreting defamation law from a status perspective offers a way to
coherently understand doctrine. Interpretative projects are important in
themselves, especially in areas that are cloudy and mystifying. Status theory,
however, is a more capacious framework; it offers prescriptive guidance to courts,
legislators, and reformers. The goal of this Part is to explicate the normative side
of the theory—employing a socio-economic-legal analysis.
In the traditional legal account, defamation law only protects good name
interests. The argument developed here is that the traditional account sells
defamation law short. By intervening in status competitions, that is, by
protecting some claims to status and denying others, defamation law inexorably
affects the choices individuals make in the first instance about how to acquire
141 See Waldron, supra note 37. See also infra notes 276-282 and accompanying text.
142 Lyrissa Barnett Lidsky, Silencing John Doe: Defamation & Discourse in Cyberspace, 49
DUKE L.J. 855, 885 (2000)
143 See generally Leslie Meltzer Henry, The Jurisprudence of Dignity, 160 U. PA. L. REV. 169,
217-18 (2011) (discussing courts defamation dignity jurisprudence); Neomi Rao, Three Concepts
of Dignity in Constitutional Law, 86 Notre Dame L. Rev. 183, 253-58 (2011) (considering, from
a comparative perspective, dignity in the context of defamation law).
Electronic copy available at: https://ssrn.com/abstract=4021605

<<PAGE_BREAK>>

ARBEL, A STATUS THEORY OF DEFAMATION LAW 24/51
status.144 This Part introduces the concept of status games –the status
competitions through which individuals gain and lose status. On this basis, it
explains how determinations in particular cases affect the choice of status games,
and then develops the normative argument that courts should openly recognize
their role and consider status games explicitly when they adjudicate cases. In
other words, courts play a regulatory role in status games and, while there are
important institutional constraints, a judicial reckoning of this role is vital.
1. Status Games
Defamatory remarks jeopardize social status. Obviously, not all statements
about me jeopardize my status. To falsely say that I cannot grow yams will have
nil effect on my social status, but it would be devastating if I lived in a different
society.145 There are specific social rules at play that govern status, rules that
define how status is lost, but also how it is gained. It is those rules that give
structure to the status competitions that are played within status games.
Status games are emergent social systems of recognized rules of status
acquisition, maintenance, and deprivation, alongside the entailments of status.146
Status games are a near-universal property of any social group, forming
spontaneously and often informally and subconsciously.147 The variety of status
games is dazzling, and they span the immediately recognizable (the consumption
of expensive items, titles, and physical appearance) to the nuanced and seemingly
“natural” (accent, manners, and even body language). A 19th-century lady is
instructed to “never read in company,” and when encountering a “gentleman at
the foot of flight of stairs,” she shall “Stop, bow, and motion him to precede.”148
These overtly sexist rules were codified in etiquette books, which themselves fell
out of fashion, only to be replaced by modern, less legible, status games. Probably
the most radical account of status games is the one proposed by sociologist Ervin
Goffman, who famously claimed that the entire presentation of the self is a form
of soliciting social impressions.149
Because many native status games are invisible from within, a useful tell is the
feeling one experiences when imagining transgressions. A faux-pas evokes such a
visceral response that it even redounds to third parties—in what is known as
144 The Technical Appendix develops a critique of the protection account on its own terms.
It explains why, from a social perspective, defamatory remarks are not necessarily harmful, thus
undermining the protection imperative. See infra Technical Appendix.
145 William R. Bascom, Ponapean Prestige Economy, 4 SW. J. ANTH. 211, 213 (1948).
146 See e.g., Anderson et al., supra note 96, at 116.
147 See Jessica Koski et al., Understanding Social Hierarchies: The Neural and Psychological
Foundations of Status Perception, 10 SOC. NEUROSCIENCE 527 (2015) (“[S]ocial hierarchies are
highly pervasive across human cultures … and they appear to emerge naturally in social groups …
this group organization is not strictly a product of human cognition, as almost every group-living
species demonstrates a natural tendency to organize into a social hierarchy.”).
148 FLORENCE HARTLEY, THE LADIES' BOOK OF ETIQUETTE, AND MANUAL OF POLITENESS,
284-85 (1860).
149 ERVING GOFFMAN, THE PRESENTATION OF SELF IN EVERYDAY LIFE (1959).
Electronic copy available at: https://ssrn.com/abstract=4021605

<<PAGE_BREAK>>

ARBEL, A STATUS THEORY OF DEFAMATION LAW 25/51
‘cringe’—just imagine accidentally calling the President ‘dude’, burping in a
company dinner, or the ubiquitous nightmare of coming to school with no
pants.150
Reports of social ‘fouls’ diffuse in the community through informal
mechanisms such as gossip.151 This is obviously relevant to defamation law,
which is focused on sanctioning false reports. It is worth noting that individuals
seem to take pleasure in diffusing and consuming such reports: the promise of
‘juicy’ gossip sustains much of the tabloid industry.
A key observation is that status games do more than allocate status, they also
affect society itself. Status games consume resources, time, and psychic energy,
while the form of the status game impacts individuals, for better or worse.152
These effects are not always visible because, as economist Roger Congleton
recognized, they accrue to non-participants.153 For instance, politeness and
civility is a form of a status game that directly improves the well-being of others
by rewarding only those who act amicably, patiently, and pro-socially.
Philanthropy is another example of a status game that creates a real difference in
the lives of others—sometimes literally saving them.154 It has become fairly
common to complain today of virtue-signaling: the conspicuous display of
prosocial attitudes motivated by selfish concerns of status and public image. But
perhaps the effects of such signaling is not all bad. In an intriguing account,
economist Robert Frank argued that status games sometimes help economic
inequality. He argued that workers do not only care about their own absolute
wages but also about their relative earnings. When employers use differential
wages, they sow the seeds of discontent. To preserve morale, managers must
maintain a certain degree of pay equality or else risk attrition.155
Alongside their more salutary implications, one must admit, there is also a
dark side to status games.156 In The Darwin Economy, Frank argues that status
150 Modern television shows engage in intensive exploration of this feeling. See generally Julia
Havas and Maria Sulimma, Through the Gaps of My Fingers: Genre, Femininity, and Cringe
Aesthetics in Dramedy Television, 21 TELEVISION & NEW MEDIA 75–94 (2021) (theorizing the
role of cringe in contemporary television shows).
151 See Terence D. Dores Cruz et al., The Bright and Dark Side of Gossip for Cooperation
in Groups, 10 FRONTIERS IN PSYCH. 1374 (2019) (noting the function of gossip in enforcing
group norms and its universality in human societies).
152 See SHAPIRA, supra note 122, at 137-38 (discussing the signal “broadcast efficiency” based
on its social effects).
153 Congleton, supra note 3, at 176.
154 See Amihai Glazer & Kai A. Konrad, A Signaling Explanation for Charity, 86 AM. ECON.
REV. 1019 (1996).
155 See Robert Frank, Are Workers Paid Their Marginal Products?, 74 AM. ECON. REV. 549
(1984).
156 See, e.g., Douadia Bougherara et al., Do Positional Preferences Cause Welfare Gains?, 39
ECON. BULL. 1228, 1229 (2019) (“In an economy with private consumption goods, positional
preferences lead to a welfare loss.”); Congleton, supra note 3, at 176 (“A substantial portion of the
investment in positional goods may be regarded as a dead-weight loss.”). The term “positional
Electronic copy available at: https://ssrn.com/abstract=4021605

<<PAGE_BREAK>>

ARBEL, A STATUS THEORY OF DEFAMATION LAW 26/51
games often result in socially destructive outcomes. Frank’s ideas draw on
Darwinian competitions for female attention in nature, where elks grow
unwieldy antlers, elephant seals grow to unsustainable sizes, and peacocks boast
heavy and flashy tails—all features that make survival harder.157 Similarly, Frank
argues, human competition for status can result in races that consume resources
but produce no improvement. We might compare this to an overcrowded
concert. If one person stands on her tiptoes, she can see the show better. But this
can lead to a cycle where everybody else also stands on their toes, resulting in
everyone standing uncomfortably and no one seeing any better for it. 158
A powerful example of pernicious status races comes from Nobel Laureate
economist Thomas Schelling. He noted the oddity that, given a choice, hockey
players would choose to skate without a helmet, but if asked to vote on a league
rule, the overwhelming majority of players would require helmets. The reason
for this dissonance stems from the underlying race. Any player not wearing a
helmet sees the field slightly better and is thus more likely to reap status and
financial rewards. But if all players skate without a helmet, this advantage
vanishes, and the original competitive ranking is maintained while leaving all
players more vulnerable to serious injuries.159
Keeping up with the Joneses is a familiar status race among neighbors, where
entire neighborhoods are drawn into a one-upmanship game of maintaining
large lawns, driving lavish cars, and donning expensive brands. The game is not
played because of the inherent utility of these actions, it is played in order to save
face.160 As Veblen noted, individuals often engage in such “conspicuous
consumption” to impress others and win their envy, although they would rarely
admit to such motives.161 While status races may not always be conscious, their
existence in our daily life is illuminated by the common and seemingly
innocuous pursuit of “decent” clothes, a “good” car, or a “nice” house, which,
“upon analysis, turn out to be (at least partly) relative to what others have.”162
arms race” is due to Robert H. Frank, Should Public Policy Respond to Positional Externalities?,
92 J. PUB. ECON. 1777, 1778 (2008).
157 ROBERT H. FRANK, THE DARWIN ECONOMY: LIBERTY, COMPETITION, AND THE
COMMON GOOD 8-9 (2011).
158 FRED HIRSCH, SOCIAL LIMITS TO GROWTH 5 (1995); see also Erzo Luttmer, Neighbors
as Negatives: Relative Earnings and Well-Being, 120 Q.J. ECON. 963 (2005) (arguing that
individuals feel worse off when their neighbors do better).
159 FRANK, supra note 157.
160 See, e.g., Frank, supra note 156, at 1778 (suggesting large houses are a source of positional
utility); FRANK, supra note 157, at 68-69.
161 THORSTEIN VEBLEN, THE THEORY OF THE LEISURE CLASS, 33-48 (1925) (noting that
status pursuits may not be entirely conscious “so much as it is a desire to live up to a conventional
standard of decency in the amount and grade of goods consumed."). See also ROGER S. MASON,
CONSPICUOUS CONSUMPTION: A STUDY OF EXCEPTIONAL CONSUMER BEHAVIOUR 42 (1981)
(stating that a conspicuous consumer, "anxious to display wealth and gain in prestige, will rarely if
ever explicitly admit to any such intentions").
162 Richard H. McAdams, Relative Preferences, 102 YALE L.J. 1, 43 (1992).
Electronic copy available at: https://ssrn.com/abstract=4021605

<<PAGE_BREAK>>

ARBEL, A STATUS THEORY OF DEFAMATION LAW 27/51
In such situations, one can easily identify a “positional treadmill,”163 where
players end up roughly where they started, only poorer. If resources are spent,
used up, or misused along the way—say, land that could be used for habitation
is converted into a fancy lawn—society itself suffers. Thus, we can see how status,
the product of status games, is a matter of great social interest. Some games
played can enrich society while other can greatly impoverish it.164
2. Defamation Law as a Regulator of Status Games
People invest their best efforts, most precious resources, and a great degree of
mental energy in status competitions. “To exalt my station,” wrote Alexander
Hamilton to one of his friends, “I would willingly risk my life, though not my
character.”165 What if some of this energy could be directed toward positive
games, or at least redirected away from antisocial ones?
This basic insight occurred to media magnate Ted Turner.166 He looked at
the Forbes 400 list of the top wealthiest Americans and realized that it might
actually be keeping people from giving. If one is located in the 10th place, giving
away money could cost them their spot in the top-10—and the same goes for
those in the 50th place, 100th, up to the person in the 400th place, who would be
especially anxious to give away any money. He also realized that status games are
somewhat malleable. With his influence, the journal Slate created an exclusive
list of top-sixty donors. The effects, at least according to Slate, were large and
noticeable. “Whether by coincidence or not, philanthropy has blossomed since
Slate’s list was created.”167
To understand the place of defamation law in this ecosystem, consider the
fundamental problem of status. The ROI of status games, the return on all of
this investment, is measured in the currency of status: the name we develop for
ourselves. The trouble is that unlike hard currency, which can be safeguarded in
banks and vaults, good name is easily deprived. The fruits of the investment are
a vicious rumor away from being destroyed. In other words, status is fragile.
Indeed, investment mogul Warren Buffett observed that “It takes 20 years to
163 Cass R. Sunstein & Robert H. Frank, Cost-Benefit Analysis and Relative Position, SSRN
237665 (Aug. 14, 2000), https://papers.ssrn.com/sol3/papers.cfm?abstract_id=237665.
164 HIRSCH, supra note 158, at 10-11 (“Positional goods … become an increasing brake on
the expansion and extension of economic welfare.”); see also id. at 37-38. Even philanthropic
activity may be excessive. See Glazer & Konrad, supra note 154.
165 Alexander Hamilton to Edward Stevens, November 11, 1769, quoted in Ron Chernow,
ALEXANDER HAMILTON 31 (2004).
166 Nicholas Kristof, How Giving Became Cool, N.Y. TIMES (Dec. 27, 2012),
https://perma.cc/C4LT-4EFL.
167 Sebastian Mallaby, The Slate 60 Turns 10, SLATE (Feb. 20, 2006, 8:19 AM),
https://perma.cc/D2RX-AEPJ.
Electronic copy available at: https://ssrn.com/abstract=4021605

<<PAGE_BREAK>>

ARBEL, A STATUS THEORY OF DEFAMATION LAW 28/51
build a reputation and five minutes to ruin it.”168 With this comes the idea of
“status anxiety,” the recurring fear that we will become ‘nobodies’ overnight.169
Most people are attracted to safer investments, ones that promise predictable
and durable returns. If some forms of status are more fragile than others, this
creates a problem for the underlying status game—but also an opportunity for
the law to play a role.
In the Hobbesian society, attaining the status of a great inventor is for
suckers.170 Take a budding researcher, who daydreams about making a name for
himself by making groundbreaking discoveries in the natural world. He does not
harbor this aspiration because it is good for his financial welfare. In fact, his
relatives keep telling him that he would do better plowing the fields than the
skies. But our scholar is determined. However, despite all of his determination
and willingness to forgo more material pursuits, he is shaken by the realization
that his accomplishments will always be tentative. He will be forever exposed to
gossipmongers who can sully his good name by spreading rumors on how he
stole his best ideas from others. The scholar’s only recourse to defending his hard-
earned status might be violence or duels—and as 20-year-old French genius
Galois discovered, being a prodigal genius is quite distinct from being a good
marksman.171 Foreseeing all of this difficulty, the scholar decides to abandon the
innovation race altogether. He sets his aims at attaining status that cannot be so
easily deprived, through conspicuous consumption, the hoarding of property,
and ostentatious displays of power.
This thought experiment reveals the potential of defamation law. Vicious
rumors and false allegations, left unchecked, deprive their subjects of the fruit of
their investment. Defamation law secures the ROI in status games, by both
sanctioning the gossipmonger and compensating the subject. We know that
when judges protect property, they guard the incentive to maintain it; when they
protect contractual claims, they invite reliance and investment; and when they
deny enforcement of illegal contracts, they discourage illicit transactions.172 By
the same token, when judges extend defamation protection, they secure status
168 Snyder, Benjamin. “7 Insights from Legendary Investor Warren Buffett.” CNBC, May 1,
2017. https://www.cnbc.com/2017/05/01/7-insights-from-legendary-investor-warren-
buffett.html.
169 See generally ALAIN DE BOTTON, STATUS ANXIETY (2008) (exploring the concept).
170 It is perhaps no coincidence that Hobbes was skeptical about ‘glory’. See generally Strong,
supra note 103.
171 See PROSSER AND KEETON, supra note 126, at § 111 p. 772 (arguing that defamation law
came to replace duels and blood feuds). See also JOHN LYDE WILSON, THE CODE OF HONOR OR
RULES FOR THE GOVERNMENT OF PRINCIPALS AND SECONDS IN DUELLING 6 (1858) (“[I]n cases
where the laws … give no redress … it is needless and a waste of time to denounce the [dueling.]”);
see also STARKIE, supra note 36, at 6 (recounting a case where the plaintiff said that if he could not
expect recovery in court “he would have cut the defendant’s throat”).
172 See generally Harold Demsetz, Toward a Theory of Property Rights, 57 AM. ECON. REV.
347 (1967).
Electronic copy available at: https://ssrn.com/abstract=4021605

<<PAGE_BREAK>>

ARBEL, A STATUS THEORY OF DEFAMATION LAW 29/51
and thus promote participation in the underlying status game.173 With
defamation law in place, the Scholar will be less likely to be defamed and, even
if he will be, could recover some compensation from the offender. Conversely, if
one day the law decides that allegations of plagiarism, real or false, are beyond its
purview, then this can have a significant impact on certain intellectual status
games. What defamation law protects, it encourages; what it shuns, it
discourages.
To be sure, defamation law affects status games only on the margin. The law
is hardly the only thing that binds them together. There were status games
between Cain and Abel long before any legal system evolved.174 Still, along the
relevant margins, defamation law affects the choice of status games that
individuals play—and the intensity with which they play them.175 Not a small
feat.
Yet the standard account is seemingly oblivious to these regulatory effects. It
talks in terms of protection, not regulation. But it should be clear that by
protecting, the law also has broader behavioral effects. And it is not that modern
defamation law does not consider social effects. After all, the primary thrust of
New York Times v. Sullivan is the fear that stringent defamation standards can
chill the incentive to participate in public debates.176 What courts fail to
recognize, however, is that stringent defamation standards also secure rewards in
the underlying status game.177 It is like thinking about liability for accidents only
in terms of compensating victims and the good drivers it may deter from driving,
not considering at all how safer roads benefit drivers and pedestrians alike.
The truth is that when courts decide cases, they cannot help but play a key
role in the regulation of status games. Any time the court announces, for
example, that calling a person a “slacker” for avoiding the draft is defamatory, it
promotes status based on service to the nation.178 When the courts decide to treat
allegations of female ‘promiscuity’ in a special manner, as per-se defamatory, they
promote a status game built around chastity.179 And when courts deny the aegis
of defamation law in the case of bigoted defamation, they weaken the bonds that
hold bigoted status games together.180
173 Cf. Waldron, supra note 37, at 1605 (“A democratic republic might equally be concerned
with upholding and vindicating important aspects of legal and social status… and with protecting
that status (as a matter of public order) from being undermined by various forms of obloquy.”).
174 Genesis 4.
175 Other laws also interact with status games. See infra Part III.3.
176 New York Times Co. v. Sullivan, 376 U.S. 254, 300 (1964).
177 For a critique of the theory of the chilling of speech, see Daniel Jacob Hemel & Ariel
Porat, Free Speech and Cheap Talk, 11 J. LEGAL ANALYSIS 46 (2019); see also Arbel & Mungan,
supra note 87.
178 Choctaw Coal & Mining Co. v. Lillich, 86 So. 383, 384-85 (1920) (holding that ‘slacker’
is per se libelous as it is “unquestionably a term of the severest reproach”).
179 See infra Part III.3.
180 See infra Part III.1.
Electronic copy available at: https://ssrn.com/abstract=4021605

<<PAGE_BREAK>>

ARBEL, A STATUS THEORY OF DEFAMATION LAW 30/51
In sum, status games involve intense investment, but their rewards can be
fragile. Defamation law secures these rewards when it sanctions false allegations,
thus contributing to the integrity of status games. Any judicial decision that
either expands or contracts the scope of defamation law inevitably affects the
status games that individuals play, in terms of both the choice of which games to
play and the intensity with which individuals play them. This understanding
elucidates what judges are really doing when they decide cases; it also opens the
way to a more normative view on what judges should be doing.
3. The Judicial Role in Defamation cases
The diagnosis invites a prescription. For reasons of judicial integrity and
accountability, I believe courts must openly acknowledge that they regulate
status games when they decide defamation cases. It is what judges—and to a
lesser extent legislators—do, and recognition of this fact is necessary. Professor
Lidsky once noted that a troubling aspect of defamation doctrine today is “not
that value choices are made but rather that they are cloaked in the deceptively
neutral language of determining defamatoriness.”181 It is now time to decloak the
courts’ role in regulating status games by turning away from the obfuscatory
protection-from-harm view. Perhaps judges are not always conscious of the full
effects of their decisions, but this only means that they cannot hope to perform
their role well. Courts should openly admit the role they are playing, and have
been playing for generations, in regulating status games.182
Acknowledgment is the first step; the more ambitious one is the license to
shape defamation law’s scope on the basis of the underlying status game. In short,
courts should extend status protection when society approves of the status game
in which the status was attained, and deny protection when society views the
status game with opprobrium. If society wants to protect innovation in the
Hobbesian society, it may need to create some form of defamation law; and if it
wants to disrupt status games based on bigoted hierarchies, it should let anyone
spread rumors freely. Protection-from-harm, the center of the standard account,
is an instrument in status theory. Harm to status should only be remedied when
the claim to status is legitimate. Harm is the tail, not the dog.
This means a reconstruction of the judicial role, from protecting status to
regulating status. Robert Post had the foresight to recognize this point. He
explained that “the meaning and significance of reputation will depend upon the
kinds of social relationships that defamation law is designed to uphold.”183 But
181 Lidsky, supra note 33, at 9.
182 See, e.g., Bovard v. Am. Horse Enters., 247 Cal. Rptr. 340 (Cal. Ct. App. 1988).
183 Post, supra note 41, at 693.
Electronic copy available at: https://ssrn.com/abstract=4021605

<<PAGE_BREAK>>

ARBEL, A STATUS THEORY OF DEFAMATION LAW 31/51
his focus on fostering social relationships was left mostly unheeded.184 Perhaps
status theory can help amplify this message and guide decision-making.
4. Which Status Games are Worth Protecting?
The difficult question is not whether courts and legislators should regulate
status games, but how.
They say that the first step is admitting that you have a problem. It will be an
important first step to explicitly recognize that the hidden underbelly of
defamation law determinations is the craft of regulating status games. Such an
open admission could lead, over time, to the evolution of decision and
accountability norms. To be sure, regulation of status games is an involved
decision, but this point calls for moderation and caution as much as it does for
transparency and accountability. Thus, on its own, admitting that defamation
law is in the business of regulating status games would be the first step towards
developing a robust caselaw.
There are also some good reasons to think that a principled approach to the
regulation of status games is within reach. When a claim involves loss of status,
the next question should ascertain the origin of that status—what is the
underlying status game that gave rise to the plaintiff’s status in the first place?
Such an investigation will reveal some status games that are virtuous, many that
are of ambiguous value, and some that are clearly noxious.185 Then depending
on the nature of the status game, judges can craft the scope of protection that
best fulfills society’s goals. 186
Virtuous Status Games. Status games that are valuable can be discerned by
their positive spillovers. Scholastic status races fit well in this category, as they
lead scholars to exert themselves to become the first to discover a vaccine, observe
an important physical phenomenon, or develop a new theory. 187 A different
example comes from the Bill and Melinda Gates Foundation, a non-profit
184 Defamation law scholar David Anderson, in a road to Damascus moment, recognized the
regulatory role of defamation law. “Compensation is not the only legitimate purpose of defamation
law. Robert Post is right . . . . [the Law also aims] to enforce society’s civility norms.” David A.
Anderson, Rethinking Defamation Law, 48 ARIZ. L. REV. 1047, 1049 (1991).
185 See Congleton, supra note 3, at 182-183 (arguing that status games involving positive
externalities may need to be subsidized, while negative externalities should be met with a Pigouvian
tax); see also Huberman, Loch & Önçüler, supra note 91, at 103 (“Intrinsic status seeking by
individuals has important implications for social and economic systems because it can provide a
powerful motivation to perform; it also can lead to unproductive competitions … such as in the
overconsumption of positional goods.”).
186 See Congleton, supra note 3, at 181 (“If status-seeking activities affect only the welfare of
others in the status game, it is relatively straightforward to demonstrate that too many resources
will be invested in the quest for status.”).
187 Some ancient texts recognize the motivating force of envy on scholarship, holding that
“jealousy among teachers increases wisdom.” Talmud Bava Batra, 21a
https://www.sefaria.org/Bava_Batra.21a?lang=bi. For a skeptical account, see Brian L. Frye,
Plagiarize This Paper, 60 IDEA 294 (2020) (“[A]cademic plagiarism norms are primarily an
inefficient and illegitimate form of extra-legal academic rent-seeking that should be ignored.”).
Electronic copy available at: https://ssrn.com/abstract=4021605

<<PAGE_BREAK>>

ARBEL, A STATUS THEORY OF DEFAMATION LAW 32/51
devoted to fighting poverty, improving healthcare, and expanding access to
information technology.188 Here, the pursuit of legacy—sometimes maligned as
selfish and narcissistic—led the Gates’ to donate $36 billion dollars to help
improve the world. Status games around magnanimity and generosity of spirit
are key drivers of philanthropy everywhere. Similarly, the quest for fame
harnesses the creative energies of many individuals, directing them to use those
energies to create art that will make everyone “remember my name.”189
Ambivalent status games. Other status games are not so clearly virtuous, yet
they feature some positive elements. Through surveys, sociologists have mapped
the way individuals perceive the distribution of status among occupations.190
The distribution sometimes appears justified, other times arbitrary and even
unjust. A typical survey found that biologists (ranked at 6.9) outperform bankers
(6.1) and that barbers (4.0) outperform bartenders (3.6). The extremes are
particularly telling. On the lowest end, one finds corner street drug dealers (1.9)
and panhandlers (2.1), as well as table clearers (2.3) and the loaded category of
agricultural migrant workers (2.7). On the opposite extreme, one finds surgeons
(7.7),191 astronauts (7.4), and mayors of large cities (7.2). While some of these
allocations are sensible, others appear harsh and unfair. In fact, there are signs of
racism, ageism, and sexism in the allocation of status among occupations.192 So
there is nothing particularly compelling about the current occupational status
distribution. But as long as the idea of occupational status is not contested, courts
may want to extend defamation law’s protection in this area.
Noxious status games. The last set of status games are those that prove
pernicious due to their negative social externalities. At one point in history,
alleging that a person was a “bastard” was a matter of great offense, involving
deeply held social mores of wedlock and matrimony. 193 This view reflected what
188 BILL & MELINDA GATES FOUNDATION, https://www.gatesfoundation.org (last visited Jan.
29, 2022).
189 IRENE CARA, FAME (RSO Records 1980).
190 Tom W. Smith & Jaesok Son, Measuring Occupational Prestige on the 2012 General
Social Survey, 122 GSS METHODOLOGICAL REP. (2014), https://perma.cc/58ZW-AKV7. The
relative ranking of occupations appears fairly robust to the manner in which the question is asked.
Margaret M. Marini, Occupational and Career Mobility, ENCYCLOPEDIA SOCIO. 1989 (2d ed.
2000).
191 Worryingly, lawyers (6.4) rate below medical doctors and narrowly overtake social
scientists (6.2).
192 See, e.g., Wun Xu & Ann Leffler, Gender and Race Effects on Occupational Prestige,
Segregation, and Earnings, GENDER & SOC. 377, 383-84 (finding race and gender effects);
Michael Hout et al., Prestige and Socioeconomic Scores for the 2010 Census Codes, 124 GSS
METHODOLOGICAL REP. 13 (2016) (reporting some evidence of race and gender effects); Anthony
Lemelle, The Effects of the Intersection of Race, Gender and Educational Class on Occupational
Prestige, 26 WESTERN J. BLACK STUD. 89 (2002) (finding that “race, gender and educational class
are important in the distribution of occupational prestige”).
193 BLACKSTONE, supra note 139 at *433; Harris v. Nashville Tr. Co., 162 S.W. 584, 585
(Tenn. 1914) (holding that it is “libelous per se to charge one in print or writing with being
illegitimate”); Jerald v. Huston, 242 P. 472, 474 (Kan. 1926) (“[C]ast[ing] aspersions on a man's
pedigree … [is] slanderous per se.”).
Electronic copy available at: https://ssrn.com/abstract=4021605

<<PAGE_BREAK>>

ARBEL, A STATUS THEORY OF DEFAMATION LAW 33/51
sociologists call a “closed stratification system” where status is “ascribed” based
on one’s pedigree.194 Slowly, society moved to a more open stratification system
where status is “achieved,” meaning that status mobility was possible based on
one’s accomplishments. 195 As society opened,196 judicial attitudes towards
bastardy started changing in the 1960s, culminating in a 1997 decision, where a
court simply shrugged off such allegations as patently unimportant.197
Disputes in this area point to an underlying status game of “legitimacy,” and
it is one that modern society rejects. It joins a larger class of noxious status games
involving immutable characteristics, such as race, ethnicity, and sex.198 The task
of identifying the status game involved does not require expertise that courts lack.
In many of these cases, one does not even feel the need for an overarching status
theory to know that the underlying status games are socially venomous.
5. Regulating Status Games: Legitimacy and Institutional Capacity
Calling for courts to openly embrace their role in regulating status games
raises several objections. One objection comes from James Whitman’s analysis of
the laws of civility.199 His account suggests that American law lacks the cultural
foundations to deal with the regulation of norms of civility. Another related issue
is the law’s legitimacy in regulating status games, a deeply social phenomenon.
Finally, there is also a narrower but no less important institutional concern about
the capability of courts to intervene in status games effectively.
This section grapples with these issues. The response to the first and second
concerns is a demonstration of the depth of American law’s interest in the
regulation of status. The response to the third concern is, for the most part, an
open acknowledgment of the problem.
Let us first consider the concern that American society either lacks status
games or is disinterested in regulating them. This objection is found most
forcefully in Whitman’s influential critique of norms of civility.200 This account
holds that American law either lacks the interest or the foundation to regulate
what he calls “civility rules,” a concept that roughly maps onto status games.
194 HUGHES & KROEHLER, supra note 207, at 176-177.
195 Id.
196 Congleton suggests that the move to status on the basis of merit rather than heritage is one
of the sources of strength for capitalist societies. Congleton, supra note 3, at 188. Under this view,
the move from status to contract may be seen as a change not so much in legal technology but in
the type of status games played.
197 Levinsky's, Inc. v. Wal-Mart Stores, Inc., 127 F.3d 122, 128 (1st Cir. 1997) (“For better
or worse, our society has long since passed the stage at which the use of the word “bastard” would
occasion an investigation into the target's lineage or the cry “you pig” would prompt a probe for a
porcine pedigree.”); Bolton v. Strawbridge, 156 N.Y.S.2d 722, 723 (Sup. Ct. 1956) (“Despite
their vulgarity and profanity, the words ‘bastard’ and ‘no good’ have been held not slanderous per
se and not actionable without proof of special damage.”).
198 Society seems to tolerate allocation of status on the basis of some immutable traits, such
as beauty, intelligence, height, and physique.
199 Whitman, supra note 54.
200 See id.
Electronic copy available at: https://ssrn.com/abstract=4021605

<<PAGE_BREAK>>

ARBEL, A STATUS THEORY OF DEFAMATION LAW 34/51
According to Whitman, modern era American, German, and French cultures
have all leveled the distribution of status, motivated by an egalitarian ideal of
social equality. The difference is that German and French societies, drawing on
their aristocratic traditions, decided to level-up status—treating everyone equally
with the respect once reserved for aristocrats.201 But the U.S., which lacks these
traditions, has “leveled-down” civility and thus endorses treating everyone as a
commoner, with equal (dis)respect.202 The upshot is that “American incivility is
woven into the cloth of the American egalitarian tradition,”203 which means that
“in general, America has no law of civility.”204
If this theory only claims that there are differences in the manifestations of
civility norms or the status games played between these societies, it is obviously
true. But if the contention is that the essence of American society is “incivility,”
i.e., lacking strict rules and regulation of social behavior due to the elision of
social status differences, this is a profound error—and a harmful one at that. To
be sure, the presence of status and class in American society is not always explicit
and so it may be easy to miss. People always take their own culture to be a natural
reflection of the way things should be.205 This is especially true in the context of
American culture, which is said to deem taboo the acknowledgment of class and
status differences.206 But as sociologists universally recognize, civility norms are
dyed in the wool of American society,207 and the law is hardly disinterested in
the regulation of status games.
When I first immigrated to the United States, I found myself hurtling at an
invisible wall of civility rules and status games. Each person was carrying around
them an invisible perimeter of space that belonged to them—their ‘personal
space’—and while everybody knew the metes and bounds of each person’s
perimeter, I did not. 208 Worse, the dimension of the invisible perimeter changes
201 Whitman contrasts American law in particular with the German doctrine of insult, which
gives rise to an action for simply showing disrespect. See generally id. at 1297.
202 See id. at 1387-90.
203 See id. at 1398.
204 See id. at 1384.
205 See, e.g., DAVID GRAEBER, DEBT: THE FIRST 5000 YEARS, 122 (2012) (“Consider the
custom, in American society, of constantly saying "please" and "thank you." To do so is often
treated as basic morality … but [based on comparative cultural analysis] it is not.”).
206 Joan C. Williams, Marina Multhaup, & Sky Mihyalo, Why Companies Should Add Class
to Their Diversity Discussions, Harv. Bus. Rev. (Sept 5, 2018) (“[I]n the United States, talking
about class is taboo”).
207 See MICHAEL HUGHES & CAROLYN J. KROEHLER, SOCIOLOGY: THE CORE 177 (2011)
(“The United States is founded neither on the idea that all people should enjoy equal status nor
on the notion of a classless society.”); see also GRAEBER, supra note 205, at 122-24 (arguing that it
is American middle-class behavior that treats everyone with “feudal deference”).
208 See Agnieszka Sorokowka et al., Preferred Interpersonal Distances: A Global Comparison,
48 J. CROSS-CULTURAL PSYCH. 577 (2017) (reporting the preferred interpersonal distances in a
survey of 42 countries).
Electronic copy available at: https://ssrn.com/abstract=4021605

<<PAGE_BREAK>>

ARBEL, A STATUS THEORY OF DEFAMATION LAW 35/51
based on one’s gender, age, and social status.209 You wouldn’t stand as close to
your boss or teacher as you would with a classmate, but I did. And how about
the rules that dictate how and when you can interject in your interlocutor’s
speech? The rules are not written anywhere, but as someone who still unwittingly
breaks them, I assure you that they exist.210 Time norms are another sore topic,
for someone from a culture who has a different set of rules on timeliness. The
idea that American society is somehow ‘incivil’ at its core thus appears far-
fetched.
Status norms are not only everywhere in the United States, they are also
hierarchical and not leveled by any measure. A working-class person goes to the
beach; a high-class person summers at “the Vineyard.” The CEO can approach
the frontline employee, tap them on the shoulder, and say “good work”—but
the worker may not return the favor after a positive earnings call. Between the
person who repairs your car and the person who repairs your body, you can only
“Hi, man” one of them.
Paul Fussell catalogs class differences in the 1980s that still feel mordant
today.211 Working-class Americans are fans of Football, middle-upper class
Americans follow tennis and golf; one class wears clothes with conspicuous brand
names plastered on them, the higher class finds such behavior ‘tacky’; one class
finds the possessive apostrophe redundant in communication, the other finds
mixing ‘its’ and ‘it’s’ to be an affront against all that is sacred in this world.212
The empirically minded could gauge a town’s class, Fussell argues, by measuring
its bowling-alleys-per-capita.213 What defines status games in the United States
is not their absence, but the pretense of their absence— the ethos of having
abolished class and status in favor of merit and mobility.
Any fair observer of social life in America is bound to conclude that status
permeates society even large parts of the legal system.214 It takes willpower to
resist the call of cultural Marxism to construe the sustained insistence that
“America has no law of civility”215 as being itself a mark of class and class
ideology. The legal system (or state apparatus, to those lacking willpower) takes
civility with great solemnity. There is, after all, an entire branch of government
that dresses its members in special regalia, insists on referring to them as your
209 Ann Leffler et al., The Effects of Status Differentiation on Nonverbal Behavior, 45 SOCIAL
PSYCHOLOGY Q. 153, 154 (1982) (Summarizing research showing that “persons of higher status
have more and better [personal] space for their use than do persons of lower status”).
210 Id. at 159 (finding that status differences predict speech interruptions).
211 See generally FUSELL, supra note 5. For a review and discussion, see Scott Siskind, Book
Review: Fussell on Class, ASTRAL CODEX TEN, https://perma.cc/W9M2-U3F4.
212 FUSELL, supra note 5, 114-16.
213 Id.
214 Nestor M. Davidson, Property and Relative Status, 107 MICH. L. REV. 757, 812 (2009)
(noting that “law both reinforces and undermines property's hierarchical signaling” and the
“intimate involvement of the state in what might at a remove seem a private dynamic”).
215 See id. at 1384.
Electronic copy available at: https://ssrn.com/abstract=4021605

<<PAGE_BREAK>>

ARBEL, A STATUS THEORY OF DEFAMATION LAW 36/51
honor, and makes the expression of contempt towards them a criminal offense.
In 2020, a Rhode Island man discovered these civility laws; when the judge read
his judgment, he impolitely said, “that’s bullshit”—to which the judge
responded by condemning him to three years in prison.216
Beyond the judicial branch, buried in history are numerous attempts to
regulate away unwanted status games such as honor duels,217 blood feuds,
potlatch traditions, and, more contemporarily, street racing.218 Sometimes the
law is invoked not to outlaw status games, but to moderate them. The use of tax
law often exemplifies this.219 Between 1990 and 2002 a luxury tax was applied
to yachts, jewelry, expensive furs, and private jet planes.220 The idea, owing to
John Stuart Mill, was that if these goods are purchased because they are
expensive, no harm will befall society from taxing them.221 Tellingly, the
regulation of status games is selective; higher education was not taxed, despite
the surge in costs.222 While Congress has since abandoned the luxury tax, some
216 In re Lamontagne, 228 A.3d 631 (R.I. 2020) (remanding for resentencing and finding a
sentence of more than six months excessive); see also People v. Sweat, 23 N.E.3d 955 (N.Y. 2014)
(“[A] court may hold a person in criminal contempt for … contemptuous, or insolent behavior”
that may “impair the respect due to [the court’s] authority.”).
217 Weber notes that in Germany, army officers were legally required to participate in duels
even though the criminal code prohibited this practice. MAX WEBER, ECONOMY AND SOCIETY: AN
OUTLINE OF INTERPRETATIVE SOCIOLOGY, 318 (1968). See also Hassani Mahmooei et al.,
Dueling for Honor and Identity Economics, MUNICH PERSONAL REPEC ARCHIVE (Jul. 30, 2012),
https://perma.cc/27MC-58ZH (arguing that duels served an organizing social function and
emerged within the aristocracy, but became a middle-class institution in France and Germany).
218 Congleton, supra note 3, at 183 (discussing potlatch). The potlatch serves as a cautionary
tale because many think it insidious to impose European values on indigenous people.
219 On the idea of Pigouvian taxes and subsidies on status games, see Congleton, supra note
3, at 182-183; David Jinkins, Conspicuous Consumption in the United States and China, 127 J.
ECON. BEHAV. & ORG. 115 (2016) (“Luxury taxes on … conspicuous goods skew consumption
back toward the no-signaling optimum.”). One study finds that status-driven concerns lead to
excessive consumption and under-saving. Nick Feltovich & Ourega-Zoe Ejebu, Do Positional
Goods Inhibit Saving? Evidence from a Life-Cycle Experiment, 107 J. ECON. BEHAV. & ORG. 440
(2014).
220 Omnibus Budget Reconciliation Act of 1990 Pub. L. No. 101–508, 104 Stat. 1388
(1990), 42 U.S.C. § 1396 (1990). The scope of the tax changed throughout this period. On the
reaction to the tax, see, e.g., Kevin E. Cullinane, The Bush Budget: Luxury Tax is a Luxury Nation
Cannot Afford, Industries Say, L.A. TIMES (Jan. 31, 1992 12:00 AM),
https://www.latimes.com/archives/la-xpm-1992-01-31-fi-1159-
story.html#:~:text=In%20his%201993%20annual%20budget,was%20proposed%20for%20thos
e%20goods.
221 5 JOHN S. MILL, PRINCIPLES OF POLITICAL ECONOMY WITH SOME OF THEIR
APPLICATIONS TO SOCIAL PHILOSOPHY, ch. 6, pt. 7 (1848). For an alternative view of the luxury
tax, see Joseph Bankman & David A. Weisbach, The Superiority of an Ideal Consumption Tax
over an Ideal Income Tax, 58 STAN. L. REV. 1413, 1428 (2006).
222 Higher education is not only a status good, but it is hard to ignore the status qualities of
“being educated.” On costs, see https://research.collegeboard.org/trends/college-pricing/figures-
tables/growth-in-published-charges.
Electronic copy available at: https://ssrn.com/abstract=4021605

<<PAGE_BREAK>>

ARBEL, A STATUS THEORY OF DEFAMATION LAW 37/51
states still employ a “mansion” tax on luxury homes,223 and similar taxation is
common around the world.224
There are other status games that the law wants to encourage. and one way of
doing it is gatekeeping who can claim status. A particularly clear demonstration
comes from the Stolen Valor Act—an attempt to regulate status by rationing its
allocation only to war heroes.225 The Supreme Court struck down its original
version on First Amendment grounds, but Congress has shown incredible vigor
and rare unanimity in passing a revised (albeit weaker) version.226 Or consider
the 1978 Act designating the exclusive right to use the word “Olympic” to the
United States Olympic Committee (USOC).227 When a California non-profit
sought to promote awareness to gay rights by organizing an event called the “Gay
Olympic Games,” the USOC objected. The case reached the Supreme Court,
which approved limiting freedom of speech to foster status exclusivity.228
And, of course, trademark law is a central locus of status regulation. While
the law has various functions—prevention of confusion chief among them229—
it is hard to understand other parts without invoking notions of status games.
Consider the post-sale confusion doctrine, which has little to do with confusion
and a lot to do with status dilution.230 This doctrine applies to a situation where
a competitor sells counterfeit items to buyers who know (and are thus not
confused) that they are purchasing a counterfeit at a presumably lower price.231
This doctrine fights such sales because of concern with status:232 If they can
afford a nice Rolex, why should we buy one?233
223 Michael Leachman & Samantha Waxman, State “Mansion Taxes” on Very Expensive
Homes, CENTER ON BUDGET AND POLICY PRIORITIES (Oct. 1, 2019)
https://www.cbpp.org/research/state-budget-and-tax/state-mansion-taxes-on-very-expensive-
homes.
224 Nadine Schmidt & Sheena McKenzie, Tampons Will No Longer be Taxed as Luxury
Items After Landmark German Vote, CNN: WORLD (Nov. 8, 2019, 4:24 AM),
https://www.cnn.com/2019/11/08/europe/tampon-tax-germany-luxury-item-grm-
intl/index.html.
225 18 U.S.C § 704 (2006).
226 U.S. v. Alvarez, 567 U.S. 709, 737 (2012). Stolen Valor Act of 2013 (Pub.L. 113–12)
(passed unanimously in the senate and 390-3 in the House), https://perma.cc/9SET-L2V7.
227 Amateur Sports Act of 1978, Pub. L. No. 95-606, 92 Stat. 3045 (1978).
228 San Francisco Arts & Athletics v. U.S. Olympic Comm., 483 U.S. 522, 539 (1987)
(“[M]uch of the word's value comes from its limited use.”).
229 15 U.S.C. § 1066 (2018).
230 See United States. v. Gillette Co., 828 F. Supp. 78, 80-82 (D.D.C. 1993); Mark P.
McKenna, A Consumer Decision-Making Theory of Trademark Law, 98 VA. L. REV. 67, 104
(2012). On the history of the doctrine, see Connie D. Powell, We All Know It’s a Knock Off -
Re-Evaluating the Need for the Post-Sale Confusion Doctrine in Trademark Law, 14 N.C. J.L.
TECH. 1, 17-24 (2012).
231 See Irina D. Manta, Hedonic Harms, 11 OHIO ST. L.J. 241, 268-69 (2013).
232 See, e.g., Rolex Watch U.S.A. v. Canner, 645 F. Supp. 484, 493, 495 (S.D. Fla. 1986)
(offering a mixed reputation and status based rationale for the doctrine).
233 Id. at 495; see also Hermes Int’l v. Lederer de Paris Fifth Ave., Inc., 219 F.3d 104 (2d Cir.
2000) (describing the harm as individuals “achieving the status of owning the genuine article at a
Electronic copy available at: https://ssrn.com/abstract=4021605

<<PAGE_BREAK>>

ARBEL, A STATUS THEORY OF DEFAMATION LAW 38/51
As these examples illustrate, American law is brimming with status concerns
which reflect a deep cultural interest in status games.234 Indeed, status is so deeply
embedded in the American system that some believe the law should intervene to
shelter individuals from status games. As Martha Nusbaum argues: 235
Social groups will continue to inflict shame on others with or
without the cooperation of the law, so the law needs to do more
than simply refuse to join in this behavior. It should actively
protect the individual who may want a place of retreat from the
shame that inevitably will continue to attach to unusual people
and behavior.
Seeing the deep involvement of the law in status games helps assuage concerns
of legitimacy. But it does leave open the question of capacity—how capable are
sitting judges and legislators of making good determinations on the regulation
of status games? This is a larger question, and it involves not just technical
expertise but also questions of ideology. My personal view is that courts and
legislators should make such determinations cautiously and rarely—but I think
this question requires much deeper analysis than the present scope allows. What
matters most, I think, is that judges are already making such determinations
when they determine defamation law cases and that there is no divorcing case
outcomes from the regulation of status games.
***
The social drama associated with loss of status, insult, and humiliation has
captivated audiences throughout human history. This drama, inherent to any
defamation lawsuit, can easily distract us and make us lose sight of broader
considerations, mainly, the status games that produced the lost status and whose
preservation is now at stake. When we turn our attention to these status games,
we see that American law has a keen interest in them, although it tends to do so
in a particularly American fashion—focusing on commercial trademarks and
military valor. The investigation revealed that not only are status claims
implicated in all defamation lawsuits, but also that the law proactively maintains
some and dismantles others.
The recognition that defamation law is enlisted to stabilize and destabilize
status games opens the way to new defamation law jurisprudence. In the new
jurisprudence, judges openly confront the underlying status game and ask
whether it is one worth preserving. If so, judges perhaps question whether more
knockoff price”). See also Jeremy N. Sheff, Veblen Brands, 96 MINN. L. REV. 769, 790-804 (2012)
(discussing Kal Raustiala & Christopher J. Sprigman, Rethinking Post-Sale Confusion, 108
TRADEMARK REP. (2018) (noting the framing of the doctrine in “consumers’ generalized desire for
exclusivity and specialness”).
234 For a comprehensive analysis, see Richard H. McAdams, Relative Preferences, 102 YALE
L.J. 1 (1992).
235 MARTHA C. NUSSBAUM, HIDING FROM HUMANITY: DISGUST, SHAME, AND THE LAW 297
(2004).
Electronic copy available at: https://ssrn.com/abstract=4021605

<<PAGE_BREAK>>

ARBEL, A STATUS THEORY OF DEFAMATION LAW 39/51
zealous protection is actually needed. If it is a noxious status game, judges would
explicitly refuse to lend it any protection. Large legal pivots in light of changing
mores are especially apt to legislative determination, and legislators may come to
play a larger role in the new jurisprudence. Status theory and the evolving
jurisprudence around it is not just an abstract way of thinking about defamation
law, it directly contributes to the decisions courts and legislators make in specific
cases. Demonstrating this claim is the task of the following Part.
CASE STUDIES
1. Racist and Bigoted Speech
One of the deepest quagmires of defamation doctrine is that of bigoted
defamation. This category contains such allegations as asserting that a Christian
person is a Jew, that a white person is of a different race, that a straight person is
gay, or that a cisgender person is transgender.236 These cases feature a plaintiff
who claims that these allegations are false and that they have impugned her social
standing within her bigoted community; thus, she seeks recompense for the harm
she suffered.
Such claims are deeply disturbing: a person sues so they can continue to keep
a privilege that results from a social hierarchy that humiliates others. Yet lawsuits
in this fashion are frequently made, presenting a vexing problem to the standard
view of defamation law that portrays defamation law as simply reacting to and
redressing harm. If harm to social standing is all there is, then it is difficult to
deny that bigoted statements cause a person to lose their (illegitimate) standing
within a bigoted community—indeed, the bigoted accusation was probably
made for that reason.
This reasoning emboldened courts to find defamation in a host of
problematic cases, such as when a straight person was called gay,237 or when a
white person was alleged to be black.238 Worse, if judges are seen as simply
reacting to harm—rather than enforcing social norms of behavior—they evade
accountability for the implications of their decisions. As noted earlier, Judges
were actively portraying themselves as disinterested social scientists who make
236 See generally John Watson, Defamation by a Racial Misidentification: A Study of the
Social Tort, 4 RUTGERS RACE & L. REV. 77 (2002).
237 See generally Anthony Michael Kreis, Lawrence Meets Libel: Squaring Constitutional
Norms with Sexual-Orientation Defamation, 122 Yale L.J. Forum 125, 128 (2012). See also
Lidsky, supra note 33 (“Courts have been slow to embrace a progressive view by declaring that an
allegation of homosexuality cannot be libelous.”).
238 See, e.g., Eden v. Legare 1 S.C.L. 68, 1 Bay 171, at 71 (1791) (finding that allegation that
a white person is black is “calculated to inflict injury”); Bowen v. Independent Pub. Co., 96 S.E.2d
564 (S.C. 1957); Stultz v. Cousins, 242 F. 794 (6th Cir. 1917) (holding that it was libelous to
allege that a white man was black). See generally John C. Watson, Defamation by a Racial
Misidentification: A Study of the Social Tort, 4 RUTGERS RACE & L. REV. 77, 104 (2002).
Electronic copy available at: https://ssrn.com/abstract=4021605

<<PAGE_BREAK>>

ARBEL, A STATUS THEORY OF DEFAMATION LAW 40/51
“objective” determinations of harm, factual determinations that led them to the
‘inevitable’ conclusion that belonging to an ethnic group is defamatory.239
Fortunately, courts are increasingly pivoting away from their old positions.240
This development is tempered by a pernicious compromise compelled by the
standard model of reaction to harm: court can avoid a finding of defamation
only by engaging in the subterfuge that society abolished bigotry.241
The logical chain leading to such artifice starts and ends with the issue of
harm. The problem in bigoted defamation cases is that bigoted statements to
bigoted communities do cause harm—it is the very definition of a bigoted
community. When courts decided they wanted to circumvent a finding of
defamation, the only route they thought was open to them was to deny the
existence of this harm. Courts did so by limiting the scope of the audience,
focusing not on the actual, relevant audience, but on “right-thinking” parts of
society or a “substantial and respectable minority” to the exclusion of bigoted
groups.242 Courts realized, however, that even this measure may lead to
unwanted conclusions: to this day, there are non-negligible parts of society that
are bigoted yet enjoy social esteem. Thus, courts had to stretch the ‘finding’ of
harm further, and hold that evidence for what these “right-thinking” people
actually think is not a matter for factual determination, but rather, one of judicial
intuition.243 Armed with this double artifice, courts were able to ‘find’ that a
statement that a woman “would do anything for five dollars” did not impute
unchastity in 1956,244 or that a derogatory term hurtled at an alleged gay man
ceased being derogatory in 1977.245 If concluding that there is nothing
defamatory in belonging to a specific race or ethnicity requires erasing bigotry
and invalidating the experiences of those marginalized by bigoted
communities—well, this is a serious issue for the legal system.
Scholars wrestled with these tensions. In an insightful early article,
defamation law scholar Lyrissa Lidsky suggested to resolve the tensions by
dividing the investigation into an objective, empirical determination of harm
239 See supra note 27
240 See, e.g., Mitchell v. Tribune, 99 N.E. 2d 397 (Ill. App. Ct. 1951) (holding that it was
not libelous to refer to a white man as black); Thomason v. Time-Journal, Inc., 379 S.E.2d 551
(Ga. App. 1989); Jay Barth, Is False Imputation of Being Gay, Lesbian, or Bisexual Still
Defamatory? The Arkansas Case, 34 U. ARK. LITTLE ROCK L. REV. 527, 528 (2012) (“In recent
years, however, courts have become conflicted on whether a false imputation of a person as LGB
is defamatory.”).
241 Lidsky, supra note 33, at 10 (“The resulting subterfuge is a natural outgrowth of an inquiry
that has little to do with actual harm and even less to do with the actual community segment whose
opinion the plaintiff values.”).
242 Id. at 7.
243 Id. at 8 (“[C]ourts rely on their own intuitive judgments about who constitutes the relevant
community, what values that community shares, and whether those values are respectable.”).
244 Bolton v. Strawbridge, 156 N.Y.S.2d 722, 724 (Sup. Ct. Westchester Co. 1956).
245 Moricoli v. Schwartz, 361 N.E.2d 74, 76 (Ill. App. Ct. 1977). Illinois was indeed the first
state to decriminalize sodomy, in 1961. See generally Kreis, supra note 237, at 125.
Electronic copy available at: https://ssrn.com/abstract=4021605

<<PAGE_BREAK>>

ARBEL, A STATUS THEORY OF DEFAMATION LAW 41/51
within a community, and an explicitly normative element: choosing a specific
community whose opinions matter. 246 Making the normative step explicit, she
argued, would “reinforce[] defamation’s symbolic role in the definition,
affirmation, and enforcement of community values in America.”247 In a later
article, Lidsky explains that this requires an evaluation of the reaction of a
“rational” audience, rather than the actual audience.248 In contrast, David Han
argued that courts should focus on the empirical element and predict how a
“targeted audience will likely process the speech, rather than on a strong
normative view of how an idealized ‘rational audience’ should process the
speech.”249
Their differences aside, these scholars both compellingly argue that there is
something deeply artificial about courts using a harm-based standard while
ignoring evidence of actual harm.250 Both of these accounts, however, still rely
on a reactionary, harm-centered approach. While they offer plausible solutions
to the problems of harm from bigoted speech within the existing framework,
status theory offers a direct approach that avoids the problem altogether. Under
the status approach, the question posed in bigoted speech cases is not whether,
as a matter of fact, a given community would judge a person negatively based on
their race. It is also not about whether the communities that view gay individuals
in a negative light are ‘substantial’, ‘respectable,’ or ‘rational’—intolerance to
LGBTQs is still a live issue, only recently starting to retreat from the mainstream.
What matters, instead, is the nexus between defamation lawsuits and status
games. When the plaintiff prevails in a defamation lawsuit, she receives money
damages which allow her to recoup her investment in status attainment. The
shadow of such payments deters would-be defamers from making false
allegations. The lawsuit also vindicates the plaintiff’s good name, alerting other
players in the status game as to whether her claim to status is rightful or not. On
the flip side, when a court denies the ability to bring defamation lawsuits, it
disrupts the status game. The denial makes it harder to know who claims status
honestly, and easier to make unfounded claims.
The solution to bigoted defamation is plain: disrupt the underlying racial
status game by denying defamation protection. If an individual suffers harm to
a status privilege in a racial status game, feigning that harm does not ‘really’ exist
is counterproductive. It is exactly because a harm exists that the status game is
worrisome. Courts of law should openly acknowledge that the claim is
246 Id. at 48.
247 Id. at 49.
248 See Lyrissa B. Lidsky, Nobody's Fools: The Rational Audience as First Amendment Ideal,
2010 U. Ill. L. Rev. 799 (2010).
249 David Han, The Mechanics of First Amendment Audience Analysis, WM. & MARY L.
REV. 1647, 1653 (2014).
250 Lidsky, supra note 248, at 838-49 (explaining why focusing on actual audiences rather
than “rational” audiences can result in various democratic harms).
Electronic copy available at: https://ssrn.com/abstract=4021605

<<PAGE_BREAK>>

ARBEL, A STATUS THEORY OF DEFAMATION LAW 42/51
illegitimate because it arises out of a status game that the court will not reinforce,
legitimize, or even ignore.251 Courts should pointedly say: we reject bigoted
status games.252
Such a principled holding would communicate to members of bigoted
communities that not only are ethno-racial status games illicit, but their gains
are also fleeting. When participating in such status competitions, members of the
majority often confront the threat that some rumor would undermine the
‘purity’ of their pedigree. With defamation law, they can deter such rumors and,
once made, they can enlist the legal system to publicly disprove them, thus
vindicating their claim to privilege. Without defamation law, however, majority
members will find their gains tentative and unprotected, because they are always
a rumor away from being challenged. Shrinking defamation law would work,
then, to destabilize the status game for majority members. At the same time,
shrinking defamation law’s reach would a blessing for minority members. After
all, defamation law was never available to them. This is because in their case, a
public statement about their identity would never be granted the protection of
defamation law—no matter how harmful within his bigoted community, a
public allegation that a gay man is gay cannot be defamatory if it is true.253
2. Collaborators & Snitches
Law enforcement requires the assistance of collaborators, but, in some parts
of society, cooperating with the government carries a social stigma.254 This gives
rise to an interesting dilemma in defamation law jurisprudence.
Take, for example, the Saunders case.255 There, a local TV station reported
that the plaintiff, an inmate, was an FBI informant. Saunders sued for
defamation, alleging harm to his social standing among his community of
inmates which caused him “physical and mental damage.”256 If the lawsuit was a
matter of negligent exposure to bodily harm or intentional infliction of
emotional harm, the matter would not be so problematic. But as the lawsuit was
brought in defamation, the court faced a palpable conundrum. Holding that
cooperation with law enforcement is a source of humiliation sends the wrong
message. But it is also hard to deny the fact that the plaintiff suffered real harm
within his community—a fact that the Saunders court reluctantly recognized.
251 It should be obvious that tort law, and defamation law in particular, cannot completely
eradicate status games. Their modest goal is only to increase the fragility of them.
252 See Richard Delgado, Words that Wound: A Tort Action for Racial Insults, Epithets, and
Name-Calling, 17 Harv. CIV. RTS.-CIV. LIBERTIES L. REV. 133, 140-41 (1982) (noting the
harmful social effects of racial stigmatization). I am unable to address here status games that involve
falsely passing as a member of a minority group, but the criteria developed here offers a clue.
253 Other laws may be available in such scenarios—intentional infliction of emotional harm
is a prominent example. But such laws remain unaffected by the scope of defamation law.
254 See generally ALEXANDRA NATAPOFF, SNITCHING: CRIMINAL INFORMANTS AND THE
EROSION OF AMERICAN JUSTICE (2009).
255 Saunders v. Bd. of Dirs., WHYY-TV (Channel 12), 382 A.2d 257 (Del. Super. Ct. 1978).
256 Id. at 258.
Electronic copy available at: https://ssrn.com/abstract=4021605

<<PAGE_BREAK>>

ARBEL, A STATUS THEORY OF DEFAMATION LAW 43/51
The court’s holding in the Saunders case involved a maneuver that should be
familiar by now. The court said that the “opprobrium” suffered by the informant
was insufficient because its effect was confined only to a “limited community in
which attitudes and social values may depart substantially from those generally
prevailing which an action for defamation is designed to protect.”257 Thus, the
court rejected the plaintiff’s claim. The problem is that the reactionary
protection-from-harm view has no problem protecting other minority views only
held by small communities.258 In Air Wisconsin Airlines v. Hoeper, for example,
the Supreme Court found that the statement that the plaintiff “was an FFDO
who may be armed,” was defamatory in the eyes of the “reasonable TSA
officer”—hardly a large segment of the population.259 There is also nothing that
hangs on the divergence of values within a small community. Courts were willing
to find defamation even though the defamatory statement was only offensive
within the sub-ethnic community of Vietnamese immigrants.260
What the court should have done in the Saunders case is radically
straightforward. Rather than employing the condescending criteria that inmates
are not “right-thinking individuals,”261 the court should have said that it
recognizes that some communities play status games around contempt for law
enforcement and fidelity to violent organizations. Consistent with the analysis
above,262 the court does not endorse such status games, and so it refuses to lend
defamation’s law protection to status claims resulting from these games. To an
extent, such a decision can destabilize status pursuits in these illicit status games,
and it is therefore justified.
257 Id. at 259. See also RESTATEMENT OF TORTS, supra note 7, at § 559 (defamation, even in
the eyes of “a substantial group is not enough if the group is one whose standards are … anti-
social”).
258 PROSSER AND KEETON, §111, at 777 ("[A] plaintiff may suffer real damage if he is lowered
in the esteem of any substantial and respectable group, even though it may be quite a small
minority."). Courts have also held that a statement which only hints at the identity of the plaintiff
is still defamatory, as long as there are “some who reasonably” identify the plaintiff. SMOLLA, supra
note 127, at § 4:44.
259 See Air Wisconsin Airlines Corp. v. Hoeper. See also David S. Ardia, Reputation in a
Networked World: Revisiting the Social Foundations of Defamation Law, 45 HARV. CIV. RTS.-
CIV .LIBERTIES L. REV. 261, 283 (2010) (arguing that defamation law is primarily concerned with
“the impact of the statement on those who make up the plaintiff’s community.”); PROSSER AND
KEETON., supra note 126.
260 Clay Calvert, Difficulties and Dilemmas Regarding Defamatory Meaning in Ethnic
Micro-Communities: Accusations of Communism, Then and Now, 54 U. LOUISVILLE L. Rev. 1
(2016).
261 In Connelly v. McKay, 176 Misc. 685, 28 N.Y.S.2d 327 (N.Y. Misc. 1941) the court
ignored the views of interstate truck drivers, who shunned a service station managed by the plaintiff
who was alleged to have been an informant for the Interstate Commerce Commission.
262 See supra Part II.4.
Electronic copy available at: https://ssrn.com/abstract=4021605

<<PAGE_BREAK>>

ARBEL, A STATUS THEORY OF DEFAMATION LAW 44/51
3. Female Sexual Autonomy
The last case study involves allegations that a woman is unchaste. According
to modern doctrine, allegations that a woman is “promiscuous” are so harmful
that they belong in a special category of “per se” defamatory statements.263 Per
se defamation means that harm to reputation is assumed, relieving the plaintiff
of a significant hurdle. A modern reader would likely be puzzled why this rule’s
existence and its special application to women. Because jurists are used to
thinking about defamation law through the prism of harm prevention, rather
than the regulation of social norms, they might be tempted to use this logic here
as well. Indeed, Prosser himself argued that this rule simply reflects harm
differentials: “Such a rule never has been applied to a man, since the damage to
his reputation is assumed not to be as great.”264 On close examination, however,
the reactionary model conceals a far more troubling reality.
The first sign of trouble was noted by Post, who showed that Prosser’s logic
is incongruous with the fact that the presumption of harm to women is
irrebuttable.265 It is one thing to say that harm to social standing is hard to prove,
it is entirely another to say that it cannot be proven not to exist.
A second sign comes from the rule’s history. While female chastity was a
central theme of 18th century England,266 it did not emerge at its moment of
zenith. Rather, it only emerged a century later267—and by a special act of
Parliament, no less268—when chastity concerns (and with them, good name
harms) have started declining.
263 RESTATEMENT (SECOND) OF TORTS § 574 (1977). For some modern examples, see Bryson
v. News Am. Publications, Inc., 174 Ill. 2d 77, 94, (Ill. 1996) (holding that an article referring to
the female plaintiff a “slut” was per-se defamatory); Doe v. Simone, No. CIV.A. 12-5825, 2013
WL 3772532, at *5 (D.N.J. July 17, 2013) (accusations that the female plaintiff was a “slut,” the
“queen of sluts,” and a “whore.”); Walia v. Vivek Purmasir & Assocs., Inc., 160 F. Supp. 2d 380,
394–95 (E.D.N.Y. 2000) (holding as slander per-se the defendant’s statement that the female
plaintiff was a “whore” and a “slut”).
264 PROSSER, supra note 10, at 760; see also Sexton v. Todd, Ohio (Wright) 316, 320-21
(1833) (“[An allegation of sexual impropriety] is vastly more injurious to a female than to our
sex.”).
265See Post, supra note 41 (“The fact that the presumption of general damages is
irrebuttable is inexplicable from the standpoint of the concept of reputation as property.”).
266 See Soile Ylivuori, Rethinking Female Chastity and Gentlewomen’s Honour in
Eighteenth-Century England, 59 HISTORICAL J. 71 (2016).
267 The common law before then did not consider allegations of unchastity to be slanderous
per se. PROSSER AND KEETON, supra note 126, at § 92. However, “[b]y the late 1800s the vast
majority of states had responded to the proliferation of sexual slander suits by designating
statements that impugned a woman’s chastity to be slander per se.” LISA PRUITT, HER OWN GOOD
NAME 4 (2004). See, e.g., Ala. Code § 7359 (1923) (cited in Marion v. Davis, 114 So. 357, 358
(Ala. 1927) and Note, Bases of Slander Per Se in Ohio: Comments, 15 OHIO STATE L.J. 312, 322-
323 (1954)).
268 In Roberts v. Roberts, 122 Eng. Rep. 874 (1864), a man told the plaintiff’s husband that
she was “as great a whore as any in the town of Liverpool.” Lord Cockburn C.J. lamented that he
could provide no remedy absent a showing of special damages, decrying the law as “cruel.” This
Electronic copy available at: https://ssrn.com/abstract=4021605

<<PAGE_BREAK>>

ARBEL, A STATUS THEORY OF DEFAMATION LAW 45/51
The harm perspective cannot explain the rule’s scope, its emergence at a
specific point in time, and the need to use special legislation. But status analysis
provides a considerably more viable explanation. As would be clear to most
modern readers, the underlying status game played in chastity defamation cases
is a sexist status game of ‘purity’, whereby a woman’s status is gained or lost
through exercise of her sexual autonomy.269 This mainstream 18th century status
game faced new challenges in the 19th century, as women started entering the
labor market and were starting to reevaluate their social fetters.270 The hypothesis
would be, then, that Parliament realized that it could breath life into this status
game by reinforcing it through defamation law: making it expensive to impugn
a chaste woman’s name, and cheap to besmirch a ‘promiscuous’ woman. It was
now easier than ever to distinguish oneself based on one’s sexual history, and
‘innocent’ women could easily claim the law’s protection. If true, this explains
why the per se rule only emerged after the status game’s zenith, band then only
by special legislative intervention. This is not to say that any of this was
conscious, but as Professor Pruitt notes, “Nineteenth-century legal rules around
sexual slander thus had unfortunate consequences for women, reinforcing the
social significance of their sexual virtue.”271
This perspective also allows us to rethink a seemingly progressive reform in
the Second Restatement of Torts. As an attempt to make the rule more modern,
the drafters restated it in a gender-neutral fashion,272 winning the praise of
was resolved with the enactment of the Slander of Women Act 54 & 55 Vict c. 51. See generally
LAURENCE H. ELDREDGE, THE LAW OF DEFAMATION 118-19 (1978).
269 Rejent v. Liberation Publ’n, Inc., 197 A.D.2d 240, 245 (N.Y. App. Div. 1994) (“[T]he
notion that while the imputation of sexual immorality to a woman is defamatory per se, but is not
so with respect to a man, has no place in modern jurisprudence.”); SMOLLA, supra note 127, at §
7.05[5] at 7–11, 7–12 (noting that this rule is “quite blatantly sexist and discriminatory, and is
based on outmoded assumptions about sexual behavior”). See generally Wendy N. Hess, Slut-
Shaming in the Workplace: Sexual Rumors & Hostile Environment Claims, 40 N.Y.U. REV. L. &
SOC. CHANGE 581 (2016) (exploring the social double-standard regarding male and female
sexuality). The concept of chastity is far more nuanced than engagement in sexual activity. See
generally Ylivuori, supra note 266.
270 For a critique of these laws, see Lisa R. Pruitt, Her Own Good Name: Two Centuries of
Talk about Chastity, 63 MD. L. REV. 401, 404 (2004). (“[T]he law’s adjudication of [per-se
defamation lawsuits for lack of chastity] has been negative in its reinforcement of society’s
expectations regarding women’s sexual behavior.”).
271 Lisa R. Pruitt, “On the Chastity of Women All Property in the World Depends”: Injury
from Sexual Slander in the Nineteenth Century, 78 IND. L.J. 965, 1015 (2003). Anthony Kreis
criticizes courts that treated allegations of homosexuality as per-se defamatory as being stigmatizing
and inconsistent with substantive due process. Kreis, supra note 237, at 128.
272 RESTATEMENT (SECOND) OF TORTS § 574 (AM. L. INST. 1977). Cf. RESTATEMENT
(FIRST) OF TORTS §574 (AM. L. INST. 1938) (“One who falsely and without a privilege to do so,
publishes a slander which imputes to a woman unchastity is liable to her.”).
Courts have applied this rule to men as well. See, e.g., Sullivan v. Malta Park, 156 So. 3d
1200, 1213 (La. Ct. App. 2014) (holding that the allegation of an extra-marital affair, directed at
a man, was per se defamatory). All cases found that cite to § 574 which are applied to men do not
concern sexual promiscuity in general, only adultery.
Electronic copy available at: https://ssrn.com/abstract=4021605

<<PAGE_BREAK>>

ARBEL, A STATUS THEORY OF DEFAMATION LAW 46/51
commentators for the progressive stance.273 Never mind the fact that this rule is
almost never applied to men,274 the critical point here is that the rule itself should
be abolished. The problem is not with its inequal application, but the chastity
status game itself. The progressive stance is not that both men and women
should be equally shamed for exercising their sexual autonomy. Rather, it is that
both sexes should be free to make sexual choices without being subject to
ridicule, judgment, or humiliation—in other words, that society should refrain
from sexual chastity status games for all sexes. Reforming the Restatement to
‘protect’ both women and men is about as sensible as reforming it to protect both
gays and straights against false allegations concerning one’s sexuality. Neither the
allegation that one is gay nor that one is straight should be considered
defamatory, as the very status game is repugnant. The reactionary harm model
obscures this issue.275 Thus, while policymakers correctly identified defamation
as a vehicle for social change, their application of this insight was misguided due
to a fundamental confusion about the nature of status games.
***
These three case studies illustrate how a clear-eyed view of status games can
guide more principled decision-making in this confused area of law. Still, one
might leave the present discussion with the impression that status theory only
works to restrict the scope of the law, such as by denying the claims of majority
members of bigoted groups.
This is only partly true. Status theory may also be used to ground a much
more capacious role for defamation law, as the regulation of hate speech
demonstrates. In Jeremy Waldron’s Holmes Lecture, he made the case that hate
speech should be regulated by allowing defamation suits based on group libel. 276
Waldron posed what he called “a dignitarian rationale” to the regulation of hate
speech.277
273 See SMOLLA, supra note 127, at § 7.05[5] 7–11, 7–12 (“The Restatement (Second) takes
a laudable lead in this area, modifying the traditional rule to a sex neutral standard that renders
any imputation of ‘sexual misconduct’ by a man or woman slanderous per se.”).
274 Based on an analysis of all cases citing to § 574, only one exception to this rule was found.
See, e.g., Hickerson v. Masters, 226 S.W. 1072, 1073 (Ky. 1921). Modern examples include
Dellefave v. Access Temporaries, No. 99 Civ. 6098(RWS), 2001 WL 286771 (S.D.N.Y. Jan. 11,
2001) (holding that an allegation of a sexual relationship in the workplace was not per-se
defamatory, in particular because the relationship was heterosexual); Ricciardi v. Weber, 795 A.2d
914, 927 (N.J. Super. Ct. App. Div. 2010) (expressing doubt that per-se slander applies to a
“statement made about men as well”). A relatively recent affirmation of the rule is found in Regehr
v. Sonopress, Inc., No. 2:99CV690K, 2000 WL 33710902, at 4 (D. Utah 2000), but cf. Rejent
v. Liberation Publications, Inc., 197 A.D.2d 240, 243 (N.Y. App. Div. 1994) (holding that the
imputation that a male model was lustful was capable of being held as libel per-se).
275 See Kreis, supra note 228, at 128.
276 See generally Waldron, supra note 37.
277 Id. at 1612.
Electronic copy available at: https://ssrn.com/abstract=4021605

<<PAGE_BREAK>>

ARBEL, A STATUS THEORY OF DEFAMATION LAW 47/51
The problem, for Waldron, is that dignity can only do so much.278 Dignity
only offers a limited basis to expanding group libel. Racist speech is surely an
affront to their target’s sense of dignity, safety, and autonomy. But the dignitary
effect is ultimately an empirical fact contingent on the target’s subjective
reaction.279 Many may experience a deep offense, but others may ignore the
malarkey of racists (or at least not feel denigrated by them).280 However, status
theory is not so limited by subjective offense; the problem it identifies is the
objective social status games that racist speech engenders. If hate speech
contributes to the evolution of racial social hierarchies, then this effect is
cognizable social harm, independent of any individual’s experience of dignitary
harm.281 Unfettered by any individual’s reactions, status-based regulation can
thus achieve more than the dignity view alone.282
CONCLUSION
There is no escaping status games—we all play them. Almost every choice we
make is infused with status considerations: the clothes we wear, our choice of
vocabulary, the unconscious decision whether to state a request with “can you”
or “would you.” There is no opting out.
We should care greatly about which status games are played. Some status
games are virtuous, if not in their intentions, then in their effects on the world.
Being a pro-bono lawyer carries with it some status, as it should. Being a social
activist fighting to feed the hungry and vindicate the downtrodden should be a
matter of pride. If we cannot compensate schoolteachers, we might as well respect
them. But with at least the same fervor we should reject those status games that
act to create social hierarchies based on race, ethnicity, sexual identity, and the
like. In the words of Isabel Wilkerson:283
The tyranny of caste is that we are judged on the very things we cannot change: a
chemical in the epidermis, the shape of one’s facial features, the signposts on our bodies
278 This is especially the case with respect to views of dignity as a negative right. See generally
Neomi Rao, Three Concepts of Dignity in constitutional Law, 86 NOTRE DAME L. REV. 183
(2011).
279 Robert Mark Simpson, Dignity, Harm, and Hate Speech, 32 LAW PHILOS. 701, 723
(2013) (critiquing Waldron’s account of harm to dignity as an “exercise in consequentialist
speculation”); see also Eric Barendt, What Is the Harm of Hate Speech?, 22 ETHICAL THEORY
MORAL PRACT. 539–553 (2019) (critiquing Waldron’s account of the harm caused by hate
speech).
280 See Barendt, supra note 279, at 542 (critiquing Waldron’s injury to dignity view).
281 See Robert Mark Simpson, Dignity, Harm, and Hate Speech, 32 LAW PHILOS. 701, 727
(2013) (questioning whether, as a matter of fact, hate speech “contributes to identity-based social
hierarchies”). Notably, Simpson’s account takes a status-based view of dignity.
282 Status theory would thus support the decision in cases such as Taylor v. Metzger, 706 A.2d
685 (N.J. 1998), where racist epithets were held to be capable of amounting to intentional
inflection of emotional harm. Limiting the ability of social agents to enforce racial hierarchies
threatens the underlying status game.
283 WILKERSON, supra note 3.
Electronic copy available at: https://ssrn.com/abstract=4021605

<<PAGE_BREAK>>

ARBEL, A STATUS THEORY OF DEFAMATION LAW 48/51
of gender and ancestry—superficial differences that have nothing to do with who we
are inside.
This Article builds on the sociological concept of status to argue that
defamation law is best seen as regulating status games. This is not all that
defamation law does, of course, but status concerns help explain and justify a
large part of a tort often described as mystifying. Courts are heavily implicated
in the regulation of status games, but their role is often cloaked and
misunderstood. With an explicit understanding of the link between defamation
and status games, society can decide which ones to nurture and which ones to
abandon in the 21st century.
TECHNICAL APPENDIX
The purpose of this Appendix is to offer a technical argument for why the
central justification today of defamation law is unpersuasive. As developed in the
Article, many commentators justify defamation law as a tool of redressing harm
to social standing. This is a decidedly ex-post perspective that ignores any
behavioral effects on the attainment of status. The primary argument developed
is that defamatory remarks do not harm status but redistribute it. As such,
defamatory remarks can be socially neutral or even beneficial in their effect, and
although they would occasionally be detrimental, the law of defamation does not
even attempt to track these instances.
The analysis is motivated by a common idea in the sociological and economic
literature—according to which social status is a zero-sum game. 284 While
individuals belong to a large number of social communities, and status is
evaluated on the basis of multiple dimensions—the social ranking is ultimately
considered to be a closed system. This is why economists consider status to be
the ultimate “positional good,” one “whose value is only defined in reference to
their position on an imaginary scale or ladder.”285 If society can be likened to this
imaginary ladder, it will follow that “[e]ach step up the status ladder for one
person logically requires a step down for another.”286 Sociologist Joel Podlonsky
summarizes this view:
284 Frederic C. Godart & Matthew S. Bothner, What is Social Status, Comparisons and
Contrasts with Cognate Concepts, SEMANTICS SCHOLAR (2009) (defining status as a “zero-sum
relational asset.”). See also Cecilia L. Ridgeway and Henri A. Walker, Status Structures, SOCIO.
PERSPECTIVES ON SOC. PSYCH. 281 (1995) (defining status structures as “rank-ordered
relationships,” which implicitly denotes the zero-sum character of the system); Richard H.
McAdams, Relative Preferences, 102 YALE L. J. 1, 5 (1992).
285 See, e.g., Bougherara et al., supra note 156, at 1229 (“[S]tatus being the ultimate positional
good.”); Congleton, supra note 3, at 178 (“The common element of all status games is that relative
performance rather than absolute performance ultimately determines individual utility levels,
where ‘performance’ is measured by the status-assigning rules of the game of interest.”).
286 Bougherara et al., supra note 156, at 1228.
Electronic copy available at: https://ssrn.com/abstract=4021605

<<PAGE_BREAK>>

ARBEL, A STATUS THEORY OF DEFAMATION LAW 49/51
“Within any social system, status is … zero-sum in character.
One actor cannot increase his status without another losing status.
As a consequence, to the extent that status is the indicator of
interest, it is necessarily the case that high status will not be
available to all actors within a social system.”287
This is not meant as an argument that participation in the status game is zero-
sum; the major takeaway from the Article is that participation is all but zero-
sum. Rather, this Appendix seeks to explore the logical consequences of the
common justification. Taking its ex-post perspective at face-value, and likewise
ignoring any ex-ante effects, the question is whether defamatory statements
indeed cause a social harm. Using two models of status, the analysis shows that,
from a social perspective, the protection justification is unpersuasive.
Ordinal Status. Suppose there is a community of individuals.
The individuals are assumed to be identical in all but their strict rank ordering.
𝑛𝑛 ∈ ℕ ,𝑛𝑛 ≥ 2
The relative social position of individual i is given by , with .
The lowest ranking individual is thus noted by and the highest by . Utility
𝑟𝑟𝑖𝑖 𝑟𝑟𝑖𝑖 < 𝑟𝑟𝑗𝑗,∀𝑖𝑖 < 𝑗𝑗
from status is given by the monotonically increasing utility function , with
𝑟𝑟1 𝑟𝑟𝑛𝑛
the utility of the individual with a status rank and .
𝑈𝑈(.)
Assume that the effect of defamation is to reduce one’s social standing
𝑟𝑟𝑖𝑖 = 𝑈𝑈(𝑟𝑟𝑖𝑖) 𝑈𝑈(0)= 0
by spots. It then follows that:
Corollary 1: With ordinal status, defamation is welfare neutral.
𝑥𝑥 > 0
Proof:
Defamation moves the tth individual from position to position .
But because rankings are relative, this implies that the individual previously in
𝑟𝑟𝑡𝑡 𝑟𝑟𝑡𝑡−𝑥𝑥 < 𝑟𝑟𝑡𝑡
the is moved up to the position, and similarly for any individual
above them with . Thus, total utility, , remains unchanged.
𝑟𝑟𝑡𝑡−𝑥𝑥 𝑟𝑟𝑡𝑡−𝑥𝑥+1
Note that individuals are assumed here to h𝑛𝑛ave similar utility functions, but
𝑟𝑟𝑖𝑖 < 𝑟𝑟𝑡𝑡 ∑1𝑈𝑈(𝑟𝑟𝑖𝑖) ∎
one might plausibly argue that individuals differ in the utility they draw from
status. In such a case, defamation may lead to a net increase or decrease in utility,
but there is no a-priori reason to assume any specific allocation of utility
functions.
Cardinal Status. Suppose that individuals in the community are identical in
all but their initial endowment of an intangible status good, with the total
endowment being .288 The endowment of status goods of the ith
individual is denoted by . This time, however, individuals do not care about
𝑆𝑆 ∈ (0,∞]
their rank directly, but about their distance from others. Individual i'’s total
𝑠𝑠𝑖𝑖
distance from others is given by .
𝑑𝑑𝑖𝑖
𝑛𝑛
𝑑𝑑𝑖𝑖 = ∑𝑗𝑗=1�𝑠𝑠𝑖𝑖 −𝑠𝑠𝑗𝑗� = 𝑛𝑛𝑠𝑠𝑖𝑖 −𝑆𝑆
287 PODOLNY, supra note 93, at 25.
288 Status goods can be thought of as the “accumulation of deference behavior”, as in Michael
Sauder, Freda Lynn & Joel M. Podolny, Status: Insights from Organizational Sociology, 38 ANNU.
REV. SOCIOL. 267, 268 (2012).
Electronic copy available at: https://ssrn.com/abstract=4021605

<<PAGE_BREAK>>

ARBEL, A STATUS THEORY OF DEFAMATION LAW 50/51
Because status is defined as the accumulation of deference behavior or “pellets
of peer recognition,”289 we can think of defamation as destroying some of the
target’s ‘pellets.’ That is, defamation reduces the target’s status goods by x units.
Let be the target’s status ranking post defamation. We can now state the
private′ harm to the target from defamation as:
𝑑𝑑𝑡𝑡
That is, the target’s ′original utility from her status goods less her utility from
|𝑈𝑈(𝑑𝑑𝑡𝑡)|−|𝑈𝑈(𝑑𝑑𝑡𝑡)|=|𝑈𝑈(𝑛𝑛𝑠𝑠𝑡𝑡 −S)|−|𝑈𝑈�𝑛𝑛(𝑠𝑠𝑡𝑡 −𝑥𝑥)−(𝑆𝑆−𝑥𝑥)�|
having x fewer units of the status good.290 Note that, while defamation destroys
some of the target’s status goods, this loss is partially offset by the fact that there
are fewer status goods to go around, which lowers the community average.
Finally, as we are considering the idea of risk to one’s status, it will be fairly
natural to assume that U'<0, U''>0.291 We can now state the following
proposition.
Proposition: Punching up: Defamation, on the margin, increases welfare if
it is directed at a high-status individual. Punching down: Conversely,
defamation reduces welfare on the margin if it is directed at a low-status
individual.
Proof. Defamation destroys x units of status goods, and so the effect of
defamation on total welfare is:
𝑊𝑊
𝑛𝑛−1
The deriva𝑊𝑊tive= w�ith r𝑈𝑈es(p𝑛𝑛e𝑠𝑠c 𝑖𝑖 t −to𝑆𝑆 x +is:𝑥𝑥 )+𝑈𝑈(𝑛𝑛𝑠𝑠𝑡𝑡 −𝑛𝑛𝑥𝑥−𝑆𝑆+𝑥𝑥)
1
𝑛𝑛−1
𝑑𝑑𝑊𝑊 ′
To under=sta�nd t𝑈𝑈he (e𝑛𝑛ff𝑠𝑠e 𝑖𝑖 ct− o𝑆𝑆f s+ma𝑥𝑥l)l c+ha(n1g−es,𝑛𝑛 e)v𝑈𝑈al′u(a𝑛𝑛t(e𝑠𝑠 a 𝑡𝑡 t −𝑥𝑥)− 𝑆𝑆+𝑥𝑥)
𝑑𝑑𝑥𝑥 1
𝑥𝑥 = 0
𝑛𝑛−1
𝑑𝑑𝑊𝑊 ′
Rearranging � = �𝑈𝑈 (𝑛𝑛𝑠𝑠𝑖𝑖 −S)+(1−n)𝑈𝑈′(𝑛𝑛𝑠𝑠𝑡𝑡 −S)
𝑑𝑑𝑥𝑥 𝑥𝑥=0 1
𝑛𝑛
′
By concavity, the to�tal m𝑈𝑈ar(g𝑛𝑛i𝑠𝑠n 𝑖𝑖 al− chSa)n−ge𝑛𝑛 i𝑈𝑈n ′u(t𝑛𝑛il𝑠𝑠i 𝑡𝑡 ty− (tSh)e first expression on the
1
left) will be larger than the change in the target’s utility multiplied by n if and
only if .
𝑆𝑆
𝑠𝑠𝑡𝑡 > 𝑛𝑛 ∎
289 Robert K. Merton, The Matthew Effect in Science, II: Cumulative Advantage and the
Symbolism of Intellectual Property, 79 ISIS 606, 620 (1988).
290 We consider the absolute value of the difference, as and may be negative.
291 See GEOGGREY BRENNAN & PHILIP PETTIT, THE ECONOMY OF ES′TEEM, 83-105 (2005).
𝑈𝑈(𝑟𝑟𝑡𝑡) 𝑈𝑈(𝑟𝑟𝑡𝑡)
Another way to rationalize this assumption is to see that it is plausibly more consequential to a
person’s well-being to move close to those around him rather than to move farther apart. To the
extent that wealth is also a status symbol, the marginal benefit from having a car rather than taking
the bus is arguably greater than being able to afford a newer model.
Electronic copy available at: https://ssrn.com/abstract=4021605

<<PAGE_BREAK>>

ARBEL, A STATUS THEORY OF DEFAMATION LAW 51/51
Corollary 2: The optimal amount of defamation of an individual t is given
by .
P∗roof 𝑛𝑛 . B 𝑠𝑠𝑡𝑡 y − 𝑆𝑆 the Proposition, defamation of any high-status individual is utility-
𝑥𝑥 = 𝑛𝑛−1
maximizing on the margin, hence the optimal degree of defamation x is defined
by . Below that point, the individual becomes low-
status, and punching-down is welfare-minimizing. Rearranging, this implies that
𝑑𝑑𝑡𝑡 = 𝑛𝑛(𝑠𝑠𝑡𝑡 −𝑥𝑥)−𝑆𝑆+𝑥𝑥 = 0
.
∗
𝑛𝑛𝑠𝑠𝑡𝑡−𝑆𝑆
𝑥𝑥 = 𝑛𝑛−1 ∎
Electronic copy available at: https://ssrn.com/abstract=4021605

---

## ssrn-4181890: Legal Studies
Source: papers/ssrn-4181890/paper.txt

Legal Studies
Research Paper Series
Research Paper No. 23–66
Defamation with Bayesian Audiences
Yonathan A. Arbel
Murat C. Mungan
This paper can be downloaded without charge from the
Social Science Research Network Electronic Paper Collection
Electronic copy available at: https://ssrn.com/abstract=4181890

<<PAGE_BREAK>>

J,V0N0 1
Defamation with Bayesian Audiences
YonathanA.Arbel,* MuratC.Mungan†
Howstrictlyshouldthelawregulatefalsedefamatorystatements? Wefirstshowthat
thepresenceofjudicialerrorsoftenputsdefamationlawonaLaffercurve: regulation
thatistoolaxortoostrictisinferiortomoderateregulation.Whilemoderateregulation
is ideal, it is not always attainable, due to practical and legal constraints. With these
constraints,thepresenceofBayesianaudiencescancausetheoptimalregulationtobe
laxerthanisprescribedbystandardmodelswithna¨ıveaudiences.Thishighlightsthe
importanceofaccountingfortheimpactofdefamationlawsonbeliefformation.
Keywords:Defamation,Bayesianaudience,informationregulation,disclosure.
JELclassification:C72;D82;D83;K10;K13;K39.
1. Introduction
Whenstatementsaremadeinpublic,audiencesassesstheircredibilitybased
onavarietyofcues.Oneofthesecuesishowstrictlythelawsanctionsfalse
statements, i.e., whether talk is cheap. Such audience effects complicate the
standardanalysisofdefamationlaw,whichtraditionallyonlyfocusesonhow
the law affects speakers and the subjects of their speech. We investigate here
theoptimalstrictnessofdefamationlawwhenaccountingforaudienceeffects.
Defamation law imposes tort liability on speakers who publish false state-
ments that harm their target’s good name. A typical example comes from a
recentcasewhereahospitalstafferfalselyallegedthatadoctorwasworking
undertheinfluenceofalcohol.Thedoctorwonalawsuitagainstthestafferand
recoveredmillionsofdollarsindamages(Denmanv.St.Vincent,2020).While
the basic structure of defamation law is well established, there is an ongoing
socialdebateondefamationlaw’sproperscope.WithcallsfromtheSupreme
Court, legal scholars, politicians, and various pundits, there is growing pres-
suretodaytoreformdefamationlaw(Arbel&Mungan,2019).Inthemidstof
thesecalls,anewRestatementprojectwasrecentlyannounced.
Theliteratureondefamationlawisvast,buttheeconomicanalysisofdefama-
tion law is quite limited (Hemel, 2020). In deciding the level of strictness of
defamationlaw,standardlegalanalysesaredominatedbyatwo-sidedbalanc-
ing act. On the one hand, society considers the interests of the target of the
speech—her need for compensation and the need to protect her by deterring
defamatory speech against her. On the other hand, society also considers the
speaker,hisrighttofreespeech,andthesocialconcernwithchillingvaluable
speech(NYTimesv.Sullivan,1964).
*UniversityofAlabamaSchoolofLaw.E-mail:yarbel@law.ua.edu
†GeorgeMasonUniversity,AntoninScaliaLawSchool.E-mail:mmungan@gmu.edu.
Draft,Vol.0,No.0,
doi:/ewmxxx
©.
Allrightsreserved.ForPermissions,pleaseemail:
EElleeccttrroonniicc ccooppyy aavvaaiillaabbllee aatt:: hhttttppss::////ssssrrnn..ccoomm//aabbssttrraacctt==44118811889900

<<PAGE_BREAK>>

2 .V0N0
Inreality,wenoted,defamationlawalsoaffectspartiesbeyondthespeaker
andhistarget.Inparticular, defamationlawalsoaffectsaudiencesofspeech.
Thisisnotjustduetothefamiliarideathatstrictdefamationlawwouldlimit
thesupplyoffalsespeechthroughthedeterrenceofspeakers.Ifthatwerethe
case,theprotectionofaudienceswouldbeasimplematterofsettingsanctions
asstrictaslegallypossible.Defamationlawalsoaffectsaudiencesbychanging
theirassessmentofthecredibilityofspeechand,thus,itaffectstheaudience’s
propensitytoactuponstatements(Pennycooketal.2020, Arbel2022).Such
effectsaddcomplexitythatthestandardanalysisneglects.Theneglectofau-
dienceeffectsmaybebecauselawyersnaturallyfocusonthepartiesthattake
anactivepartinthelegalprocess–thevictimastheplaintiffandthespeakeras
thedefendant(Heymann,2012).Whateverthereason,tworecentinformalac-
counts(Hemel&Porat,2019&Arbel&Mungan,2019)suggestthatomission
ofaudienceeffectsisconsequentialtotheoptimalstrictnessofdefamationlaw.
Our object here is to bridge this gap by offering a general framework that
analyzesbehaviorandevaluateswelfarebasedonthestrictnessofdefamation
law. To do so, we construct a model that includes three key features: (i) a
Bayesian (rather than a na¨ıve) audience, (ii) errors in the court’s judgment
(wrongfulliabilityaswellaswrongfulfailuretofindliability),and(iii)acap
onrecoverabledamages.Weexplaintheroleeachofthesefeaturesplays,after
brieflyreviewingthestructureofourmodelanditsimplications.
Weconsiderthebehaviorofthreeparties.Aspeaker,whohasprivateinfor-
mation about a certain target – a business or an individual. The speaker may
make claims about the target to an audience member. The audience member
then decides whether to interact—trade, collaborate, socialize—with the tar-
get. Targets can be a high- or low-type, and audiences would rather interact
only with the former kind. If the target loses an interaction, he may bring a
lawsuitagainstthespeakerallegingdefamation.Westudybehaviorunderdif-
ferentlevelsofdamagesfordefamationandtheirsocialwelfareimplications.
Our analysis reveals three central findings. First, we find that there is an
optimallevelofdamagesthatsupportsseparatingequilibriainwhichwould-be
defamersaredeterredfromsharingfalseinformationandspeakersonlyshare
informationhonestlywiththeiraudience.Audiencemembersbelievespeakers
and act upon this information. Naturally, social welfare is highest under this
regime.
Second, we find that defamation laws often follow a ‘Laffer Curve.’ Lax
regulationresultsinafloodofcheaptalk,whichleadstoaudiencesdiscount-
ing all statements—true or false—and simply acting on their priors. This re-
sultsinequilibriawhereimportantinformationisleftuncommunicated.Sanc-
tioningdefamationtoostrictlyisalsounwanted,becausehighsanctionsinvite
frivolous litigation, which in turn chills true negative statements. In between
thesetwoextremes,theoptimallevelofdamagesfollowsaninverseUshape,
with a range of optimal damages. Thus, our unified framework shows that
bothcheaptalkand‘overpriced’talkareundesirableastheydepriveaudiences
ofrelevantinformationthatcouldbemadeavailabletothemundermoderate
damages.
EElleeccttrroonniicc ccooppyy aavvaaiillaabbllee aatt:: hhttttppss::////ssssrrnn..ccoomm//aabbssttrraacctt==44118811889900

<<PAGE_BREAK>>

-- 3
Our third result emerges when the cap on damages is lower than the level
necessary to support equilibria in which the target’s type is fully revealed. In
reality, it is difficult to calculate the exact level of damages, and even when
possible,damagesareboundedbybothconstitutionalconsiderationsandlim-
its on defendants’ wealth. In such cases, we find that a lax approach can be
superiortoamorestringentone.Thereasonisthatstringentregulationinvites
audience trust, but because some statements are false, this trust can be mis-
placed, leading to the deterrence of valuable interactions. Compounding the
issueisthatstringentregulationincreaseslitigation.Laxregulation,however,
invitesaudiencestorelymoreontheirpriorsandreduceslitigation.Thus,per-
hapscounter-intuitively,laxregulationbecomespreferabletostrictregulation
whenreputationalharmsarelarge,andtheoppositeconclusionmayholdwhen
reputationalharmsaresmall.
All three features of our model (Bayesian audience, judgment errors, and
damagecaps)playimportantrolesintheproductionoftheseresults.
First, when courts make no errors in judgment, people have no incentive
tobringfrivolousclaimsagainstspeakers.Inthiscaseverylargedamages(if
feasible) are always preferable to smaller damages, because they only deter
falsespeechwithouthavinganyimpactontruenegativespeech.Thisisady-
namicthatemergesinmanyothercontextsaswell,andhighlightstheroleof
judgment errors in explaining the inefficiency of very large damages in the
defamation context, and the emergence of the Laffer Curve to which we al-
luded.
Second, the prior economics literature on defamation law assumes that a
publisher(e.g.atabloid, journal,anindividualetc.)canalwaysharmanother
personbymakingnegativestatementsaboutthem,andtheextentofthisharm
isindependentofthelawsinplace(e.g., Garoupa1999a,b, Bar-Gill&Ham-
dani 2003).1 This is equivalent to the audience –whose beliefs and behavior
isnotconsideredinthepriorliterature–naivelyformingitsbeliefsandacting
uponthem.Thus,inthepriorliterature,themainfunctionofreformingthelaw
is to alter the expected costs and benefits of making disparaging statements,
but not the harmful impact of defamatory statements. With a na¨ıve audience,
increasingdamagesleadstoareductionintheexpectedharmtothetarget,be-
causeitdetersnegativespeech.ThisisnotsowhentheaudienceisBayesian.
Becauseverylowdamagesresultinfrequentfalseallegations,theydilutethe
informational content of speech, and therefore causes the audience to act ac-
cordingtoitspriors.Thus,inadditiontoprovidingstraightforwardrationales
for some behavioral responses in the defamation context (e.g., disregarding
certainfalsespeech),theincorporationofBayesianaudiencesalsohasimpor-
tantnormativeimplications, e.g., loweringdamagescanreducetheharmthat
resultsfromdefamatorystatements.
1. Themirrorimageofthisassumptionisalsoinvokedinthisliterature:thespeaker’sbenefit
frommakinganegativestatementisindependentoftheaudience’sbeliefs,becausetheaudienceis
notconsideredinthisliterature.Thisassumptionismade,forinstance,inDalviandRefalo(2008),
whichfocusesexclusivelyonthespeakers’incentivesandignoresnotonlytheaudience’sbeliefs
andbehaviorbutalsothetarget’s.
EElleeccttrroonniicc ccooppyy aavvaaiillaabbllee aatt:: hhttttppss::////ssssrrnn..ccoomm//aabbssttrraacctt==44118811889900

<<PAGE_BREAK>>

4 .V0N0
Third, this normative distinction becomes quite significant with binding
damagecaps,2 inwhichcasefalsedisparagingremarkscannotbefullyelimi-
nated.Thus,withBayesianaudiences,thechoiceisbetweenahighdegreeof
interactionsbetweentheaudienceandtargets(goodandbad)achievedthrough
lowdamages,andthemaximumlevelofdamagesthatcausesbadinteractions
tobedeterredalongwithsomegoodinteractions.Theformeroptionisprefer-
ablewhenthevalueofgoodinteractionsarelarge.Ontheotherhand, witha
na¨ıveaudience,maximumdamagesarealwayspreferable,becauseevenwith
low damages the audience believes false disparaging remarks, which are in
highsupplyduetothelackofdeterrentdamages.
In short, the main impact of judicial errors in our analysis is to rule out
theoptimalityofverylargedamages.Thisbecomesanimportantissuewhen
the damage cap is very large (or non-existent), in which case the presence
of judicial errors supplies an independent rationale for not having very large
damages.Ontheotherhand,whenthedamagecapisbinding,ana¨ıveaudience
impliesthatthemaximumdamageisoptimal,andthisresultisoverturnedwith
Bayesianaudiences.
While our analysis focuses on defamation law, the basic question we pose
here is relevant for a broad range of legal contexts. The law regulates false
speechindomainsasdiverseascorporatedisclosures,falseadvertising,whistle-
blowers, and law enforcement. Common to these domains is a basic tension
betweenthestrictnessofsanctionsformisreportingandtheinformativenessof
speech,andwecommentonpotentialimplications.
The next section offers some brief background and reviews the related lit-
erature.Section3presentsthemodelanditsanalysis.Section4evaluatesthe
welfare implications of different damages regimes, and highlights the impor-
tanceofaccountingforaudienceeffects.Section5containsseveralextensions
and discussions of the basic model, such as the public enforcement case, the
generalizationofthemodeltocaseswherespeakersmaybemotivatedtospeak
truthfullyortoexcessivelypraisethetarget,anddiscussionsofcontextsother
thandefamationlaw.Section6providesconcludingremarks.
2. LiteratureReview
Defamationlawregulatesthedisseminationoffalsestatementsthatare‘defam-
atory.’ To be defamatory, a statement must not only be false but also made
publicandbecapableofharmingone’sreputationandstandinginthecommu-
nity.Defamationlawisconsideredtobeabranchoftorts,anditencompasses
severaldistincttorts,mostnotablylibelandslander.Today,however,thedis-
tinctionhaslesspracticalsignificancethaninthepast,andinwhatfollows,we
abstractfromit.
Many defamation lawsuits are brought by individuals, but businesses and
firmscanalsobringsuit.Arecenthigh-profileexampleinvolvesalawsuitby
‘Dominion,’ a firm that sells voting hardware and software, against various
2. Asimilardynamicalsoemergeswhencourtsfrequentlymakejudgmenterrors,aswebriefly
explaininsection5.4.,below,andingreaterdetailinArbeland&Mungan2020.
EElleeccttrroonniicc ccooppyy aavvaaiillaabbllee aatt:: hhttttppss::////ssssrrnn..ccoomm//aabbssttrraacctt==44118811889900

<<PAGE_BREAK>>

-- 5
publicfiguresandmediaoutlets,whoallegeditwasinvolvedinthemanipula-
tionofelectionvotes.3
Defamation law evolved in the common and ecclesiastical courts of Eng-
land. In the United States, the states took the doctrine and used it to develop
theirownvariants.Amajordevelopmenttookplacein1964,whentheSupreme
Court decided the seminal case of NYTimes v. Sullivan. There, the Court re-
viewedtheexistingbodyofdoctrineinlightoftheFirstAmendmentprotec-
tionoffreespeechandpress.TheCourtmadeitconsiderablyharderforpublic
figures to bring lawsuits on matters of public interest. In the years that fol-
lowed,thedoctrinewasrefinedand,whilestillcarryingsignsofitsconvoluted
history,reachedacertaindegreeofbalance.Inrecentyears,however,therehas
beengrowingpressuretoreformthelaw.CommentsfromtheSupremeCourt
(McKee v. Cosby, 2019; Berrisha v. Lawson, 2021), the political sphere, le-
galcommentators, andpundits—allrevealdissatisfactionwiththelaw.Many
ofthesecommentssuggestthatdefamationlawshouldbemadestricter; e.g.,
CassSunsteincalledtheNYTimesv.Sullivandecision‘anachronistic’andar-
guedthatpublicfiguresshouldbeallowedtobringsuitmoreeasily(Sunstein,
2021). Interestingly, the reason why the law should protect good name inter-
estsisnotwellunderstood.Somegroundthelaw’sinterventioninaproperty
likeinterestingoodname,orgoodname’sbasisindignity,property,andhonor
(Post, 1984) while others relate it to concepts of social status and reputation
(Arbel,2021).
The legal literature on defamation law is rich and vast, and it explores a
varietyoftopics,involvingdeepquestionsofpoliticalphilosophyandconsti-
tutionalcommitments.Itisthereforequitesurprisingthattheliteratureonthe
economicsofdefamationlaw‘haslagged’andissparse(Hemel,2020).Some
notablecontributionsinthisspaceincludesRichardPosner’spioneeringanal-
ysis (Posner, 1973, 1986), which highlighted the applicability of cost-benefit
analysis to defamation law. More recent work focuses on the law’s effect on
media’sincentivestoinvestigateandreporttopicsofpublicinterest(Bar-Gill
&Hamdani,2003,Dalvi&Refalo,2008,Acheson&Wohlschlegel,2018)and
on political dishonesty (Garoupa, 1999a,b). As noted, this paper differs from
theseanalysesbyconsideringaBayesianaudience,alongsidedamagecapsand
judicialerrors.
Despitethesecontributions,courtsandlegalcommentatorsarelimitedtoa
fairlyrudimentaryunderstandingoftheincentivesfosteredbydifferentdefama-
tion law regimes. Here we amplify on two informal contributions that recog-
nizetherelevanceandimportanceofaudiencestotheanalysisofdefamation
law (Hemel & Porat, 2019, Arbel & Mungan, 2019). Methodologically, our
article borrows tools from the rich literature on signaling (Spence 1973) and
cheaptalk(Crawford&Sobel,1982).Ouranalysiscanalsobeinterpretedas
part of emerging literature that looks at how laws can be used to create in-
formalsanctionsthroughthebehaviorofthirdparties(e.g.,Deffains&Fluet,
3. USDominion,Inc.v.FoxNewsNetwork,LLC,C.A.N21C-03-257EMD(Del.Super.Ct.
Dec.16,2021).
EElleeccttrroonniicc ccooppyy aavvaaiillaabbllee aatt:: hhttttppss::////ssssrrnn..ccoomm//aabbssttrraacctt==44118811889900

<<PAGE_BREAK>>

6 .V0N0
2019,Mungan2016,Be´nabou&Tirole,2006,2011,Rasmusen1996).
3. Model
We model the interactions between three parties: the speaker (S, she), the
target of the speech (T, he), and the audience, captured by a representative
member (A, it). A faces an informational problem: T is either a good or a
bad type, and A’s value of interacting with T depends on T’s type, which
is unknown to A. Before A decides whether to interact with the target, S,
who knows T’s type, communicates with A and may either disparage T or
makeanon-disparagingcomment.Becausewestudydefamation,weconsider
thepossibilitythatS mayfalselydisparageT inordertodeteraninteraction
betweenAandT.Wedeferthediscussionofspeakersbeing(atleastpartly)
motivatedbyadesiretotruthfullyshareinformation,asthishaslimitedimpact
onouranalysis.4 WemodeltheinteractionsasaBayesiangame,anduseitto
identifyPerfectBayesianEquilibria.5
3.1 Preliminaries
Thetarget,T,obtainsabenefitofr fromtheinteraction,wheret∈{B,G}
t
denotes his type and where the letters abbreviate bad and good, respectively.
T’s type is privately known to himself and S, but not to A, who only knows
thattheproportionofgoodtypesisγ ∈(0,1).6Apreferstointeractwithgood
types,butnotbadtypes,becausethisresultsinautilityofg >0>−bwhere
bisthedisutilityAbearsfrominteractingwithabadtype.Thus,absentfurther
information,AwouldprefertointeractwithT ifγg−(1−γ)b > 0,andwe
assumethisinequalityholds,sinceotherwisenointeractionswouldtakeplace
between A and T even without (negative) input from S.7 Thus, the audience
preferstointeractwiththetargetifitsupdatedbelief(basedonthestatementit
receivesfromS)ofT’slikelihoodofbeingagoodtypeexceedsthethreshold
b
x≡ <γ, (1)
(cid:98) g+b
wheretheinequalityfollowsfromtheassumptionthatAwouldprefertointer-
actwithT absentinputfromS.
ThespeakerhasaninterestinwhetherAandT interact:Sobtainsagainofv
whenAavoidsinteraction(alternatively,vcanbeinterpretedasalossincurred
whenAchoosestointeractwithT).v isarandomvariablewiththecumula-
tive distribution function F(v) with support (0,1] where the upper-bound of
the support is normalized to simplify notation. The specific v-draw is private
4. Consistentlywiththelaw,truthfulnegativestatementsarenotconsidereddefamatory.How-
ever,thecourtmaymakeerrorsinascertainingwhetheranegativestatementistruthful,andthis
possibilityisincorporatedinourmodel,asweexplainbelow.
5. Figure5intheAppendixdepictstheinteractionsbetweenthethreepartiesandishelpfulin
followingthedetaileddescriptionsoftheinteractionsthatweprovide,next.
6. Insection5wediscusstheconsequencesofendogenizingγ.
7. Ananalysisofthiscasecanbefoundinanearlierversionofthisarticle, andyieldsno
furtherinsights(seeArbel&Mungan(2020)).
EElleeccttrroonniicc ccooppyy aavvaaiillaabbllee aatt:: hhttttppss::////ssssrrnn..ccoomm//aabbssttrraacctt==44118811889900

<<PAGE_BREAK>>

-- 7
informationavailableonlytoS,andwecallv thespeaker’stype.Weassume
thatinteractionsbetweenAandT aresociallyvaluableif,andonlyif,T isa
goodtype,i.e.r +g >1>0>r −b.
g b
After Nature determines the types of T and S, the target’s type becomes
commonknowledgeamongT andS(butnotA).Atthispoint,Schooseswhat
type of statement to send A regarding T’s type. The types of possible state-
ments follow defamation law’s distinction between disparaging statements,
which are potentially actionable, and non-disparaging statements, which are
non-actionable(e.g.,positiveremarks,silence,opinion,etc.).
Subsequently, A decides on whether to interact with T or to avoid him,
and, finally, T, decides whether to bring a lawsuit against S if a disparaging
remarkwasfollowedbyA’schoicetoavoidinteractingwithT.8 Wenotethat
this setting includes the possibility of T suing S, even if T is in fact a bad
type,i.e.,afrivolouslawsuitmaybebrought.Thisisanimportantpossibility
becausecourtsmayerrintheirjudgment.Tocapturetheparties’payoffsfrom
litigation,wedefinethefollowing:
d: damagespaidbyS toT whenthecourtfindsforT
l: totallitigationcosts.Weassumethatlitigationcostsarenotprohibitive(l<1)
and,withoutlossofgenerality,thatthecostsareequallysharedbytheparties.
q : probabilityofplaintiffvictorywhenT isoftypet∈{B,G}
t
(cid:16) (cid:17)
Weassumetheprobabilityofwrongfulliabilityissmall: q <q l/2
B G 1−l/2
Becausecourtswieldbroadlatitudeinsettingthelevelofdamages,9wefol-
low the existing literature (see, e.g., Garoupa 1999a,b) and use d as a policy
lever to operationalize different defamation regimes. The value of d can also
be interpreted as expected damages, i.e. d = E[d˜] where d˜is a random vari-
ablerepresentingactualdamagesawardedwhosedistributionisaffectedbythe
court’sinterpretationofthelaw.Wealsonotethatdcanbechosenseparately
for each type of statement (represented by all variables described above, r ,
g
r ,g,b,etc.)beinganalyzed,whichwetakeasgiveninouranalysis.
b
It is worth noting that we take the odds of winning at trial, q and q ,
B G
as exogenously given. This is a standard commitment assumption in the en-
forcementliterature,andimpliesthatcourtsarecommittedtoreviewingcases
onlyontheirmerit,i.e.,withoutbringingintheirinformedestimatesaboutthe
proportion of frivolous cases. Our assumption relating q to q , above, cor-
G B
respondstothecasewherejudicialerrorsarepossible,butoccurinfrequently.
Wenotethattheanalysisofthealternativecasewithlargejudicialerrorsleads
8. Inpractice,courtsoftenrequiresomeproofofharmtoallowmonetaryrecovery,hencethe
requirementherethatthedefamatoryremarkpreventedaninteraction.
9. Courtscan,withinlimitations,awardnominal,economic,non-economic,andpunitivedam-
ages, andhavedemonstratedconsiderablediscretioninpractice.SomeexamplesincludeLoth-
schuetzv.Carpenter,898F.2d1200,1205(6thCir.1990)($1innominaldamages);WasteMgmt.
ofTexas,Inc.v.TexasDisposalSys.Landfill,Inc.,434S.W.3d142,162(Tex.2014)($450,000
ineconomicharms); Cantuv.Flanigan,705F.Supp.2d220(E.D.N.Y.2010)($150millionin
non-economicdamages);Armstrongv.Shirvell,596F.App’x433,448(6thCir.2015)($500,000
inpunitivedamages).
EElleeccttrroonniicc ccooppyy aavvaaiillaabbllee aatt:: hhttttppss::////ssssrrnn..ccoomm//aabbssttrraacctt==44118811889900

<<PAGE_BREAK>>

8 .V0N0
tosimilarresults,andacompleteanalysisofthiscasecanbefoundinArbel&
Mungan(2020).
3.2 Players’Actions,Beliefs,Strategies,andPayoffs
Next,wedescribetheplayersstrategies,beliefs,andactions.Forsimplicity,
eachplayer’sactionislabelledaseither0or1,asfollows:
Table1: Players’PotentialActions
Player Action
0 1
S Don’tDisparage Disparage
A Interact Avoid
T Don’tLitigate Litigate
We note that labeling A’s action of interacting as 0 may appear counter-
intuitive.However,thebenefitofthisnotationisthatasuitisfiledonlyincases
where all players’ actions are 1. This makes it simpler to express the pay-off
ofthespeaker(asinTable3,below),sinceshefacesexpectedlitigationcosts
onlywhenallactionsequal1.
Usingthisnotation,wecandescribethestrategiesofeachplayerasfollows:
Table2: Players’Strategies
Player Strategy
S s(t,v):{B,G}×(0,1]→{0,1}
A a(z):{0,1}→{0,1}
T p(t):{B,G}→{0,1}
Here,inspecifyingA’sstrategy,zdenotesthestatementreceivedbyA.
BecauseoursolutionconceptisaPerfectBayesianEquilibrium(henceforth
PBE),wealsospecifyA’sbeliefsregardingT’stype,as:10
x : BeliefthatT isagoodtypegivenz =i
i
Withthisnotation,weexpresstheexpectedpay-offsofeachplayer,giventheir
beliefsandinformation,asfollows:
Table3: Players’Payoffs
Player Payoff
S a(s(t,v))(v−p(t)s(t,v)(q d+ l))
t 2
A a(z)(x g−(1−x )b)
z z
T (1−a(s(t,v)))p(t)(q d− l)+a(s(t,v))r
t 2 t
10. BecauseA’svaluationofhisinteractionwithT dependsonlyonT’stype,weneednot
specifyA’sbeliefsregardingS’stypeforpurposesofidentifyingthePBE.
EElleeccttrroonniicc ccooppyy aavvaaiillaabbllee aatt:: hhttttppss::////ssssrrnn..ccoomm//aabbssttrraacctt==44118811889900

<<PAGE_BREAK>>

-- 9
3.3 EffectiveandIneffectiveCommunicationEquilibria
Perfect Bayesian Equilibria consist of assessments (i.e. a profile of beliefs
and strategies) that satisfy sequential rationality and consistency of beliefs.
SincetherequirementsforPBEarewellknown,werelegatetheirformaldef-
initions to Appendix A, below. As in many other contexts, communications
canbedisregardedbytheaudienceinsomeequilibria.Wedistinguishbetween
theseandothertypesofequilibriabyusingthefollowingdefinition.
Definition1APBEisaneffectivecommunicationequilibriumif,andonly
if,theaudiencechoosesnottointeractwiththetargetwithsomepositiveprob-
abilitybasedontheinformationitreceivesfromthespeaker.
We start by noting that defamation law cannot eliminate ineffective com-
munication equilibria. This is because when the audience’s beliefs regarding
the target’s types are unconditional on the speaker’s statement and equal to
its prior (i.e. x = x = γ), it chooses to interact with the target regardless
0 1
of what it hears from the target (i.e. a∗(z) = 0). This results in payoffs of 0
andrtothespeakerandtarget,respectively.Thesepayoffsareindependentof
the actions of the speaker and target, which makes them indifferent between
playing any of the strategies available to them. Thus, any assessment where
the speaker plays a strategy that supports the audience’s beliefs constitutes a
PBE.Thesimplestexampleisonewherethespeakerneverchoosestodispar-
agethetarget(i.e.s(t,v)=0foralltandv).Weformalizethisobservationas
follows.
Proposition 1. Under all defamation regimes, there exist ineffective com-
municationequilibria.
Proof. The assessment consisting of x∗ = x∗ = γ, a∗(z) = 0, s∗(t,v) =
(cid:26) 0 if q d⩽l/2 1 fort 0 ∈{B,G}
0, and p∗(t) = t satisfies sequential
1 if q d⩾l/2 fort∈{B,G}
t
rationality and consistency of beliefs (i.e. requirements 1-4 in Appendix A),
andthusisaPBE.
Proposition 1 notes that ineffective communication equilibria are always
present, regardless of the defamation regime in place. If these were the only
equilbria, defamation law would be irrelevant. Thus, we proceed by showing
thatsomelevelsofdamagesinfactgenerateeffectivecommunicationequilib-
ria.
Proposition 2. (i) Extremely low damages (i.e. d < l ) and extremely
2qG
highdamages(i.e.d> 2−l)onlygenerateineffectivecommunicationequilib-
2qB
(cid:16) (cid:17)
ria. (ii) There exist a range of moderate damages, D ⊂ l , 2−l , which
2qG 2qB
generate effective communication equilibria. (iii) The audience acts consis-
tentlywiththespeaker’sstatement,i.e.a∗(z)=z,inalleffectivecommunica-
tionequilibria.
Proof. SeeAppendix.
EElleeccttrroonniicc ccooppyy aavvaaiillaabbllee aatt:: hhttttppss::////ssssrrnn..ccoomm//aabbssttrraacctt==44118811889900

<<PAGE_BREAK>>

10 .V0N0
The intuition behind the first part of proposition 2 is relatively straightfor-
ward.Whendamagesareextremelylow,thetargetisdeterredfromsuingthe
speaker, even when he has a meritorious case, since expected damages (i.e.
q d)arelowerthanlitigationcosts.Thiscausesthespeaker’sstatementstobe
G
perceived as cheap-talk by the audience, since the speaker faces no negative
consequence from making disparaging statements. Thus, the audience disre-
gards the speaker’s statements and acts according to its priors. On the other
hand,whendamagesareextremelyhigh,alltargetsareincentivizedtolitigate,
andexpecteddamagesarehighenoughtodeterallspeakertypesfrommaking
disparaging statements. Thus, the audience is once again left without any in-
formativestatements,thistimeduetotheover-pricingofspeechasopposedto
thepresenceofcheap-talk.
Itisonlymoderatedamagesthatsupporteffectivecommunicationsbetween
speakers and audience members, and this is formalized in proposition 2-(ii).
Part (iii) of proposition 2 simply rules out the possibility of counter-intuitive
equilibria,forinstance,inwhichtheaudienceinfersfromadisparagingremark
thatthetargetmustbeagoodtypeandvice-versa(i.e.wherea∗(z)=1−z).
These preliminary findings indicate that if defamation laws are to have any
impact, theymustdosothrougheffectivecommunicationequilibriaobtained
under moderate damages. Thus, we analyze these equilibria in further detail,
next.
3.4 ModerateDamagesandEffectiveCommunicationEquilibria
The damages in place affect the target’s incentive to sue when disparaged,
aswellasthespeaker’sincentivestodisparagethetargetinthefirstplace.We
notetwopairsofcriticaldamagesthatpertaintoeachparty’sincentives.First,
l l
d ≡ andd ≡ (2)
1 2q 3 2q
G B
are the smallest damages that causes a type G and B target, respectively, to
bring suit whenever the speaker disparages him.11 On the other hand, when
damagesaregreaterthan
2−l 2−l
d ≡ andd ≡ (3)
2 2q 4 2q
G B
typeGandBtargets,respectively,areexpectedtobringsuit,andthisdetersthe
speakerfromdefamingthetarget.Ourassumptionofnon-prohibitivelitigation
costsandsmalljudicialerrorsimpliesthatthesefourcriticaldamagelevelsare
orderedasfollows:
d <d <d <d (4)
1 2 3 4
Thus,therearethreecategoriesofmoderatedamages,whichwecalllow,inter-
mediate,andhighdamages.Weexplaintheincentivesthateachplayerfacesin
11. Weassume,onlytosimplifyexposition,thatanindifferenttargetchoosesnottolitigate.
EElleeccttrroonniicc ccooppyy aavvaaiillaabbllee aatt:: hhttttppss::////ssssrrnn..ccoomm//aabbssttrraacctt==44118811889900

<<PAGE_BREAK>>

-- 11
eachofthesedamagecategoriesunderaneffectivecommunicationequilibrium
(whenoneexists).
LowDamages(d∈(d ,d ))
1 2
In this range, the target has the incentive to litigate only if he is type G,
sinceq d > l > q d.Thus,inaneffectivecommunicationequilibrium,the
G 2 B
speaker faces no threat of litigation from disparaging a bad type, and thus a
type B target is disparaged with certainty. On the other hand, if the speaker
encountersatypeGtarget,sheexpectsthatdisparaginghimwillleadtoacost
of
l
v (d)≡q d+ . (5)
G G 2
Thus,thespeakerchoosestodisparageatypeGtargetifhertypeexceedsthis
value.Therefore,atypeGtargetisdisparagedwithaprobabilityof
1−F(v (d)) (6)
G
Ouranalysisthusfaridentifiesthebehaviorofthespeakerandtargetinan
effectivecommunicationequilibrium,assumingthatitexists.But,forthistype
ofequilibriumtobesupportable,theaudience’sbeliefsmustbeconsistentwith
theequilibriumbehavioroftheotherparties.Thus,theaudiencemustholdthe
belief that a target who is not disparaged must be a good type, since all bad
typesaredisparaged,i.e.
x∗ =P(t=G|z =0)=1
0
Ontheotherhand,whentheaudiencereceivesadisparagingstatement,itmust
believethatthetargetisneverthelessagoodtypewithaprobabilityof
γ[1−F(v (d))]
x∗(d)=P(t=G|z =1)= G <γ (7)
1 γ[1−F(v (d))]+(1−γ)
G
This is because a type G target is disparaged with probability 1−F(v (d))
G
whereas a type B individual is disparaged with certainty, and the likelihood
withwhichthetargetisagoodtypeisγ.
Aswenotedvia(1)theaudiencefindsitinitsbestinteresttointeractwith
thetargetifitbelievesheisagoodtypewithaprobabilityexceedingxˆ.Thus,
aneffectivecommunicationequilibriumissupportableinthisrangeif
x∗(d)<xˆ<x∗ =1 (8)
1 0
In the upper portion of this range, this condition certainly holds, since 1 −
F(v (d ))=0,i.e.thespeakerisalwaysdeterredfromdisparagingatypeG
G 2
target.Moreover,x∗(d)isclearlydecreasinginthisdamagerange,whichcan
1
easily be verified by inspecting (7). Therefore, within low damages, there is
some critical damage dˆ, above which effective communication equilibria are
obtained.Whetherdˆ=d ,i.e.whethereffectivecommunicationequilibriaare
1
supportable with all lower moderate damages, depends on parametric values
andhasnoimportantimplications.
EElleeccttrroonniicc ccooppyy aavvaaiillaabbllee aatt:: hhttttppss::////ssssrrnn..ccoomm//aabbssttrraacctt==44118811889900

<<PAGE_BREAK>>

12 .V0N0
Based on these observations, we can summarize the impacts of increasing
damagesintherange(dˆ,d )onthebehaviorofallplayersineffectivecommu-
2
nication equilibria. As damages are increased, the speaker disparages type G
individualslessfrequently,sincethethresholdspeechbenefitthatsherequires
isincreasingindamagesper(5).Thisleadstolessfrequentlitigationaswell
as less frequent blocking of beneficial interactions between the audience and
thetypeGtarget.Thelevelofdamagesleadstonofurthereffects, becausea
typeBtargetisdisparagedwithcertaintyinthisrange.
IntermediateDamages(d∈[d ,d ])
2 3
When damages are increased into the intermediate range the speaker is al-
waysdeterredfromdisparagingatypeGtarget.Thisisbecausetheexpected
damages and litigation costs associated with doing so exceed the benefit that
she obtains from blocking the target’s interaction with the audience. More-
over,becaused<d ,atypeBtargetlackstheincentivestolitigate.Thus,the
3
speakeralwaysdisparagesatypeB target.Basedonthisbehavior, itfollows
thatinaneffectivecommunicationequilibriumtheaudience’sbeliefsaregiven
by
x∗=P(t=G|z =0)=1and
0
x∗=P(t=G|z =1)=0
1
This trivially implies that effective communication equilibria are supportable
byalldamagesinthisrange,since0=x∗ <xˆ<x∗ =1.
1 0
Quite importantly, in this range all effective communication equilibria are
separatingequilibriawhereinthespeakerchoosesto[not]disparagewhenever
sheknowsthatthetargetistypeB [G].Welaternotethesuperiorityofthese
equilibriawhenweconductawelfareanalysis.
HighDamages(d∈(d ,d ))
3 4
With high damages, a type B target is given the incentive to frivolously
litigate. This, in turn, causes the speaker to be deterred from disparaging a
typeB targetwhenherbenefitfromblockinginteractionsislow.Specifically,
shechoosestodisparageatypeBindividualonlyifherbenefitexceeds
l
v (d)≡q d+ (9)
B B 2
Thus,abadtypeisdisparagedwithaprobabilityof
1−F(v (d))<1 (10)
B
On the other hand, when the speaker encounters a type G target, she never
disparages him given the high damages. Based on this behavioral profile, in
equilibriumtheaudience’sbeliefsaregivenby
γ
x∗(d)=P(t=G|z =0)= >γ and
0 γ+(1−γ)F(v (d))
B
x∗=P(t=G|z =1)=0
1
EElleeccttrroonniicc ccooppyy aavvaaiillaabbllee aatt:: hhttttppss::////ssssrrnn..ccoomm//aabbssttrraacctt==44118811889900

<<PAGE_BREAK>>

-- 13
Figure1
Sincexˆ<γ,itfollowsthatx∗ >xˆ>x∗,andthereforeeffectivecommunica-
0 1
tionequilibriaaresupportablebyallhighdamages.
As the above discussion indicates, increasing damages in this range only
reduces the frequency with which speakers disparage a type B target. Thus,
increasing damages in this range has countervailing effects: it increases the
frequencyofinteractionswithbadtypesbutreducesthefrequencyoflitigation.
Wesummarizeourfindingsinthissubsectionthroughfigure1,below,which
depictsthequalitativerelationshipbetweendamagesandthebeliefsofA;the
likelihood with which a type t ∈ {B,G} target is disparaged; and the likeli-
hood of litigation in effective communication equilibria. Next, we conduct a
welfareanalysiswhichbuildsonthesekeyfindings.
EElleeccttrroonniicc ccooppyy aavvaaiillaabbllee aatt:: hhttttppss::////ssssrrnn..ccoomm//aabbssttrraacctt==44118811889900

<<PAGE_BREAK>>

14 .V0N0
4. WelfareAnalysis
Inanalyzingthesocialdesirabilityofdifferentdefamationregimes,weuse
a simple social welfare function which consists of the sum of each player’s
expectedpay-off.Weconductthiswelfareanalysistohighlightthethreemain
pointsthatweemphasizedintheintroduction.First,welfareisnon-monotonic
in damages for defamation. More precisely, we show that the shape of wel-
fare obtained through effective communication equilibria vis- a`-vis damages
resemblesaLafferCurve:welfareisincreasinginthelowerrangeofmoderate
damages (i.e. for d ∈ (dˆ,d )), is maximized in the intermediate range (i.e.
2
when d ∈ [d ,d ]), and is decreasing in the upper range of moderate dam-
2 3
ages (i.e. when d ∈ (d ,d )). Second, when there is a cap on damages (e.g.
3 4
reflecting the wealth of the defendant or a legal bound on permissible dam-
ages), then all effective defamation remedies may reduce welfare. Third, we
contrasttheimplicationsofamodelwithaBayesianversusana¨ıveaudience.
Whentheaudienceisna¨ıveandeasilymisledbyfalsestatements,typeGtar-
gets always prefer stricter defamation laws. The same is not true when the
audienceisBayesian,becauseabsentsizeabledamagestheaudienceperceives
the speaker’s disparaging statements as cheap-talk and disregards them. This
insight leads to a divergence between the normative implications of the two
models:withbindingcapsondamages,itmaybeoptimaltohavenodefama-
tionlawsatallwithaBayesianaudiencebutoptimaltohavemaximaldamages
withana¨ıveaudience.Next,weconsiderandformalizeeachofthesepoints.
4.1 TheLafferCurveofDefamationLaw
Underineffectivecommunicationequilibria,theaudienceactsaccordingto
its priors. Thus, it chooses to interact with the target regardless of the state-
ments by the speaker. There is no litigation since interaction always takes
place.Thus,expectedwelfareisindependentofdamages,andisgivenby
W ≡(1−γ)[r −b]+γ[r +g] (1)
I B G
On the other hand, under effective communication equilibria, the specific
functionalformofwelfarediffersdependingonwhichofthethreerangesdam-
agesarein,asexplainedtheprevioussection.Next,weconsiderwelfareunder
eachrange.
Withlowdamagesthatsupporteffectivecommunicationequilibria(i.e.d∈
(dˆ,d )), when the target is type B, the speaker disparages him, the audience
2
refuses to interact, and the target chooses not to litigate. Thus, with a proba-
bilityof(1−γ)expectedwelfareequalsthespeaker’sexpectedbenefitE[v].
WhenthetargetistypeG,thespeakerdisparageshimonlywhenv > v (d).
G
In those cases, the audience avoids an interaction with T, and the target liti-
gates.Thus,withaprobabilityofγ,expectedwelfareisF(v (d))[r +g]+
G G
(cid:82)1
(v−l)f(v)dv.Therefore,expectedwelfareisgivenby:
vG(d)
(cid:32) (cid:33)
(cid:90) 1
W (d)≡(1−γ)E[v]+γ F(v (d))[r +g]+ (v−l)f(v)dv (2)
L G G
vG(d)
EElleeccttrroonniicc ccooppyy aavvaaiillaabbllee aatt:: hhttttppss::////ssssrrnn..ccoomm//aabbssttrraacctt==44118811889900

<<PAGE_BREAK>>

-- 15
Whendamagesareintermediate(i.e.d∈[d ,d ]),effectivecommunication
2 3
leadstoseparatingequilibriawhereininteractionstakeplaceif,andonlyif,the
targetisagoodtype.Moreover,thereisnolitigationsincetypeB targetslack
theincentivestolitigate.Thus,welfareinthisrangeisgivenby
W ≡(1−γ)E[v]+γ[r +g] (3)
S G
Finally,whendamagesareintheuppermoderaterange(i.e.d ∈ (d ,d )),
3 4
thespeakerchoosesnottodisparageatypeGtarget.Thus,withaprobability
of γ, welfare is r + g. When the target is type B, the speaker chooses to
G
disparagehimonlywhenv > v (d),andthisleadstolitigation.Thus,witha
B
(cid:82)1
probabilityof1−γ,expectedwelfareisF(v )[r −b]+ (v−l)f(v)dv.
B B vB(d)
Thus,expectedwelfareis
(cid:32) (cid:33)
(cid:90) 1
W (d)≡(1−γ) F(v (d))[r −b]+ (v−l)f(v)dv +γ[r +g](4)
H B B G
vB(d)
A very simple yet important observation is that W is increasing whereas
L
W isdecreasingindamages.Thisisbecause,whendamagesareinthelower
H
moderaterange, theimpactofincreasingdamagesistoreducethelikelihood
ofdefamatorystatementsagainstatypeGtarget.Thisisbeneficial,becauseit
reducesthelikelihoodofblockedbeneficialinteractionsbetweenAandT as
well as wasteful litigation between T and S. Similarly, when damages are in
theuppermoderaterange,loweringdamagesleadstoanincreaseinthelikeli-
hoodwithwhichatypeBtargetisdisparaged.Thisincreasesthelikelihoodof
harmfulinteractionsbeingblocked,butattheexpenseofincreasedlitigation.
The former (beneficial) effect dominates the latter (detrimental) effect, since
thespeakerdisparagesatypeB targetonlyifherbenefitsfromdoingsomore
than off-set total litigation costs. This last point can be formalized by noting
that
W′ =(1−γ)f(v )v′ {(r −b)−(v −l)}⩽0 (5)
H B B B B
sincer <bandv (d)⩾v (d )=l.
B B B 3
To summarize these observations, we depict welfare as a function of dam-
agesinfigure2,below,whichisaccompaniedbyclarifyingnotes.12
The most striking feature of figure 2 is that welfare obtained under effec-
tivecommunicationequilibriamimicsaninverseUshape,notwithstandingthe
factsthatitcontainsadiscretedrop13 aroundd = d andthatwelfareiscon-
3
stant in the [d ,d ] range. This is what we interpret as the Laffer curve of
2 3
defamationlaw.Welfareisnotmonotonicallyincreasingindamages,because
12. Wenotethateffectivecommunicationequilibriamayormaynotbesupportableforalllow
damages,asexplainedintheprevioussection.Figure2depicts,onlyforexpositionalpurposes,a
casewherealllowdamagessupporteffectivecommunicationequilibria.
13. Once damages pass over to the upper moderate range, damages are sufficient to invite
firivilouslitigationbytypeBtargets.Thisleadstoadiscretereductioninwelfare,sinceitcauses
thelikelihoodofdisparagingstatementsagainsttypeBindividualstodiscretelydropfrom1to
1−F(vB(d))anditalsocausesadiscretejumpinthelikelihoodoflitigation(seefigure1).
EElleeccttrroonniicc ccooppyy aavvaaiillaabbllee aatt:: hhttttppss::////ssssrrnn..ccoomm//aabbssttrraacctt==44118811889900

<<PAGE_BREAK>>

16 .V0N0
Figure2
large damages (i.e. d > d ) reduce welfare by deterring accurate negative
3
speech against a type B target. On the other hand, reducing damages to low
levels (i.e. d < d ) is also detrimental because it leads to defamatory state-
2
mentsagainstatypeGindividual,whicharetakenseriouslybytheaudience.
Anotherfeatureofthewelfarecurvedepictedinfigure3isthattheseparat-
ing equilibria obtained through intermediate damages lead to greater welfare
thanineffectivecommunicationequilibria.Wenotethatthisisnocoincidence,
andoccursduetothefactthatwhiletheaudienceinteractswitheithertypein
ineffectiveequilibria,itinteractswithatargetif,andonlyif,itisagoodtype
when damages are in the intermediate moderate range. Thus, when there are
nocapsondamagesitfollowsthatsettingdamagesintheintermediatemoder-
aterangeissociallydesirable.Weformalizethisresultthroughthefollowing
proposition,whoseprooffollowsfromourcomments,above.
Proposition3. SeparatingequilibriawhereSchoosestodisparageT if,and
onlyif,heistypeB leadtogreaterexpectedwelfarethananyotherequilibria
andareobtainableonlythroughintermediatedamages.
Animplicationofproposition3isthatmaximizingwelfarethroughdefama-
tion law requires the implementation of separating equilibria through the use
of intermediate damages. We note that this implication is obtained under the
assumption that these damages are feasible. However, when these damages
are too large for the defendant to pay (i.e. when the defendant is judgement-
proof)orwhentherearelegalrestrictions(e.g.constitutional)onthedamages
EElleeccttrroonniicc ccooppyy aavvaaiillaabbllee aatt:: hhttttppss::////ssssrrnn..ccoomm//aabbssttrraacctt==44118811889900

<<PAGE_BREAK>>

-- 17
thatcanbechosen,damageslargeenoughtosupportequilibriainwhichtarget
typesarefullyrevealedmaynotbeavailable.Wediscussthiscase,next.
4.2 BoundedDamages
Weused¯todenotetheupperboundondamages.Animmediateimplication
ofproposition3isthatwhend¯⩾d ,theupperboundisnon-binding.Thus,we
2
focusonthecasewhered¯< d .Withthisrestrictioninplace, thereareonly
2
tworelevantrangesofdamagesthatonecanselectfrom;(i)verylowdamages
which only support ineffective communication equilibria (d ⩽ d ), and (ii)
1
damagesinthelowerrange(d∈(d ,d¯)).
1
In the latter range, if d¯is close to d it is possible for effective communi-
1
cationequilibriatobeunsupportable,14 andtheanalysisofthiscaseistrivial:
thereisnofeasiblelevelofdamagesthatcanresultineffectivecommunication
equilibria, and hence the choice of damages is irrelevant. Thus, we focus on
the more interesting case where maximum damages are sufficient to support
someeffectivecommunicationequilibria,i.e.x∗(d¯)<xˆ.
1
Inthiscase,wecancomparethewelfarebenefitsandcostsassociatedwith
ineffective and effective communication equilibria. The former equilibria, as
reflectedby(1), alwaysleadtointeractionsbetweenT andA.Theseinterac-
tionsarewelfarereducingwhenthetargetistypeB.Hence, whenthetarget
istypeB,effectivecommunicationequilibriaperformbetter,sincetheydeter
interactionsbetweenT andA.However,thiscomesatthecostofdeterringso-
ciallybeneficialinteractionsbetweenatypeGtargetandAwhenthespeaker
has a sufficiently high type (i.e. v > v ). This implies that a switch from an
G
ineffective communication equilibrium to an effective communication equi-
librium trades-off deterrence of good interactions against deterrence of bad
interactions. Therefore, when the harm to the target from defamatory state-
mentsislargerelativetootherconsiderations,arathercounter-intuitiveresult
is obtained. Even when it is possible to implement effective communication
throughdefamationlaws,itissociallymoredesirablenottodoso.Thishap-
pensbecauseputtingapriceonspeechlendsmorecredibilitytothespeaker’s
statements,whichshecanthenusetoinefficientlyblockagoodinteraction.In
such cases, the superior option is to not make speech credible and cause the
audiencetorelyonitspriors,whichcausesittointeractwiththetarget.
Weformalizethisresultviaproposition4below,andweprovideanexample
anditsgraphicaldepictionviafigure4toillustrateit.
Proposition4. Supposetherearebindingmaximumdamages(i.e.d¯<d ).
2
Then, given all other parameters, there exists a threshold harm from effec-
tive defamation, r¯ , such that ineffective communication equilibria lead to
G
(weakly) higher welfare than all effective communication equilibria if, and
onlyif,r ⩾r¯ .
G G
14. Thisoccurswhenmaximumdamagesarenotenoughtodeterspeechagainstgoodtypes
frequentlyenoughinaneffectivecommunicationequilibrium,asnotedvia(7)-(8)andtheaccom-
panyingdiscussion.
EElleeccttrroonniicc ccooppyy aavvaaiillaabbllee aatt:: hhttttppss::////ssssrrnn..ccoomm//aabbssttrraacctt==44118811889900

<<PAGE_BREAK>>

18 .V0N0
Proof. Using(1)and(2),wecanexpressthedifferenceinbetweenineffective
andeffectivecommunicationequilibriaas:
(cid:90) 1
W −W =(1−γ)[r −b−E[v]]+γ [r +g−v+l]f(v)dv
I L B G
vG(d)
Thisexpressionisincreasingandunboundedinr .Thus,thereexistsr¯ such
G G
thatW ⩾W iffr ⩾r¯ .
I L G G
In figure 3, below, we depict multiple cases which illustrate the rationale
behindproposition4.Inthisexample,visdistributeduniformlyandr¯ =1.7
G
isusedtoillustrateallthreepossibilities.15
Asthefigureillustrates,thegapbetweenwelfareobtainedthroughlowdam-
ages under the two types of equilibria is decreasing in damages but increas-
ingtheharmthatthetargetsuffersfromeffectivedefamation.Thus,forsmall
defamation harms to the target, effective communication equilibria obtained
through maximum damages are superior, and the opposite conclusion holds
forlargedefamationharms.Theexceptionalcasewherethetwotypesofequi-
librialeadtothesameamountofwelfarewhenmaximumdamagesareusedis
alsodepictedasanintermediatecase(i.e.thecasewherer =r¯ ).
G G
Theseobservationsimplythatwhendamagesinducingcompleterevelation
of target types are not feasible, it is socially desirable to strive for effective
communication equilibria only when the harms from defamation are small.
Thisresultappearscounter-intuitive,becauseitsuggeststhattheoptimalityof
effective defamation remedies ought to be inversely related to the size of the
alleged harm to the plaintiff. The rationale behind this result is that making
speechcredibleinanenvironmentwheredefamatoryspeechcannotbelargely
eliminated has the function of making some false speech credible, and thus
harmful to type G targets. When the size of the harm to these individuals is
large,itnaturallybecomesmoredesirabletotakeawaythecredibilityofneg-
ativespeechaltogether.
4.3 WelfarewithBayesianversusNa¨ıveAudiences
Inouranalysisthusfar,wehaveconsideredaBayesianaudiencewhosebe-
liefsareconsistentwithequilibriumbehavior.Analternativeassumptionoften
invokedintheliteratureisthattheharmfromdefamatorystatementsisinde-
pendentofthefrequencyoffalsestatements.Wecalltheaudienceunderthis
alternative assumption na¨ıve, and we consider the differences in the implica-
tionsofamodelwithana¨ıveversusBayesianaudience.Whentheaudienceis
na¨ıve, itavoidsaninteractionwiththetargetif, andonlyif, itreceivesadis-
paragingstatementfromthespeaker,anditdoessoregardlessofthefrequency
offalsestatements.
Thus,withana¨ıveaudience,thespeakerisabletosuccessfullyblockinter-
actionswithbothtargettypeswhendamagesareverylow(i.e.d ⩽ d ).This
1
15. Weusethefollowingvaluestoproducecurvesthatdonotoverlapwitheachotherfor
expositionalpurposes:γ=rB =l= 3
4
;g=b=1;andqG=
1
7
0
.
EElleeccttrroonniicc ccooppyy aavvaaiillaabbllee aatt:: hhttttppss::////ssssrrnn..ccoomm//aabbssttrraacctt==44118811889900

<<PAGE_BREAK>>

-- 19
Figure3
EElleeccttrroonniicc ccooppyy aavvaaiillaabbllee aatt:: hhttttppss::////ssssrrnn..ccoomm//aabbssttrraacctt==44118811889900

<<PAGE_BREAK>>

20 .V0N0
isbecausethesedamagesaretoolowtogenerateanylitigationthreatfromthe
target, and thus the speaker disparages the target independently of his type.
Thena¨ıveaudience, unliketheBayesianaudience, reliesonthestatementby
thespeakerinsteadofitsprior,andthereforealwaysavoidsaninteractionwith
thetarget.
Whendamagespassontothemoderaterange,theequilibriumbehaviorand
welfareinthena¨ıveaudiencecaseisidenticaltothosethatareobservedunder
aneffectivecommunicationequilibriumoftheBayesianaudiencecase.Thisis
becausetheBayesianaudience,likethena¨ıveaudience,actsinamannercon-
sistentwiththespeaker’sstatementsineffectivecommunicationequilibria.Fi-
nally,whendamagesareveryhigh(i.e.d>d ),thespeakerisdeterredagainst
4
makingdisparagingstatementsagainstbothtypes,andthena¨ıveaudiencein-
teracts with both types. Thus, in this range welfare with a na¨ıve audience is
equaltowelfarewithaBayesianaudience.
Inshort,themoststrikingdifferencearisingfromaswitchfromaBayesian
audience to a na¨ıve audience occurs when damages are too low to cause the
target to litigate (i.e. d ⩽ d ). The most prevalent normative impact of this
1
difference is observed when there is an upper bound on maximum damages,
since otherwise optimal equilibria are trivially obtained in the intermediate
moderate range (i.e. d ∈ [d ,d ]) under both models. Thus, we focus on the
2 3
case where d¯ < d to highlight the greatest difference between the models
2
withaBayesianandana¨ıveaudience.
Aswepreviouslynoted,withaBayesianaudience,typeGtargetsaremade
worseoffwhendamagesinthelowermoderaterangelendcredibilitytospeaker’s
statements. Thus, as we noted via proposition 4, when defamatory harms are
large,welfareisactuallyreducedwhendefamationlawsareeffectivecompared
towhentheyarenot.Theoppositeconclusionholdswithana¨ıveaudience.In
this case, increasing damages always leads to less frequent defamatory state-
ments,andtypeGtargetsalwayspreferstricterdefamationlaws.Thus,when
defamatoryharmsarelarge,contrarytothecasewithaBayesianaudience,it
isoptimaltousemaximaldamages.
We illustrate this result through figure 4, which depicts welfare obtained
in the example used to generate the high r case in figure 3,16 but this time
G
italso includeswelfareobtainedwith ana¨ıveaudience. Thefigureillustrates
thatwhileitisoptimaltoincreasedamagestotheirmaximallevelwithana¨ıve
audience,itisoptimaltousedamageslowenoughtoguaranteetheemergence
ofineffectivecommunicationequilibriawithaBayesianaudience.Thus,when
harms from defamatory statements are large, assuming that the audience is
na¨ıveisnotmerelyasimplifyingassumption,itisonethatcangeneratemis-
leadingnormativeimplications.
16. Asareminder,thiscorrespondstothecasewherevisuniformlydistributed;rG = 9
4
;
γ=rB =l= 3
4
;g=b=1;andqG=
1
7
0
.
EElleeccttrroonniicc ccooppyy aavvaaiillaabbllee aatt:: hhttttppss::////ssssrrnn..ccoomm//aabbssttrraacctt==44118811889900

<<PAGE_BREAK>>

-- 21
Figure4
EElleeccttrroonniicc ccooppyy aavvaaiillaabbllee aatt:: hhttttppss::////ssssrrnn..ccoomm//aabbssttrraacctt==44118811889900

<<PAGE_BREAK>>

22 .V0N0
5. ExtensionsandDiscussion
InSections3and4, wepresentedamodelthatallowedustoclearlyfocus
ondefamationlaws’impactontheaudience’sequilibriumbeliefsandactions.
In doing so, we abstracted from many issues that bear on the regulation of
information in more general settings, particularly, the possibility of there be-
ing a committed public enforcer, quality being endogenously chosen by the
target, the existence of honest and other types of speakers, and courts being
lessaccuratethanwepreviouslyassumed.Hereweturnourattentiontothese
issues.
5.1 EndogenousTypesandDynamicEfficiencies
In our analysis thus far, we assumed that the target’s type is exogenously
determined by nature to be either G or B with probabilities γ and 1−γ, re-
spectively. One might question the reality of this assumption, as people can
makeinvestmentsthatwouldmakethembetterorworsetradingpartners,e.g.,
create higher quality products, maintain safety standards, or keep higher hy-
gienestandards.Garoupa1999a,b,forinstance,takesasimilarapproach,and
assumesthatthetarget’sbehaviorisimpactedbywhatlawsareinplace.Here,
we explain how the types in our setting can be endogenized, and how doing
so yields results similar to those in prior work where the target’s behavior is
endogenous.
One option of incorporating quality investments into our analysis is to re-
place Nature’s choice of types with a preliminary stage where the target, T,
makes a costly investment (c) that can increase her likelihood of becoming
a good type. Formally, we may assume that γ = γ(c) with γ′ > 0 > γ′′,
limγ′(c)=∞,γ(0)=γ and limγ(c)=γ where1>γ >γ >xˆ>0.
c→0 c→∞
Thequalityinvestmentdecisionisnowpartofalargergame.Givenanysub-
gameequilibrium,thebestresponseofT istomakeaninvestmenttomaximize
hisexpectedpay-off,whichcanbedenotedasγ(c)m +(1−γ(c))m −c
G B
wherem andm refertothepayoffsheobtainsinthesub-gameequilibria.
G B
Thisobservationrevealsaveryclearresult: Whenthelawsareextreme,i.e.
d ̸∈ [d ,d ], the target has no reason to invest in quality. This follows from
1 4
Proposition 2, which shows that with extreme laws, the audience acts based
on its priors and interacts with the target. Thus, investments have no private
returnsforthetarget.
Itisonlywhenthelawsaremoderatethattargetsmayhaveanincentiveto
investinquality.Thiscanbedemonstratedbyfocusingonthelowerboundof
intermediatedamages,i.e.d .Inthiscase,ineffectivecommunicationequilib-
1
ria,itfollowsthatm =0(becauseallbadtypesaredisparaged)whilem =
B G
F(v (d))r(becausegoodtypesaredisparagedwithprobability1−F(v (d)),
G G
inwhichcasethereisalawsuitwhichpaysthetargetexpecteddamagesequal
tolitigationcosts).Thus,thetarget’spay-offisγ(c)F(v (d))r−c,and,there-
G
fore,thetargetprofits(inexpectation)frominvesting.Whetherthisissocially
good or bad, depends, of course, on whether there are net social gains from
such investments. In our context, this is socially valuable as long as the ex-
EElleeccttrroonniicc ccooppyy aavvaaiillaabbllee aatt:: hhttttppss::////ssssrrnn..ccoomm//aabbssttrraacctt==44118811889900

<<PAGE_BREAK>>

-- 23
pectedbenefitsfromgoodinteractions(F(v (d))g)—whicharenotinternal-
G
izedbyT—aregreaterthantheexpectedlitigationcostslandthelossofben-
efit to S from blocking an interaction, i.e. F(v (d))E[v|v > l]. In fact, if
G 2
investments in quality are socially valuable, as is implicitly assumed in the
literature (e.g., Garoupa 1999a,b), then increasing damages within the inter-
mediate range up to d will be desirable. This is because these higher dam-
2
ages lead to a lower probability of disparaging remarks made against good
types (as illustrated in Figure 2) and, thus, increase m , while still keeping
G
expectedpayoffsfrombeingabadtypeatm = 0.Therefore,theextension
B
of our model with endogenous types resonates with Garoupa’s (1999a,b) in-
sightsthatmoderatedamagescanincentivizeinvestmentsinbecomingagood
type.Moreover,ithighlightsthepotentialsocialcostsandbenefitsassociated
withsuchinvestmentmorespecifically.
Thediscussionherehighlightstheimportanceofinformationregulationfor
broadermarketdynamics.Theintuitionunderlyingourresultsarestraightfor-
ward.Extremelawsleadtoineffectivecommunicationequilibria.Incontrast,
moderatelawscreateanenvironmentwithmorereliableinformationregarding
types, thus generating a greater gap between the payoffs obtainable by good
typesversusbadtypes.17Inrealisticsettings,providingsuchadditionalincen-
tivesissociallydesirablewhenthepotentialinvestorisunderincentivizeddue
to problems like information asymmetries. The gains from such investments
inqualityshouldbeaddedtotheotherbenefitsofmoderatelawsthatwehave
identified.
5.2 HonestSpeakersandEulogists
Existinganalysesofdefamationlawtypicallyassumethatthespeaker’sneg-
ative statement always harms the target, which is equivalent to the audience
being na¨ıve. Moreover, these analyses (e.g. Garoupa 1999a,b and Bar-Gill &
Hamdani2003)considerstrategicspeakerswhobenefitfromdefamingthetar-
get,andwhosebenefitsfromdoingsoareindependentoftheveracityoftheir
statements.Inreality,however,manyspeakersmaynothavesuchmotivations.
Quite importantly, many people, when asked their opinion, provide an hon-
est assessment of others. Moreover, there are also people who are motivated
by doing the exact opposite of what the speakers in our model are motivated
by; namely, promoting the relationship between the target and the audience.
Inwhatfollowswedistinguishbetweenthefirsttype,truthspeakers,thelatter
type,eulogists,andtheonesweformerlydiscussedinsection3asdisparagers.
Here,webrieflyexplainwhatoccurswhenthesekindsofspeakersareincor-
poratedintoouranalysis.
Inourdiscussion,weconceiveofthesetypesasfollows.Disparagers,aswe
noted,receiveapositivevaluefromblockinganinteraction;truth-speakersare
17. Thisresultisreminiscientofthedeterrencereducingimpactsofjudicialerrorsobtained
inthelawenforcementliterature(see,e.g.,Png(1986),RizzolliandGraoupa(2012),Mungan
(2017), and Lando and Mungan (2018)) wherein judicial errors dilute the deterrence effect of
punishmentbycreatingadisconnectbetweenpunishmentandbehavior.
EElleeccttrroonniicc ccooppyy aavvaaiillaabbllee aatt:: hhttttppss::////ssssrrnn..ccoomm//aabbssttrraacctt==44118811889900

<<PAGE_BREAK>>

24 .V0N0
indifferent with respect to whether the parties will interact but receive some
valuefromspeakingtheirmind; and,eulogistsreceiveavaluefromtherebe-
inganinteraction.Therefore,solongascostsofsodoingarenothigh,dispar-
agers will badmouth the target and truth-speakers will reveal their true type.
Eulogists, in contrast, would always want to praise the target, as there is no
recourse under defamation law for false positive statements (the question of
whythisasymmetryexistsgoesbeyondthescopeofourarticle).
Theincorporationofthesetypesofspeakershasnoimpactontheobserva-
tionthatextremelystrongdefamationlawsleavetheaudiencetoactupontheir
priors. This follows, because once a critical threshold of damages is passed,
disparagers as well as truth speakers are deterred from making negative re-
marks.Thus,extremelystrongdefamationlawscausedisparagers,truthspeak-
ers, and eulogists alike to abstain from making negative statements, and the
audiencehasnooptionbuttoactaccordingtoitspriors.
The same cannot be said, however, for extremely weak defamation laws.
When damages are very low, targets lack an incentive to bring suit, making
talk cheap. Despite that, disparaging statements are still somewhat informa-
tive:Giventheexistenceofsometruth-speakers,thereissomeprobabilitythat
anynegativestatementistrue.Consequently,anaudiencethathearsanegative
statementevaluatesitscredibilitybasedontheratiooftruth-speakerstodispar-
agers.Thus,inanassessmentwitha∗(z)=z,wecanformulatetheaudience’s
consistentbeliefthatthetargetisagoodtype,conditionalonanegativestate-
ment as x∗ = γ ∆ where τ denotes the proportion of truth speakers,
1 ∆+(1−γ)τ
and ∆ is the proportion of disparagers. On the other hand, non-disparaging
remarksdonotnecessarilymeanthatT isagoodtype.Bysimilarlogic,there
is some probability that any given praise is false given the existence of eulo-
gists.Anaudiencewhichhearsapositivestatementevaluatesitsveracityasa
function of the ratio of eulogists to truth-speakers. Thus, we can express the
audience’sbeliefasx∗ =γ τ+ε ,whereεistheproportionofeulogists.
0 γτ+ε
Using these observations it is easy to verify that, under lax laws, both dis-
paraging and non-disparaging statements are somewhat informative of types.
Inotherwords,non-disparagingstatementsaremoreindicativeofgoodtypes
than no information at all (x∗ > γ), and disparaging statements are more
0
indicativeofbadtypesthannoinformationatall,i.e.x∗ <γ.Thus,iftheau-
1
dience’snecessarylevelofconfidenceforinteraction,(x),iscloseenoughtoγ
(cid:98)
suchthatx∗ ⩾ x ⩾ x∗,onecanachieveanequilibriumwhereintheaudience
0 (cid:98) 1
meaningfullyusestheinformationprovidedbyspeakers,evenwhenthereare
nosanctionsforfalsestatements.If,however,x∈/ [x∗,x∗],thenlaxlawscause
(cid:98) 1 0
theaudience toignore thestatement andact accordingto its priors, as inour
analysisinsection3.Thus,wefocusourremainingdiscussiontocaseswhere
x∗ ⩾x⩾x∗.
0 (cid:98) 1
Incaseswheredamagesaremoderate, someoftheclaimsmadeinsection
3 need to be qualified, whereas others remain intact. In particular, it is still
the case that moderate damages improve the reliability of information over
extremedamages.Toseethis,consider,forinstance,theimplicationsofrais-
EElleeccttrroonniicc ccooppyy aavvaaiillaabbllee aatt:: hhttttppss::////ssssrrnn..ccoomm//aabbssttrraacctt==44118811889900

<<PAGE_BREAK>>

-- 25
ingdamagesfromlowlevelsto l .Amongspeakers,thischangeonlyalters
2qG
the incentives of disparagers, because these are the only speakers who have
aninterestinmakingfalsestatementsaboutgoodtypes,who,giventhislevel
ofdamages,bringalawsuitagainstthem.Thus,theproportionofdisparagers
who make false statements is reduced, which causes x∗ to fall and x∗ to in-
1 0
crease,i.e.itcausesinformationsuppliedbyspeakerstobemoreinformative.
Thisobservationrevealsanotherofourresultsthatcarriesoverinamodified
way:onecanusedamagesequaltod <d todeteralldisparagersfrommak-
2 3
ingfalsestatementsandalsoguaranteethattherearenolawsuitsbybadtype
targets.Inthiscase,itimmediatelyfollowsthatx∗ =0,suchthatadisparaging
1
statementisperfectlyinformative.
The presence of eulogists, however, means that x∗ < 1. Thus, equilibria
0
that are completely informative of the target’s type are no longer obtainable.
Still,eveninthepresenceofeulogistsanddisparagers,imperfectlyinformative
equilibria are possible. Moreover, these equilibria are optimal, because they
lead to no litigation costs, cause all possible good interactions to take place,
andachievemaximumdeterrenceofbadinteractions.
We conclude that the introduction of honest speakers as well as what we
calledeulogists—peoplewhowishtopromotethetarget—doesnotaffectthe
superiorityofmoderatedamagesoverextremeformsofdamages.Whatdoes
changeisperhapssomewhatcounterintuitive: strictlawsturnouttobeworse
thanlaxlaws.Strictlawsleadtocompletelyuninformativespeechinequilib-
riumwhereaslaxlawsstillallowspeechtobesomewhatinformative,permit-
tingeffectivecommunicationequilibria.
5.3 CommitmentandPublicEnforcement
Our analysis so far focused on private enforcement of defamation laws,
where the target is the one to sue. However, private parties will only bring
alawsuitifitpaystodosoex-post, andthiscalculusexposesthemtostrate-
gicbehaviorbywould-bedefamers.Incontrast,someparties,typicallypublic
agencies, maybeabletocommitex-antetosue, evenifitdoesnotpaytodo
soex-post.Infact,thisistheimplicitassumptioninvokedinmuchoftheeco-
nomics of public law enforcement literature (see, e.g., Polinsky and Shavell
2007 for a survey). Comparing private and public enforcement can be useful
inunderstandingothercontextswhereinformationisregulated,andmayalso
illuminatethereasonswhyprivateenforcementisusedindefamation.
Tohelpinthiscomparison,weconsiderasimplemodificationofouranal-
ysis wherein instead of the target, it is a public enforcement agency that can
bring suit against disparaging remarks. The agency, however, is not privy to
thetarget’sprivateinformationregardinghistype,whichisbyassumptionun-
observable,andsoitcannotconditionitsactiononT’stype.Theagencythus
choosessomeprobability,p∈(0,1),withwhichitwillbringalawsuit.Asthe
choiceofpdoesnotdependonanynewinformation,itischosenex-anteandis
communicatedto,orobservedby,would-bespeakers.Thechoiceofpreplaces
p∗(t) in in the prior sections. We retain all other assumptions, including the
EElleeccttrroonniicc ccooppyy aavvaaiillaabbllee aatt:: hhttttppss::////ssssrrnn..ccoomm//aabbssttrraacctt==44118811889900

<<PAGE_BREAK>>

26 .V0N0
assumption that the probabilities with which the speaker will be found liable
incourtareq andq ,whenshemakesdisparagingstatementsagainstgood
G B
andbadtypes,respectively.
Thissimplemodificationallowsustocalculatetheanalogsofthetwocrit-
ical damages pertaining to the best responses of S noted in (3). Specifically,
these two critical values now become d˜ ≡ 2v¯−pl and d˜ ≡ 2v¯−pl. Thus, in
effectivecommunicationequilibriawith 2 d>d˜ 2pq th G espeake 4 rdoe 2 s p n q o B tmakedis-
2
paragingstatementsagainstgoodtypes,andrefrainsfrommakingdisparaging
statementsagainstbadtypeswhend > d˜.Itcanbeeasilyverifiedthateach
4
ofthesevaluesislargerthantheircorrespondinganalogintheprivateenforce-
mentcontext,i.e.d˜ >d andd˜ >d .
2 2 4 4
The commitment to bringing a lawsuit also changes the speaker’s behav-
ior, as a lawsuit is possible even when expected damages are low. We next
explainthebehaviorofthespeakerineffectivecommunicationequilibria,un-
der three different damages ranges, and subsequently compare them with the
correspondingbehaviorunderprivateenforcement.
Asunderprivateenforcement,itfollowsthatwhendamagesareveryhigh,
i.e.,d>d˜,alldisparagingremarksaredeterred.However,whend∈(d˜,d˜),
4 2 4
the speaker refrains from disparaging good types, but disparages bad types
wheneverhervaluefromblockinginteractionsissufficientlyhigh(i.e.v˜ (d)≡
B
p(q d− l) < v)whichhappenswithprobability1−F(v˜ (d)) > 0.Thus,
B 2 B
in this range, a disparaging remark conclusively reveals to the audience that
thetargetisabadtype;andanon-disparagingcommentisaninformative,but
inconclusive,signalthatthetargetisagoodtype,i.e.x∗ =0<γ <x∗.When
1 0
damages are low, i.e., d < d˜, the speaker is no longer necessarily deterred
2
from disparaging good types, and chooses to defame the target if her value
from blocking interactions exceeds v˜ ≡ p(q d− l). Thus, it follows that
G B 2
0<1−F(v˜ (d))<1−F(v˜ (d)),and,therefore,0<x∗ <γ <x∗ <1.
G B 1 0
We can now compare defamation laws under public and private enforce-
mentregimes.First,effectivecommunicationequilibriaarenotpossibleunder
either regime when damages are extremely high (i.e. higher than d˜ and d
4 4
in the public and private regimes, respectively). Thus, our previous conclu-
sion regarding the ineffectiveness of high damages in supporting informative
statementsextendstothepublicenforcementcaseaswell.
Second, unlike private enforcement, public enforcement can sustain effec-
tivecommunicationequilibriaevenwithlowdamages.Underprivateenforce-
ment, the speaker will anticipate that the target will not sue if damages are
sufficiently low. This can lead the speaker to disparage regardless of the tar-
get’s type, which would make statements non-informative. With public en-
forcement, however, there is always a risk of a lawsuit, thus deterring some
would-bedefamersandsustainingthereliabilityofsomestatements.Thisim-
pliesthat,unlikeintheprivateenforcementcontext,verylowdamagescanbe
usedtosupporteffectivecommunicationequilibria—atleastwhenthethresh-
oldbeliefoftheaudience,i.e.xˆ,isnottoofarfromitspriors,i.e.whenγ−xˆ
is not large, because then xˆ ∈ [x∗,x∗]. Note that this means that low dam-
1 0
EElleeccttrroonniicc ccooppyy aavvaaiillaabbllee aatt:: hhttttppss::////ssssrrnn..ccoomm//aabbssttrraacctt==44118811889900

<<PAGE_BREAK>>

-- 27
agescanbesuperiortohighdamagesinfacilitatingeffectivecommunication
betweenthespeakerandtheaudience.
Third, and quite importantly, it is impossible to obtain an equilibrium that
alwaysrevealsthetarget’stypewithpublicenforcement: asnotedabove,any
damages below d < d˜ result in good types being disparaged with a proba-
4
bilityof1−F(v˜ (d)) > 0,badtypesbeingdisparagedwithaprobabilityof
G
1−F(v˜ (d))<1,orboth.Thisimmediatelyimpliesthatprivateenforcement
B
dominatespubicenforcementintermsofitswelfareconsequences.Thediffer-
ence in the welfare obtainable under the two regimes is enhanced further by
thefactthatunderpublicenforcement,theenforcementagency’scommitment
resultsinlitigation.
Thelastpointhighlightsamoregeneralandimportantadvantageofprivate
enforcementoverpublicenforcement.Specifically, privateenforcementdele-
gates the decision to litigate to the party with the best information about the
meritsofthecase.Moderatedamagescanbecraftedtoseparategoodandbad
types based on their willingness to sue, and this enables the speaker’s state-
mentstobemoreinformativeofthetarget’stype.
Insum,thiscomparisonilluminatetherelativevalueofpublicversuspublic
enforcement.However,asourfocushereisoncommitment,weabstractfrom
otherrelevantconsiderations, suchastherelativecostsoflearningaboutdis-
paragingremarksorproducingevidence.Inasmuchaspublicagenciesemploy
discretion, they are also susceptible to capture and other public choice prob-
lems.Theseconsiderationsshouldalsobetakenintoaccountincomparingthe
relative social desirability of pubic versus private enforcement in regulating
speech.
5.4 InaccurateCourts
To keep our analysis focused, we presented results obtained in the case
wherethecourtisrelatively‘accurate’inrenderingdecisions,inthesensethat
itcommitserrorswithlowfrequency(i.e.q <q ( l/2 )).Themainroleof
B G 1−l/2
thisassumptionistoguaranteetheexistenceofarangeofmoderatedamages
whichleadstoseparatingequilibria.
We relax the assumption that courts are accurate in a prior version of this
article,18 which reveals that most results we presented extend to this case. A
notableexceptionisthattheremaybenoeffectivecommunicationequilibrium
whichleadstogreatersocialwelfarethanwhentheaudienceislefttoactbased
onitspriors,andthisistrueevenwhentherearenodamagecaps.Thereason
forthisisthatthesmallestdamageswhichincentivizetypeB targetstobring
suit(i.e.d )arethensmallerthanthesmallestdamagesthatdeterthespeaker
3
from disparaging type G targets. This causes there to be no damage amount
whichislowenoughtodisincentivizefrivolouslawsuitswhilealsocompletely
deterring defamatory speech. Thus, effective communication equilibria can-
noteliminatefalsestatements.Thiscancauseverylowdamagestobeoptimal,
duetothesamerationalesthatemergewhendamagesarebounded(seesection
18. SeeArbel&Mungan2020.
EElleeccttrroonniicc ccooppyy aavvaaiillaabbllee aatt:: hhttttppss::////ssssrrnn..ccoomm//aabbssttrraacctt==44118811889900

<<PAGE_BREAK>>

28 .V0N0
4.2).ThisresultfurtherhighlightstheimportanceofBayesianaudiences.With
ana¨ıveaudience,standardeconomicmodelswouldpredictthatoptimaldam-
agesaremoderate, becauselowdamageswouldinvitetoomuchfalsespeech
towhichtheaudiencelendscredence.
6. Conclusion
Existing economic analyses of defamation law typically assume that there
are no obstacles in the way of a person who wishes to harm another person
throughdefamatorystatements.However,forsuchharmstoberealized,people
must find the derogatory statements made by the person credible. The credi-
bility of these statements, in turn, depend on what types of consequences a
speaker faces by making such statements. Defamation law is a tool that can
be used to alter these consequences, and therefore the credibility of negative
statements.Wehaveformalizedthisdynamicbystudyingthebeliefformation
processofpeoplewhoaretherecipientsofsuchinformation.
Our analysis has revealed several interesting dynamics. When courts are
accurateandthemaximumrecoverabledamagesfromthedefendantarelarge,
onecanlargelyeliminatefalsespeech.However,whentheseconditionsdonot
hold,itispossiblefortheregulationofspeechthroughdefamationlawtocause
more harm than benefits. This may occur because the credibility of speech
obtainedthroughweakorinaccurateenforcementofdefamationlawcanlead
toanincreaseinfalsenegativespeechwhichisbelievedbytheaudience(and
thismayalsoleadtosignificantlitigationcosts).Inothercases,itpossiblefor
the increased informativeness obtained through defamation law to outweigh
its social costs. Which of these two cases is obtained depends, among other
things,ontheharminflictedtothetargetofspeech.
Onereasonwhytheseconclusionshavenotbeendevelopedinthevastlegal
literatureonthetopicispresumablytheinsufficientattentionpaidtotherole
of audiences, which have typically assumed to be na¨ıve. We believe that our
basic insights are also applicable to many other areas of law where the goal
is to regulate the veracity of information. Although our analysis represents a
stepforwardinunderstandingimportantdynamicsinthesecontexts,wewere
unabletoincorporatemanyotherpossibilitieswhichmayyieldadditionalin-
terestinginsights.Wehighlightsomeissueswehaveabstractedfromwiththe
hopeofhighlightingsomeavenuesforfutureresearch.
We have focused, for instance, exclusively on plaintiffs who bring suit to
increasetheirmonetarywell-being.But,therearemanyplaintiffswhoaremo-
tivatednotbythedamagestheymayrecover,butbytheprospectofadvancing
thetruth.Inthesecircumstances,largerexpecteddamagesmaycrowd-outthe
intrinsicmotivationsofthepotentialplaintifftobringsuitbymakingitharder
forthirdpartiestoidentifythetruemotivationsoftheplaintiff.Similarly, we
consideredahomogenousaudienceandassumedthatthespeakerhasperfect
informationregardingthetarget’stype.Relaxingtheseassumptionsmaycause
a greater wedge between the results obtained with na¨ıve audience members
and with Bayesian audience members. We hope that the framework we have
EElleeccttrroonniicc ccooppyy aavvaaiillaabbllee aatt:: hhttttppss::////ssssrrnn..ccoomm//aabbssttrraacctt==44118811889900

<<PAGE_BREAK>>

-- 29
Figure5
developed here can be used as starting point to incorporate these additional
considerations.
7. Appendix
GameTree
Figure5depictstheinteractionsbetweentheplayers.Itsummarizesthepar-
ties’payoffsattheterminalnodesonthebottomintheorderS,A,T.Thereare
twographicallimitationsofFigure5.First,itdoesnotshowinformationsets
describing A’s knowledge regarding S’s type, due to the depiction difficulty
causedbyS drawinghertypefromacontinuum.Second,foreaseofexposi-
tion, Figure5doesnotdepictNature’sv drawdeterminingS’sinclinationto
disparage.
PerfectBayesianEquilibriumRequirements
InformalizingtherequirementsforaPBE,wefirstspecifytheunconditional
(orexante)probabilitywithwhichSwilldisparageT givenanystrategy,s,as
follows:
(cid:90) 1
µ(s)≡ [γs(G,v)+(1−γ)s(B,v)]dF(v) (1)
0
When µ(s) ∈ (0,1), we can use Bayes’ rule to calculate the probability
ofT’stype, goodorbad, conditionalonthestatementmadeaboutT.Onthe
otherhand,whenµ(s) ∈ {0,1},itfollowsthatS isplayingastrategywhere
he(almost)always avoidsdisparaging(0)ordisparages(1) T, inwhichcase
Bayes’rulecannotbeusedtocalculatetheprobabilityofT beingaparticular
EElleeccttrroonniicc ccooppyy aavvaaiillaabbllee aatt:: hhttttppss::////ssssrrnn..ccoomm//aabbssttrraacctt==44118811889900

<<PAGE_BREAK>>

30 .V0N0
type, conditional on the strategy which is (almost) never played by S. Thus,
wedenotebothpossibilities,asfollows:
(cid:82)1s(G,v)dF(v)
γ 0 if µ(s)̸=0
Γ(t=G|z =1,s)≡ µ(s) (2)
Υ otherwise
(cid:82)1(1−s(G,v))dF(v)
γ 0 if µ(s)̸=1
Γ(t=G|z =0,s)≡ 1−µ(s) (3)
Υ otherwise
Here, the symbol Υ indicates that the strategy in question is (almost) never
chosenbythespeaker.
GiventhisnotationwemaycharacterizePBEasanassessmentconsistingof
thestrategyprofilea∗,s∗ andp∗ alongwithasetofbeliefsx∗ andx∗,which
0 1
satisfiesthefollowingfourrequirements.
Requirement1(R1): Ahasnoprofitabledeviationgivenitsbeliefs:
a∗(z)=0 if x >x forz ∈{0,1}
z (cid:98) (4)
a∗(z)=1 if x <x forz ∈{0,1}
z (cid:98)
R1statesthatAinteractswithT onlyifAbelieves,givenS’sstatement,that
the probability that T is a good type exceeds the threshold probability of x.
(cid:98)
Similarly, if A believes that T is a good type with a probability that is lower
thanx, AdoesnotinteractwithT.Intheexceptionalcasewherex = x, A
(cid:98) z (cid:98)
isindifferentbetweeninteractingwithT andnot,and,thusitmayplayeither
strategy.
Requirement2(R2):T hasnoprofitabledeviationsinsub-games:
0 if q d<l/2 fort∈{B,G}
p∗(t)= t (5)
1 if q d>l/2 fort∈{B,G}
t
R2statesthatthePBEstrategyofT mustbesuchthatinsubgameswhereS
disparageshim,T litigateswheneverthecostsofdoingso(l/2)arelowerthan
theexpecteddamagerewardsthathecanobtainfromlitigation.Conversely,T
choosesnottolitigatewhenthecostsarehigherthanexpecteddamages.Inthe
exceptionalcasewhereq d=l/2,T isindifferentbetweenlitigatingandnot.
t
Requirement3(R3):Shasnoprofitabledeviations:Forallt,vpairs,s∗(t,v)
maximizesplayerS’spayoff,whichcanbeexpressedas
l
U ≡a∗(s(t,v))(v−p∗(t)s(t,v){q d+ }) (6)
S t 2
The requirement with respect to S appears more complex than the re-
quirementsthatpertaintoT andA’sstrategies,becauseS choosesheractions
in anticipation of the other players’ actions. Still, the requirement is simply
that,givenherowntype,T’stype,andtheanticipatedbehaviorofAandT,S
mustchoosethecourseofactionthatwouldmaximizeherpayoff.
Requirement4(R4):A’sbeliefsareconsistent:
x∗ =Γ(t=G|z,s∗)wheneverΓ(t=G|z,s∗)̸=Υforbothz ∈{0,1} (7)
z
R4 simply states that A’s beliefs must be consistent with the implied condi-
tionalprobabilityofT beingaparticulartypebasedontheequilibriumstrategy
EElleeccttrroonniicc ccooppyy aavvaaiillaabbllee aatt:: hhttttppss::////ssssrrnn..ccoomm//aabbssttrraacctt==44118811889900

<<PAGE_BREAK>>

REFERENCES 31
of S. This requirement is applicable only to strategies which have a positive
probabilityofbeingplayedbyS.
Proof of Proposition 2: The proof begins with part (iii), which is used in
provingpart(i).
(iii) We show that the audience ends up always interacting with T, in all
equilibria where the actions of the audience are not described by a∗(z) = z
forz ∈{0,1}.
SupposethereisaPBEwherea∗(z) = 0forallz.Bydefinition,theaudi-
encealwaysinteractsinsuchassessments.
Suppose there is a PBE where a∗(z) = 1 − z for all z, then per R3,
s∗(t,v) = 0 for all v and t, and, therefore, µ(s∗) = 0, which implies that
Γ(t = G|0,s∗) = γ.ThisimpliesviaR4thatx∗ = γ,which,inturnimplies
0
viaR1that a∗(0)=0,whichcontradictstheassumptionthata∗(0)=1.
Suppose there is a PBE where a∗(z) = 1for all z. If µ(s∗) = i ∈ {0,1},
then Γ(t = G|i,s∗) = γ, which implies via R4 that x∗ = γ. This implies
i
viaR1thata∗(i)=0,whichisacontradictionwiththeinitialsupposition.If,
on the other hand, µ(s∗) ∈ (0,1), observe that, per R4, x∗ ⩽ γ implies that
0
x∗ ⩾ γ, because x∗(1−µ(s∗))+x∗µ(s∗) = γ. Thus, x∗ ⩽ γ implies that
1 0 1 0
x∗ ⩾γ >x,whichisacontradictionwiththeimplicationofR1thatx∗ ⩽x.
1 (cid:98) 1 (cid:98)
(i) Consider damages d < d , and suppose a∗(z) = z for all z. It follows
1
viaR2thatp∗(t)=0forallt.Thus,R3impliesthats∗(t,v)=1forallvand
t, and, therefore, x∗ = γ due to R4 . Thus, in equilibrium, the audience acts
1
accordingtoitspriors.
Next, consider damages d > d . It follows per R2 that p∗(t) = 1. Thus,
4
perR3,s∗(t,v) = 0forallv andt,becaused > d .ThisimpliesviaR4that
4
x∗ =γ.Thus,inequilibrium,theaudienceactsaccordingtoitspriors.
0
Theanalysisofthesetwocasesdemonstratesthatwhend ̸∈ [d ,d ],inall
1 4
PBE where a∗(z) = z for all z, the audience acts according to its priors. In
addition, part (ii) of this proposition demonstrates that the audience acts ac-
cordingtoitspriorsinallPBEwheretheaudience’sbehaviorisnotdescribed
bya∗(z) = z.Thus,wheneverd ̸∈ [d ,d ],theaudienceactsaccordingtoits
1 4
priorsinallPBE.
(ii)Thediscussionofseparatingequilibriainsection3.4demonstratesthat
suchdamagesexist.
References
Acheson, D. J. and A. Wohlschlegel. 2018. The Economics of Weaponized
DefamationLawsuits.47SouthwesternLawReview335-384.
Arbel, Y. and M. Mungan. 2019. The Case Against Expanding Defamation
Law.71AlabamaLawReview453-497.
Arbel,Y.andM.Mungan.2020.RegulatingInformationwithBayesianAudi-
ences,GeorgeMasonLaw&EconomicsResearchPaper19-28.
EElleeccttrroonniicc ccooppyy aavvaaiillaabbllee aatt:: hhttttppss::////ssssrrnn..ccoomm//aabbssttrraacctt==44118811889900

<<PAGE_BREAK>>

32 .V0N0
Arbel,Y.2021.AStatusTheoryofDefamationLaw.AlabamaWorkingPaper
Series2021.
Arbel,Y.2022.TheCredibilityEffect,AlabamaWorkingPaper.
Be´nabou,R.,andJ.Tirole.2006.IncentivesandProsocialBehavior.96Amer-
icanEconomicReview1652-1678.
Be´nabou, R., and J. Tirole. 2011. Laws and Norms. National Bureau of Eco-
nomicResearchNo.w17579.
Bar-Gill,OrenandAssafHamdani.2003.OptimalLiabilityforLibel.2Con-
tributionsinEconomicAnalysis&Policy,1-26.
Crawford, V. and J. Sobel. 1982. Strategic Information Transmission, 50
Econometrica1431-1451.
Dalvi, M. and J. Refalo. 2008. An Economic Analysis of Libel, 34 Eastern
EconomicJournal74-94.
Deffains,B.andC.Fluet.2020.SocialNormsandLegalDesign,36TheJour-
nalofLaw,Economics,andOrganization136-169.
Garoupa,N.1999.TheEconomicsofPoliticalDishonestyandDefamation,19
InternationalReviewofLawandEconomics167-180.
Garoupa, N. 1999. Dishonesty and Libel Law: The Economics of the ”Chill-
ing”Effect,155JournalofInstitutionalandTheoreticalEconomics284-300.
Garoupa,N.andM.Rizzolli.2012WrongfulConvictionsdoLowerDeterrence
168JournalofInstitutionalandTheoreticalEconomics224-231.
Hemel, D. and A. Porat. 2019. Free Speech and Cheap Talk, 11 Journal of
LegalAnalysis46-103.
Hemel,D.2020.EconomicPerspectivesonFreeSpeech.OxfordHandbookof
FreedomofSpeech,118-136.
Heymann, L.2012. TheLawofReputation, andtheInterestoftheAudience,
52BostonCollegeLawReview1341-1439.
Lando,H.andM.Mungan.2018.TheEffectofType-1ErroronDeterrence53
InternationalReviewofLawandEconomics1-8.
Mungan, M. 2016. A Generalized Model for Reputational Sanctions and the
(Ir)relevance of the Interactions between Legal and Reputational Sanctions,
46InternationalReviewofLawandEconomics86-92.
Mungan,M.2017.WrongfulConvictions,Deterrence,andStigmaDilution25
SupremeCourtEconomicReview199-216.
EElleeccttrroonniicc ccooppyy aavvaaiillaabbllee aatt:: hhttttppss::////ssssrrnn..ccoomm//aabbssttrraacctt==44118811889900

<<PAGE_BREAK>>

REFERENCES 33
Pennycook, G., Bear, A., Collins, E., and D. Rand (2020) The Implied Truth
Effect: Attaching Warnings to a Subset of Fake News Headlines Increases
PerceivedAccuracyofHeadlinesWithoutWarnings,66ManagementScience
4944-4957.
Png,IvanPL.1986.OptimalSubsidiesandDamagesinthePresenceofJudi-
cialError6InternationalReviewofLawandEconomics101-105.
Polinsky,M.andS.Shavell.2007.TheTheoryofPublicEnforcementofLaw
in1HandbookofLawandEconomics403-454.
Posner, R., 1986. Free Speech in an Economic Perspective, 20 Suffolk Law
Review1-54.
Posner,R.1973.EconomicAnalysisofLaw,1sted.
Post,R.1986.TheSocialFoundationsofDefamationLaw:Reputationandthe
Constitution.74CaliforniaLawReview691-742.
Rasmusen,E.1996.StigmaandSelf-fulfillingExpectationsofCriminality,39
TheJournalofLawandEconomics519-543.
Sunstein,C.2021.Liars:FalsehoodsandFreeSpeechinanAgeofDeception.
EElleeccttrroonniicc ccooppyy aavvaaiillaabbllee aatt:: hhttttppss::////ssssrrnn..ccoomm//aabbssttrraacctt==44118811889900

---

## ssrn-4204862: University of Virginia School of Law
Source: papers/ssrn-4204862/paper.txt

University of Virginia School of Law
Public Law and Legal Theory Research Paper Series 2022-61
Law and Economics Research Paper Series 2022-19
September 2022
Truth Bounties: A Market
Solution to Fake News
By
Yonathan A. Arbel
University of Alabama School of Law
Michael D. Gilbert
University of Virginia School of Law
University of Alabama School of Law
Working Paper No. 4204862
Abstract 4204862
A complete index of University of Virginia School of Law research papers is available at: Law and Economics:
http://www.ssrn.com/link/U-Virginia-LEC.html
Public Law and Legal Theory: http://www.ssrn.com/link/U-Virginia-PUB.html
EEEllleeeccctttrrrooonnniiiccc cccooopppyyy aaavvvaaaiiilllaaabbbllleee aaattt::: hhhttttttpppsss::://////ssssssrrrnnn...cccooommm///aaabbbssstttrrraaacccttt===444222000444888666222

<<PAGE_BREAK>>

TRUTH BOUNTIES: A MARKET SOLUTION TO FAKE NEWS 1/53
TRUTH BOUNTIES: A MARKET SOLUTION TO
FAKE NEWS
Yonathan A. Arbel* & Michael D. Gilbert**
102 North Carolina Law Review (Forthcoming)
ABSTRACT
False information poses a threat to individuals, groups, and society. Many
people struggle to judge the veracity of the information around them, whether
that information travels through newspapers, talk radio, TV, or Twitter.
Concerned with the spread of misinformation and harmful falsehoods, much of
the policy, popular, and scholarly conversation today revolves around proposals
to expand the regulation of individuals, platforms, and the media. While more
regulation may seem inevitable, it faces constitutional and political hurdles.
Furthermore, regulation can have undesirable side effects and be ripe for abuse
by powerful actors, public and private.
This Article presents an alternative for fighting misinformation that avoids
many pitfalls of regulation: truth bounties. We develop a contractual mechanism
that would enable individuals, media, and others to pledge money to support the
credibility of their communications. Any person could claim the bounty by
presenting evidence of the falsity of the communication before a dedicated body
of private arbitrators. Under the system we envision, anyone consuming
information on the internet would know immediately if a given communication
had a bounty attached, whether the communication had been challenged, and
whether the challenge succeeded or failed. As John Stuart Mill recognized, we
can trust our grasp of the truth only by putting it to the fire of challenge. Truth
bounties open the challenge to all.
* Associate Professor of Law, University of Alabama.
** Vice Dean and Professor of Law, University of Virginia. For helpful comments, we thank Liam
Bourque, Danielle Citron, Shahar Dillbary, Benjamin McMichael, and participants in the Harvard
Law School Law & Economics Seminar, the American Law & Economics Conference at Columbia
University, the Midwest Law and Economics Conference at the University of Chicago, the
Maryland Carey Law Virtual Constitutional Law and Economics Workshop, and a seminar at
Université Paris Panthéon-Assas. Alex Wilson, Gilberto Gomez, and Boston Topping provided
diligent research assistance and offered many thoughtful suggestions.
Electronic copy available at: https://ssrn.com/abstract=4204862

<<PAGE_BREAK>>

TRUTH BOUNTIES: A MARKET SOLUTION TO FAKE NEWS 2/53
Introduction .................................................................................. 3
I. Misinformation and Proposals for Reform ............................ 9
A. Increasing the Supply of True Information .......................... 10
B. Decreasing the Supply of False Information ............................ 12
C. Distinguishing True and False Information .............................. 16
II. Fake News in the Marketplace of Ideas ........................... 17
A. The Spillover Problem .......................................................... 18
B. Information Asymmetry ........................................................... 22
III. Truth Bounties .................................................................. 30
A. Skin in the Game .................................................................. 30
B. The Voluntary Pledge ............................................................... 32
C. Challenges and Fees ................................................................. 34
D. Arbitration ............................................................................ 35
E. Rewards and Signals ................................................................. 38
F. Equilibrium and Use Cases ....................................................... 40
G. Sustaining Truth Bounties .................................................... 46
IV. Bounties and the Freedom of Speech............................... 47
A. Contracts vs. Torts ................................................................ 47
B. Equity and Access ..................................................................... 49
C. Hands-On, Hands-Off, and the Invisible Hand ......................... 51
Conclusion ................................................................................... 53
Electronic copy available at: https://ssrn.com/abstract=4204862

<<PAGE_BREAK>>

TRUTH BOUNTIES: A MARKET SOLUTION TO FAKE NEWS 3/53
INTRODUCTION
False information threatens society.1 Many people struggle to judge the
veracity of the information around them, whether that information travels
through newspapers, talk radio, or Twitter. Recent allegations about bad
vaccines, stolen elections, and sex crimes by politicians demonstrate the
problem.2 With social media’s speed and the amplification of content optimized
for likes, clicks, and shares rather than value, and sometimes at the behest of
foreign powers, the mixture of truth and lies churns.3 Some fake stories take
hold, driving opinions, trends, and possibly elections. Alarmed, leading scholars
have turned to this issue with a sense of urgency, offering a menu of regulatory
reforms in books,4 law reviews,5 conferences,6 and the popular press.7
The sense of urgency notwithstanding, and although “fake news” consumes
popular discussion, the basic issue is not new.8 Beyond mass media and the
press, in fields as varied as business, law, medicine, and politics, lying can be
beneficial, so people have an incentive to lie. When lying can be legally or socially
punished—fines, imprisonment, a loss of office or reputation—it can be
deterred, at least in part.9 This explains why products like toasters and providers
like doctors mostly perform as advertised. If they did otherwise, people could
1 See, e.g., Robert Chesney & Danielle Keats Citron, Deep Fakes: A Looming Challenge for Privacy,
Democracy, and National Security, 107 CAL. L. REV. 1753 (2019).
2 See, e.g., Anthony J. Gaughan, Illiberal Democracy: The Toxic Mix of Fake News,
Hyperpolarization, and Partisan Election Administration, 12 DUKE J. CONST. L. & PUB. POL'Y 57,
74 (2017) (“The ease with which fake news, misinformation, and false allegations spread like
wildfire is now a disturbing hallmark of modern politics.”).
3 Brendan Nyhan argues that concerns with fake news reflect a “moral panic,” with little systematic
evidence “to demonstrate that the prevalence of misperceptions today (while worrisome) is worse
than in the past.” Brendan Nyhan, Facts and Myths about Misperceptions, 34 J. ECON. PERSP. 232-33
(2020). Similarly, Yochai Benkler and others contend that misinformation is a real concern but is
elite-driven, rather than grassroots social media phenomenon. Yochai Benkler et al., Mail-In Voter
Fraud: Anatomy of a Disinformation Campaign, 6 BERKMAN CTR. RSCH. PUB. 1 (2020).
4 MARTHA MINOW, SAVING THE NEWS (2021); RICHARD L. HASEN, CHEAP SPEECH: HOW
DISINFORMATION POISONS OUR POLITICS―AND HOW TO CURE IT (2022).
5 Cass R. Sunstein, Falsehoods and The First Amendment, 33 HARV. J. L. & TECH. 388 (2020); Allison
Orr Larsen, Constitutional Law in an Age of Alternative Facts, 93 N.Y.U. L. REV. 175 (2018); Abby K.
Wood & Ann M. Ravel, Fool Me Once: Regulating Fake News and Other Online Advertising, 91
S. CAL. L. REV. 1223 (2018); Ari Ezra Waldman, The Marketplace of Fake News, 20 U. PA. J.
CONST. L. 845 (2018); Nabiha Syed, Real Talk about Fake News: Towards a Better Theory for Platform
Governance, 127 YALE L.J. F. 337 (2017-2018); Madeline Lamo & Ryan Calo, Regulating Bot Speech,
66 UCLA L. REV. 988 (2019); Erwin Chemerinsky, False Speech and the First Amendment,
71 OKLA. L. REV. 1 (2018).
6 See, e.g., International Conference on Media Manipulation, Fake News and Disinformation, World Academy
of Science, Engineering, and Technology, https://waset.org/media-manipulation-fake-news-and-
disinformation-conference (last visited June 19, 2022); Fighting Fake News Workshop, Yale Law
School Information Society Project, https://law.yale.edu/isp/initiatives/floyd-abrams-institute-
freedom-expression/practitioner-scholar-conferences-first-amendment-topics/fighting-fake-
news-workshop (last visited June 19, 2022).
7 Ellen Maloney, Professor Examines How Social Media Incites Spread of Fake News, THE DAILY FREE
PRESS (Oct. 5, 2020); Kevin Aslett, It’s Not Easy for Ordinary Citizens to Identify Fake News, THE
WASHINGTON POST, (Apr. 7, 2020).
8 See, e.g., Marshall W. Van Alstyne, Free Speech, Platforms, and the Fake News Problem,
https://papers.ssrn.com/sol3/papers.cfm?abstract_id=3997980. (recounting how frescos from
the 13th century BC record falsely the victory of Ramses over the Hittites).
9 Part of the problem is that not all lies are detectable, a systemic issue in the market for “credence
goods”—goods whose utility is not apparent even after consumption, such as vitamins, prayer,
legal advice, etc. See J. Shahar Dillbary, Trademarks as a Media for False Advertising, 31 CARDOZO. L.
REV. 327, 341 (2009).
Electronic copy available at: https://ssrn.com/abstract=4204862

<<PAGE_BREAK>>

TRUTH BOUNTIES: A MARKET SOLUTION TO FAKE NEWS 4/53
sue for the harms they suffer, the state could regulate, reputations would suffer,
and profits would shrink. In many domains, economic, legal, and social
sanctions mitigate the problem of dishonesty, even if they do not quite solve it.
In the United States, critics argue that existing sanctions fall short for
deterring falsehoods, especially those propagated online. Unlike manufacturers
and doctors, the purveyors of online falsehoods are often difficult to find, live
outside the jurisdiction, and are judgment-proof.10 Challengers often lack
standing—and even a cause of action—when trying to sue over false stories
causing generalized harm.11 Suing costs time and money, damages are
speculative, and collection is uncertain. The First Amendment shields many
speakers, liars included, from lawsuits and regulations, allowing actions only for
certain categories of falsehoods that cause cognizable harms.12
Recognizing the shortfall, a new wave of literature calls for far-reaching
reforms. Leading scholars and politicians have considered a dizzying, and
sometimes contradictory, array of regulatory fixes. Information labels, fact
checks, expert curation, censorship, signal boosts and shadow bans,13 platform
liability, platform immunity, platform transparency, media subsidies, antitrust
tools—the list of reforms goes on. Some of these proposals have caught on with
legislators. Recently, Texas passed a law meant to fix perceived anti-conservative
bias by limiting social media platforms’ ability to curate content.14 In stark
contrast, President Biden expressed frustration with the failure of platforms to
curate content amid the Covid-19 pandemic—“They’re killing people.”15 The
Biden campaign called for the repeal of Section 230 of the Communications
Decency Act of 1996 (“CDA”), the federal law that provides a legal shield to
interactive computer services for most user-generated content. Recently a group
of Democrats proposed legislation in this vein.16
We make three contributions to the debate. First, we generate a clear,
comprehensive, and concise taxonomy of the various proposals. In our
framework, solutions to misinformation can be understood as attempts to
accomplish one or more of the following three goals: increase the supply of true
information, decrease the supply of false information, or improve people’s ability
to know the difference. Much of the problem of misinformation, we argue, can
be thought of as a ratio: either too many falsehoods or too few truths. This
organizational simplicity in an area full of scattershot proposals is important, not
least because it exposes contradictions and tensions within reforms and the
10 On the harms from defamatory remarks, see generally DANIELLE CITRON, HATE CRIMES IN
CYBERSPACE (2014). On the challenges of dealing with anonymous speech, see Lyrissa Barnett
Lidsky, Silencing John Doe: Defamation and Discourse in Cyberspace, 49 DUKE L.J. 855 (2000).
11 See infra note 185 and accompanying text.
12 See, e.g., United States v. Alvarez, 567 U.S. 709 (2012) (“When content-based speech regulation
is in question, however, exacting scrutiny is required.”).
13 See, e.g., Alstyne, supra note 8, at 23 (proposing that platforms that limit the exposure of accounts
produce misinformation.)
14 John Villasenor, Texas’ New Social Media Law is Blocked For Now, But That’s Not the End of the Story,
BROOKINGS (Dec. 14, 2021).
15 Quinta Jurecic, The Politics of Section 230 Reform: Learning from FOSTA’s Mistakes, BROOKINGS
(Mar. 1, 2022).
16 Margaret Harding McGill, E&C leader talks tech reform with Facebook, Google, Twitter, AXIOS (May
24, 2021)
Electronic copy available at: https://ssrn.com/abstract=4204862

<<PAGE_BREAK>>

TRUTH BOUNTIES: A MARKET SOLUTION TO FAKE NEWS 5/53
motivations to pass them. These tensions suggest that something might be
missing from our understanding of the problem itself.
Our second contribution is to use the tools of economics to complement
and generalize the insights of scholars working in this area, who are mostly
experts in constitutional and administrative law.17 We share their diagnosis that
the marketplace of ideas is producing undesirable outcomes.18 We distill their
concerns into two distinct sources of market failure: spillovers and information
asymmetries 19 These two distinct failures call for different solutions.
Spillovers arise when one person’s speech affects others. Because of
spillovers, we have too much low-quality information and not enough high-
quality information in circulation. This helps explain why many reforms focus
on the “supply side,” that is, on the producers of information. Reforms aim,
directly or indirectly, to reduce the production of false speech or promote the
production of true speech. However, spillovers are not the whole story. The
marketplace of ideas also suffers from a distinct failure of information
asymmetries. Such asymmetries arise when speakers know more about the
veracity of the information than they share than do their listeners. Audiences are
left to wonder what information to trust and what to discard. This calls for
“demand side” solutions, meaning solutions focused on information consumers,
with fact-checking on social media being a prominent example.
Scholars before us have referenced these market failures, but some of their
finer implications have gotten lost. We leverage the economic framework to
offer a critical evaluation of some dominant proposals. As we show, some
proposals run the risk of being ineffective or even counterproductive,
exacerbating the problems they seek to solve. We believe that this evaluation
contributes an important element to contemporary debates and provides new
tools for improved solutions.
Our final contribution is to develop a solution to misinformation. The
solution is general; it could apply to accidental errors in publications, deliberate
lies, defamatory statements about individuals, and generalized lies that are not
legally cognizable. It works on both market failures. On the supply side, it
reduces the incentive to produce low-quality information by making it more
expensive (and conversely, increases the rewards to producing high-quality
17 See, e.g., Frederick Schauer, Free Speech, the Search for Truth, and the Problem of Collective Knowledge, 70
SMU L. REV. 231 (2017); David Pozen, “Truth Drives Out Lies” and Other Misinformation, KNIGHT
FIRST AMEND. INST. AT COLUM. UNIV. (Feb. 9, 2022); MINOW, supra note 4; HASEN, supra note 4;
Genevieve Lakier, The Invention of Low-Value Speech, 128 HARV. L. REV. 2166 (2015); Evelyn Douek,
Content Moderation as Administration, 136 HARV. L. REV. (2022).
18 As Blocher notes, the marketplace analogy remains “the reigning (if somewhat embattled)
justification for free speech.” Joseph Blocher, Institutions in the Marketplace of Ideas, 57 DUKE L.J.
821, 847 (2008).
19 While we borrow ideas from economic theory, we do not make any strong assumptions of
rationality or perfect competition. See, e.g., id, at 833 (noting the limits of the marketplace of ideas
given, among others, “participants’ imperfect ability to reason”). To the contrary, we are sensitive
to the many cognitive and epistemic problems that prevent individuals from engaging in optimal
decision-making. At the same time, we take seriously Professor Lidsky’s admonition that to live in
a democracy requires some degree of respect and trust in the faculties of ordinary people. See
generally Lyrissa B. Lidsky, Nobody's Fools: The Rational Audience as First Amendment Ideal, 2010 U. ILL.
L. REV. 799 (2010). We emphasize the role of a public that earnestly tries to learn about the world
but is often stymied. See infra note 187 and accompanying text.
Electronic copy available at: https://ssrn.com/abstract=4204862

<<PAGE_BREAK>>

TRUTH BOUNTIES: A MARKET SOLUTION TO FAKE NEWS 6/53
information). On the demand side, the solution aims to overcome information
asymmetries by helping people distinguish truths from lies. Unlike fact-
checking, our proposal labels communications before they circulate, punishes
liars, rewards truth-tellers, and reaches more forms of communication. It does
not require constitutional amendments, regulations, or other government
involvement. It just requires a clear and complete understanding of why the
marketplace of ideas has failed.
The key insight is straightforward: to fight misinformation, speakers must
have skin in the game. They must lose something—they must be punished—
when they lie. Law often attempts to punish communicators of false
information, but it does so bluntly and often ineffectively. Suing and prosecuting
individuals is often unsuccessful due to jurisdictional challenges, legal standards,
and defendants with few assets to recover; the deep pockets—social media
companies and other online hubs—enjoy broad immunity from liability thanks
to Section 230. The trick to our mechanism is to have communicators punish
themselves, and do so voluntarily and frequently. This may sound counterintuitive,
but as we emphasize throughout, most speakers do not simply want to produce
information—they want listeners to believe it. For listeners to believe
information, speakers must be credible. One way to gain credibility is to punish
oneself for lying.
We dub our mechanism “truth bounties.” In brief, a communicator—we
will focus on an editorial board or a freelance writer, but it could be anyone—
would publish a story, advertisement, press release, etc., and simultaneously
pledge money (say, $10,000) to a third party. The story would bear an icon
indicating the bounty and its amount. Anyone who believes the story to be false
could file a challenge. To discourage frivolity, trolling, and strategic action, the
challenger would have to pay a fee to the third party, akin to a filing fee in court.
Private arbitrators would resolve the dispute, avoiding entanglements with the
government and the First Amendment. If the challenger won, she would get the
journalist’s bounty, and the loss of the bounty would be publicized. If the
challenger lost, the bounty would remain for others to claim.
Truth bounties are to speech what product warranties are to refrigerators.20
Truth bounties let communicators put skin in the game. We expect speakers to
post bounties for roughly the same reasons that manufacturers offer
warranties.21 Truthful communicators will welcome bounties because they send
a clear positive signal: they stand by their work. Truth bounties are a surefire
way to gain credibility and its attendant benefits: readers, buyers, voters. Because
serious people will not lose their bounties—their news is not fake—the system
poses little risk for them. Hoaxers, on the other hand, will shun the risk.
Someone will successfully challenge their fake news and win the money.
Foreseeing this, hoaxers will not post a bounty.
20 Sanford Grossman, The Informational Role of Warranties and Private Disclosure About Product Quality,
24 J.L. & ECON. 461 (1981); George A. Akerlof, The Market for “Lemons”: Quality Uncertainty and the
Market Mechanism, 84 Q.J. ECON. 488, 499–500 (1970).
21 Research shows that warranties result in higher purchase intentions and higher perceived quality,
consistent with theory. See, e.g., Jens Hogreve & Dwayne D. Gremler, Twenty Years of Service
Guarantee Research: A Synthesis, 11 J. SERV. RES. 322 (2008).
Electronic copy available at: https://ssrn.com/abstract=4204862

<<PAGE_BREAK>>

TRUTH BOUNTIES: A MARKET SOLUTION TO FAKE NEWS 7/53
The public would be a principal beneficiary of this system. The truth bounty
icon could appear next to communications the moment they circulate; no need
to wait days or weeks for a fact check. The icon would tell consumers which
stories have bounties and are therefore credible. Rather than resorting to crude
heuristics, such as only watching a single TV channel one trusts, consumers
could indulge in a richer information diet. With truth bounties, truth and lies can
separate rather than mix. Truth bounties would be open to all—anyone could
attach a bounty to their speech, and anyone could challenge it. Thus, the system
would sidestep the challenges of borders, standing, and jurisdiction, while
democratizing the search for truth.
Truth bounties offer a promising and robust solution to a vexing problem.22
Besides contextualizing truth bounties in light of competing reform proposals,
our objective here is to lay the groundwork for an actual, workable system.
One might worry that truth bounties favor the rich and harm the poor. This
is an important concern, but we do not think it is well founded. The system
would aid consumers of information by helping them sort what is true from what
is false free of charge. Insofar as poorer people have less education and fewer
alternative mechanisms for filtering misinformation, truth bounties would be
especially beneficial. With respect to the production of information by journalists
and others, truth bounties would not necessarily be expensive. Honest producers
of information would not lose their bounties; they would get the money back
after a certain time. By signaling credibility, bounties would allow small players
to compete in the marketplace of ideas with established, monied interests such
as major broadcasting networks and newspapers. One might worry that rich
actors could take advantage of the system by placing a bounty on stories that are
false. In the best-case scenario the bounty would help the false story catch on.
In the worst-case scenario, someone would challenge the story and collect the
bounty, but the rich actor would not mind because she has plenty of money to
spare. This could happen, but we do not think it would be likely or common.
Even if a wealthy actor were willing to bear the loss of bounties, the system
would record and publicize her track record—every story that she bountied,
every challenge that she lost, and so on. Everyone would see that her stories
lack credibility. We will return to these issues below.23
The last and perhaps most radical contribution of our paper is optimism.
Reading the literature on fake news and misinformation, one cannot avoid an
overwhelming feeling of pessimism. Many scholars who are learned in the liberal
tradition, committed to the values of a free society, and acutely aware of the
history of government overreach, censorship, and discriminatory distribution of
22 We are not the first to argue that contractual devices (including warranties) can promote honesty,
but we are the first to develop truth bounties in detail. See Yonathan Arbel, Slicing Defamation by
Contract, U. CHI. L. REV. ONLINE 109 (2020) (briefly discussing truth bounties in the context of
defamation law). In a short blog post we discovered after writing this Article, Robin Hanson
briefly discusses “News Accuracy Bonds.” See Robin Hanson, News Accuracy Bonds, OVERCOMING
BIAS (Sep. 9, 2018, 12:30 PM), https://www.overcomingbias.com/2018/09/news-accuracy-
bonds.html. Two scholars explored a mechanism akin to truth bounties for expert witnesses.
Robert Cooter & Winand Emons, Truth-Bonding and Other Truth-Revealing Mechanisms for Courts, 17
EUR. J. LAW & ECON. 307 (2004). For insightful discussions of fake news, credibility, and
incentives, see generally Van Alstyne, supra note 8, at 27-31; Daniel Hemel & Ariel Porat, Free
Speech and Cheap Talk, 11 J. LEG. ANALYSIS 46 (2019).
23 See infra Part IV.B.
Electronic copy available at: https://ssrn.com/abstract=4204862

<<PAGE_BREAK>>

TRUTH BOUNTIES: A MARKET SOLUTION TO FAKE NEWS 8/53
access to speech, have resigned themselves to the inevitability of speech
suppression. A prominent example is Dean Chemerinsky who confessed his
apostasy: “I still believe in the premise of the First Amendment—that more
speech is better”, and then added, “But ever more, I realize that it is a matter of
faith, and the internet may challenge that faith for all of us.” 24 This
pessimism may be premature. Thinking beyond the hands-off/hands-on
dichotomy of either laissez-faire policies or centralized regulation could help us
imagine new solutions. Truth bounties demonstrate the value of institutional
designs that break this binary mold. Truth bounties offer an intermediate
position and demonstrate that through the building of institutions and market
design we can realize important social goals.
24 Chemerinsky, supra note 5, at 15.
Electronic copy available at: https://ssrn.com/abstract=4204862

<<PAGE_BREAK>>

TRUTH BOUNTIES: A MARKET SOLUTION TO FAKE NEWS 9/53
I. MISINFORMATION AND PROPOSALS FOR REFORM
Misinformation is an ancient problem. Plato worried about deception and
manipulation in politics over 2,000 years ago.25 Sellers exaggerate, puff, or
outright lie about the quality of their goods and services, and presumably they
have done so for centuries. However, misinformation seems especially salient
today. Publication and dissemination have never been easier. Perhaps as a
consequence, “fake news,” meaning false or misleading information presented
as accurate reporting, circulates widely on social media. New technology allows
for “deep fake” videos that depict real people saying and doing things they never
said or did. Changing markets have weakened traditional journalism and
investigative reporting, especially at the local level.26 The scope of private
statements, alongside their permanence on the internet, amplify the reach of
defamatory statements. Together these developments make it hard for people to
assess the veracity of information.
The stakes are high. False claims about election fraud led to an assault on
the U.S. Capitol.27 False claims about COVID have led people to reject valuable
vaccines and ingest alternative medicines of doubtful efficacy.28 Absurdly false
claims about politicians engaged in the sex trafficking of minors caused a
gunman to storm a restaurant.29 False claims about Dominion’s voting machines
have led to threats against the lives of the company’s management and weakened
trust in the democratic process. False claims about Nazis helped Russia (attempt
to) justify its invasion of Ukraine.30
Given the stakes, many scholars have proposed urgent reforms. This Part
canvasses some of those proposals. We cannot do justice to all of the promising
reforms on the table, but we can summarize some of the most common and
compelling arguments. Understanding them will clarify and distinguish our
approach, which we will develop later.
To organize the various proposals in a common framework, we focus on
the root problem: people are exposed to a mix of true and false information and
25 See generally PLATO, REPUBLIC. See also Donald Lateiner, “Bad News” in Herodotos and Thoukydides:
Misinformation, Disinformation, and Propaganda, 9 J. ANCIENT HIST. 53 (2021).
26 JAMES T. HAMILTON, DEMOCRACY’S DETECTIVES: THE ECONOMICS OF INVESTIGATIVE
JOURNALISM 12-33 (2017).
27Steve Inskeep, Timeline: What Trump Told Supporters For Months Before They Attacked, NPR (Feb. 8,
2021); Atlantic Council’s DFRLab, #StopTheSteal: Timeline of Social Media and Extremist Activities
Leading to 1/6 Insurrection, JUST SECURITY(Feb. 10, 2021).
28 Brian Stelter & Virginia Langmaid, Nearly 80% of Americans Have Been Exposed to Covid Misinfo,
and Many Don't Know What to Believe, Survey Says, CNN BUSINESS (Nov. 9, 2021); Bryan Sullivan,
Fox News Faces Lawsuit For Calling COVID-19 A ‘Hoax’, FORBES (Apr. 10, 2020).
29Jessica Gresko, ‘Pizzagate’ Gunman in DC Sentenced to 4 Years in Prison, AP (June 22, 2017).
30 Daniel Funke, Fact Check: Putin's Claims Justifying War In Ukraine Are Baseless, Experts Say, USA
TODAY (Mar. 30, 2022, 2:16 PM),
https://www.usatoday.com/story/news/factcheck/2022/03/30/fact-check-why-putins-claims-
justifying-war-ukraine-baseless/7089270001/; Rachel Treisman, Putin's Claim of Fighting Against
Ukraine 'Neo-Nazis' Distorts History, Scholars Say, NPR (Mar. 1, 2022)
https://www.npr.org/2022/03/01/1083677765/putin-denazify-ukraine-russia-history.
Electronic copy available at: https://ssrn.com/abstract=4204862

<<PAGE_BREAK>>

TRUTH BOUNTIES: A MARKET SOLUTION TO FAKE NEWS 10/53
cannot distinguish between the two. One way to address the problem is to
improve the ratio of true to false information. As the ratio improves, the ability
to distinguish truth from falsity becomes less important.31 To see this clearly,
consider the limit case: if all information in circulation is true, people’s ability to
screen out false information becomes irrelevant. An alternative approach is to
help people distinguish between true and false information. Based on this, we
divide reform proposals into three categories: increasing the numerator of true
information, decreasing the denominator of false information, and assisting
people with making the distinction.
A. Increasing the Supply of True Information
In 2021, Professor Martha Minow, the former Dean of Harvard Law
School, published an important book titled Saving the News.32 The book received
considerable attention,33 understandably given its lofty ambitions. The core
argument is that “the press” has suffered in recent decades and fallen from its
“golden age,” which Minow identifies as the era between 1960 and 1980.34
Because of digital news and algorithms that tailor content to individuals, many
people live in echo chambers, giving them “few opportunities to learn,
understand, or believe what others are hearing as news.”35 These developments
have led to a democratic deficit, as “trust in news” is “essential in a democratic
society.”36
Minow offers many proposals to help traditional news. One proposal is to
create a royalty system for news shared online. The goal of this proposal is to
compensate news creators, whether The New York Times or the non-profit
Reveal, for their efforts when their reports are shared and published on social
media. 37 Minow’s approach would involve the robust enforcement of
“intellectual property rights for news” as this “means providing compensation
to producers that would help sustain the reporting and writing of material that
otherwise is at risk as conventional journalism falters.”38 The hope is that these
augmented resources would encourage the production of high-quality reporting.
31 We should distinguish between, on the one hand, sorting truths from falsehoods and, on the
other hand, the costs from failing to do so accurately. It might be better to believe a hundred
small lies than to fall for a single big one. See Yonathan A. Arbel & Murat Mungan, Defamation
Law and Bayesian Audiences, J. LEG. STUD. (Forthcoming, 2022).
32 MINOW, supra note 4.
33 See, e.g., Kevin M. Lerner, The News is Dead, Long Live the News!, BOS. REV. (Aug. 10, 2021),
https://bostonreview.net/articles/the-news-is-dead-long-live-the-news/; Alex Dalton, The Former
Harvard Law Dean Who Wants Government to Save the News Business, WASH. MONTHLY (July 26, 2021),
https://washingtonmonthly.com/2021/07/26/the-former-harvard-law-dean-who-wants-
government-to-save-the-news-business/; Alabama Law Hosts Top Constitutional Law Professors for
First Amendment Roundtable Discussion, ALA. L. SCH. (Oct. 20, 2021),
https://www.law.ua.edu/blog/news/alabama-law-hosts-top-constitutional-law-professors-for-
first-amendment-roundtable-discussion/.
34 MINOW, supra note 3, at 4.
35 Id.
36 Id. at 7.
37 Id. at 104-106.
38 Id. at 107
Electronic copy available at: https://ssrn.com/abstract=4204862

<<PAGE_BREAK>>

TRUTH BOUNTIES: A MARKET SOLUTION TO FAKE NEWS 11/53
This proposal aims to increase the supply of accurate information in
circulation. As the supply increases, the probability of a particular
communication being true should increase, and fewer people should be duped
by misinformation, regardless of whether they are adept at distinguishing reliable
from unreliable sources.
Whether Minow’s proposal would succeed is uncertain. If platforms have
to pay license fees for the sharing of quality content, they might prioritize the
sharing of unlicensed content. While it costs to produce quality journalism,
QAnon and other providers of misinformation gladly license their merchandise
for free.39 Moreover, if sharing news costs platforms, they might prioritize
sharing only those stories likely to generate clicks and ad revenue—revenue that
they could use to pay the news creators. This could create a dismal equilibrium
that incentivizes the production of sensationalist stories, click-bait headlines, and
culture-war materials. Thus, proposals that rely on IP enforcement could
backfire by increasing the proportion of false or low-quality stories shared on
social media. Paywalled journalism might provide an analogue. By generating
revenue, paywalls fund the production of quality journalism, but they dampen
its distribution.40 Minow is aware of this risk. She offers to solve it by retiring IP
rights after two years.41 Most of the value of news, however, comes from their
immediate consumption. Expansive IP alone could distort incentives, dampen
the spread of news, and encourage problematic journalistic practices.
Whatever the merits of Minow’s specific proposal, the basic intuition
behind it seems sound: to encourage the production of high-quality journalism,
we must direct more resources to it. Others have offered similar proposals.
Professors Sunstein and Hasen, for example, have each suggested subsidizing
journalism.42 Professor Leiter supports a revival of the “fairness doctrine,”
which would require information providers like broadcast media to give major
political parties equal time when addressing public issues.43 Among other
39 See Berisha v. Lawson, 141 S. Ct. 2424, 2427 (2021) (Gorsuch, J., dissenting) (“the distribution
of disinformation—which costs almost nothing to generate—has become a profitable business
while the economic model that supported reporters, fact-checking, and editorial oversight has
deeply eroded”).
40See, e.g., Mark Hill, Paywalls, Newsletters, and the New Echo Chamber, WIRED (Dec. 7, 2020),
https://www.wired.com/story/paywalls-newsletters-and-the-new-echo-chamber/ (Quoting
journalism professor Damian Radcliffe “people who are priced out of news . . . will be pushed
towards free news, some of which is more dubious in nature”).
41 MINOW, supra note 4, at 107 (“To mitigate [concerns with paywalls], the right to compensation
could expire two years from the date of first publication.”).
42 HASEN, supra note 4, at 28, 153-54; Richard L. Hasen, How to Keep the Tide of Fake News from
Drowning Our Democracy, N.Y. TIMES (Mar. 7, 2022),
https://www.nytimes.com/2022/03/07/opinion/cheap-speech-fake-news-democracy.html;
CASS R. SUNSTEIN, DEMOCRACY AND THE PROBLEM OF FREE SPEECH, 19-21, at 68-75, 89-91
(1993) (discussing normative and policy arguments that would support a regulatory scheme that
subsidizes dissemination of legitimate news and information).
43 Brian Leiter, The Epistemology of the Internet and the Regulation of Speech in America, GEO. J.L. & PUB.
POL’Y, (forthcoming 2022) https://papers.ssrn.com/sol3/papers.cfm?abstract_id=3939948 (last
revised Jan. 10, 2022).
Electronic copy available at: https://ssrn.com/abstract=4204862

<<PAGE_BREAK>>

TRUTH BOUNTIES: A MARKET SOLUTION TO FAKE NEWS 12/53
effects, the fairness doctrine could increase the supply of accurate information
by allowing for real-time challenges to spurious or unsupported claims.
B. Decreasing the Supply of False Information
Having described proposals to increase the supply of truthful information,
we next consider proposals to decrease the supply of false or misleading
information. Stricter defamation laws offer one method. Many scholars support
such a change. 44 Justices Thomas and Gorsuch would loosen federal
constitutional constraints and give states greater discretion to regulate
defamation.45 Presidents Biden and Trump voiced dissatisfaction with what they
believe is too little accountability for speech in social and traditional media.46
Pundits across the political spectrum have expressed similar arguments.47
Stricter defamation laws might be helpful. Expanding the range of
cognizable legal harms, reducing evidentiary burdens, allowing lawsuits by public
figures, and generally making it easier to recover damages from people who
spread lies should discourage lying. But this approach has important limits.
Defamation law only penalizes false information that harms the reputations of
specific people or entities. Defamation law does not reach false information in
general, as with the statement, “the war in Ukraine is fake.”48 Furthermore,
expansive defamation laws come with familiar problems, such as the general
suspicion of regulation and the risk from letting government officials influence
or even decide what is true or false. Beyond these familiar limitations, we offer
44 For a few examples, see Sunstein, supra note 5, at 389 (arguing that “New York Times Co. v.
Sullivan … looks increasingly anachronistic”); Cristina Tilley, (Re)categorizing Defamation, 94 TUL. L.
REV. 435 (2020); Glenn Reynolds, Rethinking Libel for the Twenty-First Century, 87 TENN. L. REV. 465,
465 (2020) (calling for reform); JUSTIN HENDERSON, THE TORTS PROCESS, 856 (9th ed. 2020)
(“Recent years have seen growing dissatisfaction with. . . . the law of defamation.”); David A.
Anderson, Is Libel Law Worth Reforming?, 140 U. PA. L. REV. 487, 550 (1991) (“The present law of
libel is a failure.”).
45 Berisha v. Lawson, 141 S. Ct. 2424 (2021) (Gorsuch, J., dissenting); McKee v. Cosby,139 S. Ct.
675, 682 (2019) (Thomas, J., concurring).
46 Rachel Lerman, Social Media Liability Law is Likely to Be Reviewed under Biden, WASH. POST (Jan. 18,
2021); Michael M. Grynbaum, Trump Renews Pledge to ‘Take a Strong Look’ at Libel Laws, N.Y. TIMES
(Jan. 10, 2018), https://perma.cc/M2XJ-JW8M; Donald J. Trump (@realDonaldTrump),
TWITTER (Sept. 5, 2018, 6:33 AM).
47 See, e.g., Bruce Fein, End the First Amendment Sanctuary for Fake News, THE AM. CONSERVATIVE
(Feb. 27, 2019, 1:00 PM), https://perma.cc/CUL8-LC34; Paul Schindler, Hoylman Said Stronger
Law Would Protect Lincoln Project’s Ivanka-Jared Billboards, GAY CITY NEWS (Oct. 29, 2020),
https://perma.cc/KUD9-L9QN.
48 Defamation law bars false statements about groups unless “the group or class is small such that
the matter can be reasonably understood to refer to [a specific] member”. RESTATEMENT
(SECOND) OF TORTS § 564A (AM. LAW INST. 1977). It is common to view the maximal group size
as consisting of 25 members. See O’Brien v. Williamson Daily News, 735 F. Supp. 218, 223 (E.D.
Ky. 1990), aff'd, 931 F.2d 893 (6th Cir. 1991). Modern interpretations of the First Amendment
seem to bar the possibility of creating liability for group libel, notwithstanding the Supreme Court’s
decision in Beauharnais v. People of State of Ill., 343 U.S. 250 (1952). See Brysk v. Herskovitz, 142
S. Ct. 1369, 212 L. Ed. 2d 326 (2022)(“While the decision [in Beauharnais] has never explicitly
been overruled, it appears that the case has been limited to its precise facts in subsequent decisions
of the Supreme Court.”).
Electronic copy available at: https://ssrn.com/abstract=4204862

<<PAGE_BREAK>>

TRUTH BOUNTIES: A MARKET SOLUTION TO FAKE NEWS 13/53
later a more comprehensive critique. For now, it is enough to recognize that
defamation law can only do so much.49
Stricter defamation laws focus on the production of false information.
Different proposals aim to limit the dissemination of false information. For
consumers, the effect would be the same: a smaller proportion of the
information they encounter is false. The mechanism, however, is starkly
different.
Limiting dissemination shifts the focus from individual writers and news
media to content platforms—mainly, social media platforms.50 A modern turn
in the scholarship looks at platforms as sites of administration and governance
of free speech rights, whose decisions are influenced but not always determined,
by the First Amendment.51 Under some proposals, Facebook, for example,52
could “prioritize[e] authoritative news sources” through algorithms or similar
means, and “downrank[ ] . . . deceptive content.”53 This and other proposals use
the term “curation” or “content moderation,” but they do not always mean
platform self-governance of its content—i.e., standard content moderation.
While some call for more robust, but content-agnostic, internal self-control,54
others envision curation under government mandates, which can be fairly
characterized as the outsourcing of censorship (or, in Jack Balkin’s terminology,
“collateral censorship.”).55 An effective, and arguably successful, example of
private corporate power over online speakers came in the wake of January 6th
when Google, Facebook, and Twitter limited or removed QAnon content from
their platforms.56 One study found a steep decline in internet discussions around
QAnon following these actions.57 At the same time, this curation met some
political backlash, most recently in the form of a Texas law that sought to make
it illegal.58
49 See infra Part IV.A.
50 Professor Balkin calls this “New School speech regulation.” See Jack M. Balkin, Free Speech in the
Algorithmic Society: Big Data, Private Governance, and New School Speech Regulation, 51 UC DAVIS L. REV.
1149 (2018) .
51 Evelyn Douek, Content Moderation as Administration, 136 HARV. L. REV. 3 (2022); Kate Klonick,
The New Governors: The People, Rules, and Processes Governing Online Speech, 131 HARV. L. REV. 1598
(2020).
52 Mark Verstraete, Derek E. Bambauer & Jane R. Bambauer, Identifying and Countering Fake News,
73 HASTINGS L.J. 821 (2022).
53 Pozen, supra note 17.
54 See, e.g., Danielle Citron, Cyber Civil Rights, 89 B.U. L. REV. 61 (2009).
55 Balkin, supra note 50, at 1177 (“Collateral censorship in the digital era involves nation states
putting pressure on infrastructure providers to censor, silence, block, hinder, delay, or delink the
speech of people who use the digital infrastructure to speak.”). Beyond censorship, some people
suggest more radical reforms, such as engaging antitrust authorities to regulate platforms. See, e.g.,
MINOW, supra note 4; Amy Kapiczisk, Freedom from the Marketplace of Speech, KNIGHT FIRST
AMENDMENT INST. AT COLUM. UNIV. (Feb. 14, 2022), https://knightcolumbia.org/blog/freedom-
from-the-marketplace-of-speech; Hasen, supra note 4, at 130.
56 Jared Holt & Max Rizzuto, QAnon’s Hallmark Catchphrases Evaporating from the Mainstream Internet,
MEDIUM: DFRLAB (May 26, 2021), https://medium.com/dfrlab/qanons-hallmark-catchphrases-
evaporating-from-the-mainstream-internet-ce90b6dc2c55.
57 Id.
58 CENSORSHIP OF OR CERTAIN OTHER INTERFERENCE WITH DIGITAL EXPRESSION, INCLUDING
EXPRESSION ON SOCIAL MEDIA PLATFORMS OR THROUGH ELECTRONIC MAIL MESSAGES, 2021 Tex.
Electronic copy available at: https://ssrn.com/abstract=4204862

<<PAGE_BREAK>>

TRUTH BOUNTIES: A MARKET SOLUTION TO FAKE NEWS 14/53
To encourage curation, lawmakers could increase legal exposure for false
information published on platforms. To accomplish this, many scholars support
reforming Section 230 of the Communications Decency Act.59 In brief, Section
230 immunizes platforms from liability for speech disseminated through their
systems. Many commentators support eliminating Section 230 protections60 and
imposing tort liability on websites that publish “foreseeably harmful” content. 61
Danielle Citron is a leading voice in this area. In a number of articles she has
charted a course for the redrafting of Section 230. In her view, Section 230
performs a vital role, because it allows platforms to moderate content without
risking legal exposure, thus encouraging the creation of online communities with
distinct character. She, however, forcefully rejects the broad protections
afforded to platforms that host illegal content. In her view, platforms should be
liable for illegal content if they cannot show that they have taken “reasonable
steps to address unlawful uses … that clearly create serious harm to others.”62
Legal scholars Mark Verstraete, Jane Bambauer, and Derek Bambauer have
a different view. They call for expansion of Section 230 protections on the ground
that reducing “legal liability for internet platforms” will “encourage
intermediaries to filter fake news without risk of lawsuit or damages.”63 They
suggest a model for platforms that would be run by an “elite staff of editors and
journalists ... [who would] make difficult editorial judgments about
propaganda.”64 The model entity they propose for this delicate task is the BBC.65
These proposals face headwinds. Without adversarial or at least deep
investigative processes, platforms cannot necessarily determine the truth or
falsity of stories, especially when the stories have “a kernel of truth that enables
their creators to artfully mix fact and fiction in a way that upends traditional
Sess. Law Serv. 2nd Called Sess. Ch. 3 (H.B. 20) (VERNON’S); Andrew Zhang, Texas Law Prohibiting
Social Media Companies from Banning Users Over Their Viewpoints Reinstated by Appeals Court, THE TEXAS
TRIBUNE (May 11, 2022), https://www.texastribune.org/2022/05/11/texas-social-media-law-
reinstated/.
59 Evelyn Douek, Governing Online Speech: From “Posts-As-Trumps” to Proportionality and Probability, 121
COLUM. L. REV. 759, 767 (2021), (“Section 230 of the Communications Decency Act —is
increasingly under siege across the political spectrum, with its reform seemingly imminent”).
60 MINOW, supra note 4, at 104-138; Brian Leiter, Cleaning Cyber-Cesspools: Google and Free Speech, in
THE OFFENSIVE INTERNET: SPEECH, PRIVACY, AND REPUTATION, 161-62 (Martha Nussbaum and
Saul Lemore eds., 2010).
61 Leiter, supra note 30, at 25.
62 See, e.g., Citron, supra note 54; Danielle Citron, How to Fix Section 230, B.U. L. REV. (forthcoming)
(last revised 17 Mar. 2022); Danielle Citron & Benjamin Wittes, The Internet Will Not Break: Denying
Bad Samaritans § 230 Immunity, FORDHAM L. REV. (2017); Danielle Keats Citron & Mary Anne
Franks, The Internet as Speech Machine and Other Myths Confounding Section 230 Reform, 2020 U. CHI.
LEGAL F. 45, 71 (2020).
63 Verstraete, Bambauer & Bambauer, supra note 52, at 23-25.
64 Id. at 27.
65 Id. at 27; see also Brett Frischmann, Understanding the Role of the BBC as a Provider of Public
Infrastructure, YESHIVA UNIV. JACOB BURNS INST. FOR ADVANCED LEGAL STUD. (Jan. 11, 2017),
available at https://papers.ssrn.com/sol3/papers.cfm?abstract_id=2897777 (calling for the BBC
to create a social media network). Note that the BBC does not have an unblemished record. Mike
Thomson, A Very British Coup, BBC (Aug. 22, 2005),
https://www.bbc.co.uk/radio4/history/document/document_20050822.shtml (“the BBC was
used to spearhead Britain’s propaganda campaign.”).
Electronic copy available at: https://ssrn.com/abstract=4204862

<<PAGE_BREAK>>

TRUTH BOUNTIES: A MARKET SOLUTION TO FAKE NEWS 15/53
modes of debunking information.”66 When making hard choices that involve
discretion, it will be all but impossible for platforms not to consider their own
commercial interests.67 Censorship and curation require a special degree of
certainty because there is usually no transparency or adversarial process. 68 No
one outside the editing rooms knows what got deleted. The proposal to use
disinterested elites for censorship or curation will not solve this problem.
Verstraete, Bambauer, and Bambauer demonstrate, perhaps inadvertently, the
challenge of having an elite group make censorship decisions. They use the lab-
leak theory of Covid-19 as an illustration of “fake news.” They argue that despite
persistent debunking, the theory “retains its grip on a significant share of
Americans.”69 Since they published their work, however, this theory has been
“re-bunked,” meaning some experts have considered it anew, argued for its
plausibility, and urged political actors to take it seriously.70 If even careful
scholars who study fake news reach uncertain conclusions about issues as
important as a global pandemic, we should worry about the capacity of any actor
to censor information carefully, consistently, and accurately.
In addition to questions of competence, many other challenges to curation
and censorship loom. Pre-screening all information could be prohibitively
costly, but selectively screening after dissemination might be useless. By then
the information has already circulated. More generally, many people frown on
regulation and coercion. Censorship, collateral censorship, and even heavy-
handed content moderation run contrary to democratic values and the so-called
marketplace of ideas. 71 Public actors can abuse censorship for personal
advantage, as when Vladimir Putin silences dissent.72
In sum, many proposals aim to decrease the supply of false or misleading
information. In theory, this strategy should expose people to more truth. In
practice, it faces challenges. This approach requires powerful actors, whether
the government, large platforms, or both, to screen information. Some solutions
are more moderate, but middle-of-the-road solutions can only screen the most
egregious forms of disinformation.
66 Verstraete, Bambauer, & Bambauer, supra note 52.
67 Jack Balkin notes how central curation is to the business model of online platforms. “Social
media companies . . . realized that a substantial aspect of their product was creating a hospitable
environment for end-users.” Balkin, supra note 50, at 1149.
68 Klonick, supra note 51, at 1635-1649.
69 Leiter, supra note 30 at 37.
70Amy Maxmen & Smriti Mallapaty, The COVID Lab-leak Hypothesis: What Scientists Do and Don’t
Know, NATURE (June 8, 2021); Alexander Smith, China Slams New WHO Report Suggesting Further
Investigation Into Covid ‘Lab Leak’ Theory, NBC NEWS (June 10, 2022, 12:38 PM),
https://www.nbcnews.com/news/world/covid-19-urges-investigation-chinese-wuhan-lab-leak-
theory-rcna32910.
71 See Se. Promotions, Ltd. v. Conrad, 420 U.S. 546, 553(1975)(“Our distaste for censorship—
reflecting the natural distaste of a free people—is deep-written in our law.”).
72 Leiter, supra note 13, at 16 ( “The primary reason to be skeptical of regulation of speech is the
reliability of regulators, who often have bad motives for suppressing speech.”); see also
MILTON, AREOPAGITICA 745 (“[in the search for truth, we must not] set an oligarchy of twenty
engrossers over it, to bring a famine upon our minds again, when we shall know nothing but what
is measured to us by their bushel.”).
Electronic copy available at: https://ssrn.com/abstract=4204862

<<PAGE_BREAK>>

TRUTH BOUNTIES: A MARKET SOLUTION TO FAKE NEWS 16/53
C. Distinguishing True and False Information
If people could sort truths from lies, we could worry less about producing
more of the former and less of the latter. If people were sufficiently savvy, even
a gush of misinformation and propaganda could not lead them far astray. This
idea is reflected in reform proposals that aim to make information consumers
better at making distinctions.
Much work in this spirit focuses on labeling. Social media platforms like
Twitter and Facebook already label some posts as “misleading” or “false.”73
Recently Twitter began flagging tweets that link to Russian state-sponsored
media. Private organizations like Ad Fontes Media and NewsGuard rate the
reliability of news sources.74
Scholars have pushed for more. Professor Hasen wants mandatory labels
on altered videos or audio, if and when the technology for detecting such
manipulation becomes available.75 Professor Wood and Commissioner Ravel
want mandatory disclosure of the sources of political speech on the internet.76
Others want labels on information akin to nutrition facts on packaged food.77
Labeling is often lauded for its light-touch approach. The labeler—
typically a platform or search engine—indicates that the information is
contested, inaccurate, or triggering, sometimes with a link to an authoritative (or
seemingly-authoritative) source, such as a government agency. Because no
information is deleted or redacted, labeling does not raise the same objections as
outright censorship. To clarify the point, consider the harm from type-1 and
type-2 errors. With censorship, some truths get silenced, and some falsehoods
slip through. Mistakes are inevitable. However, mistakes in labeling seem less
harmful than mistakes in censoring.
There is much to like about labels. However, they are not a panacea.
According to Professor Pozen, “warning labels, fact checks, corrections,
criticisms, and the like . . . have disappointed in countless discrete domains,” and
“[w]e shouldn’t expect them to solve a world-historical epistemic crisis.”78 Pozen
is probably right that labeling cannot “solve” the problem of misinformation,
but it can help. Some evidence shows that labels are effective,79 and new and
potentially useful innovations in labeling are in development.
73 Rachel Kraus, Facebook Labeled 180 Million Posts As 'False' Since March. Election Misinformation Spread
Anyway, MASHABLE (Nov. 19, 2020), https://mashable.com/article/facebook-labels-180-million-
posts-false; Musadiq Bidar, Twitter Will Label Posts with Misleading Information about COVID-19
Vaccines, CBS NEWS (Mar. 2, 2021), https://www.cbsnews.com/news/twitter-covid-19-vaccine-
misinformation-labels/.
74 AD FONTES MEDIA, INC. https://adfontesmedia.com/about-ad-fontes-media/ (last visited Mar.
22, 2022).
75 Hasen, supra note 3, at 144.
76 See generally Wood & Ravel, supra note 5.
77 Matthew Spradling, Jeremy Straub & Jay Strong, Protection from ‘Fake News’: The Need for Descriptive
Factual Labeling for Online Content, 13 FUTURE INTERNET 142 (2021).
78 Pozen, supra note 17.
79 See infra notes 158-160 and accompanying text.
Electronic copy available at: https://ssrn.com/abstract=4204862

<<PAGE_BREAK>>

TRUTH BOUNTIES: A MARKET SOLUTION TO FAKE NEWS 17/53
II. FAKE NEWS IN THE MARKETPLACE OF IDEAS
Misinformation is a pressing social problem. But why exactly did this
problem emerge? Why do some people produce false information and, more
challenging, why do other people choose to believe or share it?80
Many analyses today pin the rise of misinformation on the internet, the
greater ease of publishing and sharing information, and information’s digital
permeance. None of these factors, however, goes to the root of the issue. As
Bryan Caplan notes, these explanations suffer because they “focus[] exclusively
on the flaws of speakers, without acknowledging the flaws of the listeners.”81 What
we are missing, in other words, is a solid understanding of both the supply and
demand for false information—an understanding of the whole marketplace of
ideas.82
The marketplace of ideas metaphor imagines competition among speech acts.
Just as high-quality products will push inferior alternatives out of the market,
high-quality speech will push misinformation out of the market.83 The idea has
a powerful allure, but as noted recently by Rick Hasen, “The marketplace of
ideas is experiencing market failure.”84 Borrowing from economic theory, we
argue that the market actually suffers from not one, but two distinct failures. It
fails once because speech has spillover effects on the broader society, and it fails
again because of inherent information asymmetries between speakers and
audiences.
Spillovers and information asymmetries are different in their cause, logic,
and remedy. Conflating or ignoring these failures is a recipe for misguided and
counterproductive reform proposals. We define the market failures and leverage
them to illuminate some weaknesses and unintended consequences of common
reform proposals. This discussion builds the foundation for our reform, which
we believe avoids the pitfalls of some others. We also believe this discussion
supplies independent value by providing a framework and some key distinctions
to enrich the debate.
80 People may knowingly share false reports for a variety of reasons. Scott Alexander, The
Toxoplasma of Rage, SLATE STAR CODEX (Dec. 17, 2014),
https://slatestarcodex.com/2014/12/17/the-toxoplasma-of-rage/.
81 Bryan Caplan, Misinformation About Misinformation, BET ON IT (May 18, 2022),
https://betonit.substack.com/p/misinformation-about-misinformation?s=w.
82 Alex Tabarrok makes a similar point: “it’s an equilibrium process. The demand and supply of
misinformation both matter.” Alex Tabarrok, The Demand and Supply of Misinformation, MARGINAL
REVOLUTION (May 20, 2022), https://marginalrevolution.com/marginalrevolution/2022/05/the-
demand-and-supply-of-misinformation.html.
83 The metaphor dates to Abrams v. United States, 250 U.S. 616 (1919). See also RICHARD POSNER,
THE PROBLEMS OF JURISPRUDENCE 115 (1990) (applauding the “Darwinian test” for ideas).
84 HASEN, supra note 4, at 23. For an earlier statement by an economist, see Ronald H. Coase, The
Market for Goods and the Market for Ideas, 64 AM. ECON. REV. 384, 385 (Arguing that “there is a good
deal of ‘market failure’ in the U.S. marketplace for ideas”).
Electronic copy available at: https://ssrn.com/abstract=4204862

<<PAGE_BREAK>>

TRUTH BOUNTIES: A MARKET SOLUTION TO FAKE NEWS 18/53
A. The Spillover Problem
This section addresses spillovers, a common source of market failure. We
begin with a brief overview of spillovers and then discuss the challenges of
correcting them. Those challenges are especially acute in the context of speech
and information, presenting problems for some suggested reforms.
1. On Spillovers
Spillovers arise when people’s choices affect others. These outside effects
are often neglected by individuals and not given sufficient weight, precisely
because the decisionmaker does not bear the full consequences. When a factory
pollutes the air, its emissions harm everyone nearby. Because these harms do
not affect the factory’s bottom line, it may continue operating while imposing
this negative spillover. Negative spillovers cause people to engage in more of a
harmful activity than they should.85
Positive spillovers work similarly. When a homeowner keeps bees or
installs a light in a dark alley, she benefits herself and others too.86 The total
benefits of pollinators and light might exceed the costs. However, the
homeowner does not enjoy all of the benefits; many of them flow to other
people. So, homeowners keep too few bees and install too few lights. Positive
spillovers cause too little of the beneficial activity.
Speech suffers from negative and positive spillovers.87 Misinformation can
impose harm on the general public, as when fake reports diminish trust in
democratic institutions or social cohesion. High-quality journalism,
whistleblowing, inspiring oratory, and other forms of speech have broad
benefits. These benefits go beyond the commercial interests of speakers and
consumers of their speech. An informed citizenry is a social interest,
transcending the private interests of either the daily paper or its readers. So are
confidence in the democratic process, institutional legitimacy, the rooting out of
corruption, and checks on political excess. The problem is that speakers do not
necessarily capture those benefits.88 Consequently, quality journalism is in short
supply. Spillovers distort the market for speech.
2. Spillover Critique of Reform Proposals
85 ROBERT D. COOTER & MICHAEL D. GILBERT, PUBLIC LAW AND ECONOMICS 32-35 (2022).
86 Steven N.S. Cheung, The Fable of the Bees: An Economic Investigation, 16 J.L. & ECON. 11 (1973)
(investigating market reactions to pollination externalities to apple growers).
87 See, e.g., Daniel A. Farber, Free Speech Without Romance: Public Choice and the First Amendment, 105
HARV. L. REV. 554 (1991).
88 On the economics of investigative journalism, see Oren Bar-Gill & Assaf Hamdani, Optimal
Liability for Libel, 2 J. OF ECON. ANALYSIS & POL’Y 1 (2003); Nuno Garoupa, Dishonesty and Libel
Law: The Economics of the "Chilling" Effect, 155 J. INST’L & THEORETICAL ECON. 284 (1999); Nuno
Garoupa, The Economics of Political Dishonesty and Defamation, 19 INT’L REV. L. ECON. 167 (1999).
Electronic copy available at: https://ssrn.com/abstract=4204862

<<PAGE_BREAK>>

TRUTH BOUNTIES: A MARKET SOLUTION TO FAKE NEWS 19/53
Spillovers diminish the capacity of an unregulated market to produce good
results. Regulation and subsidies can help by causing speakers to “internalize”
these spillovers and thus improve outcomes.89 So far, we are in agreement with
others. What has not been widely recognized in the speech debate, however, is
how easily reforms meant to fix spillovers can make matters worse. Correcting
spillovers requires precise interventions, and precision poses a difficult, practical
problem.
Consider an example. A ranch fouls a nearby stream. If the ranch operates,
the owner earns a profit of 10. The farmers downstream pay a cost from the
water pollution equal to 14. If the ranch does not operate, no one gains or loses
anything. Given these options, the ranch should not operate. The net payoff
from not operating equals 0, which exceeds the net payoff from operating (10 –
14 = –4). However, absent regulation, the ranch will operate.90 The root
problem is, quite literally, a spillover. The rancher does not pay the 14 in costs.
They spill over to the neighbors. For the rancher, operating leads to a profit of
10, so she operates, even though the net payoff for society is –4.
In this example, the market for ranching functions poorly. To correct it,
law should impose liability (in tort, or perhaps a tax) on the rancher equal to the
social harm she causes, –14. The liability causes the rancher’s personal
calculation (10 profit, –14 from the tax, for a net payoff of –4) to match society’s
calculation (10 profit, –14 from pollution, for a net payoff of –4). The tax
induces the rancher to consider all costs and benefits, not just her own, when
deciding how to act.
For this strategy to work, liability needs to have a degree of precision.
Errors in setting liability can lead to worse results. To illustrate, suppose the ranch
causes 14 in harm to the neighbors, but the court is expected to impose liability
of only 6. For the rancher, operating leads to an expected profit of 10 – 6 = 4,
which is better than not operating and earning 0. The rancher operates, even
though the net payoff from doing so equals –4. To generalize, setting liability
too low “under corrects,” failing to stop the harmful activity. The opposite
problem can arise too. Changing our example, suppose the ranch causes only 6
in harm to the neighbors, but the court erroneously imposes liability of 14. The
rancher’s payoff from operating equals 10 – 14 = –4, so she does not operate.
But society’s payoff from operating equals 10 – 6 = 4, so she should operate.91
Setting liability too high “over corrects,” stopping a beneficial activity.
The logic works the same with positive spillovers—only that now, a subsidy
rather than a penalty may be required. To illustrate, imagine flower farms. The
farms earn profits for the owners and, by supporting pollinators, benefit other
89 The idea of using taxes to internalize externalities dates to ARTHUR PIGOU, ECONOMICS OF
WELFARE, 159-175 (1932).
90 Assuming the transaction costs of bargaining between the rancher and the neighbors
downstream are high. If the transaction costs are zero, the efficient outcome will prevail. See
Ronald Coase, The Problem of Social Cost, 3 J.L. & ECON. 1 (1960).
91 Perhaps she should operate and also compensate the neighbors for their harm.
Electronic copy available at: https://ssrn.com/abstract=4204862

<<PAGE_BREAK>>

TRUTH BOUNTIES: A MARKET SOLUTION TO FAKE NEWS 20/53
growers nearby. The optimal subsidy for flower farms equals the size of their
positive spillover. If the subsidy is too low, the farms will not operate, even
though they should. If the subsidy is too large, some farms will operate when
they should not.
This simple analysis illuminates some proposals to address fake news.
Earlier we described a proposal to subsidize quality journalism. This proposal
works in theory. Like the flower farm in our example, quality journalism creates
benefits that flow not just to the journalists and paying readers but to society at
large. This positive spillover implies that the unregulated market will produce
too little quality journalism. Law can correct this spillover with a subsidy. But
what’s the proper amount? If we make the subsidy too small, we might mitigate
the problem, but we will not solve it. The market will still produce too little
quality journalism. If we set the subsidy too high, we create a different, and
perhaps less obvious, problem. A too-high subsidy will generate journalism that
is socially wasteful and potentially harmful. Think of deep investigations of
esoteric issues, fierce and resource-intensive competitions among journalists to
scoop each other, and reports that simply check the box of whatever qualifies
for a subsidy or the grant. The problem is compounded by the difficulty of
setting criteria for these subsidies. The state of Iowa, for example, discovered
that 80% of its $32 million tax credits granted to support movie productions
were misspent.92 Misallocated subsidies could end up supporting partisan efforts,
possibly producing more misinformation.
Instead of promoting good information, some of the proposals we
canvassed aim to deter bad information. Consider reforming defamation law.
Making it easier for victims of defamation to sue and recover damages should
discourage lying. The argument works in theory but not necessarily in practice.93
Suppose a defamer makes a false statement that harms a person’s
reputation. The lie generates a benefit for the defamer (financial, psychological)
worth 10 and imposes a cost on the victim of 12. When defamation is very hard
to prove, the cost of 12 becomes a negative spillover. The defamer gets a benefit
from lying and pays no cost, so he keeps lying. Making defamation easier to
prove does not necessarily help. If the defamer must pay 12 in damages, then
the negative spillover disappears. But suppose the court errs and awards
damages below 10. In that case, the defamer will still lie. Or suppose the court
awards damages greater than 12. When damages get too high, victims (or people
who claim to be victims) can obtain counsel, and speakers clam up. As the risk
92 Office of Auditor of State, Report on Special Investigation of the Film, Television and Video
Project Production Program (2010). Available online at
http://publications.iowa.gov/9937/1/1060-2690-0E00.pdf
93 In practice, powerful parties have an advantage in using these mechanisms. Anti-SLAPP laws,
enacted in 32 states, reflect the recognition that defamation law is routinely abused. However,
Anti-SLAPP legislation only offers limited protection from abuse of process. For the sake of
argument, we will set these problems aside. Even so, expanding defamation law would not be a
panacea.
Electronic copy available at: https://ssrn.com/abstract=4204862

<<PAGE_BREAK>>

TRUTH BOUNTIES: A MARKET SOLUTION TO FAKE NEWS 21/53
of errors and high damages grows, journalists might stop reporting.94 Excessive
liability, even if designed to provide redress for innocent victims, can threaten
journalism.95
Thinking in terms of spillovers highlights another shortcoming of
defamation law. Defamation law assumes that the victim suffers all of the harm,
but this is too simple. False statements not only harm the victim; they harm the
public.96 To illustrate, if a defamatory statement causes a business to lose 20%
of its profits, this harms the business. But it must also harm some customers
who were misled about the business and took their money elsewhere. This
“elsewhere” may be inferior; after all, customers could have transacted with the
alternative business in the first instance but chose not to. The aggregate loss to
customers may exceed that of the business. Even when the target of a
defamatory statement recovers for her full harm, defamation law is under-
compensatory. Negative spillovers persist.
Finally, recall that defamation law only applies to false statements that harm
a person’s or entity’s reputation. It does not apply to false statements in general,
such as spurious accusations about stolen elections and bad vaccines. 97
Defamation cannot reach and therefore cannot correct negative spillovers
associated with such speech.98
To summarize, high-quality speech often has positive spillovers, so the free
market produces too little of it. Low-quality speech often has negative spillovers,
so the market produces too much. By using the tools of economics, we can
recast many proposals to address fake news as efforts to correct those
spillovers—to make speakers “internalize” more of the benefits and costs
associated with their speech. The analysis of spillovers organizes and simplifies
much of the debate about fake news. It also reveals shortcomings in some
proposals. To correct spillovers, we must price them accurately. Accuracy is
difficult enough when the spillover is water pollution that damages crops. It gets
much harder when the spillover is information that affects the choices of an
unknown number of people in unknown ways. And it is nearing impossible when
the benefits are as diffuse and ethereal as trust in democracy, checks and
balances, and rule of law.
94 England historically had strict laws and has become known for “libel tourism.” Journalists
around the world report receiving extensive legal threats that originate in England. See THE
FOREIGN POL’Y CTR., UNSAFE FOR SCRUTINY (Susan Coughtrie & Poppy Ogier eds., 2020). The
problem became so severe that Congress unanimously enacted the SPEECH Act, which makes
foreign defamation judgments unenforceable if they fail to meet U.S. standards or if they would
exceed the bounds of Section 230.
95 New York Times Co. v. Sullivan, 376 U.S. 254, 273 (1964) (“Whether or not a newspaper can
survive a succession of such judgments, the pall of fear and timidity imposed upon those who
would give voice to public criticism is an atmosphere in which the First Amendment freedoms
cannot survive.”).
96 See generally Yonathan Arbel, A Reputation Theory of Defamation Law (Manuscript, on file with
author).
97 See supra notes 47-49 and accompanying text.
98 The lack of regulation, according to some recent work, also means that the harm would be
mitigated. See Hemel & Porat, supra note 22; Yonathan A. Arbel & Murat Mungan, The Case Against
Expanding Defamation Law, 71 ALA. L. REV. 453 (2019); Arbel & Mungan, supra note 31.
Electronic copy available at: https://ssrn.com/abstract=4204862

<<PAGE_BREAK>>

TRUTH BOUNTIES: A MARKET SOLUTION TO FAKE NEWS 22/53
B. Information Asymmetry
This section addresses information asymmetries, a source of market failure
distinct from spillovers. We first describe information asymmetries in general
and in the context of speech in particular. Then we focus on a concept central
to information asymmetries, credibility. Finally, we use our discussion of
credibility to highlight shortcomings in some proposed reforms.
1. On (Mis)Information Asymmetry
Information asymmetry arises when one party to an exchange has
information that is not available to the counterparty.99 To illustrate, suppose
the seller sells a used car. The buyer wants to buy it but is aware that some used
cars are defective. When the parties negotiate, only the seller knows whether her
specific car is in good or bad condition. The problem for the buyer is that the
seller might not disclose the condition of the car, and even if she does, the buyer
cannot take her at her word. After all, the seller might be lying when she says
that the car is in good condition. If the buyer can’t independently verify the
condition of the car, then a mutually-beneficial exchange can fall through.
The same problem applies in the context of speakers and listeners.100 A
speaker—a journalist, advertiser, politician—makes a statement. Some of these
statements reveal valuable information known to her personally, like what
happened in a private meeting “on the bottom level of an underground garage
just over the Key Bridge in Rosslyn.”101 The speaker speaks presumably because
she wants to spread her message. The problem for the speaker is that some other
speakers are disingenuous. Alongside quality journalism, there is reporting based
on lies, propaganda, and sensationalism. Just as buyers cannot tell which sellers
are trustworthy, listeners cannot tell which speakers are trustworthy. In such
instances, listeners are increasingly reliant on trust in the editorial board or outlet.
But in an age where trust in media outlets is low, such credibility signals are
unavailing. This is the information asymmetry; speakers know (or should know)
whether their speech is accurate, but listeners do not. Because of information
asymmetries, high-quality journalists find it difficult to distinguish themselves
from low-quality propagandists.
At bottom, information asymmetry presents a credibility problem—
listeners cannot tell which sources to trust, which to discount, and how much.
The problem is two sided, afflicting audiences who seek reliable sources and
99 Akerlof, supra note 21. See also COOTER & GILBERT, supra note 85, at 36-39.
100 Drawing on these ideas, Rick Hasen suggests that a central threat today is “cheap speech,” low-
quality information that is cheap to produce and circulate. In his view, the consequence of cheap
speech is the erosion and possible displacement of higher value speech. HASEN, supra note 4, at 30-
46.
101 Bob Woodward, How Mark Felt Became ‘Deep Threat’, WASH. POST (June 2, 2005), (recounting
the Watergate affair).
Electronic copy available at: https://ssrn.com/abstract=4204862

<<PAGE_BREAK>>

TRUTH BOUNTIES: A MARKET SOLUTION TO FAKE NEWS 23/53
speakers who want to distinguish their truthful speech from misinformation. In
a sense, the credibility problem is more central than spillovers. Imagine a world
with speakers who lie and speakers who tell the truth, and suppose the audience
knows exactly whom to trust. In this world, no one would believe speakers who
share lies, so lies could not damage reputations or otherwise cause harm.
Negative spillovers would not exist.
Scholars and others who address misinformation tend to neglect credibility
effects, perhaps motivated by the belief that individuals are not discerning
consumers of information. Public audiences naively believe what they hear. This
view neglects a robust body of research ranging from epistemology and decision
theory to evolutionary psychology and child development, from information
economics to the sociology of knowledge, and from marketing to folk wisdom.
Without going into detail, this body of research shows humans seek credible
sources, possess sophisticated cognitive capability to distinguish credible and
non-credible sources, and dismiss and discount unreliable speakers.
To give a flavor of these ideas, consider a study on child development.
Three-year-old and four-year-old children were exposed to two speakers. Both
speakers stated the names of objects that the children could see. However,
occasionally they would slip, calling a shovel a towel and a ball a cookie. The
researchers found that children not only “wrote off” unreliable speakers, they
engaged in more nuanced judgments. Four-year-olds were “able to differentiate
between an informant who was 75% accurate and an informant who was 25%
accurate and preferred to seek information from the more accurate
informant.”102 This suggests that even young children can keep a mental account
of speaker reliability and assign greater credence to sources more likely to
produce accurate statements.
Even in the animal kingdom credibility matters. Peahens prefer fit mates
whose offspring will survive in the jungle. Consequently, peacocks clamor to
advertise their fitness. But talk (really, squawk) is cheap, and peahens cannot
know whom to trust. Thus, a signal evolved for reliably sorting competent
peacocks from hopefuls: colorful and weighty plumage. Only the fittest of
peacocks can survive to sexual maturity with such luggage on their back.103
Plumage is a credible signal of fitness precisely because it attracts predators and
inhibits food gathering.104 The principle relates directly to misinformation.
Listeners, even peahens, look for credible signals. Only those who send credible
(and costly) signals, like bright and heavy feathers, can be believed.105
102 Elizabeth S. Pasquini et al., Preschoolers Monitory Accuracy, 43 DEVELOPMENTAL PSYCH. 1216,
1223 (2007).
103 Dustin J. Penn &Szabolcs Számadó, The Handicap Principle: How an Erroneous Hypothesis Became a
Scientific Principle, 95 BIOLOGICAL REV. 267 (2020).
104 This is the “Handicap Principle,” a widely accepted theory in evolutionary biology. A. ZAHAVI
& A. ZAHAVI, THE HANDICAP PRINCIPLE: A MISSING PIECE OF DARWIN’S PUZZLE, 229 (1997)
(“The investment — the waste itself — is just what makes the advertisement reliable.”). For other
examples, consider an elk’s weighty antlers or a gazelle’s instinct to jump straight up upon seeing
a predator.
105 See A. Grafen, Biological Signals as Handicaps, 144 J. THEORETICAL BIOLOGY, 517 (1990).
Electronic copy available at: https://ssrn.com/abstract=4204862

<<PAGE_BREAK>>

TRUTH BOUNTIES: A MARKET SOLUTION TO FAKE NEWS 24/53
Back to humans, we find evidence that individuals invest intensively in
credible cues. For example, in labor markets, employers search for competent
employees. But some employees misrepresent their competence, making the
search difficult. In one famous model, job seekers use their level of education to
advertise their competence.106 Unlike standard models where better education
implies higher skills, this model uses education to advertise innate ability. To
simplify, if good workers find school less taxing and bothersome than bad
workers, then (under certain assumptions) bad workers choose less schooling
than good workers. Observing this, employers would rather hire better-educated
workers, even if schooling imparts no job-related skills.107 For our purposes, the
point is that employers search for signals that are credible (“I spent years in
school”) and discount empty statements (“I’m a good worker”).
In the context of news, we find that individuals are sensitive to credibility
cues in nuanced ways. One study shows that a liberal message on a conservative
news site commands more credibility than a liberal message on a liberal news site
(and the same holds in reverse).108
None of these studies or others purport to show that people are perfect at
credibility judgments. We have all had a five-minute conversation with the
average voter, and we all make mistakes.109 People are not always motivated to
search for the truth.110 A large scale study measured attitudes towards
immigration among thousands of participants.111 People often exaggerate the
number of immigrants in the country. The study measured attitudes towards the
desirable scope of immigration before and after informing respondents on the
actual number of immigrants. Respondents indeed changed their mind about the
number of immigrants, but not on their attitudes towards immigrants.
Correcting people’s misperceptions with accurate information had no effect.112
Still, these local failures should not distract from the remarkable ability of
humans to make complex credibility judgments in many circumstances. We
process many types of credibility cues, often unconsciously and rapidly, and
reject or discount statements made by unreliable sources.113 Critically, people are
sensitive to speaker incentives, recognizing that costly signals are more reliable
106 Michael Spence, Job Market Signaling, 87 Q. J. ECON. 355 (1973).
107 For supporting evidence, see BRYAN CAPLAN, THE CASE AGAINST EDUCATION, 96-123 (2018).
108 Megan Duncan, What’s in a Label? Negative Credibility Labels in Partisan News, JOURNALISM &
MASS COMMC’N Q. (Oct. 13, 2020),
https://journals.sagepub.com/doi/10.1177/1077699020961856.
109 This statement is attributed to Winston Churchill. Michael Richards, Red Herrings: Famous Quotes
Churchill Never Said, INT’L CHURCHILL SOC. (June 9, 2013),
https://winstonchurchill.org/publications/finest-hour/finest-hour-141/red-herrings-famous-
quotes-churchill-never-said/.
110 See, e.g., Nyhan, supra note 3, at 226 (“many seem especially susceptible to misperceptions that
are consistent with their beliefs, attitudes, or group identity”).
111 Daniel J. Hopkins, John Sides, & Jack Citrin, The Muted Consequences of Correct Information about
Immigration, 81 J. POL. 315–320 (2019).
112 Id.
113 See also Nyhan, supra note 3, at 226, at 229 (providing evidence that on many issues individuals
learn and converge on true beliefs, even if the process is slow and incomplete).
Electronic copy available at: https://ssrn.com/abstract=4204862

<<PAGE_BREAK>>

TRUTH BOUNTIES: A MARKET SOLUTION TO FAKE NEWS 25/53
than cheap ones. We thus think it is a mistake for scholars to neglect credibility
issues when they design reform proposals.
2. Information Asymmetry Critique of Reform
Proposals
Information asymmetries can be hard to overcome. Take the example of
the seller and the buyer. The seller’s car is high quality, but the buyer thinks
otherwise. Can the seller correct this asymmetry simply by stating, promising,
or asserting that her car is high quality? Probably not. Talk is cheap, and the
seller might lie. In the news context, the same problem applies. It is not enough
for a journal to proclaim that it does “honest reporting” or for a pundit to claim
that they “tell things as they are.” Speakers can swear fidelity to the truth until
their faces turn blue. To change minds and behaviors, listeners must believe
them. Speakers must be credible.
Recognizing the importance of credibility draws attention to the
importance of listeners. We must be attentive to listeners’ credibility judgments
when considering policy. Consider labeling, as when Twitter flags a dubious
story. Effective labeling requires (among other things) that the labeler know the
truth of the matter. But labelers do not always know the truth, and most people
surely recognize this. Moreover, labeler bias looms large. A recent study found
that black, transgender, and conservative individuals are targeted most often for
content moderation.114 Consequently, labeling is a double-edged sword. In
attempting to address one credibility problem (should readers trust the story?),
it introduces a second credibility problem (should readers trust the labeler?).
Even if labelers were trustworthy, and perceived as such, labeling would
still have a potential weakness, as the following study shows. Researchers
measured the effect of labeling misinformation on the beliefs of 5,271
participants.115 Consistent with expectations, they found that a negative label
made subjects less likely to believe the story.116 Encouragingly, they found that
labels had a strong effect on people whose political view aligned with the story.
That is, people were willing to discount a story that supported “their side” if it
was flagged.117 The unexpected finding concerns the effect on unlabeled stories.118
Participants were more likely to believe unlabeled stories than before.
114 Oliver L. Himson et al., Disproportionate Removals and Differing Content Moderation Experiences for
Conservative, Transgender, and Black Social Media Users: Marginalization and Moderation Gray Areas, 5
PROCEEDINGS OF THE ACM ON HUMAN-COMPUTER INTERACTION 1 (2021). This survey-based
analysis cannot distinguish between algorithmic and human curation.
115 Gordon Pennycook et al., The Implied Truth Effect: Attaching Warnings to a Subset of Fake News
Headlines Increases Perceived Accuracy of Headlines Without Warnings, 66 MGMT. SCI., 4944 (2020).
116 This is consistent with other findings. See Timo Koch et. al., The Effects of Warning Labels and
Social Endorsement Ces on Credibility Perceptions of and Engagement Intentions with Fake News 21, (June 13,
2021), https://psyarxiv.com/fw3zq/;Megan Duncan, What’s in a Label? Negative Credibility Labels in
Partisan News, JOURNALISM & MASS COMMC’N Q. (Oct. 13, 2020),
https://journals.sagepub.com/doi/10.1177/1077699020961856.
117 Pennycook et al., supra note 114. See also Duncan, supra note 116, at 49.
118 The researchers verify their findings in a separate experiment where some stories are labeled as
Electronic copy available at: https://ssrn.com/abstract=4204862

<<PAGE_BREAK>>

TRUTH BOUNTIES: A MARKET SOLUTION TO FAKE NEWS 26/53
Apparently, participants conflated stories that had been reviewed and
deemed accurate with stories that had never been reviewed. If this finding is
robust, then labeling might, all things considered, worsen the information
environment by making readers too accepting of unexamined stories.
One way to address this problem would be to increase the reach of labeling
efforts. If everything gets reviewed, then the absence of a label must mean that
the information is accurate. This is impossible under existing practices and
reform proposals. Worldwide, people and organizations (and bots) produce and
share a massive amount of information daily. This information is produced in a
decentralized way and shared across multiple platforms and networks. No
existing system can label such flows of information comprehensively and in real
time. At best, people can label a small subset of the information, often after the
fact. To demonstrate, consider the Washington Post’s award-winning “Fact
Checker.” The Fact Checker is a small team of journalists that runs a handful of
stories every week investigating statements by important figures.119 Meanwhile,
the Washington Post itself produces over 1,000 stories, videos, and graphics per
day.120
Algorithms have been proposed as a solution to the scaling problem.
Algorithms have much promise but also raise many problems.121 One is that
algorithms are often a black-box that outsiders struggle to understand and that
produce biased results. Another is the difficulty of algorithms in making
judgments based on a broader context.122 Once again, labeling attempts to solve
one credibility problem by introducing another one, this time about algorithms
and their biases.
Moving away from labeling, we next consider censorship, collateral
censorship, and content moderation. Putting aside the moral, political, and
institutional concerns, the removal or filtering of information can have
unintended consequences in the presence of information asymmetries. Like
labeling, truth-based content moderation requires that human moderators (or
algorithms) have privileged access to the truth. Even in the domains where this
is plausible (e.g., issues on which there is a scientific consensus), censorship and
moderation can project an aura of reliability on all published communications,
stories that have not been vetted. They find that subjects place less faith in these unverified stories.
Pennycook et al., supra note 114, at 4944.
119 Glenn Kessler, About the Fact Checker, WASH. POST (Jan. 1, 2017),
https://www.washingtonpost.com/politics/2019/01/07/about-fact-checker/.
120 Robinson Meyer, How Many Stories Do Newspapers Publish Per Day?, ATLANTIC (May 26, 2016)
https://www.theatlantic.com/technology/archive/2016/05/how-many-stories-do-newspapers-
publish-per-day/483845/.
121 See, e.g., Van Alstyne, supra note 8, at 7 (Noting that algorithms are subject to an arms race, as
prodcuers of false information are likely to find ways to circumvent the filters).
122 See CITRON, supra note 10, at 232 (2014); Danielle Keats Citron, Section 230’s Challenge to Civil
Rights and Civil Liberties, KNIGHT FIRST AMENDMENT INST.n.41 (2018). Algorithms can increasingly
approximate humans in reading and assessing data. See Arbel & Becher, Smart Readers, GEO. WASH.
L. REV. (forthcoming, 2022).
Electronic copy available at: https://ssrn.com/abstract=4204862

<<PAGE_BREAK>>

TRUTH BOUNTIES: A MARKET SOLUTION TO FAKE NEWS 27/53
the theory being that misinformation has been screened out.123 This is not
illogical; enhanced trust is a reasonable response to information gatekeeping. But
gatekeeping is necessarily imperfect. Some misinformation will slip by the
censors, and when it does people might place greater trust in it than ever. Of
course, consumers might react differently. They might question the reliability of
the censors, in which case they might place less trust in filtered content than in
unfiltered content. (Consider the reaction of some Russians to state media.)
Whereas the private removal, blocking, or filtering of online speech aims
to reduce the supply of false information, subsidies aim to increase the supply of
truthful information. If subsidies work, they lead to more accurate information
in circulation and enhanced trust. But enhanced trust means that the occasional
false story will penetrate more deeply. In such cases, misinformation becomes
more persuasive than before, even if it constitutes a smaller share of all
information. (Censorship raises the same problem.) For consumers who are
not passive, who attempt to make credibility determinations, and who know
something about the law—for example, that journalists get subsidies—the effect
of subsidies is even harder to predict. Savvy consumers might wonder about the
motivations of the actors handing out subsidies. Would conservative readers
trust newspapers that receive subsidies from liberal legislators?
Of the common reform proposals, expanding defamation law comes
closest to addressing information asymmetries. To see why, consider a recent
study.124 Participants were given a few reports, a newspaper clip, a television
screenshot, and a social media post. All of those sources of information related
to an article, which the participants also received. The participants were asked
to evaluate the credibility of the article. The participants were split into two
groups, one instructed that they live in a state where defamation law is effective
(liars pay damages), and the other in a state with ineffective defamation law. The
study found that defamation laws elicit a clear response. Effective defamation
law made participants more trusting of the news, whereas ineffective defamation
law led participants to express suspicion and doubt.
This study suggests that defamation law can facilitate credibility judgments
by listeners. Knowing that someone was not sued for defamation suggests that
their speech was truthful. More generally, this study suggests that law can have
persuasive power. Changing how we regulate information changes public
perceptions of its credibility.
Still, defamation law has shortcomings. One involves its limited reach.
Defamation law is inapplicable to general speech or many matters of broad
public interest. It requires an identifiable victim who has suffered reputational
harm.
123 Arbel & Mungan, supra note 98; Hemel & Porat, supra note 22.
124 Yonathan A. Arbel, The Credibility Effect (Manuscript on file with authors).
Electronic copy available at: https://ssrn.com/abstract=4204862

<<PAGE_BREAK>>

TRUTH BOUNTIES: A MARKET SOLUTION TO FAKE NEWS 28/53
Separate from this problem, defamation law can only do so much to
enhance credibility. Like a 1960s television, defamation law produces a low-
quality picture. The problem grows from the complexity of the law125 and,
relatedly, the challenge of predicting liability.126 Suppose the local newspaper
runs a story about a teacher alleged to have defrauded the school system. The
higher the expected sanction to the newspaper for defamation, the more an
observant reader would find the story believable. But can a reader know the
expected sanction? Damages in tort law depend on a complex, protracted
process, which—in the context of defamation—involves “presumed” damages
with little actual proof. Even lawyers struggle to agree on an acceptable range.
As a result, liability will be determined by a semi-random assortment of factors
concerning the particular effect the publication had on the specific teacher,
whether he lost his employment, whether he was retained by a different school,
whether he had to undergo therapy, and whether his partner deserted him over
the allegation. All of this is entirely opaque to the reader at the time of reading,
introducing considerable noise into the signal.127
Defamation law can produce a noisy signal in another way. Suppose a court
correctly finds for the victim in a defamation suit. On the optimistic view, this
makes the community adopt a more favorable view of the victim, perhaps even
completely restoring her tarnished reputation. But what if the victim never sues?
Victims are heterogenous. Some are rich, sophisticated, powerful, and litigious;
others are none of those things. A study presented participants with a report
accusing a blogger of trying to blackmail the mayor.128 One group of participants
was told that defamation laws are highly effective, and the other group was told
the opposite. Participants were asked to evaluate the credibility of the story
assuming the blogger (the victim) did not file a lawsuit. The study showed that
failing to bring suit acted as a powerful signal. Participants in the effective
defamation group were more than three times as likely to believe the accusations
against the blogger. Because we know that not all victims sue, even when they
have a valid claim, this finding reveals a problem. Failure to sue for defamation,
regardless of the reason, may cause people to infer that a false accusation was
true.
The last concern marries information asymmetries and spillover concerns.
Defamation law can encourage all-or-nothing decisions. Either the publisher
decides to publish or not. This is not ideal. In the real world, there is nothing
like perfect knowledge. The seller of a car will not always know its mechanical
condition with perfect accuracy. A journalist will often have a nuanced
understanding of the veracity of a story. Almost no story is unassailably true, and
almost no source is beyond reproach. With defamation law, journalists drop
stories when there is sufficient doubt—although some of the doubtful stories do
125 PROSSER ET AL., PROSSER AND KEETON ON THE LAW OF TORTS, 771 (1988) (“the law of
defamation is full of absurdities and anomalies for which no legal writer has haver had a kind
word.”).
126 This issue afflicts audiences and speakers, but we focus only on audiences.
127 Newspapers also face this uncertainty, and it carries chilling consequences for publishing
decisions.
128 Arbel, supra note 124.
Electronic copy available at: https://ssrn.com/abstract=4204862

<<PAGE_BREAK>>

TRUTH BOUNTIES: A MARKET SOLUTION TO FAKE NEWS 29/53
have merit and should be published. But the publisher has to worry about its own
liability rather than the public value of the story. And so publishers may shy away
from contested issues, their public import notwithstanding.
Ideally, information providers would be able to communicate not just the
information itself, but also their degree of confidence. If a reporter knows the
source has a conflict of interest, it will be better to communicate this fact
alongside the story—even if the reporter still finds the source credible. And if a
story is marginal, it might be better to publish it along with the reasons that the
editorial board found it doubtful than not to publish it at all. Defamation law
does not encourage this type of behavior.
*****
In sum, we have argued that speech suffers from two market failures,
spillovers and information asymmetries. Because of spillovers, we have too
much bad information and not enough good information in circulation. Because
of information asymmetries, consumers cannot tell which sources to trust. If
consumers do not trust them, high-quality speakers like professional journalists
will communicate less or stop communicating entirely. These two market failures
call for distinct solutions, each with their own challenges. Fixing spillovers
requires a degree of precision in the regulatory response, which in turn requires
a hard-to-evaluate assessment of the scope of incentive misalignment. Fixing
information asymmetries requires solutions that will increase truth-telling and
also public trust.
Ideally, solutions would address both of these problems at the same time.
We cannot achieve this ideal, but we can move in this direction. We need a
strategy for reform that will help people identify trustworthy sources. The
strategy must comply with the law, including the First Amendment. It should
operate ex ante, meaning before information circulates, not after the fact. It
must operate at scale, meaning a significant portion of the information in
circulation, not just bits and pieces, can be labeled, tagged, or otherwise sorted
so that consumers know what to trust. Finally, the strategy must account for
credibility, which sits at the heart of information asymmetry. The next Part
presents such a strategy.
Electronic copy available at: https://ssrn.com/abstract=4204862

<<PAGE_BREAK>>

TRUTH BOUNTIES: A MARKET SOLUTION TO FAKE NEWS 30/53
III. TRUTH BOUNTIES
Here we sketch a solution to misinformation: truth bounties. We develop
a system built on voluntary pledges of conditional payments by speakers. The
bounty would act as a promise or a bond that the speaker’s statement is true. If
the statement proves to be materially false, the speaker would lose the bounty.
In offering a truth bounty, speakers would signal that they have confidence in
the truthfulness of the information they share—so much confidence that they
are willing to put money on the line.
Our solution is private and voluntary and operates based on contracts.
Thus, it functions outside of public law, avoiding obstacles like the First
Amendment. Unlike other reform proposals, ours works ex ante; speakers post
bounties before their information disseminates. Our solution also operates at
scale. Millions of communications could operate in the system we develop.
More importantly, our solution addresses the central challenge facing
information consumers in the digital age: credibility. Knowing that speakers have
something to lose should make consumers more confident in their speech. By
seeing how much speakers post, listeners can also learn something very
important about the reliability of the information. Bounties send a finely tuned
signal.
This Part explains our solution in detail, beginning with its conceptual
roots.
A. Skin in the Game
Law often improves behavior through sanctions. People drive safely,
respect others’ property, and refrain from littering because doing otherwise will
lead to some kind of negative consequence, whether imprisonment, a fine, or
the payment of damages. Law forces people to put “skin in the game.” They
have something to lose—money, freedom—if they act wrongly, and this
encourages them to act rightly. In the context of misinformation, many
regulatory measures and proposals adopt this logic. They aim to sanction, in one
way or another, the purveyors of lies.
Sometimes sanctions can do more than harm wrongdoers. They can help
“rightdoers.” A primary benefit of sanctions for misinformation is that they
benefit honest purveyors of information by making their communications
credible. To illustrate, suppose a seller advertises a product as having high quality
and promises to deliver it tomorrow in exchange for a payment from the buyer
today. The buyer would like the product if it is indeed high quality, but can she
trust the seller? Talk is cheap, and the seller might send a low-quality product.
Contract law overcomes the problem by threatening the seller with a sanction.129
If she fails to deliver the product as she warranted, the buyer can sue for
129 Criminal law has this feature too, although it is only used for severe transgression. See Alvarez,
567 U.S. 709 (2012).
Electronic copy available at: https://ssrn.com/abstract=4204862

<<PAGE_BREAK>>

TRUTH BOUNTIES: A MARKET SOLUTION TO FAKE NEWS 31/53
damages. Contract law forces the seller to put skin in the game. If she breaks
her promise, she will have to pay.130 The threat of this sanction does not
necessarily harm the seller. She wants buyers to trust her, and having skin in the
game helps. The threat of liability makes her promises credible.131
The same idea operates in other areas of law. Manufacturers sell toasters,
lawn mowers, medicines, and electric cars. They make representations about
these products, such as “it has a range of 300 miles.” They want consumers to
trust these statements and buy the products. Contract law regards these
statements as warranties, compelling the manufacturer to pay if the product fails.
In addition, consumer protection laws, including prohibitions on fraud and false
advertising laws, make the representations trustworthy.132 If the carmaker lies
about the range, regulators will issue a fine, consumers and competitors will sue,
or both. Law forces the manufacturers to put skin in the game, and this tends
to help honest manufacturers. Having something to lose signals to consumers
that they tell the truth.133
To summarize, law forces some people who supply information to put skin
in the game, and this has two effects. It discourages some dishonest
communications, and it makes the remaining communications credible.134
Knowing that lies get punished increases trust in information.
We are interested in information in general, including information about
politics and current events, not simply promises from sellers or representations
about products. Can existing law force people who produce information in
general to put skin in the game? Only to a limited degree. We have explained
that defamation law only applies to information about specific people (“he
robbed a bank”), not information in general (“Vaccines are fake”). 135
Furthermore, public figures like celebrities and politicians must prove actual
malice to succeed in a defamation suit.136 That high bar is hard to meet, meaning
purveyors of false information often escape, and know they can escape,
liability.137
130 Note that warranties transcend (some) requirements, meaning that warranties are applicable
also to users of the product who are not purchasing directly from the manufacturer. See Richard
E. Speidel, Warranty Theory, Economic Loss, and the Privity Requirement: Once More into the Void, 67 B.U.
L. REV. 9, 11 (1987).
131 See ROBERT COOTER & THOMAS ULEN, LAW & ECONOMICS (6th ed. 2011).
132 Consumer protections include products liability, which is complicated and may have many
effects. See generally Keith N. Hylton, The Law and Economics of Products Liability, 88 NOTRE DAME L.
REV. 2457 (2013).
133 See, e.g., MARK A. GEISTFELD, PRODUCT LIABILITY LAW, 355 (2nd ed. 1999) (“There are good
reasons for expecting that the prospect of liability gives sellers an incentive to invest in safer
products.” ).
134 So long as courts cannot determine the truth with full accuracy, liability rules also chill some
honest speech. For the law to produce a credible signal, consumers must believe that, on average,
published statements are likely to be true. Their propensity to believe also depends on the costs
of mistakes. For a full analysis, see Arbel & Mungan, supra note 31.
135 Id.
136 New York Times Co. v. Sullivan, 376 U.S. 254 (1964).
137 One can put skin in the game without law. Many newspapers try to report truthfully not only
Electronic copy available at: https://ssrn.com/abstract=4204862

<<PAGE_BREAK>>

TRUTH BOUNTIES: A MARKET SOLUTION TO FAKE NEWS 32/53
In sum, having skin in the game should make producers of information
more honest and trustworthy. But getting skin in the game is difficult.
Defamation law applies only to some information producers. The First
Amendment and other obstacles discussed earlier prevent law from doing much
more. Reputation is limited in crowded and dynamic information environments.
This does not mean the skin-in-the-game theory fails. Having something to lose
should make statements more credible. However, law prevents us—lawmakers,
regulators, ordinary citizens—from forcing most information producers to put
skin in the game.
B. The Voluntary Pledge
When sticks fail, carrots can do the trick. We propose a system built on
voluntary, conditional payments by speakers. We call the conditional payment a
truth bounty. The bounty would act as a promise backed by a bond that the
speaker’s statement is true. If the statement proves to be materially false, the
speaker would lose the bounty. In posting a bounty, people would signal that
they have confidence in the truthfulness of the information that they share. In
choosing the size of the bounty, people could express not just their confidence,
but also the degree of their confidence.
The bounty could not be too small, lest it be ineffective. If a person
pledged, say, $1, no one would take it seriously. This would not amount to
putting skin in the game. On the other hand, the bounty could not be too large.
If the system required a bounty of, say, $10 million, many people would not have
the resources to use the system, and the people who did would worry—and thus
be overly cautious in their expression—to avoid any mistakes. They might lose
a fortune without good cause. We will say more about mistakes later. For now,
the point is simply that the optimal bounty presents a Goldilocks problem—not
too small, not too large.
Who would set the amount of the bounty? In principle, the decision could
be left to the speaker or set by the bonding system accepting the bounty.138 The
former would allow speakers to set an amount that corresponds to their level of
confidence in the story. The higher the confidence level, the larger the bounty.
It would also allow for flexibility based on resources. A $1,000 bounty would
mean more coming from a local newspaper or an independent investigative
journalist than from a large company like CNN. On the other hand, having the
system set the bounty could promote consistency and standardization. For
because they fear liability for defamation but because they fear a loss of reputation. Reputations
for truthfulness pay off in terms of subscriptions, ads, and readership, and spreading misleading
information would squander a good reputation. But reputation is not a panacea. See generally
Yonathan Arbel, Reputation Failure and the Limits of Market Discipline, 54 WAKE FOREST L. REV. 1239
(2019).
138 The Magnusson-Moss Act attempts to standardize the form of certain warranties, but much
like our proposal does not require that any warranties be extended. 15 U.S.C. § 2301 et seq.
Electronic copy available at: https://ssrn.com/abstract=4204862

<<PAGE_BREAK>>

TRUTH BOUNTIES: A MARKET SOLUTION TO FAKE NEWS 33/53
information consumers, those virtues might make truth bounties easier to
understand.
In the simplest implementation, the speaker would deposit the truth bounty
in escrow managed by a third party. This solution might not work well at scale.
Mass speakers like the New York Times probably would not want to tie up so
much capital in escrows. As an alternative, the speaker could post collateral, or
a third party like an insurance company could underwrite the speaker’s
publications. This would limit the capital requirements for the speaker and
enable them to use the system at scale.139
Information producers would advertise their truth bounties. This could be
accomplished in various ways. For written communications, a natural way would
involve the use of an icon. Imagine a news organization publishing a story on
its website. An icon could appear next to the headline indicating that the story
has a bounty. The icon would be standardized. Over time, users of the system
would learn its meaning, just as people have learned to recognize trademarks like
McDonald’s arches and security icons deployed online to suggest secure
commercial transactions. The icon would tell information consumers, whoever
and wherever they are, that the news organization feels so confident about the
story that it put money on the line. The following figure illustrates a possible
implementation.
$10,000
We started this section by contrasting sticks and carrots. We cannot force
information producers to put skin in the game, but we can encourage them by
offering something of value. In exchange for a truth bounty, they get the icon.
For the reasons explained below, the icon symbolizes credibility. Seeing the
amounts of money newspapers and other publishers spend on advertising their
quality and reliability, there are good reasons to believe that many information
producers would voluntarily pay for credibility.
139 One might worry about the moral hazard and adverse selection inherent to any insurance
scheme, but remember that insurers have various ways to ameliorate these problems. See Steven
Shavell, On the Social Function and the Regulation of Liability Insurance, 25 GENEVA PAPERS ON RISK
AND INSURANCE 166 (2000).
Electronic copy available at: https://ssrn.com/abstract=4204862

<<PAGE_BREAK>>

TRUTH BOUNTIES: A MARKET SOLUTION TO FAKE NEWS 34/53
C. Challenges and Fees
How does a truth bounty promote credibility? If the bounty is simply a
loan—a third party holds the money for a while and then returns it—then the
bounty and icon are meaningless. Speakers must bear risk. If a communication
with a bounty attached turns out to be false, the speaker must lose the bounty.
This is the key to the system.
To introduce risk, we propose a decentralized system of challenges.
Suppose a reader sees a story with the icon indicating a bounty. Further suppose
that the reader concludes that the story is false. Under a defamation regime, there
is little the reader can do—unless he or she happens to be discussed in the story,
and even then the legal hurdles are substantial. Under our proposed system, the
reader could initiate a challenge. This is a critical feature of the system. Any
member of the public could initiate a challenge to any communication with a
bounty. Unlike defamation law, the system would not limit claims to the targets
of specific allegations—it does not require any allegations at all.
Challenges could proceed in different ways, but for communications on the
internet, a straightforward way would involve clicking on the icon. Doing so
could bring challengers to a website. Information on the story in question—
title, date, publisher, author, etc.—would load automatically, and the challenger
could pursue her complaint.
Whether out of malice or ignorance, people could clog the system with
meritless challenges. To mitigate this problem, the system could charge a
challenge fee. The fee would force the challenger (whether a natural person or
an entity) to put skin in the game. Like court fees, paying the challenge fee
signals that the challenger has confidence in the merits of her claim.
As with the bounty, the challenge fee presents a balancing act. A small fee
would fail to screen out meritless challenges, but a large fee could block even
meritorious challenges. A similar problem arises when setting a court’s filing
fees.140 One approach would be to make the challenge fee a single-digit percent
of the bounty subject to some minimum. In any event, experience would inform
the optimal amount.
After paying the fee, the challenger would have an opportunity to present
her initial challenge. Basically, she would explain why she believes the story to
be false. This process could take many forms. One approach would allow the
challenger to present her argument in writing on the website and upload
supporting files (images, audio, video). Afterwards the speaker would have an
opportunity to rebut the challenger’s initial complaint, again with text and
possibly supportive files. This simple approach would not involve motions, oral
arguments, or other trappings of a trial.
140 See generally COOTER & ULEN, supra note 131, at 420-422.
Electronic copy available at: https://ssrn.com/abstract=4204862

<<PAGE_BREAK>>

TRUTH BOUNTIES: A MARKET SOLUTION TO FAKE NEWS 35/53
The goal of this initial step would be to create a simple plausibility review.
The challenge fee would also serve this function, but it could not prevent a deep-
pocketed challenger from clogging the system. The bounty system—the entity
collecting bounties and challenge fees and creating the icon—would conduct the
plausibility review. The goal would be to screen out meritless claims: they are
incoherent, have no evidence, make fantastical accusations, etc.
Assuming the challenger clears this bar, the case would proceed to
arbitration.
D. Arbitration
The challenge would be resolved by arbitrators. The arbitral process could
be informal and flexible, or it could resemble a trial. One could imagine other
approaches between these poles. One could imagine presenting the parties with
a menu of approaches from which they choose. We will not canvass specific
possibilities but rather focus on some general features.
The arbitrators would be private actors. To avoid legal obstacles, nothing
in the system requires state action. People would not get dragged into court
against their will. No state or federal judge would assess the truthfulness of, say,
someone’s political speech, a possibility that raises serious concerns under the
First Amendment. The system would be both voluntary and private, although
some of its infrastructure might be provided by law.141
To build confidence in the system, arbitrators should be high-profile people
with reputations for trustworthiness. As the system gains traction, the pool of
arbitrators could broaden to encompass subject matter experts. Panels may
include non-lawyers. Although helpful, training in law might not always be
necessary.
To further build trust, the following mechanism could be used. The parties
to a challenge could select an arbitrator from a pool. Each party would select
one arbitrator, and the selected arbitrators would select the third, tie-breaking
arbitrator. This system, which is common in arbitration, diminishes the risk of
bias and appearances of bias. Selecting the decisionmaker creates legitimacy and
makes it harder to complain about the outcome.
What exactly would the arbitrators decide? They could not decide whether
a challenged communication is actually true or false. Deciding on the actual
truth or falsity of a proposition raises deep challenges at the core of
epistemology.142 To demonstrate, readers probably assume (as do we) that the
141 For example, arbitration awards are subject to legal review under certain, restrictive, conditions.
See Hall Street Associates, L.L.C. v. Mattel, Inc., 552 U.S. 576 (2008).
142 See generally ALVIN I. GOLDMAN, EPISTEMOLOGY AND COGNITION (1986).
Electronic copy available at: https://ssrn.com/abstract=4204862

<<PAGE_BREAK>>

TRUTH BOUNTIES: A MARKET SOLUTION TO FAKE NEWS 36/53
earth revolves around the sun and the moon is made of rocks, not cheese. But
do we really know? Have you studied astronomy or tasted moon dust?143
Like judges and jurors in the formal legal system, the arbitrators would
adopt a practical approach to truth guided by legal standards. Recall our news
organization publishing a story on its website. In posting a bounty, the
organization would not promise that every word is true, with no subsequent
disproval possible. Such a promise would demand too much. A single error in
a name, date, or location could cost the organization its bounty. Furthermore,
some elements of a story might involve opinions, not facts. Opinions can be
silly, uninformed, or whatever else, but adjudicating their falsity is either
impossible or fraught with error.
For these reasons, posting a bounty would not commit the speaker to
absolute truth. Rather, the speaker would commit to a standard. The optimal
standard could be determined through experience (and perhaps vary by subject
matter or industry). As a starting point, we suggest the following: “This
information, taken as a whole, is materially accurate and not misleading.” The
challenger’s burden would be to show that the information is materially
inaccurate, or the information is misleading.
The term “materially” does important work. In general, small errors such
as misspelled names or botched dates would not be material to the content of a
story or other communication. Indeed, even defamation law does not consider
these types of mistakes.144 Thus, speakers could post bounties without fear of
losing over a typo or silly mistake.
The materiality requirement and the “taken as a whole” language in our
standard would require that the accuracy of a communication be assessed in a
time-bound manner. The question is not whether the communication is accurate
forevermore. The question is whether it was accurate at the time the bounty was
posted given the information reasonably available to the speaker. To illustrate,
suppose a person claimed in the year 1500 that the sun revolved around the
earth. This was false, but the speaker could not reasonably have been expected
to know that (Galileo came a century later). Liability for truth must account for
what could have been known.
Under our proposed standard, a challenger could win by showing that a
communication is “misleading.” A story can be accurate but misleading at the
same time, as when a person truthfully reports the findings of one scientific study
143 See, e.g., Richard Posner, The Jurisprudence of Skepticism, 86 MICH. L. REV. 827, 836 (1988) (“Many
scientific theories, including natural selection and the "big bang," are not verifiable by
experimentation or any other method of exact observation; many have been proved false after
having been universally accepted. . . many. . . are temporary or ad hoc constructs to explain
phenomena that might be explained in other ways”.).
144 KEETON ET AL., supra note 124, at 842 (explaining that in defamation law “it is not necessary to
prove the literal truth of the accusation in every detail, and that it is sufficient to show that the
imputation is substantially true, or, as it is often put, to justify the ‘gist,’ the ‘sting,’ or the
‘substantial truth’ of the defamation.”).
Electronic copy available at: https://ssrn.com/abstract=4204862

<<PAGE_BREAK>>

TRUTH BOUNTIES: A MARKET SOLUTION TO FAKE NEWS 37/53
but then generalizes from it, without bothering to mention other, equally credible
scientific studies that reach different conclusions. Thus, the terms “accurate”
and “not misleading” in our proposed standard do independent work. Of course,
demands for context are endless. The standard does not require one to provide
every piece of illuminating information, only information that is critical to the
proper interpretation of the statements.
The arbitrators would decide whether the challenger met the burden as laid
out in the standard. In doing so, they would have to rely on a burden of proof.
We suggest preponderance of the evidence. The question becomes: has the
challenger shown by a preponderance of the evidence that the information, taken
as a whole, is materially inaccurate or misleading? This will strike some readers
as a low bar. We believe, however, that users of the system would welcome it
(the standard mirrors defamation between private individuals). People and
organizations would post bounties to build credibility. Compared to clear and
convincing evidence or beyond a reasonable doubt, the preponderance of the
evidence standard would make it easier for a challenger, thus increasing the
credibility effect. At the same time, speakers need not worry about an onslaught
of try-your-luck challenges due to three internal checks. The challenge fee and
plausibility review offer the first two gatekeeping functions; the fee-shifting rule
elaborated below is the third. A preponderance standard coupled with these
screens would seem to strike a sensible balance. “The story is likely to be accurate
and not misleading,” a reader might reason, “because otherwise someone would
bring a challenge and win.”
Later we will provide some specific examples of how arbitration might
work in practice. For now, we will conclude with two general points. First, a
functional system would require decisions about many details: the formality of
the process, motions and evidence, whether there are oral arguments, appeals,
and so on. Those decisions raise an important tradeoff. Adopting a simple,
informal process should tend to lower costs but cause more errors.145 With few
steps and limited evidence, errors would be inevitable, as when a true story is
deemed false, or vice versa. Conversely, adopting a sophisticated, formal process
should tend to increase costs but cause fewer errors. Obviously fewer errors
would be better, but costs are not irrelevant. No one would use the system if it
became too costly in time, money, or effort.146
Here is the second point. Our proposed standard would necessarily require
arbitrators to exercise judgment. Does the alleged omission make the story
materially inaccurate? Does that phrasing make the story misleading? Like
ordinary people, different arbitrators would reach different judgments on those
questions in some close cases. Other standards would inevitably raise versions
of the same problem. No matter how the standard is phrased or the burden of
proof defined, arbitrators would sometimes disagree, different arbitral panels
145 COOTER & ULEN, supra note 131.
146 Id.
Electronic copy available at: https://ssrn.com/abstract=4204862

<<PAGE_BREAK>>

TRUTH BOUNTIES: A MARKET SOLUTION TO FAKE NEWS 38/53
would sometimes reach different decisions in the same dispute, and observers
would sometimes disagree with arbitral decisions.147
We do not believe this problem is fatal. The formal legal system suffers
from this problem, yet it appears to function well much of the time, especially in
private disputes like the ones we imagine. Arbitral panels could write and publish
short opinions explaining their decisions. As with judicial opinions, this might
temper some backlash.148 Having a strong suite of arbitrators, steeped in
journalistic norms, would go a long way—and having the funds to recruit them,
makes this option viable.
Importantly, speakers could hedge their communications to avoid the
uncertainty inherent in close cases. Speakers who want to avoid finding
themselves with a marginal case could either conduct more investigations to
support their communications or, in the alternative, hedge and qualify the
language they use. They could add qualifying language to their communications,
explicitly distinguish opinions from facts, and otherwise make editorial choices
that turn “borderline” communications into “clearly accurate and not
misleading” communications. This would, of course, be a virtue.
E. Rewards and Signals
After the arbitrators reached a decision, two things would happen: money
would change hands, and the outcome would become public. To begin, we
discuss the money. If the challenge succeeds, the challenger gets the bounty. To
make it concrete, if the Tuscaloosa Today pledged $10,000 on a story, and if a
challenger convinced the arbitral panel that the story is materially inaccurate, the
challenger would get the $10,000. On the other hand, if the challenge failed, the
bounty would remain intact.
The possibility of making money would encourage challengers, which
would be important to the system, especially in its formative period. One could
think about this feature of the system as outsourcing the search for truth.
Challenges mean people are consuming information, recognizing the “bounty”
icon, hunting for inaccuracies or misleading statements, and attempting to root
them out. For some, the ability to refute falsities would be enough to earnestly
participate. For others, the money would provide the incentive. For some,
having the money come from the speaker would sweeten the deal. A fierce critic
of Fox News would not only like to receive $10,000, he might take pleasure in
knowing that Fox News had to foot the bill.149
147 See, e.g., Anthony Niblett & Albert H. Yoon, Judicial Disharmony: A Study of Dissent, INT. REV. L.
ECON. 42, 60–71 (2015).
148 William C. Vickrey et al., Opinions as the Voice of the Court: How State Supreme Courts can Communicate
Effectively and Promote Procedural Fairness, NAT’L CENTER FOR STATE COURTS (2012) (Arguing that
“rulings communicate not only to lawyers but also to the public and media and explain how courts
resolve disputes and determine constitutional rights.”).
149 Cf. Andrew T. Hayashi, The Law and Economics of Animus, 89 U. CHI. L. REV. 581 (2022).
Electronic copy available at: https://ssrn.com/abstract=4204862

<<PAGE_BREAK>>

TRUTH BOUNTIES: A MARKET SOLUTION TO FAKE NEWS 39/53
So far, we have abstracted from the costs of running the system. In reality,
operating the system, marketing its services, and performing arbitration would
cost a lot. Much like the legal system, these costs must be funded. We believe
the source of funding should not be the bounty itself. Instead of taking a portion
of the bounty, funds could come from three other sources: initial fees paid by
speakers that are independent of the bounty; the challenge fees; and, much like
any other arbitration process, the parties themselves.
Parties to arbitration often pay for the arbitral process. However, we would
augment that usual system with a critical design choice: fee shifting. Under the
so-called American Rule, each party bears its own litigation costs. Under the
English rule, which we endorse for this system, the loser pays for the process.
In our context, if the challenger succeeds, the speaker loses the bounty and pays
for the arbitration. If the challenger fails, the challenger pays the arbitrators.
Scholars have concluded that the English rule discourages weak challenges
and encourages strong ones.150 The intuition is straightforward. By increasing
the cost to challengers whose challenges fail, fee shifting would push them to
bring only strong challenges, meaning challenges likely to succeed. We believe
that, for our system, this is a desirable feature. Given the inherent uncertainty in
determining truth, it is desirable to have fewer costly arbitrations with close
cases, while making clear-cut, winning cases easier to bring. Although the system
we envision could not adjudicate with perfect accuracy the truth or falsity of
every possible communication, it could effectively refute stories that are clearly
false. That would be immensely valuable, and the English rule would help
achieve that goal.
In addition to money changing hands, arbitration would result in publicity.
The outcome of arbitration—whatever it is—must be publicized. Publicity could
come through different channels. The winning party would naturally want to
publicize their winning—“we successfully refuted the claim that X was taking
bribes.” But some challengers would have smaller platforms than others, and
from experience we know that parties can misreport the outcomes of
proceedings. Hence, the system would function better with a formal, centralized
method of reporting outcomes.
In the context of digital communications, this could happen through the
icon—the same icon that indicates a communication has a bounty. The icon
could be adjusted to send different messages. To begin, the icon could be, say,
light green, indicating the information has a bounty but has not been challenged.
After a challenge has been filed but before it has been resolved, the icon could
(explaining how the size of a fine and the recipient of the money can affect the fine’s power to
deter).
150 David A. Root, Attorney Fee-Shifting in America: Comparing, Contrasting, and Combining the "American
Rule" and "English Rule", IND. INT'L & COMP. L. REV. See also Theodore Eisenberg & Geoffrey P.
Miller., The English vs. The American Rule on Attorneys Fees: An Empirical Study of Attorney Fee Clauses
in Publicly-Held Companies’ Contracts, NYU L. ECON. RSCH. PAPER 10-52 (2010).
Electronic copy available at: https://ssrn.com/abstract=4204862

<<PAGE_BREAK>>

TRUTH BOUNTIES: A MARKET SOLUTION TO FAKE NEWS 40/53
turn, say, yellow, indicating that a challenge is pending. Perhaps readers could,
simply by clicking the icon, see the pleadings and the status of the dispute. After
a challenge fails, the icon could turn dark green, indicating that the information
has been successfully defended. This would make the information especially
credible. If a challenge succeeds, the icon could turn red. In both of the latter
cases, clicking on the icon could reveal the arbitral panel’s opinion.
The system would track the records of speakers and challengers, and
clicking (or hovering) on the icon could reveal this information. To illustrate,
suppose a person reads a story online. The reader does not recognize the name
of the author or publication, but she sees that the story has a bounty. Hovering
over the icon reveals that the author has bounties on 100 stories, seven have
been challenged, and all seven challenges have failed. This makes the reader
especially confident about the accuracy of the story. Conversely, suppose the
reader sees that the story has a bounty, and the yellow icon indicates that it has
been challenged. Hovering over the icon reveals that the challenger has
challenged 50 different stories and succeeded in 35 cases. This rightly makes the
reader more skeptical of the story.
F. Equilibrium and Use Cases
The system we envision would have broad reach. For digital information,
anyone in the world with internet access and a credit card could attach a truth
bounty to his or her communication. Anyone in the world with internet access
and a little money could challenge such a communication. Although many
details would need to be worked out, arbitration could proceed virtually, with no
need for physical records or travel. This would greatly reduce costs and frictions
growing from competing courts, jurisdictional questions, and legal standards that
vary by state and nation.
If the system succeeded, a virtuous equilibrium would result. People
everywhere would, upon seeing the icon, have greater confidence in the veracity
of the information. They would know that the source of the information had
skin in the game. Not seeing the icon would send a similarly helpful signal.
Information without the bounty would be suspect. Because people could make
money by challenging false or misleading information, relatively few people
would attach bounties to such information, meaning relatively few challenges
and arbitrations would take place, and that would tamp down costs.
The analogy of warranties is important here. Samsung, a large and well
regarded company, voluntarily offers warranties with the sale of every fridge.
The voluntary offer of warranties is a common marketing norm. It is used by
large organizations like Samsung and small ones like the local tailor. Deciding to
offer a warranty involves a financial risk. These firms understand that quite well.
But they also understand the marketing potential of credibility. Truth bounties
make it possible to warrant the truth. Let us now examine a few use cases, in
order to make matters more concrete.
Electronic copy available at: https://ssrn.com/abstract=4204862

<<PAGE_BREAK>>

TRUTH BOUNTIES: A MARKET SOLUTION TO FAKE NEWS 41/53
1. Media Publishing
A natural use for truth bounties, and the one we emphasize throughout, is
media publishing. Under the proposed system, the editor of a publication could
choose which stories to support with truth bounties. Staking money would have
several benefits for the editor. Most obviously, a truth bounty elicits trust. Reader
trust is the currency of mainstream journalism—and many newspapers pride
themselves on the quality of their reporting. They advertise their quality, citing
their own reporting standards as a reason to have confidence in their work and,
by extension, to read or watch their communications.151
Truth bounties could also aid in product differentiation. Product
differentiation is helpful in a competitive landscape and of particular importance
for entrants (in this context, new media) who seek to establish themselves. In a
sense, truth bounties are a form of advertising, but unlike general advertising
which suffers from a cheap talk problem, truth bounties send a loud and clear
signal.
It may seem paradoxical for a media company to voluntarily commit to
the payment of money for stories, especially given the tenuous financial status
of many newspapers today and the large volume of stories they run. But on
careful consideration, truth bounties are more realistic than they may appear. In
a sense, newspapers already put money behind many of their stories. There is a
risk that somebody might take offense and bring a defamation lawsuit. While
stories on issues of public import are protected, this protection is limited, as
illustrated by the trial of former vice-presidential candidate Sarah Palin against
the New York Times for an editorial linking her to a mass shooting.152 Even if
the Times was likely to win (it did), the expense of the trial must have been
significant. Had the paper lost, the scope of liability could have been large and,
perhaps worse, highly unpredictable. Truth bounties hedge risks—they stipulate
amounts that are known in advance and can be controlled by the paper itself.
And just like the implied stake demanded by defamation law, no payouts have
to be made if the stories are true.
Finally, consider profits. Many media companies want to earn money.
If the New York Times posted truth bounties, it might convince some skeptics
to trust its reporting. If only a fraction of the millions of Fox News watchers
bought a subscription, the Times could come out ahead. Likewise, if Fox News
wanted to draw viewers and readers away from CNN and MSNBC, it could
151 Efrat Nechushtai & Lior Zalmanson, ‘Stay Informed’, ‘Become an Insider’ or ‘Drive Change’:
Repackaging Newspaper Substriptions in the Digital Age, 22 JOURNALISM 2035 (2021) (finding that,
among the 55 top-circulated daily newspapers, every subscription pitche included information
quality).
152 Jeremy W. Peters, Sarah Palin v. New York Times Spotlights Push to Loosen Libel Law., N.Y. TIMES
(Feb. 15, 2022), https://www.nytimes.com/2022/01/23/business/media/sarah-palin-libel-suit-
nyt.html.
Electronic copy available at: https://ssrn.com/abstract=4204862

<<PAGE_BREAK>>

TRUTH BOUNTIES: A MARKET SOLUTION TO FAKE NEWS 42/53
attach truth bounties to its stories. The ability to signal the quality of one’s
product is valuable, whether that product is a toaster, electric car, or information.
2. Campaign Speech
In January 2015, two Republican presidential candidates got into a heated
debate on national television.153 Rick Perry argued that Mitt Romney had
supported health care mandates and that he was trying to cover up his past
support for these policies.154 “Rick, I’ll tell you what” Romney replied, turning
to face his opponent and extending his hand “Ten Thousand bucks? Ten
thousand dollar bet?” Romney was willing to stake this amount to prove his
point, but he was rebuffed by Perry: “I’m not in the betting business.”155
This short exchange is revealing. It demonstrates, first, how much factual
statements matter for political figures. Whether or not Romney supported
healthcare was important for his candidacy. 156 Second, Perry had no skin in the
game. Because the odds of Romney suing him for defamation and winning were
very low, and because no one else could sue, the accusation was effectively cheap
talk. Perry could just as easily have asserted that Romney was secretly a Democrat
or a citizen of Russia. A more subtle point concerns the social reaction to this
offer. Romney was roundly mocked for his response because “casually offering
a $10,000 bet” was a violation of a social norm—it made Romney appear “rich,
elite, and out of touch.”157
Truth bounties could offer a helpful tool in politics. If such bounties had
been in use, Romney could have staked $10,000 (or more) behind his claim that
he never supported healthcare mandates. To be specific, he could have written
a statement after the debate, posted it online, and attached a truth bounty. To
mitigate the social norms problem, perhaps Romney’s campaign or a political
action committee, rather than Romney himself, could have staked the bounty.
Anyone—not just Rick Perry—could have challenged Romney’s statement.
Romney’s opponents would have relished the chance to disprove his claim and
collect the bounty. Romney would have relished the chance to defend his claim
153 For an exposition of this point, see Hemel & Porat, supra note 22.
154 Amy Gardner & Philip Rucker, Rick Perry Stumbles Badly in Republican Presidential Debate, WASH.
POST (Nov. 10, 2011), https://www.washingtonpost.com/politics/republican-presidential-
candidates-focus-on-economy/2011/11/09/gIQA5Lsp6M_story.html.
155 Mitt Romney’s ‘Out of Touch’ $10,000 Bet, THE WEEK (Jan. 8, 2015)
https://theweek.com/articles/479518/mitt-romneys-touch-10000-bet.
156 See Tom Cohen, Romney Camp Seeks to Clarify Its Health Care Message, CNN POLITICS (July 5,
2012), https://www.cnn.com/2012/07/05/politics/health-care-romney/index.html (asserting
that Romney’s stance on the healthcare mandate during the 2012 election was a key issue due to
the Republican desire to overturn the Affordable Care Act).
157 Mitt Romney’s ‘Out of Touch’ $10,000 Bet, THE WEEK (Jan. 8, 2015)
,https://theweek.com/articles/479518/mitt-romneys-touch-10000-bet. See also Romney’s $10k
Gamble, POLITICO (Dec. 11, 2011) ,https://www.politico.com/story/2011/12/romneys-bet-wins-
him-opening-on-attacks-070246; Chris Cillizza & Aaron Blake, Mitt Romney’s $10,000 Mistake,
WASH. POST (Dec. 12, 2011), https://www.washingtonpost.com/blogs/the-fix/post/mitt-
romneys-10000-mistake/2011/12/11/gIQA9aEQpO_blog.html.
Electronic copy available at: https://ssrn.com/abstract=4204862

<<PAGE_BREAK>>

TRUTH BOUNTIES: A MARKET SOLUTION TO FAKE NEWS 43/53
in a serious setting with professional arbitrators and a factual record. Best of all,
voters would receive a meaningful signal of truthfulness amid the political noise.
Consider also the following example. In December of 1995, the Republican
National Committee was under pressure to show that it supported expansions
to Medicare. The Committee ran an advertisement depicting Chairman Haley
Barbour holding an oversized cashier’s check payable to “YOUR NAME
HERE.”158 The ad, which was followed by the coupon reproduced below,
offered $1 million to anyone who could disprove the Republicans’ assertion that
they passed a balanced budget in 1995 and increased Medicare spending by 50%.
Eighty different individuals tried to claim the prize.159 Representative Gene
Taylor, a Democrat, argued that the budget was not “balanced” as claimed; Mr.
Charles Resor of Wilson, Wyoming, focused on the second part, claiming that
the use of “increases” was fallacious, and the correct language should have been
“would have increased.”160 The RNC responded to all of these claims with a
form letter denying the prize. In the resulting litigation, the RNC argued that the
advertisement was “parody,” and, in the alternative, that the statement was not
disproven.161 The trial court rejected the first argument, finding that it was a
158 USA TODAY (Dec. 13, 1995).
159 Republican Nat’l Comm. v. Taylor, 299 F.3d 887, 889 (D.C. Cir. 2002).
160 Id.
161 Id. at 889-90.
Electronic copy available at: https://ssrn.com/abstract=4204862

<<PAGE_BREAK>>

TRUTH BOUNTIES: A MARKET SOLUTION TO FAKE NEWS 44/53
binding offer, but it accepted the second argument and granted summary
judgment.
This story has an important lesson about the utility and practicality of truth
bounties. The fact that politicians found the need to buy credibility by staking
funds is quite telling of an unmet market demand for credibility. At the same
time, it exposes the risk of multiple claimants, with as many as 80 different
claimants conducting investigations and seeking the $1 million. On the other
hand, the case is useful in assuaging practical concerns. The RNC summarily
rejected all claims with a form letter; very few lawsuits were actually filed, and
the few lawsuits filed were dismissed on summary judgment. Only two cases
were appealed, and they were quickly dismissed. Importantly, the first-come,
first-served language presumably solved over-participation and excessive
litigation. The effect of the first-come language emphasizes the importance of a
default rule that only the first in line can claim the bounty (although she is free
to trade some of her rewards with others in exchange for better evidence).
Truth bounties could have many applications in politics. Here are two
other examples. Candidates could attach bounties to their qualifications and
background (“I served in the war, I am a citizen of the United States, I did not
plagiarize my college thesis”). Super PACs and other groups could attach
bounties to their political ads. This might be especially useful to “dark money”
groups, which want people to believe their communications but do not want to
reveal their donors. These uses and many others would not only help speakers,
they would help listeners. Voters would find it easier to sort truth from lies.
3. Advertising
How do you sell mattresses? As many failed businesses have learned,
having a good product is only one part of the battle, sometimes the easier one.
Effective advertising is key. The problem for a mattress manufacturer is that
pretty much every other manufacturer already promises “the best sleeping
experience,” regardless of the quality of their product. Standing out is difficult.
Truth bounties could be used for commercial speech. A mattress
manufacturer could make statements backed by a truth bond. For example, the
manufacturer could claim that its mattress is made in the United States from top-
quality latex, has been lab tested, or is clinically proven to reduce back pain. In
all cases, the credibility benefits of having a truth bounty should materialize.
A case of desperados and welshers provides a striking illustration. Rudy
Turilli operated a museum dedicated to the notorious desperado Jesse James. A
central attraction of his museum was his theory that James did not die in a
shootout. Instead, he assumed a secret alias and lived in what became Turilli’s
museum until he passed away of old age. Turilli went on air, advertised his
theory, and then offered $10,000 ($70,000 in 2022 USD) to “anyone who could
Electronic copy available at: https://ssrn.com/abstract=4204862

<<PAGE_BREAK>>

TRUTH BOUNTIES: A MARKET SOLUTION TO FAKE NEWS 45/53
prove me wrong.” Turilli’s whole career was built around this assertion.162
Unfortunately for him, the widow of James proved him wrong. Turilli refused
to pay, claiming no contract was ever made and, if made, that his allegations were
never properly refuted. The court, however, disagreed with him and ordered the
payment of the bounty.
Other cases show the difficulty of collecting such bounties under existing
law. Consider Kolodziej v. Mason.163 During a television appearance a defense
attorney claimed that his client couldn’t have traveled from his last known
location to the scene of the crime in the relevant timeframe and was therefore
innocent. The lawyer added “I challenge anybody to show me—I’ll pay them a
million dollars if they can do it.”164 An entrepreneurial law student accepted the
challenge, replicating the trip and showing that it was manageable in time. The
lawyer refused to pay, and the parties went to court. The judge ruled that there
was no contract because the lawyer’s statement was indefinite and hyperbolic,
comparable, the judge explained, to stating “I’ll be a monkey’s uncle.”165 The
judge refused to enforce a promise, made by a lawyer on national television, that
contained a price and induced verifiable reliance by the plaintiff.
To be sure, false advertising law, misrepresentation doctrine, and Unfair,
Deceptive, or Abusive Acts or Practices legislation already create some liability
for advertisers, discouraging them from making misrepresentations about their
products and services. But this liability is limited, either due to the high legal
standard, the time and effort required for litigation, or the narrow scope of
people who have standing to sue. By contrast, truth bounties come with a lower
legal standard, and anyone could claim them.
Truth bounties are similar to product warranties. Indeed, the fact that many
manufacturers provide warranties suggests the value and realism of truth
bounties. Truth bounties are a generalization of this tried-and-true contractual
mechanism.
These ideas cast light on the paradoxical nature of the puffery defense.
Under the puffery doctrine, companies cannot be sued for false advertising if
their statements can be interpreted as “mere puffery”—i.e., exaggeration,
hyperbole, and other speech that is judged implausible. This is often interpreted
as a pro-business rule because it shields firms from liability. But the converse is
also true. Strong puffery defenses make all speech less credible, making it
necessary for firms to invest more in advertising to win market share. Many of
these investments are socially wasteful. If truth bounties could replace some of
them, that would be another benefit.
162 James v. Turilli, 473 S.W.2d 757, 761 (Mo. Ct. App. 1972) (“[D]efendant had virtually made a
career out of his contention Jesse W. James was not killed in 1882 but lived many years thereafter
as J. Frank Dalton.”).
163 774 F.3d 736, 740 (11th Cir. 2014).
164 Id. at 739.
165 Id. at 744.
Electronic copy available at: https://ssrn.com/abstract=4204862

<<PAGE_BREAK>>

TRUTH BOUNTIES: A MARKET SOLUTION TO FAKE NEWS 46/53
G. Sustaining Truth Bounties
We have explained how truth bounties could combat misinformation by
distinguishing truthful from dishonest speech. By helping people make the
distinction, the bounty system would benefit not only information consumers
but also the many honest information producers who want to separate
themselves from liars, swindlers, and propagandists. Once implemented, a
bounty system would offer many advantages over other reform proposals touted
today. But could it be sustained?
In game theory, it is common to examine systems by first assuming they
work and then asking whether they will stop working once in place (i.e., asking
whether they are an “equilibrium”). This way of thinking about the world is
useful in many ways, one of which is that it highlights that however much effort
is put into implementing policies, they can be undone quickly if they are not self-
sustaining.
With this frame of mind, we can appreciate the power of truth bounties in
creating incentives for actors to maintain the system. Consider a world where all
the major newspapers use truth bounties extensively, politicians apply a bounty
to their arguments on the campaign trial, and commercials by large advertisers
usually include a bounty. Now consider a CEO of a news outlet who considers
a money-saving reform: no bounties on any of company’s stories. It is easy to
see why that would be tempting in the short run: no funds will have to be tied
up, no bounties will have to be paid. But in the longer run, such a strategy would
be destructive. Without truth bonds, readers would treat the news outlet with
skepticism. The CEO would see readership and revenues drop.
This is not a mere thought experiment. We mentioned earlier strong
evidence that labeling some stories as false leads readers to adjust their
perceptions of unlabeled stories, considering them more credible.166 The reverse
would happen here. Deviating from a truth-bounty norm would be a clear red
flag to readers that the source lacks credibility. Importantly, surveys of news
consumption show that readers and viewers greatly care about source credibility
when choosing which content to consume. A recent survey showed that 53% of
US respondents said they prefer to pay for news than use free alternatives
because paid news has “better quality.”167
We have explained that, once operational, a truth bounty system could
sustain itself. Making it operational—developing the system in the first
instance—is a separate and important challenge. One might even think it
undermines our ideas. If the system we propose has so many advantages, why
doesn’t it already exist? Here are two hypotheses. The technology necessary for
a global truth bounty system has not been available for long, and the widespread
focus on misinformation and search for solutions is relatively recent.
166 Pennycook et al., supra note 114, at 4944-4957.
167 Understanding Value in Media: Perspectives from Consumers and Industry, WORLD ECONOMIC FORUM
(Apr. 2, 2020), https://www.weforum.org/reports/value-in-media.
Electronic copy available at: https://ssrn.com/abstract=4204862

<<PAGE_BREAK>>

TRUTH BOUNTIES: A MARKET SOLUTION TO FAKE NEWS 47/53
IV. BOUNTIES AND THE FREEDOM OF SPEECH
We have described in detail the infrastructure necessary to create a system
of truth bounties. Here we examine truth bounties on a higher level of
abstraction. First, we consider the advantages of using a voluntary, contract-
based approach to misinformation rather than a mandatory, tort-based
approach. Second, we consider the relationship between truth bounties and
equity. We do not believe the system would benefit the rich or harm the poor.
Third, we consider the place truth bounties might occupy in contemporary
speech debates and the opportunities they open for thinking about other
alternative reforms.
A. Contracts vs. Torts
In the eyes of many, defamation law and other information regulations have
failed.168 Still, the standard response has been to double down.169 Many reform
proposals promise benefits, but some also have obvious and immediate risks:
chilling reporting on controversial issues, increasing the cost of information
production and hence information consumption, and making the government a
truth arbiter in contentious domains.
Here we consider bounties as an alternative to the proposed expansions of
current law. We do not make the absolute argument that bounties are superior
to regulation, only that on the current margins, bounties are a better solution
than the blunt expansion of defamation and similar laws.
In a world of exploding information sources, individuals cannot hope to
vet all information hurtled at them. Instead, they opt to rely on basic filters and
heuristics, such as only consuming information produced by sources perceived
as reliable: a single news station, sources that tend to agree with one’s pre-existing
views (and thus have shown themselves to be reliable arbiters of truth, as the
individual understands it), and homophilic attributes.170 The danger is that such
proxies can lead to echo chambers and polarization. By comparison, truth
bounties offer a salient and direct signal of reliability. Rather than making the
broad choice of CNN versus Fox News, one could pick and choose from all
sources. The question is not “which station?” but rather “is there a bounty?”.
A truth bounty is a tax on bullshit.171 If the system took root, news without
a bounty would find less demand and become less effective. The incentive to
168 See, e.g., Verstraete, Bambauer & Bambauer, supra note 52, at 3 (“[M]any proposed solutions [to
the problem of fake news] are unable to strike at the root of the problem[.]”).
169 See supra notes Part I.
170 ‘Who Shared It?’: How Americans Decide What News to Trust on Social Media, AMERICAN PRESS
INSTITUTE (Mar. 20, 2017),
https://www.americanpressinstitute.org/publications/reports/survey-research/trust-social-
media/.
171 This is a paraphrase of Alex Tabarok, who studied bets in public discourse. Alex Tabarrok, A
Electronic copy available at: https://ssrn.com/abstract=4204862

<<PAGE_BREAK>>

TRUTH BOUNTIES: A MARKET SOLUTION TO FAKE NEWS 48/53
produce or spread misinformation would fall. To remain relevant, purveyors of
misinformation could post bounties for their stories, but they would lose their
money. Thus, bounties would discourage misinformation in two
complementary ways: it would cost more to produce misinformation, and it
would reach a smaller audience.
We would not expect the same effect from stricter defamation law.
Although defamation law also imposes a tax on falsities, we explained earlier that
it produces a noisy signal.172 Knowing whether defamation law deters the
reporting of false information requires one to know the implied stakes: can or
will the victim sue, how strong is the case, what damages would the publisher
owe, and so on. Truth bounties are more reliable because they are easier to
interpret and claim. The stakes (i.e., the size of the bounties) are known and
advertised in advance; they do not depend on legal details particular to this or
that jurisdiction. Any member of the public could challenge any communication
with a bounty. If the victim of a story lacks evidence, someone else might have
it. Bounties work even when defamation does not apply, as when a story spreads
lies but does not tarnish any reputations.
Defamation law, being a scion of tort law, also has a particular structural
problem. In a nutshell, the deterrent effect of tort liability divorces the public
value of information from the private harm.173 Whether a newspaper should run
a story will be affected by the scope of expected liability—but the scope of
liability will be uncertain and biased to protect the wealthy. Expected liability when
reporting about a random teacher from Oklahoma is lower than the expected
liability of reporting about a socialite like Ghislaine Maxwell, who was found
guilty of child sex trafficking. This might encourage the paper to report on the
teacher. But the social value of reporting will often run in the opposite
direction.174
Beyond the benefits to the general public, bounties also have advantages
for publishers: credibility, predictability, cost, and coverage. Naturally, these
advantages do not extend to all publishers: a scandalous tabloid would probably
fare worse under a system of truth bounties. But for speakers who care about
truth—either for its own sake or as a way of engendering trust—bounties could
be extremely helpful.
One might think that the bounty system would disadvantage victims of
defamation.175 There are two distinct concerns, the magnitude of compensation
Bet is a Tax on Bullshit, MARGINAL REVOLUTION (Nov. 2, 2012, 7:35 AM),
https://marginalrevolution.com/marginalrevolution/2012/11/a-bet-is-a-tax-on-bullshit.html.
172 See discussion in Part 2.
173 Because of this mismatch, newspapers will generally have suboptimal incentives to investigate
and publish stories. See Matthew Gentzkow & Jesse M. Shapiro, Competition and Truth in the Market
for News, 22 J. ECON. PERSP. 133 (2008); David J. Acheson & Ansgar Wohlschlegel, The Economics
of Weaponized Defamation Lawsuits, 47 SW. L. REV. 335, 336 (2018).
174 Indeed, this is why the Supreme Court created the exception for reports on issues of public
concern, but this should be seen as patchwork.
175 The true victims of defamation are all the people who were misled by it, and in the view of one
Electronic copy available at: https://ssrn.com/abstract=4204862

<<PAGE_BREAK>>

TRUTH BOUNTIES: A MARKET SOLUTION TO FAKE NEWS 49/53
and its recipient. Under defamation law, the victim can get compensated for the
full scope of her harm. In a bounty system, either the victim or any member of
the public may claim the bounty, which may be smaller (or larger) than the true
harm. These might seem like serious concerns. But we are not advocating for
abolishing the existing system of liability. We are only arguing that it would be
advantageous to pursue truth bounties instead of expansions to the liability
regime. Unless defamation law goes away, which we do not advocate or
anticipate, truth bounties would not cause victims to lose any rights.
Truth bounties offer another benefit to victims. To vindicate their good
names under defamation law, victims must sue.176 To vindicate their good
names with a truth bounty, it is enough that someone brings a challenge. With
many potential challengers drawing on a larger pool of evidence, the probability
of vindication for a victim necessarily increases. Of course, no one could bring
a challenge without a bounty, but this is another virtue of the system. Without
a bounty attached, stories that defame people should garner less attention and
be taken less seriously. The harms to the victim would decrease.
Truth bounties have a final, more structural benefit. Given the First
Amendment, legislators and regulators cannot impose whatever sanctions they
desire on false speech. To the extent bounties are voluntary, they sidestep these
constraints. A writer, publisher, advertiser, scientist, politician or whoever else
could choose to post a bounty, and someone could challenge it, without violating
any constitutional norm.
B. Equity and Access
Truth bounties aim to democratize the search for truth by enabling
individuals to participate equally in the marketplace of ideas. A critical concern
is to ensure equitable access for all individuals. On this score, we believe that
truth bounties can outperform some alternative proposals, while complementing
others. In contrast to defamation law, which imposes unpredictable and possibly
significant financial risks on speakers and litigants,177 and in contrast to reforms
that would vest big platforms with editorial responsibilities that could
disproportionately impact smaller outlets, truth bounties offer a more equitable
approach.
To begin, consider information consumers. The system would aid all such
consumers by helping them sort truths from falsehoods at zero cost. Insofar as
poorer people have less education and fewer alternative tools for filtering out
of us, the subject of defamation has no privileged claim to priority in this sense. See Arbel, supra
note 96. Still, in the analysis here we follow the conventional treatment of the victim.
176 Many commentators argue that vindication is an important goal of defamation law See Randall
P. Bezanson, The Libel Suit in Retrospect: What Plaintiffs Want and What Plaintiffs Get, 74 CAL. L. REV.
189, 792 (1986); Randall P. Bezanson, Libel Law and the Realities of Litigation: Setting the Record Straight,
71 IOWA L. REV. 226, 228 (1985).
177 See supra notes 125-27 and accompanying text.
Electronic copy available at: https://ssrn.com/abstract=4204862

<<PAGE_BREAK>>

TRUTH BOUNTIES: A MARKET SOLUTION TO FAKE NEWS 50/53
misinformation, truth bounties would help them the most. We do not perceive
any equity issues on the consumer side.
Now consider information producers. Using the truth bounty system
would require some resources, which of course not everyone has. But it would
require fewer resources than one might think. As discussed, communicators
might be able to choose the size of the bounty. A $100 bounty from a poor
freelancer might mean more than a $1,000 bounty from the Wall Street Journal.
People can tailor the bounties to their resources. Furthermore, communicators
only lose their bounty if their story turns out to be false or misleading. If their
story is accurate, they keep it. Bounties would not operate forever; any particular
bounty might be good for, say, one year. If no challenge succeeds during that
time, the communicator gets the bounty back, possibly with interest. In short,
honest communicators would not need lots of money to spend. They would need
some money to lend.
To prevent frivolity, people challenging a bountied story would have to pay
a fee. Paying such a fee would be challenging for poorer individuals. This
problem is important but not unique to this context. The same issue arises with
victims of accidents or defamation who cannot afford to sue. Some solutions are
available, such as crowdfunding or third-party litigation funding. The latter
option seems especially relevant in this context. The poor person A could
partner with the resourced person B, with B paying the challenge fee, A
disproving the story, and the parties splitting the bounty. Since many of the
bountied stories would have a public interest component, it is possible that poor
challengers could attract support from wealthy benefactors, NGOs, or public
groups.
Truth bounties have another advantage for smaller players. Today many
people segregate themselves into information silos, consuming information only
from sources that they trust such as the Washington Post or Fox News.178 This
not only results in echo chambers; it advantages established publishers over
smaller ones, making entry difficult. Truth bounties would allow entrants
without established reputations to distinguish themselves by warranting the
quality of their reporting. Warranties are a clear, battletested method of signaling
reliability and attracting new clientele.179
We conclude by considering whether truth bounties would advantage
wealthy actors. The main concern, we think, is that truth bounties would benefit
dishonest wealthy actors who pursue strategic goals at the expense of truth. Rich
players could, simply by attaching a bounty to their communication, send a signal
that their communication is credible, even if it is actually false. In this way, a
truth bounty system could magnify the power of lies by making them more
persuasive. This is certainly a concern, but here are three reasons to think it is
178 Linley Sanders, Trust in Media 2022, YouGov (Apr, 5, 2022)
https://today.yougov.com/topics/politics/articles-reports/2022/04/05/trust-media-2022-
where-americans-get-news-poll.
179 See supra note 21 and accompanying text.
Electronic copy available at: https://ssrn.com/abstract=4204862

<<PAGE_BREAK>>

TRUTH BOUNTIES: A MARKET SOLUTION TO FAKE NEWS 51/53
not serious. First, rich actors who post only small bounties may not gain much
credibility. If a billionaire placed a $1,000 bounty on his communication, would
anyone take it seriously? To signal credibility, he might need a much larger
bounty. Of course, a larger bounty means he will lose more when someone
successfully challenges his communication, discouraging him from pursuing this
strategy in the first place. Second, rich, dishonest actors might be willing to lose
thousands or even millions of dollars here and there. We doubt, however, that
many would be willing to lose those sums over and over by supporting one false
communication after another. We would not expect a flood of bountied, false
stories. Third, and most importantly, truth bounties have dynamic reputational
effects. The system would maintain and publicize a record of bounties and
challenges. People encountering a bountied story on the internet could quickly
learn that the author had, for example, bountied 100 other stories, 11 of which
were challenged, with just one challenge succeeding. Think of what this kind of
information would mean for a wealthy, dishonest actor pursuing the strategy
described above. He might bounty a false story to buy credibility, but consumers
would see that he had bountied many other stories, most of which were
challenged and successfully disproven. The actor’s miserable track record would
expose him and neutralize the credibility gains from his bounty.
In sum, no system to address something as complicated as truth will be
fool-proof or offer completely equitable access to justice. But we believe that
truth bounties could do well on these scores, particularly when compared to the
status quo.
C. Hands-On, Hands-Off, and the Invisible Hand
Should society regulate false information? Perhaps the ablest, sharpest
champion of what we might call information laissez-faire is John Stuart Mill, who
argued that “We can never be sure that the opinion we are endeavoring to stifle
is a false opinion; and if we were sure, stifling it would be an evil still.”180 This
idea culminated in the metaphor of the marketplace of ideas, which was
established when Justice Holmes in Abrams v. United States said that “the best test
of truth is the power of the thought to get itself accepted in the competition of
the market.”181 The marketplace metaphor calls for a hands-off approach to
information.
Technology today presents new challenges to the hands-off approach.182
The digital revolution made it cheaper for low-quality information producers to
spread their messages and drown the truth and easier for people to either get
sucked into or comfortably maintain echo chambers around them. It also
180 JOHN STUART MILL, ON LIBERTY31 (1859).
181 Abrams v. United States, 250 U.S. 616, 630 (1919).
182 MINOW, supra note 3. Hasen suggests that recent advances pose a “clear and present danger” to
people’s ability to judge the truth. HASEN, supra note 4, at 24.
Electronic copy available at: https://ssrn.com/abstract=4204862

<<PAGE_BREAK>>

TRUTH BOUNTIES: A MARKET SOLUTION TO FAKE NEWS 52/53
undermined the traditional revenue models of high-quality journalism. As
Professor Hasen argues, the problem is that speech is too cheap.183
Hasen and others who have argued along these lines might be right.184
However, this does not point inevitably to regulation as the solution. Neither
does exasperation with the flaws of regulation mean that we need to give up on
any attempt to improve the information environment. Truth bounties offer an
intermediate position between government regulation and laissez-faire. Truth
bounties are autonomy-preserving and voluntary. They would operate through
privately-run institutions. Their significance, then, goes beyond their
effectiveness. They expand our choice set of how to design institutions for a
modern society.
As an institution, truth bounties are respectful of autonomy because, unlike
the one-size-fits-all approach of tort liability, they could allow each speaker to
tailor her own potential exposure to liability. Having a choice of the extent to
which we want to “put ourselves out there,” is an important aspect of our
autonomy, but tort and criminal liability usually neglect this question.
Another appealing institutional feature is the respect for the agency of
audiences, trusting their ability to discount statements that are backed by nothing
more than words. In the bounty system, audiences have standing.185 We
emphasized throughout that audiences are reliably imperfect, but we think it is
important not to pathologize them. The Supreme Court itself takes a rational
view of audiences, making sure not to belittle them, which Lyrissa Lidsky
powerfully defended by noting that:186
[A] State that indulges an irrationality assumption, or even a bounded
rationality assumption, fails to respect the autonomy of its citizens, an
autonomy upon which a self-governing democracy depends.187
Truth bounties are voluntary with speakers choosing their level of
engagement. In practice, however, they might not feel optional. In a world
where truth bounties are common, speakers will feel strong pressure to offer
them. Self-regulation does not necessarily mean light, half-hearted, or sham
regulation. It can be very powerful. Consider the many sellers offering return
policies far more generous than they are legally required to offer, even at
substantial cost to themselves.
Finally, while truth bounties are run by private organizations, they are
backed by state institutions and infrastructure. Arbitration awards are backed by
the enforcement power of the state, and the rules that govern truth bounty
183 HASEN, supra note 4, at 24.
184 See generally HASEN, supra note 4.
185 See, e.g., Norman v. Borison, 418 Md. 630, 17 A.3d 697 (Md. Ct. Spec. App. 2011) (“the
defamation of a company does not create a cause of action for its shareholders or owners”).
186 Lidsky, supra note 19, at 805. See also McConnell v. FEC, 540 U.S. 93, 258 (2003) (Scalia, J.,
concurring in part and dissenting in part).
187 See Lidsky, supra note 188, at 805.
Electronic copy available at: https://ssrn.com/abstract=4204862

<<PAGE_BREAK>>

TRUTH BOUNTIES: A MARKET SOLUTION TO FAKE NEWS 53/53
institutions (the arbitral panels, the company accepting the bounties) are
products of legislatures and possibly other, official lawmaking bodies.
CONCLUSION
Misinformation threatens society. Many observers before us have proposed
reforms meant to address this threat. While many of these proposals are
thoughtful and valuable, many share a common oversight: they fail to take
seriously credibility effects, that is, how they might affect not just speakers but
also listeners. If a primary problem is that people believe the wrong sources, then
we must be attentive to what forms people’s credibility judgments. This is central
to overcoming the key market failures, spillovers and information asymmetries,
at the heart of free speech.
Having skin in the game begets trust. Perhaps more importantly, having
skin in the game begets better information. “BS vendors,” in the lively language
of Nassim Taleb, cannot survive over time if they have to pay out of pocket.188
This is why the Carbolic Smoke Ball company went bankrupt.189
Professor Hasen laments the rise of “cheap” speech, arguing that the
“cheap speech era has threatened American democracy.”190 If this is the
problem, the solution must involve making speech expensive.191 What makes
our approach novel is not this insight. Indeed, it underlies the many proposals
to impose fines, sanctions, and tort liability on false speech. The novelty of our
approach lies in developing a private mechanism for achieving this goal. The
mechanism is new and occupies a position between top-down regulation and
laissez-faire.
Truth bounties offer an autonomy-preserving alternative that can deeply
impact our democracy and institutions. By pledging one’s statements, one can
broadcast confidence broadly and effectively. By allowing every member of the
public to file a claim, truth bounties democratize the search for truth. By
originating in private incentives, truth bounties can cover ground made immune
to regulation by the First Amendment.
Implementing truth bounties is a challenge, but we believe it is feasible
and—critically—self-sustaining. Once established in one domain, the institution
can expand to others, the right kind of virality.
188 Cf. NASSIM NICHOLAS TALEB, SKIN IN THE GAME: HIDDEN ASYMMETRIES IN DAILY LIFE
(2018).
189 A. W. B. Simpson, Quackery and Contract Law: The Case of Carbolic Smoke Ball, 14 J. LEG. STUD.
345, 368-75 (1985); Carlill v. Carbolic Smoke Ball Co., 1 Q.B. 256 (Dec. 7, 1892).
190 HASEN, supra note 4, at 26.
191 Interestingly, Hasen does not take this approach. He advocates regulations ranging from
funding disclosure rules to bans on targeting of election speech. HASEN, supra note 4, at 77-132.
Electronic copy available at: https://ssrn.com/abstract=4204862

---

## ssrn-4491043: How Smart Are Smart Readers? LLMs and the Future of the
Year: 2024
Authors: Yonathan Arbel
Source: papers/ssrn-4491043/paper.txt

How Smart Are Smart Readers? LLMs and the Future of the
No-Reading Problem
Yonathan A. Arbel & Shmuel I. Becher
Abstract. Large Language Models (LLMs) can be used to summarize and simplify
complex texts. In this study, we investigate the extent to which state-of-the-art
models can reliably operate as ‘smart readers’: applications that empower
consumers to tackle lengthy, difficult-to-read, and inaccessible standard form
contracts and privacy policies.
Our analysis reveals that smart readers (1) reduce by 66.9% the length of
contracts; (2) reduce reading time by 14:41 minutes (3) improve text readability
by converting college-level texts to texts readable by fifth-grade students; and (4)
do so without considerably compromising the essential information in the
original contracts. Despite these impressive results, smart readers are not flawless.
They sometimes miscommunicate legal terminology and occasionally present
information in a misleading or erroneous manner. Such issues prevent smart
readers from replacing the advice of a qualified lawyer. However, for the large
mass of daily transactions where consumers would not consider using a lawyer,
current-generation smart readers could be an effective tool. We thus conclude
that current generation smart readers have arrived and that their arrival invites
an academic and policy paradigm change.
 Associate Professor of Law, University of Alabama, School of Law
 Professor of Law and Associate Dean (Research), Victoria University of Wellington; Lee Kong
Chian Visiting Professor of Law, Yong Pung How School of Law, Singapore Management University. We
thank Victoria University of Wellington for financial supports, Tim Samples and the editors of this
collections for their feedback on a previous version, and Nicholas Takton for outstanding editorial work.
Electronic copy available at: https://ssrn.com/abstract=4491043

<<PAGE_BREAK>>

ARBEL & BECHER HOW SMART ARE SMART READERS? 2/41
TABLE OF CONTENTS
I. Introduction ................................................................................................. 3
II. Setting the Scene: LLMs & the No-Reading Problem................................... 4
III. Dataset and Methodology ............................................................................ 8
IV. High-Level Results ..................................................................................... 12
A. Simplification Assessment ..................................................................... 12
1. Text Length ..................................................................................... 12
2. Text Complexity .............................................................................. 13
3. Text Readability ............................................................................... 14
B. Quality Assessment ............................................................................... 16
V. Simplification & Quality: Specific Clauses ..................................................... 17
A. Wall Street Journal: Changes to Subscriber Agreement ......................... 18
B. Wall Street Journal: Agreement to Arbitrate .......................................... 20
C. Airbnb: Collecting Personal Information from Third Parties ................. 23
D. Netflix: Cancellation ............................................................................. 26
E. Amazon: Reviews, Comments, Communications, & Other Content ..... 27
F. Amazon: Risk of Loss ............................................................................ 30
G. Yahoo: Information Sharing .................................................................. 32
H. Spotify: Liability Limitation and Claim Filing ....................................... 35
VI. Simplification of Specific Clauses: Discussion ............................................ 38
VII. Summary ................................................................................................... 40
TABLE OF FIGURES
Figure 1: Length Reduction (in Thousand Words) ............................................. 13
Figure 2: Aggregated Reduction Results: Words, Sentences & Reading Time ..... 13
Figure 3: Difficult Words ................................................................................... 14
Figure 4: Text Readability Flesch-Kincaid .......................................................... 15
Figure 5: Text Readability CRM ........................................................................ 16
Figure 6: Clause Simplification, WSJ .................................................................. 20
Figure 7: Clause Simplification, WSJ (2) ............................................................ 23
Figure 8: Clause Simplification, Airbnb .............................................................. 25
Figure 9: Clause Simplification, Netflix .............................................................. 27
Figure 10: Clause Simplification, Amazon .......................................................... 30
Figure 11: Clause Simplification, Amazon (2) ..................................................... 32
Figure 12: Clause Simplification, Yahoo ............................................................. 35
Figure 13: Clause Simplification, Spotify ............................................................ 38
Electronic copy available at: https://ssrn.com/abstract=4491043

<<PAGE_BREAK>>

ARBEL & BECHER HOW SMART ARE SMART READERS? 3/41
I. INTRODUCTION
An organizing problem in consumer contracts is the no-reading problem.1
The common view in the scholarship is that consumers rarely read standard form
contracts,2 and, therefore, their manifested assent to them is superficial.3 If
consumers indeed do not read (let alone understand) the terms of their
transactions, their ability to make informed decisions is doubtful, and sellers’
incentive to provide fair and efficient contract terms is undermined.4
This chapter evaluates whether smart readers—technological tools that use
large language models (LLMs) to parse texts—can solve this problem and
transform standard form contracting. We evaluate this question by testing
current models on their ability to simplify contractual texts. Testing current
generation models might seem like writing on ice: the rate of technological
improvement is staggering, and whatever results we obtain today will be eclipsed
by tomorrow’s models.5 Yet, we engage in this analysis because we want to
determine if today’s smart readers have already managed to pass a utility
threshold. If today’s smart readers can empower consumers, this would directly
impact the large body of scholarship and policy directed at solving this problem
1 See generally Ian Ayres & Alan Schwartz, The No-Reading Problem in Consumer Contract Law, 66
STAN. L. REV. 545 (2014) (describing the no-reading problem and offering a solution to it); see also
RESTATEMENT OF CONSUMER CONTS. § 3 Reporters’ Notes (AM. L. INST., Tentative Draft 2019) (pointing
out that the terms of standard form contracts are “invisible to most consumers” and discussing how firms
that modify their contracts must give consumers reasonable notice); Melvin Aron Eisenberg, Text Anxiety,
59 S. CAL. L. REV. 305 (1986) (theorizing that when consumers confront the dense text of form contracts,
they respond by refusing to read it).
2 The exact scope of the problem is somewhat contested, but there is at least one domain definitely
afflicted by extremely low levels of readership: online end-user license agreements. See, e.g., Yannis
Bakos, Florencia Marotta-Wurgler & David R. Trossen, Does Anyone Read the Fine Print? Consumer
Attention to Standard-Form Contracts, 43 J. LEGAL STUD. 1, 22 (2014) (finding that consumers rarely read
the terms of end-user license agreements).
3 Victoria C. Plaut & Robert P. Bartlett, Blind Consent? A Social Psychological Investigation of Non-
Readership of Click-Through Agreements, 36 L. & HUM. BEHAV. 293, 293 (2012) (noting the “documented
phenomenon” of “‘blind consent’” — accepting the terms without reading them — associated with
“standard, paper-based contracts” now occurs with online Click-Through Agreements). To be sure, the no-
reading problem presents additional challenges, aside from consent, to consumer contracting, and
consumers’ consent should be doubted for reasons other than the no-reading problem. See, e.g., Michael I.
Meyerson, The Reunification of Contract Law: The Objective Theory of Consumer Form Contracts, 47 U.
MIAMI L. REV. 1263 (1993) (discussing contractual issues in battle of the forms cases where seller includes
a disclaimer of warranty of merchantability that the buyer does not read and highlighting the importance
of informing consumers, even if they do not read or grasp the terms); Margaret Jane Radin, Boilerplate
Today: The Rise of Modularity and The Waning of Consent, 104 MICH. L. REV. 1223 (2006) (discussing
how even if companies make terms easier to read, consumers will not necessarily read them and asserting
that consent is fictional, when, for instance, the terms are filed somewhere inaccessible, as in airline tariffs).
Recent work argues that AI contracting technologies, namely “nano contracts,” will autonomously
negotiate contracts and circumvent the standard negotiation process and its attendant issues. E.g., Yonathan
A. Arbel, On the Scales of Private Law: Nano Contracts, 37 HARV. J. L. & TECH. (forthcoming 2024).
4 For a skeptical view, see Douglas G. Baird, The Boilerplate Puzzle, 104 MICH. L. REV. 933 (2006).
5 On the rapid rise in AI capabilities on a variety of tasks, see Yonathan A. Arbel, Matthew Tokson,
Albert Lin, Systemic Regulation of Artificial Intelligence, 56 ARIZ. ST. L. REV. (forthcoming 2024).
Electronic copy available at: https://ssrn.com/abstract=4491043

<<PAGE_BREAK>>

ARBEL & BECHER HOW SMART ARE SMART READERS? 4/41
through non-technological means. If they cannot, however, regulation may be
justified in relying on non-technological tools.
To frame our analysis, we offer a brief background on smart readers and their
relevance to the no-reading problem in Section II. In Section III, we describe our
dataset and methodology. We present the results of our examination at the level
of the entire agreement, comparing the complexity, length, readability, and
quality of the legal documents before and after their simplification in Section IV.
Then, in Section V, we shift the focus from the entire legal text to (eight) specific
clauses, allowing for a more in-depth and digestible analysis of the models’
capabilities, advantages, and limitations.
In Section VI, we discuss the key insights of this study. We find that smart
readers perform well on both quantitative and qualitative metrics. They cut in
half text difficulty, shorten long texts considerably, and generally capture the
most important or intricate aspects of the original texts they simplify. Yet, smart
readers also struggle with some types of clauses and sometimes understate, omit,
or provide incorrect information on some contractual aspects. In all, smart
readers do not replace the careful eye of an experienced lawyer, but they can
address consumer problems at scale, cheaply, efficiently, and effectively. In other
words, we find that smart readers have arrived.
II. SETTING THE SCENE: LLMS & THE NO-READING PROBLEM
While most scholars believe that consumers do not read form contracts and
privacy policies (the “no-reading problem”), the reason for this phenomenon is
not quite settled. Why do consumers abstain from reading? Scholars have offered
several explanations. Some focus on rational apathy, with not reading emerging
as a rational strategy considering the immediate and real costs of reading against
the uncertain future gains of doing so. Consumers may also misperceive contract
terms or ignore them altogether if they are prone to myopia, information
overload, or other forms of behavioral biases.6 The take-it-or-leave-it nature of
most form contracts also makes reading unattractive for negotiation purposes.7
Other explanations for consumers’ tendency to not read form contracts relate to
6 See OREN BAR-GILL, SEDUCTION BY CONTRACT: LAW, ECONOMICS, AND PSYCHOLOGY IN
CONSUMER MARKETS (Oxford Univ. Press 2012).
7 See Nat’l Lab. Rels. Bd. v. Gen. Elec., 418 F.2d. 716, 768 (2d Cir. 1969), cert. denied, 397 U.S. 965
(1970) (characterizing a “take-or-leave-it” approach as a “hard position” that “may be unattractive").
Electronic copy available at: https://ssrn.com/abstract=4491043

<<PAGE_BREAK>>

ARBEL & BECHER HOW SMART ARE SMART READERS? 5/41
reputational constraints, trust and social norms, and a (sometimes misguided)
belief in the courts’ reluctance to enforce unreasonable terms.8
However, perhaps the most influential accounts relate to the writing itself.
Consumer form contracts are cognitively taxing, visually difficult, and replete
with blocks of off-putting ALL-CAPS while employing arcane terms, complex
language, and difficult concepts.9 Consumers do not read contracts, in short,
because reading them is a miserable experience.10
These challenges lead to a central problem in unregulated markets. Namely,
if consumers do not read forms and the law generally allows them to proliferate,
firms can insert self-serving terms without losing demand.11 This situation gives
rise to a winning strategy we dub HIDE. Under HIDE, firms adopt forms that
are “Hardly Interpretable but Dependably Enforceable.” The HIDE strategy
allows firms to benefit from both worlds: maximizing their share of the
transactional surplus while reaping the benefits of legal enforcement.12
To deal with HIDE and increase the legitimacy of consumer form contracts,
scholars, regulators, courts, and advocates have sought solutions to make
contracts more readable and accessible and consumers’ assent less questionable.
Courts, in a perhaps naïve attempt to incentivize consumers to read, often
impose a so-called duty to read.13 At the same time, lawmakers around the
country have instituted hundreds of plain language laws.14 The UCC famously
conditions enforcement of warranty disclaimers on their formatting and
8 The literature here is vast. See, e.g., Yonathan A. Arbel & Roy Shapira, Theory of the Nudnik: The
Future of Consumer Activism and What We Can Do to Stop It, 73 VAND. L. REV. 929 (2020) (consumer
expectations and reputational constraints); Shmuel I. Becher & Tal Z. Zarsky, Minding the Gap, 51 CONN.
L. REV. 69 (2019) (reputation, conduct, and trust); see also Oren Bar-Gill, Seduction by Plastic, 98 NW.
U. L. REV. 1373 (2004) (cognitive biases); Shmuel I. Becher, Behavioral Science and Consumer Standard
Form Contracts, 68 LA. L. REV. 117 (2007) (behavioral phenomena); Robert A. Hillman & Jeffrey J.
Rachlinski, Standard-Form Contracting in the Electronic Age, 77 N.Y.U. L. REV. 429 (2002) (discussing,
among other things, trust and social norms as impediments to reading).
9 See Yonathan A. Arbel & Andrew Toler, ALL-CAPS, 17 J. EMPIRICAL LEGAL STUD. 862, 865 (2020)
(using all-caps does not “improve consumer consent in any appreciable manner”); see also Uri Benoliel &
Shmuel I. Becher, The Duty to Read the Unreadable, 60 B.C. L. REV. 2255 (2019) ((un)readability); Tim
Samples, Katherine Ireland & Caroline Kraczon, TL; DR: The Law and Linguistics of Social Platform
Terms-of-Use, 39 BERKELEY TECH. L. J. (forthcoming 2024) (length).
10 Eisenberg, supra note 1, at 310.
11 See Meyerson, supra note 3, at 1312.
12 See NANCY KIM, WRAP CONTRACTS: FOUNDATIONS AND RAMIFICATIONS 76-87 (Oxford Univ.
Press 2013) (exploring the utilization of such terms and the courts’ enforcement).
13 E.g., Mut. of Omaha Ins. Co. v. Driskell, 293 So.3d. 261, 264 (Miss. 2020) (noting that the insured
had “an affirmative duty to read” the insurance policy); see also JOSEPH M. PERILLO, CALAMARI AND
PERILLO ON CONTRACTS 342 (6th ed., West 2009); John C. Calamari, Duty to Read – A Changing Concept,
43 FORDHAM L. REV. 341 (1974) (examining the idea in detail).
14 Michael Blasie, Regulating Plain Language, 2023 WIS. L. REV. 687, 687 (2023) (noting that
“legislators and regulators” have “passed over seven hundred plain language laws”).
Electronic copy available at: https://ssrn.com/abstract=4491043

<<PAGE_BREAK>>

ARBEL & BECHER HOW SMART ARE SMART READERS? 6/41
presentation;15 the Magnuson-Moss Act16 controls language in disclaimers; the
Truth in Lending Act (TILA)17 controls both presentation and language. Agency
action is also involved. For instance, the CFPB recently published new guidelines
on what counts as abusive behavior, which includes ‘buried disclosures’ broadly
understood to include ‘the use of fine print, or complex language’.18
Such regulations cover broad markets and are quite influential. A prominent
example comes from insurance markets. Here, some states and government
agencies have adopted not only plain language requirements but also required
specific scores on reading metrics, such as the Flesch-Kincaid readability metric.19
While well-intentioned, these policies have an uneasy fit to those anonymous
mass transactions that typify the consumer experience. Consumers are diverse,
and their cognitive and linguistic skills, education, socioeconomic status, life
experience, expectations, and visual acuity can differ significantly. Millions of
American adults struggle with literacy, for diverse reasons.20 The idea of plain
language homogenizes consumers, supposing that a single serving of simpler
words can address the needs of a diverse group. But, in reality, such reforms come
at a cost and do not necessarily help those who need protection most. At the
same time, writing legal texts that would be readable by those with low literacy
is a challenge to the best of writers. Furthermore, plain language efforts often do
not address the issue of length: consumers are likely to avoid reading plain
language contracts if their length is excessive, and few regulatory frameworks
limit the length of legal texts.
Enter smart readers. In 2021, we noticed that the emergent transformer
technology shows real promise in processing text in general and legal texts in
particular. GPT-2, and later GPT-3, could interact with natural language in ways
not conceivable before. The feasibility of developing smart readers— that is,
15 U.C.C. § 2-316.
16 15 U.S.C. § 2301 et seq.
17 15 U.S.C. § 1601.
18 CONSUMER FIN. PROT. BUREAU, POLICY STATEMENT ON ABUSIVE ACTS OR PRACTICES 5 (2023),
https://www.consumerfinance.gov/compliance/supervisory-guidance/policy-statement-on-abusiveness/
#71 [https://perma.cc/R6L3-SFB9]; see also Yehuda Adar & Shmuel I. Becher, Ending the License to
Exploit: Administrative Oversight of Consumer Contracts, 62 B.C. L. REV. 2405 (2021) (proposing a
dynamic preventive model of administrative oversight over consumer contracts).
19 For a few examples see Benoliel & Becher, supra note 9, at 2273-74.
20 8.4 million Americans are estimated to be below level 1 on the international PIAAC test, which is
considered functionally illiterate; another 8 million are also suspected of falling into this category, although
the evidence on this is weaker. Saida Mamedova & Emily Pawlowski, Adult Literacy in the United States,
NAT’L CTR. FOR EDUC. STAT. (July 2019), https://nces.ed.gov/pubs2019/2019179/index.asp
[https://perma.cc/83X4-HRTG]. For a skeptical view of literacy statistics, see Yonathan A. Arbel, The
Readability of Contracts: Big Data Analysis (2023) (working paper, on file).
Electronic copy available at: https://ssrn.com/abstract=4491043

<<PAGE_BREAK>>

ARBEL & BECHER HOW SMART ARE SMART READERS? 7/41
advanced large language models (LLMs) capable of parsing, personalizing, and
clarifying legal texts for consumers—is becoming manifestly clear.21
As we demonstrated elsewhere,22 these capabilities mean that, for the first
time, readers could have contracts presented in a way that they could understand.
Instead of serving an abstract average or reasonable consumer, smart readers
could tailor the text to specific, ad-hoc, personalized, or idiosyncratic needs of
the individual user. Most promising, the technology was almost entirely
consumer-sided. The seller was not part of the process, and any HIDE strategy
they might pursue was now challenged. Consumers could have control. Smart
readers could penetrate the dense language thicket; each contract could be
tailored to the individual consumer.
To be sure, the technology in 2021 was nascent. The models we used were
quite clunky and success was sporadic.23 To showcase its potential, we had to
cherry-pick examples, a fact we explicitly noted.24 GPT-3 produced outputs that
were sometimes unreliable and misleading, while other times they were
meandering and irrelevant.25 Understandably, when we presented our work,
commentators were often skeptical. One reason for their skepticism was that the
technology’s inconsistency meant consumers cannot reliably trust it. There were
also understandable concerns about the ability of this technology to separate the
wheat from the chaff, work at scale, parse complex texts, account for specific legal
knowledge, and avoid capture by sellers.
We could not provide hard proof that these issues were temporary. However,
the arc of this technology was clear to those immersed in the technical details of
how it worked. The problems salient back then were true issues, but they related
to insufficient data and compute resources,26 rather than a missing intellectual
breakthrough. At the fundamental level, it was clear that these issues were
transient.
At the time of writing this manuscript, the latest state-of-the-art model (GPT-
4) has moved from previous generations’ worse-than-guesswork on the MBE
21 Yonathan A. Arbel & Shmuel I. Becher, Contracts in the Age of Smart Readers, 90 GEO. WASH. L.
REV. 83, 111 (2022).
22 Id. at 87.
23 Id. at 89.
24 Id.
25 See id. at 120.
26 Compute is a term of art referring to a measure of computer resources used for processing
information. See Lennart, What is Compute? – Transformative AI and Compute [1/4], EFFECTIVE
ALTRUISM F. (Sept. 23, 2021), https://forum.effectivealtruism.org/posts/BHPxe8YuuJ4SZWAF3/what-is-
compute-transformative-ai-and-compute-1-4 [https://perma.cc/2VFJ-QEE8].
Electronic copy available at: https://ssrn.com/abstract=4491043

<<PAGE_BREAK>>

ARBEL & BECHER HOW SMART ARE SMART READERS? 8/41
exam to passing the bar27 and, in fact, surpassing the level of the average test
taker. It passed other bars as well. GPT-4 has blazed through the LSAT (88th
percentile) and medical exams (75th percentile).28 It achieved good scores on
challenging economics and advanced quantum physics exams.29 Most
importantly, the sentiment changed. While the technology is imperfect in many
ways, it became apparent that its current achievements do not represent all of its
potential. Indeed, the main question commentators and the public ask today is
not what the technology can do, but what it cannot.30
The rate of mass adoption of ChatGPT has surpassed almost any other
technology or invention.31 Versions of LLMs are now accessible to the end user
free of charge. The technology requires little expertise to use. Most of all, the
technology is impressive. From a law and policy perspective, the time is ripe to
evaluate whether smart readers could empower consumers and solve the no-
reading problem.32
III. DATASET AND METHODOLOGY
Dataset. Our dataset consists of eight contracts and privacy policies, from
diverse key industries, with varying degrees of length and complexity. We
selected agreements and policies from some of the most popular businesses and
service providers. These documents include (1) Yahoo Privacy Policy, (2) Wall
Street Journal Terms of Service, (3) Spotify Terms and Conditions, (4) Snapchat
27 Pablo Arrdondo, GPT-4 Passes the Bar Exam: What That Means for Artificial Intelligence Tools in
the Legal Profession, STAN. L. SCH. (Apr. 19, 2023), https://law.stanford.edu/2023/04/19/gpt-4-passes-
the-bar-exam-what-that-means-for-artificial-intelligence-tools-in-the-legal-industry/
[https://perma.cc/DE9U-FHGN].
28 John Koetsier, GPT-4 Beats 90% of Lawyers Trying to Pass the Bar, FORBES (Mar. 14, 2023),
https://www.forbes.com/sites/johnkoetsier/2023/03/14/gpt-4-beats-90-of-lawyers-trying-to-pass-the-
bar/?sh=77c790ca3027 [https://perma.cc/ZTF4-6NSJ].
29 Bryan Caplan, GPT Retakes My Midterm and Gets an A, BET ON IT (Mar. 21, 2023),
https://betonit.substack.com/p/gpt-retakes-my-midterm-and-gets-an [https://perma.cc/LMG4-E3TY]
(economics); Matt Swayne, ChatGPT-4 Receives ‘B’ on Scott Aaronson’s Quantum Information Science
Final — Immediately Emails the Dean Seeking a Better Grade, QUANTUM INSIDER (Apr. 13, 2023),
https://thequantuminsider.com/2023/04/13/chatgpt-4-receives-b-on-scott-aaronsons-quantum-
information-science-final-immediately-emails-the-dean-seeking-a-better-grade [https://perma.cc/M8WT-
X65A] (quantum physics).
30 E.g., Pranshu Verma & Gerrit De Vynck, ChatGPT Took Their Jobs. Now They Walk Dogs and Fix
Air Conditioners, WASH. POST (June 2, 2023), https://www.washingtonpost.com/technology/2023/06/
02/ai-taking-jobs/ [https://perma.cc/TD5K-JFG2]; Meghan Bartels, You Can Probably Beat ChatGPT at
These Math Brainteasers. Here’s Why, SCI. AM. (May 25, 2023), https://www.scientificamerican.com/
article/you-can-probably-beat-chatgpt-at-these-math-brainteasers-heres-why/ [https://perma.cc/XH95-
FAM7].
31 Krystal Hu, ChatGPT Sets Record for Fastest-Growing User Base - Analyst Note, REUTERS (Feb.
2, 2023), https://www.reuters.com/technology/chatgpt-sets-record-fastest-growing-user-base-analyst-
note-2023-02-01/ [https://perma.cc/B5LD-8MEX].
32 Our analysis joins other recent work at the law and technology frontiers. For instance, adopting a
different helpful measure, Noam Kolt created a dataset of questions on the content of contracts to test the
performance of LLMs as a tool to answer content-related questions. Kolt’s work showed that the older
generation, GPT-3, could already achieve a 77% precision. Noam Kolt, Predicting Consumer Contracts,
37 BERKELEY TECH. L. J. 71, 104 (2022).
Electronic copy available at: https://ssrn.com/abstract=4491043

<<PAGE_BREAK>>

ARBEL & BECHER HOW SMART ARE SMART READERS? 9/41
Terms of Service, (5) Netflix Terms and Conditions, (6) Google Terms of
Service, (7) Amazon Conditions of Use, and (8) Airbnb Privacy Policy.33
Assessed Criteria: Readability, Length and Quality. Our examination focuses
on three key criteria at the heart of the no-reading problem. First is text
readability. As noted, many suspect that unreadability deters consumers from
reading. Therefore, we sought to examine whether language models can make
consumer form contracts and privacy policies more readable.
The most famous readability measure is the Flesch Ease of Reading test,
which assesses text readability on a 0-100 scale.34 This test was later amended to
convert the scores to a grade-level equivalent, resulting in the Flesch-Kincaid
variant.35 Microsoft users might be familiar with these readability tests, which are
embedded in Word.36 This test is joined by a battery of other tests: Gunning-
Fog, SMOG, Linsear-Write, Automated Readability, and Dale-Chall.37
The common ground shared by these tests is that they abstract from the
meaning strata of the text and evaluate it based on syntactic features, most
commonly sentence length, word syllabicity, and word rarity. These measures
are widely used but have been recently critiqued for their limited reliability and
validity.38 One special concern is that these tests are highly manipulable. By
choosing a different implementation of the Flesch-Kincaid test one could obtain
results that show the same text requires 4.6 extra years of schooling.39 To limit
33 Because the terms and privacy policies referenced here were retrieved with New Zealand IP
address, they have been posted on the author’s own website for permanency. Welcome to the Yahoo Privacy
Policy, YAHOO!, https://battleoftheforms.com/wp-content/uploads/2024/01/Yahoo-Privacy-Policy.txt
(last updated Apr. 2022) [https://perma.cc/4HC8-SDWE] [hereinafter Yahoo! Privacy Policy]; Subscriber
Agreement and Terms of Use, WALL ST. J., https://battleoftheforms.com/wp-content/uploads/
2024/01/WSJ-terms.txt (last updated June 27, 2018) [https://perma.cc/8KEV-2CBH] [hereinafter WSJ
Terms]; Spotify Terms of Use, SPOTIFY, https://battleoftheforms.com/wp-content/uploads/2024/01/spotify-
TsCs.txt (last updated Sept. 14, 2019) [https://perma.cc/8X8Z-7ED4] [hereinafter Spotify Terms]; Snap
Inc. Terms of Service, SNAP, https://battleoftheforms.com/wp-content/uploads/2024/01/Snapchat-terms-
of-service.txt (last updated Nov. 15, 2019) [https://perma.cc/EP6R-T6SH]; Netflix Terms of Use, NETFLIX,
https://battleoftheforms.com/wp-content/uploads/2024/01/Netflix-Ts-Cs.pdf (last updated Jan. 5, 2023)
[https://perma.cc/W55H-VAL7] [hereinafter Netflix Terms]; Google Terms of Service, GOOGLE,
https://battleoftheforms.com/wp-content/uploads/2024/01/google_terms_of_service_en_NZ.txt [https://
perma.cc/7BPC-AV3S]; Conditions of Use, AMAZON, https://battleoftheforms.com/wp-
content/uploads/2024/01/Amazon-Conditions-of-Use.txt (last updated Sept. 14, 2022) [https://perma.cc/
8JGR-3C8Z] [Amazon Terms]; Privacy Policy for the United States, AIRBNB, https://battleoftheforms.
com/wp-content/uploads/2024/01/Airbnb-privacy.txt (last updated Jan. 25, 2023) [https://perma.cc/J2VT-
3PXG] [hereinafter Airbnb Privacy Policy].
34 John Garger, Determine the Readability Using the Flesch Reading Ease, JOHN GARGER (Jan 29,
2020), https://www.johngarger.com/blog/determine-readability-using-the-flesch-reading-ease [https://
perma.cc/6TMU-78Z9].
35 Id.
36 For one explanation, see Benoliel & Becher, supra note 9, at 2273.
37 Common Education Data Standards, Assessment Item Text Complexity System, DEP’T OF EDUC.,
https://ceds.ed.gov/element/000907 (last visited July 23, 2023) [https://perma.cc/5WPV-G846].
38 Arbel, supra note 20.
39 Id.
Electronic copy available at: https://ssrn.com/abstract=4491043

<<PAGE_BREAK>>

ARBEL & BECHER HOW SMART ARE SMART READERS? 10/41
these issues, we use the Combined Readability Measure (CRM), which measure
averages within implementations of the same test and across a number of
readability measures. This approach smooths test difference and produces results
that are, at the very least, far less manipulable.
The second criterion we assess is text length. Consumer contracts and privacy
policies grow longer over time, and there is reason to believe that lengthy texts
dissuade consumers from reading. Accordingly, we analyzed the language
models’ ability to shorten the sampled eight legal documents.
Finally, even if language models can shorten and simplify legal texts, there is
still the concern that this will come at the expense of meaning and context. In
other words, simplifying a text can result in losing key facts, important details,
nuances, and context. Therefore, our third criterion is text quality. Here, we
sought to evaluate to what extent the simplified summaries captured the
important legal aspects, risks, obligations, and rights.
Simplification tools: challenges, selection, and programming. While some
services offer AI-powered summarization, none specialize in contracts. Aiming
to fully understand and control the summary process presented three technical
challenges. We discuss them in turn.
First, many language models are available to select from and each has different
limitations on context size and a different mode of interaction (aka Application
Programming Interfaces (APIs)). We addressed this issue by selecting the best
models that could be used inexpensively. We believe this simulates well the future
direction of smart readers, where they will not necessarily rely on state-of-the-art
technology to contain costs. The models we picked, however, were all competent
models by today’s standards, and, hence, offer a good representation of current
capabilities. These models came from two firms: Anthropic (Claude) and
OpenAI (ChatGPT).
The second challenge we encountered was that current models have
constraining limits on input length, meaning that we could not process the entire
contract at once. We handled this challenge by developing our own smart reader.
In essence, the code we developed performs the following tasks:
(1) Handle the communication mode with the various models (API);
(2) Code for each model its limitations on input length;
Electronic copy available at: https://ssrn.com/abstract=4491043

<<PAGE_BREAK>>

ARBEL & BECHER HOW SMART ARE SMART READERS? 11/41
(3) Divide the text into ‘chunks’ that fit the input length limitations;40
(4) Define in code our prompt for the task;
(5) Use a new Python library called ‘langchain’;41 the code iteratively asks the
models for simplification of the relevant chunks; and
(6) Use the code to combine the chunks together into the resulting simplified
contract.
The third challenge involved devising a specific prompt that would ensure
our goals as described above: (1) no loss of information, (2) simpler language,
and (3) shorter language. Devising this prompt was arguably the most critical
aspect in our design since the wording of the prompt can radically change the
quality of the output generated by the model. But because there are no robust
prompt optimization algorithms that we could use, we relied instead on trial and
error.
After some experimentation, we decided on the following prompt:
Simplify contract, low Flesch Kincaid score, KEEP MEANING. Use
short words, not legal terms. Swap: accomplishment=success,
responsibility=duty, extravagant=fancy. Keep necessary legal concepts.
Short sentences. Preserve legal aspects. NO COMMENTS.
It is worth noting three points regarding the prompt. First, the prompt was
shorter than we wanted, but it was necessary to keep it short to limit the burden
on the maximum input length. It is possible that a more elaborate prompt would
yield better outcomes. Second, the prompt aims to ensure the model prioritizes
certain objectives using capitalization. Third, the prompt uses a few examples,
which is known to increase model performance.
Analysis. Our analysis proceeds in three phases. First, we test the ability of
smart readers to simplify the contracts and policies using objective metrics. As
detailed in part IV.A, these included length, complexity, and readability. Second,
we assess the quality of the summaries and the extent to which they capture key
information. To that end and as we explain in more detail below,42 we use
Spotify’s Terms of Use as a sample contract and identified specific important
40 Chunking is not a trivial task, since cutting off a document in the middle risks disrupting its meaning.
This risk is especially true for cutting off in the middle of a sentence, but is also true for other cutting
criteria given textual inter-dependence. Our chunking algorithm divided the document into sentences and
then made sure each chunk only had full sentences. A more robust system would have divided the
document into clauses, but besides the technical difficulty of detecting clause limits, even this approach
would cut off inter-clause dependencies.
41 Introduction | LangChain, LANGCHAIN, https://python.langchain.com/en/latest/index.html (last
visited July 24, 2023) [https://perma.cc/LM58-BUSQ].
42 See Part IV.B.
Electronic copy available at: https://ssrn.com/abstract=4491043

<<PAGE_BREAK>>

ARBEL & BECHER HOW SMART ARE SMART READERS? 12/41
contractual aspects and possible consumer traps. We then assess the extent to
which two simplification outputs included the issues we spotted in their
summary. Third, we examine in-depth the simplification of eight specific clauses.
Whereas Part V focuses on the high-level results, Part V outlines the analysis
process of the specific terms, its results, and our evaluation.
IV. HIGH-LEVEL RESULTS
We now detail our general results. In Section A, we discuss the simplification
assessments. Using common tools, we objectively measure text length,
complexity, and readability. We supplement these objective metrics in Section
B, where we detail our subjective impression of two of the simplifications and
their ability to capture key information.
A. Simplification Assessment
1. Text Length
We started by measuring the reduction in words. On average and across all
contracts, the various models produced a text that was about 30% of the length
of the original in terms of words. In terms of reading time,43 if the original version
would take on average 20 minutes and 45 seconds to read, the simplified version
only takes 6 minutes and six seconds, a time-saving of 14 minutes and 39
seconds. The following figure summarizes the average effect across all agreements
and models.
43 Based on Marc Brysbaert, How Many Words Do We Read Per Minute? A Review and Meta-Analysis
of Reading Rate, 109 J. MEMORY & LANGUAGE 1, 21 (2019) (the average adult reads at a rate of 238 words
per minute for non-fiction texts and 260 words per minute for fiction ones). As suggested to us by Professor
Tim Samples, the reading time for difficult texts is longer, and by the same source it is estimated as 238
multiplied by 4.6 divided by the mean word length. The following Figure includes this method of analysis.
Electronic copy available at: https://ssrn.com/abstract=4491043

<<PAGE_BREAK>>

ARBEL & BECHER HOW SMART ARE SMART READERS? 13/41
Figure 1: Length Reduction (in Thousand Words)
Figure 4: Text Readability Flesch-KincaidFigure 2: Length Reduction (in
Thousand Words)
Another notable feature of the models is their great variability. Despite
employing a similar prompt, the models produced wildly different results. While
all models did well in terms of summarization, the worst one (Davinci-001) saw
a reduction of 49%, while the best one (Curie-001) decreased 88.4% of the
original length. And while all models perform admirably, the longest version was
three times longer than the shortest one. In other words, there is a large degree
of inconsistency between models.
The following figure aggregates the reduction across all documents to provide
an overview of the average reduction in the number of words and sentences, as
well as the required reading time.
Figure 2: Aggregated Reduction Results: Words, Sentences & Reading Time
2. Text Complexity
One way to assess the simplification of text is by a count of difficult words in
the text before and after simplification. Although there is no single way to
Electronic copy available at: https://ssrn.com/abstract=4491043

<<PAGE_BREAK>>

ARBEL & BECHER HOW SMART ARE SMART READERS? 14/41
measure word difficulty, we relied on the word list compiled for a famous
readability test: Dalle-Chall.44 This list is admittedly somewhat limited and not
tailored to legal jargon. However, it is adequate for our purposes of assessing
differences between versions (rather than the absolute number of difficult words).
The Figure below shows the number of difficult words in the different
documents. The red bar shows the number of difficult words in the original text
and the purple bar summarizes the average number of difficult words across the
various models. Across all documents, we note an average reduction of 328
difficult words, representing a 61% reduction. As before, there is great model
variability in simplification. Still, even the worst model (DaVinci-001)
substantially reduced the number of difficult words, removing 36% of them.
Figure 3: Difficult Words
3. Text Readability
There is more to text readability than difficult words, and the literature on
readability has developed several quantitative tools to measure readability.45 As
discussed above, we report on the results of the famous Flesch-Kincaid score and
the average of a number of readability measures (CRM).46
44 See Common Education Data Standards, supra note 37. We implemented this word list via the
Textstat library in Python.
45 See id. (listing out different readability tests).
46 The results stem from the mean of popular Python libraries that implement readability tests: textacy,
textstat, textexplore, readcalc, pylexitext, and readability. Chaitanya Aggarwal & Shivam Bansal, Texstat
0.7.3, PYTHON PACKAGE INDEX (Mar. 15, 2022), https://pypi.org/project/textstat/ [https://perma.cc/
2LUW-PJ29]; Temiloluwa Awoyele, Text-Explore 0.0.2, PYTHON PACKAGE INDEX (Mar. 18, 2022),
https://pypi.org/project/text-explore/ [https://perma.cc/RGA9-Q8ME]; Victor Bona, Pylexitext 0.3.1,
Electronic copy available at: https://ssrn.com/abstract=4491043

<<PAGE_BREAK>>

ARBEL & BECHER HOW SMART ARE SMART READERS? 15/41
As the next figure depicts, the original contracts were written at a level that
requires between 10 and 14 years of schooling on the Flesch-Kincaid measure.47
Figure 4: Text Readability Flesch-Kincaid
On average, LLMs reduced the reading difficulty of the original contracts by
1.47 grade levels. That said, there was great variability among the models, with
the best performing model (Claude-001) reducing the reading level by an average
of 5.6 grade levels, down to a 5.4 grade level. This reduction would make
contracts accessible to 11-year-olds. This improvement is quite important as a
large body of scholarship recommends that reading materials be accessible to
people who read between the sixth to eighth grade level.48
Figure 5 below provides similar numbers with the CRM measure. The
average reduction on the CRM was more modest, with close to a single grade
level. However, here too, the best performing model (Claude-001) did very well
and reduced the reading level by 5 grade years, down to a level close to the
seventh grade (that is, a 6.8 grade level).
PYTHON PACKAGE INDEX (May 19, 2021), https://pypi.org/project/pylexitext/ [https://perma.cc/BP4Y-
WPV7]; Burton DeWilde, Textacy 0.13.0, PYTHON PACKAGE INDEX (Apr. 2, 2023), https://pypi.org/
project/textacy/ [https://perma.cc/2359-TRPJ]; Joao Palotti, ReadabilityCalculator 0.2.37, PYTHON
PACKAGE INDEX (Apr. 30, 2018), https://pypi.org/project/ReadabilityCalculator/ [https://perma.cc/58RE-
ZX24]; Andreas van Cranenburgh, Readability 0.3.1, PYTHON PACKAGE INDEX (Jan. 12, 2019), https://
pypi.org/project/readability/ [https://perma.cc/D3PD-UNQ9].
47 For reasons of legibility, we rounded the labels on the bars, though their height reflects their
unrounded score.
48 See, e.g., Kristie B. Hadden, Latrina Prince, Laura James, Jennifer Holland, & Christopher R.
Trudeau, Readability of Human Subjects Training Materials for Research, 13 J. EMPIRICAL RSCH. ON
HUM. RSCH. ETHICS 95, 96 (2018) (noting that “experts recommend that written materials developed for
public use are written at a sixth to eighth grade level or below for ease of reading and comprehension”).
Electronic copy available at: https://ssrn.com/abstract=4491043

<<PAGE_BREAK>>

ARBEL & BECHER HOW SMART ARE SMART READERS? 16/41
Figure 5: Text Readability CRM
Quite surprisingly, despite our prompts, some models have made them more
complex. Yet again, the models have had mixed success in simplifying the
contracts. The most consistent models were Claude-001 and Text-Davinci-003,
a finding consistent with them being the most advanced in our group.
B. Quality Assessment
To develop a better sense of the quality of the outputs generated by LLMs,
we supplemented our metric-based examination above with a more subjective
evaluation. Essentially, we compared the first parts49 of an original text—
Spotify’s Terms of Use—with two simplified outputs, produced by ChatGPT-
Turbo and Claude. Particularly, we sought to examine whether the simplified
versions captured the key issues and points we identified in the original text.
We started by reading the original text and highlighting clauses likely to be
of special importance for unwary consumers. We detected 11 central or tricky
points (dubbed here “traps”). We then read the two simplified versions,
examining whether these versions properly mentioned the identified 11 key
points. We also noted our general subjective impression of the texts’ quality,
presentation, and user-friendliness.
49 By first parts, we mean clauses one to three, which contained 2,360 words.
Electronic copy available at: https://ssrn.com/abstract=4491043

<<PAGE_BREAK>>

ARBEL & BECHER HOW SMART ARE SMART READERS? 17/41
Overall, we found that both platforms made the contracts much simpler and
captured most of the important information. However, significant differences
were evident between the two outputs in terms of length, visual presentation,
and the use of bullet points. The visual presentation, however, should not be
emphasized. It was more an artifact of the way we coded the smart reader than a
technological challenge. With more resources, we can produce a smart reader
that will organize the text, use bullet points, and even engage in creative design,
including colors and comic-style graphics.
In addressing the 11 traps, both models performed reasonably well, albeit
with somewhat varying degrees of success. Both models captured most, but not
all, traps and important information in their summaries. For example, ChatGPT
Turbo included 9 of the 11 traps in its summary. Interestingly, one of the traps
that Claude omitted overlapped with one of these two missing traps. This finding
has two implications. First, if some models fail to address certain issues, another
model better at detecting them can supplement them (the ‘ensemble’ method).
Second, there is room for research into the possibility that current LLMs might
systematically miss some types of information.
In general, we observe that some of the omissions and presentation issues we
encountered are due to the need to cut the original texts into smaller chunks.
This “chunking” strategy is common today, but it is imperfect.50 It interferes
with the flow of the text and cuts context, an especially important concern in
interdependent contracts. With time, input length will not pose as much of an
issue, so the flaws associated with this specific problem are transient.
This broad review allowed us to develop a general sense of quality. However,
it did not capture some of the subtleties of simplification. To that end, we next
analyzed specific clauses.
V. SIMPLIFICATION & QUALITY: SPECIFIC CLAUSES
To develop a more robust understanding of the capability of smart readers to
produce high-quality simplifications, we next shifted our focus from the entire
contracts to specific clauses within them. We chose to focus on eight specific
terms that may pose challenges for the unsuspecting consumer. That is, rather
than measuring performance on random clauses, some of them potentially trivial,
50 Alberto Artasanchez & Prateek Joshi, Assessing Text Through Bag of Words Model in Natural
Language Processing, MEDIUM (June 9, 2020), https://odsc.medium.com/assessing-text-through-bag-of-
words-model-in-natural-language-processing-9654f17abf56 [https://perma.cc/VY45-KSG2].
Electronic copy available at: https://ssrn.com/abstract=4491043

<<PAGE_BREAK>>

ARBEL & BECHER HOW SMART ARE SMART READERS? 18/41
we actively selected clauses that we thought mattered for consumers. These
included, for example, clauses that address cancelation, information sharing,
liability limitation, dispute resolution, and unilateral modifications.
Because this focus resulted in relatively short texts (i.e., specific clauses), we
could effectively use GPT-4, the current state-of-the-art model. For consistency,
we used the same prompt as before. In what follows, we delineate the contract
clauses we examined. For each clause, we provide the original text, followed by
the simplified version offered by GPT-4. We then evaluate the simplification in
terms of length, complexity/readability, and quality.
A. Wall Street Journal: Changes to Subscriber Agreement
Original51
1. Changes to Subscriber Agreement: We may change the terms of this
Agreement at any time by notifying you of the change in writing or electronically
(including without limitation, by email or by posting a notice on the Service that
the terms have been “updated” or similar words). The changes also will appear
in this document, which you can access at any time by going to the Subscriber
Agreement and Terms of Use link at the footer of those Services which are made
available through a website or to the Legal or Legal Notices area of those Services
which are made available as an application. By using a Service after changes are
made to this Agreement you signify that you agree to be bound by such changes.
Simplified
1. Subscriber Agreement Updates: We can update this Agreement whenever
needed. We’ll let you know about these updates, either in writing or digitally
(like by email or posting an update notice on the Service). These updates will be
added to this document. You can find it anytime by clicking on the Subscriber
Agreement and Terms of Use link at the bottom of any website-based Services,
or in the Legal area of any app-based Services. If you keep using a Service after
we update this Agreement, it means you accept these updates.
Evaluation
This clause allows the service provider to change the terms of the agreement
unilaterally, an issue of considerable import for consumers.52 We find the
simplification to be highly effective. It uses the second person to refer to the
51 WSJ Terms, supra note 33.
52 E.g., Shmuel I. Becher & Uri Benoliel, Sneak In Contracts, 55 GA. L. REV. 657, 657 (2021)
(asserting that unilateral modifications can “affect virtually every aspect of a contract”); see also David
Horton, The Shadow Terms: Contract Procedure and Unilateral Amendments, 57 UCLA L. REV. 605, 645
(2010) (describing how unilateral amendments give drafters “a kind of contractual dexterity”).
Electronic copy available at: https://ssrn.com/abstract=4491043

<<PAGE_BREAK>>

ARBEL & BECHER HOW SMART ARE SMART READERS? 19/41
reader. It starts the paragraph with a thesis statement (as in TRIAC and other
writing conventions)53 and offers a direct summary of the effect of the clause.
While generally true to the original, there is yet a subtle issue here. In the
original, changes to the contract are only effective if communicated. In the
simplified version, it is implied that changes are done unilaterally, and some users
may infer that communicating those changes is more of a courtesy than a
prerequisite. If a firm makes uncommunicated changes to its agreement, the
simplified version may mislead the consumer into thinking that the changes are
effective. Still, the difference is not large, and the actual meaning of “we will let
you know about these updates” (as per the simplified version) may be somewhat
ambiguous.
Either way, the rest of the paragraph is well-executed. The quantitative
analysis depicted in Figure 6 shows a reduction of nearly 7.5 grade levels on the
Flesch-Kincaid measure and 8 grade reduction on the average of scores of the
various readability measures. In either case, the text is evaluated as readable by
an eighth-grader. Furthermore, the simplified version reduced 26% of the text,
cutting the number of words by 33 (out of 127).54 The number of sentences
doubled from three to six due to splitting long sentences into shorter ones.
Consistently, the average word length, although not depicted (in this and the
following figures), falls from 5.17 characters to 4.45.
53 Eric Drown, TRIAC Paragraph Structure, UNIV. NEW ENG.,
https://ericdrown.uneportfolio.org/triac/ (last visited July 24, 2023) [https://perma.cc/SD4R-PQKQ].
54 Counting words depends on a technique involving the splitting of words called tokenization. John
Maeada & Matthew Bolanos, What Are Tokens?, MICROSOFT (May 23, 2023), https://learn.microsoft.
com/en-us/semantic-kernel/prompt-engineering/tokens [https://perma.cc/S8XQ-5RCD]. Microsoft Word
counts words in a fairly simplistic manner, counting contractions and hyphenated words as a single word,
thus somewhat biasing results. Carol Bratt, Ignore Hyphens When Performing a Word Count in MS Word,
DAVE’S COMPUT. TIPS (Oct. 23, 2012), https://davescomputertips.com/ignore-hyphens-when-performing-
a-word-count-in-ms-word/ [https://perma.cc/B4MK-K6QY].
Electronic copy available at: https://ssrn.com/abstract=4491043

<<PAGE_BREAK>>

ARBEL & BECHER HOW SMART ARE SMART READERS? 20/41
Figure 6: Clause Simplification, WSJ
B. Wall Street Journal: Agreement to Arbitrate
Original55
14. Agreement to Arbitrate.
14.1 The parties acknowledge that any statutory or common law claims related
to intellectual property may require forms of equitable relief that are best
administered by courts; accordingly, the parties agree that except for statutory or
common law claims related to intellectual property and disputes that qualify for
small claims court, any controversy or claim arising out of or relating to this
Agreement or any aspect of the relationship between us, whether based in
contract, tort, statute, fraud, misrepresentation or any other legal theory, will be
resolved by arbitration administered by the American Arbitration Association
(“AAA”) in accordance with its Commercial Arbitration Rules and the
Supplementary Procedures for Consumer Related Disputes. Judgment on the
award rendered by the arbitrator may be entered in any federal or state court of
competent jurisdiction located in the County of New York in the State of New
York. For more information about arbitration, the AAA and the arbitration
process, please consult the American Arbitration Association web site at adr.org.
You agree that by entering into this Agreement, you and we are each waiving the
right to trial by jury, except as otherwise stated above. Any arbitration under this
Agreement will take place on an individual basis; class arbitrations and class
actions are not permitted and, by entering into this Agreement, you are giving
up the ability to participate in a class action. All issues are for the arbitrator to
decide, except that issues relating to the scope, application, and enforceability of
55 WSJ Terms, supra note 33.
Electronic copy available at: https://ssrn.com/abstract=4491043

<<PAGE_BREAK>>

ARBEL & BECHER HOW SMART ARE SMART READERS? 21/41
the arbitration provision are for the court to decide. As stated in Section 15
below, New York law applies to any arbitration under this section, but the parties
acknowledge that the Federal Arbitration Act governs the interpretation and
enforcement of this provision. This agreement to arbitrate shall survive
termination of this Agreement. This arbitration agreement does not preclude you
from bringing issues to the attention of federal, state, or local agencies, and, if
the law allows, they can seek relief against us for you.
14.2 Unless you and we agree otherwise, the arbitration will take place either in
the subscriber’s county of principal residence or the County of New York in the
State of New York. For claims of $14,000 or less, you can choose whether you
would like arbitration carried out based only on documents submitted to the
arbitrator, or by a hearing in person, or by phone.
14.3 The arbitrator may award money or equitable relief in favor of only the
individual party seeking relief and only to the extent necessary to provide relief
warranted by that party’s individual claim. To reduce the time and expense of
the arbitration, the arbitrator will not provide a statement of reasons for his or
her award unless requested to do so by both parties. Unless both you and we
agree otherwise, the arbitrator may not consolidate more than one person’s
claims, and may not otherwise preside over any form of a representative or class
proceeding.
Simplified
14. Solving Disputes.
14.1 We agree that some issues, like those tied to ideas, may need to be sorted
out by courts. Except for these, and for small disputes that fit into small claims
court, we’ll deal with any problems or disputes from this Agreement through a
process called arbitration. This will be managed by the American Arbitration
Association (“AAA”). You can find more about this at adr.org. Decisions from
arbitration can be used in any federal or state court in New York County, State
of New York. By agreeing to this, both you and we give up the right to a jury
trial, except for the cases we just noted. The arbitrator will deal with issues one
by one; group arbitrations and group actions aren’t allowed. We agree that this
arbitration process, based on New York law, will still apply even after this
Agreement ends.
14.2 Unless we both say otherwise, the arbitration will happen either where you
live or in New York County, State of New York. For claims of $14,000 or less,
you get to pick how the arbitration will be done: only by looking at submitted
documents, through a meeting in person, or by phone.
14.3 The arbitrator can award money or make fair changes in favor of only the
person asking for it and only to the level needed to provide help based on their
claim. The arbitrator won’t provide a reason for the decision unless both parties
ask. The arbitrator won’t deal with more than one person’s claims at a time unless
both you and we agree otherwise.
Electronic copy available at: https://ssrn.com/abstract=4491043

<<PAGE_BREAK>>

ARBEL & BECHER HOW SMART ARE SMART READERS? 22/41
Evaluation
This clause provides for mandatory arbitration and makes specific procedural
requirements on a highly sensitive issue that impacts access to justice, corporate
power, and the development of the law.56 While the simplification is generally
good, we note a few problems. First, perhaps by virtue of the prompt’s insistence
on a change of terms, it replaced the heading ‘Agreement to Arbitrate’ with
‘Solving Disputes.’ While the latter communicates better, it does not make the
term arbitration sufficiently salient.
Relatedly, some choices of words may implicate different legal consequences.
The model translated intellectual property to “ideas.” This change is quite
wrong: not all ideas are subject to IP, and this may give a sense that more disputes
belong in courts than the original agreement allows. Yet again, the problem here
may stem from our prompt, which insisted on using simpler terms. A similar
issue afflicts the choice of “group actions” instead of “class actions” and the
language suggesting that arbitration awards can be “used” rather than “entered.”
In terms of quality, a worrisome omission is that the original clarifies that the
customer may still bring complaints to state or federal agencies. The simplified
version does not mention that. This omission can deprive the customer of
important rights.
A final issue is that the model translated equitable relief to “fair changes.”
These two ideas differ, and the simplified version could mislead. Yet, the
dilemma of simplification of this term is quite pressing, and the average
consumer may find both terms ambiguous. It is hard to effectively translate
equitable relief—which may consist of in-kind remedies, injunctive remedies,
apologies, and other measures—to a simple term. At the same time, keeping the
original term would sacrifice the ability of laypeople to parse it. All in all, this
simplification is disputable but not irrational.
On the quantitative measures, we see a dramatic reduction in grade level
evaluated for the reading of the agreement. Again, the simplification transformed
an agreement readable by PhDs into one readable by eighth-graders. The word
56 David Horton & Andrea Cann Chandrasekher, After the Revolution: An Empirical Study of
Consumer Arbitration, 104 GEO. L.J. 57, 57 (2015) (describing how the stakes around this issue have
“soared” since 2010); Jeff Sovern, Elayne E. Greenberg, Paul F. Kirgis, & Yuxiang Liu, “Whimsy Little
Contracts” with Unexpected Consequences: An Empirical Analysis of Consumer Understanding of
Arbitration Agreements, 75 MD. L. REV. 1, 2-3 (2015) (finding only a quarter of more than 5,000
respondents had a correct understanding of arbitration agreements); see also Shmuel I. Becher & Uri
Benoliel, Dark Contracts, 64 B.C. L. REV. 55, 68-71 (2023).
Electronic copy available at: https://ssrn.com/abstract=4491043

<<PAGE_BREAK>>

ARBEL & BECHER HOW SMART ARE SMART READERS? 23/41
count has fallen by 46%. The number of sentences has only fallen slightly (from
19 to 18), and the average word length fell from 5.04 to 4.33.
Figure 7: Clause Simplification, WSJ (2)
C. Airbnb: Collecting Personal Information from Third Parties
Original57
2.4 Personal Information We Collect from Third Parties
We collect personal information from other sources, such as:
• Third-Party Services. If you link, connect, or login to the Airbnb Platform with
a third-party service (e.g., Google, Facebook, WeChat), you direct the service to
send us information such as your registration, friends list, and profile
information as controlled by that service or as authorized by you via your privacy
settings at that service.
• Background Information. For Members in the United States, to the extent
permitted by applicable laws, we may obtain, for example, reports of criminal
records, sex offender registrations, and other information about you and/or your
background. For Hosts in India, to the extent permitted by applicable laws, we
may perform criminal background checks. For Members outside of the United
States, to the extent permitted by applicable laws and with your consent where
required, we may obtain police, background, or registered sex offender checks.
We may use your information, including your full name and date of birth, to
obtain such reports. […]
57 Airbnb Privacy Policy, supra note 33.
Electronic copy available at: https://ssrn.com/abstract=4491043

<<PAGE_BREAK>>

ARBEL & BECHER HOW SMART ARE SMART READERS? 24/41
• Referrals and Co-Travelers. If you are invited to the Airbnb Platform, for
example, as a co-traveler on a trip, the person who invited you can submit
personal information about you such as your email address or other contact
information.
• Guest Travel Insurance. If you make a claim under our Guest Travel Insurance
policy, we will receive information regarding your claim in order to process,
handle, or assess your claim and as outlined in this Privacy Policy.
• Other Sources. To the extent permitted by applicable law, we may receive
additional information about you, such as references, demographic data, or
information to help detect fraud and safety issues from third-party service
providers and/or partners, and combine it with information we have about you.
For example, we may receive background check results or fraud warnings from
identity verification service providers for use in our fraud prevention, security
investigation, and risk assessment efforts. We may receive information about you
and your activities on and off the Airbnb Platform, or about your experiences
and interactions from our partners. We may receive health information,
including but not limited to, health information related to contagious diseases.
Simplification
2.4 Info We Get from Other Sources. We get personal info from other places
like:
• Other Services. If you connect your Airbnb account with a service like
Google, Facebook, or WeChat, you allow them to send us certain info like
your registration and profile details.
• Background Checks. In the US, we might get reports on criminal records and
other background info. In India, we might run criminal background checks on
hosts. In other countries, we might get police or background checks if the law
allows and you agree.
• Invites and Co-travelers. If someone invites you to Airbnb, like to join a trip,
they might give us your contact info.
• Guest Travel Insurance. If you make a claim under our travel insurance
policy, we get info about your claim.
• Other Places. If the law allows, we might get more info about you from other
service providers or partners, and mix it with the info we already have. This
could be background checks, fraud warnings, info about your activities on and
off Airbnb, and even health info related to infectious diseases.
Evaluation
This provision delineates the categories of personal data that Airbnb collects
from third-party sources, which is another important practice for consumers to
understand. The simplification has successfully distilled the original provision’s
complex legal language into more accessible terms without distorting the overall
Electronic copy available at: https://ssrn.com/abstract=4491043

<<PAGE_BREAK>>

ARBEL & BECHER HOW SMART ARE SMART READERS? 25/41
meaning. The use of “other sources” instead of third-party services is quite
helpful, and the use of “info” instead of information may be grammatically
inaccurate yet useful (or at least understandable).
However, certain points could be clearer and more comprehensive. For
instance, the simplified version omits the example that some of the information
shared may contain the user’s friends list. This omission is not misleading per se,
but we suspect that consumers may not otherwise expect Airbnb to share this
information with third-parties.
As for background checks, the simplification converts “with your consent
where required” to a proposition that implies that consent will always be sought.
This modification is misleading because sharing will sometimes occur without
consent. An arguably more minor omission regards information sharing with the
insurer. The simplified version does not mention that the privacy policy limits
information sharing; i.e., it gives a sense that information sharing is unlimited.
The quantitative measure shows another substantial improvement, reducing
the readability level from college level to sixth or seventh grade. Furthermore, the
word count has declined by 50%: from 370 words to 185. This drop included a
minimal decrease in the number of sentences (from 16 to 15) and moderate
reduction in the average word length (from 5.04 to 4.33).
Figure 8: Clause Simplification, Airbnb
Electronic copy available at: https://ssrn.com/abstract=4491043

<<PAGE_BREAK>>

ARBEL & BECHER HOW SMART ARE SMART READERS? 26/41
D. Netflix: Cancellation
Original58
3.4. Cancellation. You can cancel your Netflix membership at any time, and you
will continue to have access to the Netflix service through the end of your billing
period. To the extent permitted by the applicable law, payments are non-
refundable and we do not provide refunds or credits for any partial membership
periods or unused Netflix content. To cancel, go to the “Account” page and
follow the instructions for cancellation. If you cancel your membership, your
account will automatically close at the end of your current billing period. To see
when your account will close, click “Billing details” on the “Account” page. If
you signed up for Netflix using your account with a third party as a Payment
Method and wish to cancel your Netflix membership, you may need to do so
through such third party, for example by visiting your account with the
applicable third party and turning off auto-renew, or unsubscribing from the
Netflix service through that third party.
Simplification
3.4. Ending Your Membership. You can stop your Netflix membership whenever
you want. You’ll still be able to use Netflix until the end of your billing cycle.
Under current law, we can’t refund payments and we don’t give refunds or
credits for part of a membership period or for unused Netflix content. To stop
your membership, visit the “Account” page and follow the steps there. If you
stop your membership, your account will close at the end of your billing cycle.
To find out when that is, click “Billing details” on the “Account” page. If you
joined Netflix using a third party for payment and you want to stop your
membership, you may have to do this through that third party. This might
involve turning off auto-renew or unsubscribing from Netflix through them.
Evaluation
This provision governs the cancellation of a Netflix subscription, yet another
tricky issue in consumer contracts.59 The simplification seems to maintain the
overall integrity of the original paragraph while making it more accessible to the
reader. However, there is a misinterpretation of the refund policy that could
potentially mislead consumers.
The original text states that Netflix’s general policy is not to provide refunds
or credits for any partial membership periods or unused Netflix content, but that
58 Netflix Terms, supra note 33.
59 Cf. Roman Inderst & Marco Ottaviani. Sales Talk, Cancellation Terms and the Role of Consumer
Protection, 80 REV. ECON. STUD. 1002, 1002 (2013) (discussing similar concerns in insurance plans and
annuities).
Electronic copy available at: https://ssrn.com/abstract=4491043

<<PAGE_BREAK>>

ARBEL & BECHER HOW SMART ARE SMART READERS? 27/41
the firm can make exceptions to the extent permitted by applicable law. This text
suggests that in some jurisdictions, Netflix may indeed be required to issue
refunds. In contrast, the simplified text asserts that “under current law, we can’t
refund payments.” This language indicates that Netflix is legally prohibited from
providing refunds. This erroneous interpretation potentially miscommunicates
Netflix’s refund policy to consumers, particularly those residing in regions where
laws may, in fact, mandate refunds. This difference is a major issue that can
mislead consumers and undermine their rights.
The quantitative measure shows another significant improvement, setting the
readability level at between the sixth and seventh grade (instead of the high
school level required for reading the original). At the same time, the word count
has only declined by 16% (from 163 to 137). This included a small increase in
the number of sentences (from 8 to 10), and a slight decrease in the length of
words (from 4.82 to 4.47).
Figure 9: Clause Simplification, Netflix
E. Amazon: Reviews, Comments, Communications, & Other Content
Original60
REVIEWS, COMMENTS, COMMUNICATIONS, AND OTHER
CONTENT You may post reviews, comments, photos, videos, and other
60 Amazon Terms, supra note 33.
Electronic copy available at: https://ssrn.com/abstract=4491043

<<PAGE_BREAK>>

ARBEL & BECHER HOW SMART ARE SMART READERS? 28/41
content; send e-cards and other communications; and submit suggestions, ideas,
comments, questions, or other information, so long as the content is not illegal,
obscene, threatening, defamatory, invasive of privacy, infringing of intellectual
property rights (including publicity rights), or otherwise injurious to third parties
or objectionable, and does not consist of or contain software viruses, political
campaigning, commercial solicitation, chain letters, mass mailings, or any form
of “spam” or unsolicited commercial electronic messages. You may not use a false
email address, impersonate any person or entity, or otherwise mislead as to the
origin of a card or other content. Amazon reserves the right (but not the
obligation) to remove or edit such content, but does not regularly review posted
content.
If you do post content or submit material, and unless we indicate otherwise, you
grant Amazon a nonexclusive, royalty-free, perpetual, irrevocable, and fully
sublicensable right to use, reproduce, modify, adapt, publish, perform, translate,
create derivative works from, distribute, and display such content throughout the
world in any media. You grant Amazon and sublicensees the right to use the
name that you submit in connection with such content, if they choose. You
represent and warrant that you own or otherwise control all of the rights to the
content that you post; that the content is accurate; that use of the content you
supply does not violate this policy and will not cause injury to any person or
entity; and that you will indemnify Amazon for all claims resulting from content
you supply. Amazon has the right but not the obligation to monitor and edit or
remove any activity or content. Amazon takes no responsibility and assumes no
liability for any content posted by you or any third party.
Simplification
POSTS, MESSAGES, AND OTHER CONTENT You can post reviews,
comments, photos, videos, and more. You can send messages and share ideas,
comments, questions, or other info. But make sure your content is legal, polite,
respects others’ privacy, and doesn’t infringe on anyone’s rights. Don’t post
harmful or unwanted content like spam, viruses, false info, or anything that
misleads others. We can remove or change this type of content, but we don’t
check all content regularly.
If you do post or share stuff, unless we say otherwise, you’re giving Amazon
permission to use it. This permission doesn’t end, doesn’t cost anything, and can
be passed on. We can use it, change it, publish it, perform it, translate it, make
new stuff from it, and share it anywhere in any form. You also let Amazon and
others we give permission to use your name with your content, if they want. You
promise that you own or control the rights to what you post, that it’s correct,
that it won’t break this rule or hurt anyone or anything, and that you’ll cover
Amazon for all claims related to your content. Amazon can monitor, change, or
remove any activity or content but isn’t required to. Amazon isn’t responsible for
any content posted by you or anyone else.
Electronic copy available at: https://ssrn.com/abstract=4491043

<<PAGE_BREAK>>

ARBEL & BECHER HOW SMART ARE SMART READERS? 29/41
Evaluation
This provision governs content contribution to the platform, most notably in
the form of reviews. This provision raises an important issue since consumers
often rely on online reviews and use them in their decision-making. Hence,
ensuring reliable and robust online information flows is crucial in disciplining
sellers and maintaining efficient markets.61
Overall, we find the simplification above to be effective. However, some
issues require attention. First, the simplified version leaves out a few important
restrictions. It fails to mention the prohibition on email spoofing and political
campaigning explicitly mentioned in the original, thereby providing less
comprehensive guidance to users. At the same time, the original possibly
contained too many illustrations, so the balance is delicate.
Second, the contract contains an important clause about the warranties
provided by users when they post content, which is especially weighty in its
implications. Users have to guarantee the accuracy of their reviews and ensure
that these reviews will not harm others. This requirement could be burdensome
to users and is quite unexpected, given that truthful reviews may well harm
unscrupulous, negligent, or underperforming sellers. The simplification
communicates most of it, but perhaps a more formal tone might be beneficial in
highlighting the gravity of these obligations. This difference potentially points to
a deeper problem at the heart of the simplification project: whereas simplification
often entails a more casual or flippant tone, formality is sometimes a good signal
of the gravity of obligations.62
By readability metrics, this was the most complex original text so far. The
reduction from 19-20 years of education to a level readable by an eighth grader
is, therefore, quite impressive. Also, the length fell by 26% (from 304 words to
226). This dip was nonetheless accompanied by an increase in the number of
sentences (from 8 to 12), which, as noted, often results from text simplification
61 See Shmuel I. Becher & Tal Z. Zarsky, E-Contract Doctrine 2.0: Standard Form Contracting in the
Age of Online User Participation, 14 MICH. TELECOMMS. & TECH. L. REV. 303, 333 (2008) (viewing
accreditation issues in terms of reliability and trustworthiness as challenges to online information flow);
Arbel & Shapira, supra note 8, at 952 (asserting “reputational information is too often unreliable”);
Yonathan A. Arbel, Reputation Failure: The Limits of Market Discipline in Consumer Markets, 54 WAKE
FOREST L. REV. 1239, 1275 (2019) (explaining why statistically reviews are unreliable as “sole guides for
consumer decision-making”).
62 Arbel and Toler test this and do not find evidence to support the red-flag theory of formality, yet in
the context of a fairly specific intervention. See Arbel & Toler, supra note 9, at 896.
Electronic copy available at: https://ssrn.com/abstract=4491043

<<PAGE_BREAK>>

ARBEL & BECHER HOW SMART ARE SMART READERS? 30/41
(i.e., employing short sentences). Finally, word length fell from 5.17 to 4.33
characters per word.
Figure 10: Clause Simplification, Amazon
F. Amazon: Risk of Loss
Original63
RISK OF LOSS All purchases of physical items from Amazon are made pursuant
to a shipment contract. This means that the risk of loss and title for such items
pass to you upon our delivery to the carrier. RETURNS, REFUNDS AND
TITLE Amazon does not take title to returned items until the item arrives at our
fulfillment center. At our discretion, a refund may be issued without requiring a
return. In this situation, Amazon does not take title to the refunded item. For
more information about our returns and refunds, please see our Returns Center.
Simplification
LOSS RISK When you buy physical items from Amazon, they are yours once
we give them to the carrier for delivery.
RETURNS, MONEY BACK, AND OWNERSHIP If you return something,
it’s not ours until it gets to our fulfillment center. Sometimes, we might give you
your money back without needing a return. If that happens, you still own the
item. To learn more about returns and refunds, visit our Returns Center.
63 Amazon Terms, supra note 33.
Electronic copy available at: https://ssrn.com/abstract=4491043

<<PAGE_BREAK>>

ARBEL & BECHER HOW SMART ARE SMART READERS? 31/41
Evaluation
This clause assigns the risk of delivery loss to the customer. Consumers may
not expect such a clause, as they have little control over Amazon’s shipping
methods. Indeed, some jurisdictions regard contract terms that relieve the
supplier of responsibility, which they would have to bear under law or by virtue
of the contract (if not for that term), as presumably unfair.64
The simplification preserves the overall meaning, but it could do better in
highlighting key customer responsibilities and exceptions. It effectively
communicates that the items belong to the buyer upon delivery to the shipper.
However, it does not communicate clearly enough that the customer bears the
risk if something goes wrong with the delivery.
The same criticism, but to a lesser extent, applies to returns. The proposed
simplification, “If you return something, it’s not ours until it gets to our
fulfillment center,” does not adequately communicate the contractual risk
allocation, such as what happens if items are lost in the return process. On the
positive side, we note the effectiveness of using “you still own” relative to “take
title.”
Figure 11 depicts the most modest improvement in readability so far.
Readability improved by just a single grade level, but that is likely because the
original is both short and relatively simple. Still, we believe greater improvements
could take place with additional prompting. Likewise, the change in length was
also relatively less substantial, with a 23% reduction (from 95 words to 73).
There was no change in the number of sentences and a marginal change to the
word length, falling from 4.64 to 4.45.
64 See, e.g., Standard Contracts Law, 1982, LEVITANSHARON & CO., https://www.israelinsurancelaw.
com/standard-contracts-law-1982/ (last visited July 24, 2023) [https://perma.cc/6QNG-MJJX] (listing out
various sections of the contract code in Israel, particularly sections 3 and 4, which treat provisions that
relieve supplier’s responsibilities as per se unfair).
Electronic copy available at: https://ssrn.com/abstract=4491043

<<PAGE_BREAK>>

ARBEL & BECHER HOW SMART ARE SMART READERS? 32/41
Figure 11: Clause Simplification, Amazon (2)
G. Yahoo: Information Sharing
Original65
How We Share This Information
a. Yahoo shares information within its affiliated brands and companies. We also
share information we have about you for the purposes described in this Privacy
Policy, including to provide Services that you have requested (including when
you connect with third-party apps and widgets). We do not sell, license or share
information that individually identifies our customers with companies,
organizations or individuals outside of Yahoo unless one of the following
circumstances applies:
i. With Your Consent. We will share information with companies,
organizations or individuals outside of Yahoo when we have your consent.
ii. Within Yahoo. Information may also be shared within Yahoo, including
with other Yahoo Services and affiliates. Yahoo affiliates may use the information
in a manner consistent with their privacy policies.
iii. With Partners. We may share your information with nonaffiliated
companies who are:
▪ Trusted Partners. We provide user information to trusted partners who
work on behalf of or with Yahoo based on our directions and in compliance with
appropriate confidentiality measures. Learn more.
65 Yahoo! Privacy Policy, supra note 33.
Electronic copy available at: https://ssrn.com/abstract=4491043

<<PAGE_BREAK>>

ARBEL & BECHER HOW SMART ARE SMART READERS? 33/41
▪ Advertising, Analytics and Business Partners (Limited to Non-Personally
Identifiable Information). We may share aggregated or pseudonymous
information (including demographic information) with partners, such as
publishers, advertisers, measurement analytics, apps, or other companies. For
example, we may tell an advertiser how its ads performed or report how many
people installed an app after seeing a promotion. We do not share personally
identifiable information (like phone number or email address) with these
partners, such as publishers, advertisers, ad agencies, or analytics partners.
▪ When you use third-party apps, websites or other products integrated with
our Services, they may collect information about your activities subject to their
own terms and privacy policies.
▪ We allow other companies that show advertisements on our webpages or
apps to collect information from your browsers or devices. Other companies’ use
of cookies and other data collection technologies are subject to their own privacy
policies, not this one. Like many companies, we may allow cookie matching with
select partners. But, these parties are not authorized to access Yahoo cookies.
Simplification
How We Share Your Info a. Yahoo shares your info within its related brands and
companies. We also share info for the purposes mentioned in this Privacy Policy,
including to give you Services you asked for. We don’t sell or share info that
identifies our customers with outside companies unless one of these situations
happens:
i. You Say Okay. We’ll share info with outside companies if you give us
permission.
ii. Inside Yahoo. We might share your info within Yahoo, including with other
Yahoo Services and linked companies. These Yahoo companies may use the info
in line with their own privacy rules.
iii. With Partners. We may share your info with companies who aren’t part of
Yahoo:
▪ Trusted Partners. We give user info to trusted partners who do work for or
with Yahoo. They follow our rules and keep the info confidential. Learn more.
▪ Ad, Analytics, and Business Partners (Only Non-Personal Info). We may
share grouped or pseudonymized info (like demographic info) with partners such
as publishers, advertisers, and other companies. We don’t share personal info
(like phone number or email) with these partners.
▪ When you use third-party apps or websites tied to our Services, they may
collect info about what you do, based on their own rules and privacy policies.
▪ We let other companies that show ads on our webpages or apps to collect
info from your browsers or devices. Their use of cookies and other data gathering
tech follows their own privacy rules, not ours.
Electronic copy available at: https://ssrn.com/abstract=4491043

<<PAGE_BREAK>>

ARBEL & BECHER HOW SMART ARE SMART READERS? 34/41
Evaluation
This provision governs Yahoo’s information sharing, an important aspect of
today’s markets and economies.66 The specific challenge here is that the original
has inconsistent logic. For example, it says that personally identifiable
information about customers will not be shared without consent unless it is with
advertisers with whom personally identifiable information can be shared even
without consent.
Overall, the clause attempts to set rules that allow Yahoo to share all
information in various ways and personally identifiable information in limited
ways. We find that the simplification captures this intended logic, although even
the best simplification may not overcome the difficulty of parsing what it means
for Yahoo to allow for cookie matching with partners without letting them access
their cookies. This example provides a more general, important (yet
straightforward) insight: AI simplification has limited value if the original legal
documents are not properly drafted. Slightly restated, firms might circumvent
smart readers and undermine their potential to assist consumers by adopting
specific drafting strategies.67
That aside, the simplification is overall helpful. The “you say Okay” is a rather
nice touch on “Your consent,” although given the quality of consent required (a
checkbox), it may overstate the necessary level of consent. It also omits the
confusing cookie-matching policy noted above.
More generally, the reduction in text complexity was quite dramatic. The
average readability score fell from post-high school level to a level of between
seven and eight grade. The length fell by 26% (from 355 words to 264), with a
small change to the number of sentences (from 21 to 19). Average word length
fell from 5.45 to 4.53 characters per word.
66 Indeed, many scholars have discussed the importance of information sharing. See, e.g., Stacy-Ann
Elvy, Paying for Privacy and the Personal Data Economy, 117 COL. L. REV. 1369 (2017) (discussing the
importance of information sharing); Anja Lambrecht, Avi Goldfarb, Alessandro Bonatti, Anindya Ghose,
Daniel G. Goldstein, Randall Lewis, Anita Rao, Navdeep Sahni, & Song Yao, How Do Firms Make Money
Selling Digital Goods Online?, 25 MKTG. LETTERS 331 (2014) (same); Shmuel I. Becher & Tal Z. Zarsky,
Big Mistake(s) (Jan. 26, 2024) (unpublished manuscript) (on file with authors) (same).
67 See Arbel & Becher, supra note 21, at 118, 141 (discussing adversarial attacks).
Electronic copy available at: https://ssrn.com/abstract=4491043

<<PAGE_BREAK>>

ARBEL & BECHER HOW SMART ARE SMART READERS? 35/41
Figure 12: Clause Simplification, Yahoo
H. Spotify: Liability Limitation and Claim Filing
Original68
Limitation of Liability and Time for Filing a Claim
Subject to applicable law, you agree that your sole and exclusive remedy for any
problems or dissatisfaction with the Spotify Service is to uninstall any Spotify
software and to stop using the Spotify Service. You agree that Spotify has no
obligation or liability arising from or related to third-party applications or the
content thereof made available through or in connection with the Spotify
Service, and while your relationship with such third-party applications may be
governed by separate agreements with such third parties, your sole and exclusive
remedy, as with respect to Spotify, for any problems or dissatisfaction with any
third-party applications or the content thereof, is to uninstall or stop using such
third-party applications.
In no event will Spotify, its officers, shareholders, employees, agents, directors,
subsidiaries, affiliates, successors, assigns, suppliers, or licensors be liable for (1)
any indirect, special, incidental, punitive, exemplary, or consequential damages;
(2) any loss of use, data, business, or profits (whether direct or indirect), in all
cases arising out of the use of or inability to use the Spotify Service, devices, third-
party applications, or third-party application content; or (3) aggregate liability
for all claims relating to the Spotify Service, third-party applications, or third-
party application content more than the greater of (a) the amounts paid by you
to Spotify during the twelve months prior to the first claim; or (b) $30.00. Any
68 Spotify Terms, supra note 33.
Electronic copy available at: https://ssrn.com/abstract=4491043

<<PAGE_BREAK>>

ARBEL & BECHER HOW SMART ARE SMART READERS? 36/41
liability we do have for losses you suffer is strictly limited to losses that were
reasonably foreseeable.
For clarification, these terms do not limit Spotify’s liability for fraud, fraudulent
misrepresentation, death or personal injury to the extent that applicable law
would prohibit such a limitation and for any other liability that, by applicable
law, may not be limited or excluded.
Simplification
Based on the law, you agree that the only way to fix any issue or unhappiness
with the Spotify Service is to remove any Spotify software and stop using the
Spotify Service. You agree that Spotify is not to blame or liable for any issues
related to apps from other parties or the content from them available through or
linked to the Spotify Service. Even though you might have separate deals with
these other parties, your only way to fix any issue or unhappiness with any apps
from other parties or the content from them, as far as Spotify is concerned, is to
remove or stop using such apps from other parties.
Spotify, its staff, shareholders, workers, agents, leaders, child companies, linked
companies, future owners, people who take over, suppliers, or those who have a
right to give licenses won’t be liable for (1) any indirect, special, extra, punitive,
exemplary, or follow-on damages; (2) any loss of use, data, business, or money
(direct or indirect), in all cases from using or not being able to use the Spotify
Service, devices, apps from other parties, or content from apps from other parties;
or (3) total liability for all claims about the Spotify Service, apps from other
parties, or content from apps from other parties more than the higher of (a) the
amounts you paid Spotify in the twelve months before the first claim; or (b)
$30.00. Any liability we do have for losses you go through is strictly limited to
losses that could have been reasonably seen coming.
Just to be clear, these terms do not limit Spotify’s liability for fraud, wrong
representation, death or personal injury to the extent that the law would stop
such a limit and for any other liability that, by the law, may not be limited or
taken away.
Evaluation
Liability limitation is a recurring and important theme in consumer contracts,
and many jurisdictions treat broad liability limitation clauses with suspicion.69
Unsurprisingly, Spotify’s clause considerably limits its liability. Nonetheless, its
wording is inconsistent and confusing. The clause states that the only remedy
available to the user is the uninstallation of the app, then moves to limit monetary
69 See, e.g., Council Directive 93/13/EEC, of the European Parliament and of the Council of 5 April
1993 on Unfair Terms in Consumer Contracts, annex, 1990 O.J. (L 95) 29. (paragraph 1b of the annex
refers to “inappropriately excluding or limiting the legal rights of the consumer vis-à-vis the seller or
supplier or another party in the event of total or partial non-performance or inadequate performance by the
seller or supplier of any of the contractual obligations…”).
Electronic copy available at: https://ssrn.com/abstract=4491043

<<PAGE_BREAK>>

ARBEL & BECHER HOW SMART ARE SMART READERS? 37/41
remedies to a maximum of $30, and then states that Spotify is liable for anything
it cannot disclaim by law.
The summary does an overall good job. It delivers the message of the
disclaimer in simple language and references the customer to dispute issues with
third parties directly. The emphasis that the liability of a third party is limited
“as far as Spotify is concerned” is useful in another aspect: It communicates a
certain indifference to such harm, and some consumers may find this warning
useful.
However, there are a few noteworthy issues with the simplification. Perhaps
guided again by our prompt, the simplification replaces special terms of art.
Thus, it changes “incidental damages” to “extra damages,” “consequential
damages” to “follow-on damages,” and “foreseeable damages” to “could have
seen coming.” Whereas the simplified version might be better in terms of
communication, it unduly alters the legal meaning of the clause.
Concerning quantitative metrics, this simplification was the least successful.
While it improved readability by seven to eight grade levels, it retained the
original structure of the paragraph-long sentence. Readability tests are not well-
calibrated to deal with such cases, and the absurd result (28.5 years of schooling
exceeds that of almost every lawyer), should be interpreted qualitatively.
Furthermore, the simplification made the document marginally longer (from
307 words to 309), suggesting that, at times, text simplification sometimes
necessitates more exposition. While there was a slight increase in the number of
sentences (from 5 to 6), we observed a reduction in average word length, falling
from 5.17 character per word to 4.45.
Electronic copy available at: https://ssrn.com/abstract=4491043

<<PAGE_BREAK>>

ARBEL & BECHER HOW SMART ARE SMART READERS? 38/41
Figure 13: Clause Simplification, Spotify
VI. SIMPLIFICATION OF SPECIFIC CLAUSES: DISCUSSION
Our analysis emphasizes the role of two aspects of the simplification process:
(a) enhanced accessibility (shorter length, reduced complexity, and increased
readability) and (b) quality of simplification. Regarding the former, we note that
the simplified clauses did well on all the quantitative metrics. In each case, the
improvement in readability metrics was significant; on average, reducing the
reader’s required education level by half.
While we do not necessarily endorse a literal interpretation of the specific
grade level assignment, we do recognize the difference as large and meaningful.
At the same time, as the Spotify example illustrates, simplified texts might still
be inaccessible by standard metrics. The same applies to length and complexity:
While the simplified versions presented a substantial improvement on these
dimensions, there is no guarantee that consumers are willing to read even these
shorter and less complicated texts.
Importantly, the improvement in readability was associated with shorter
clauses. This facet is noteworthy, as simplification often requires more
exposition. At the same time, the impact on the number of sentences varied, and
the effect on word length was relatively mild. However, setting objective metrics
aside, we observed an overall significant improvement. The simplified texts were
Electronic copy available at: https://ssrn.com/abstract=4491043

<<PAGE_BREAK>>

ARBEL & BECHER HOW SMART ARE SMART READERS? 39/41
more accessible and used simple and direct language, making them easier to read
and understand.
In terms of accuracy, our report is more mixed. Simplifications of specific
clauses were generally accurate and beneficial, especially considering we
intentionally chose problematic clauses. Nevertheless, we noticed a range of
issues. Some were relatively minor, such as not using a formal tone or failing to
include an example that some consumers would find useful. Other issues were
more substantial, such as suggesting that consent will be actively sought from the
user when it would not, or when omitting the customer’s right to complain to
state and federal agencies.
An additional significant issue we observed is the incorrect usage of legal
terminology. Using “follow-on damages” instead of “consequential damages”
entailed more than just confusing the informed consumer. These two concepts
of damages are distinct, having very different legal implications. Admittedly, this
error may be our own making: the prompt insisted that complex words should
be simplified. A less stringent approach would not invite such losses in meaning,
although it could compromise the simplification’s effectiveness. Yet, to know
whether a given term is a term-of-art or a colloquial term requires some domain
expertise, and this may point to a limitation of at least current generation general
models.
This last point introduces a potentially thorny issue. We generally assume
that the canonical contract is the one held by the seller, rather than the one
interpreted by the smart reader. However, we wonder if some sellers will persuade
the court to adopt the smart reader’s version when it serves them by arguing that
this is the version the customer presumably used. If courts follow this path,
changes to terms-of-art can be harmful to the buyer.
Finally, our analysis did not touch on bias, toxicity, and hallucinations—
several issues that afflict current generation models.70 These issues were fairly
muted in our analysis, but we do expect them to become relevant as consumers
use smart readers more frequently. We thus acknowledge that our inspection is
limited in ways that future research may seek to tackle.
70 Kathy Baxter & Yoav Schlesinger, Managing the Risks of Generative AI, HARV. BUS. REV. (June
6, 2023), https://hbr.org/2023/06/managing-the-risks-of-generative-ai [https://perma.cc/2Q7Y-T86Q].
Electronic copy available at: https://ssrn.com/abstract=4491043

<<PAGE_BREAK>>

ARBEL & BECHER HOW SMART ARE SMART READERS? 40/41
VII. SUMMARY
Our study suggests that smart readers can substantially shorten legal texts,
reduce their complexity, and improve their readability. Our assessment also
indicates that smart readers typically identify important information and include
this information in their summaries. Overall, it was encouraging and impressive
to find that the simplifications did not substantially undermine the quality of the
text and the scope of information that consumers receive.71 Thus, if consumers
choose to use smart readers, this decision could have significant impact on the
viability of HIDE strategies and other market outcomes.
The in-depth evaluation of the simplification of specific clauses reinforced
our conclusion that while the overall quality of simplification is very high, it is
not perfect. However, perfection is not the benchmark. Considerable literature
finds that in many domains, consumers rarely read dense legal texts. In such
cases, consumers proceed with a vague understanding of the underlying
transaction. Provided that smart readers simplify contracts and policies and make
them readable, then as long as they are not materially misleading, they can
enhance consumers’ decision-making. Specifically, smart readers could
potentially facilitate informed decisions, enhance efficiency, and thus encourage
competition over terms and pressure sellers to draft better contracts.
Furthermore, many consumers may wish to examine legal texts ex post, once or
a dispute arises or when encountering an issue with the transaction they entered.
Smart readers can serve well these consumers, who are likely to have more
tailored queries and specific aspects to decipher.
Ultimately, simplification tools do not replace lawyers and do not render the
original drafting entirely irrelevant to the end consumer. Still, they offer a
marked improvement over current consumers’ realistic alternatives, such as not
reading the text and misperceiving legal aspects. Furthermore, our analysis
suggests that smart readers may not only serve individual consumers, but also
71 It is worth noting that while our quality assessment was labor-intensive and had subjective aspects,
future developments may advance automated tools to evaluate the quality of legal summaries at scale. See,
e.g., Bianca Steffes, Piotr Rataj, Luise Burger, & Lukas Roth, On Evaluating Legal Summaries With
ROUGE, in PROC. NINETEENTH INT’L CONF. A.I. & L. 475 (2023) (finding that current tools are
insufficient for quality evaluation and suggesting to increase the reliability of ROUGE by pre-selecting
sentences); see also Huyen Nguyen & Junhua Ding, Keyword-Based Augmentation Method to Enhance
Abstractive Summarization for Legal Documents, in PROC. NINETEENTH INT’L CONF. A.I. & L. 437 (2023)
(finding that keywords-based augmentation is effective in improving quality and enhancing summarization
models).
Electronic copy available at: https://ssrn.com/abstract=4491043

<<PAGE_BREAK>>

ARBEL & BECHER HOW SMART ARE SMART READERS? 41/41
energize intermediaries and consumer organizations who can scale up the use of
such tools.
Notably, we used non-specialized models with little special domain training
to deliver these results, which implies that our findings represent a lower bound,
rather than an upper limit. It seems more realistic than ever that smart readers
will soon have the ability to automatically detect problematic terms, warn
consumers about them, evaluate contracts on a scale, compare contracts, and
benchmark them.72 Consumers can consult with a smart reader in a Q&A mode,
asking questions like “What happens if I don’t pay the balance in full?” or “Can
I switch providers when I want to?”. Such advances can transform consumer
contracting.
Against this revolutionary potential, it is crucial to keep the concerns around
accuracy, capture, and bias in mind. Today’s models make errors, and these
errors may not be neutral.73 It is possible that as smart readers grow in influence,
companies will wish to influence their output or find ways to mislead them or
circumvent their potential. It is, therefore, necessary to consider these concerns
when evaluating the technology and its trajectory. In this context, massive open-
source models may limit the potential for invisible model corruption.
Our assessment of current generation models concludes that smart readers
have arrived. They are not (yet) a full replacement for careful review by a lawyer.
However, for the large mass of contracts and privacy policies that today go
unread, they serve as a cheap, effective, and scalable alternative. If their potential
materializes, a law and policy paradigm shift would be appropriate, if not
inevitable.
72 Combining language models with technologies that can automate the detection of unfair terms in
consumer contracts is a promising path to consider. For a study that experimentally examines the use of
machine learning platforms to perform such detection, see Marco Lippi, Przemyslaw Palka, Giuseppe
Contissa, Francesca Lagioia, Hans-Wolfgang Micklitz, Yannis Panagis, Giovanni Sartor, & Paolo Torroni,
Automated Detection of Unfair Clauses in Online Consumer Contracts, 302 LEGAL KNOWLEDGE & INFO.
SYS. 145 (2017); see also Arbel & Becher, supra note 21, at 106-108 (discussing smart readers and
benchmarking).
73 Kolt, supra note 32.
Electronic copy available at: https://ssrn.com/abstract=4491043

---

## ssrn-4526219: Public Law and Legal Theory Research Paper Series
Year: 2023
Authors: Yonathan Arbel
Source: papers/ssrn-4526219/paper.txt

Public Law and Legal Theory Research Paper Series
Research Paper No. 23-27
Generative Interpretation
Yonathan A. Arbel
UNIVERSITY OF ALABAMA - SCHOOL OF LAW
David A. Hoffman
UNIVERSITY OF PENNSYLVANIA C AREY LAW SCHOOL
This paper can be downloaded without charge from the
Social Science Research Network
Electronic Paper collection: https://ssrn.com/abstract=4526219.

<<PAGE_BREAK>>

ARBEL & HOFFMAN
Generative Interpretation
Yonathan A. Arbel & David A. Hoffman*
99 N.Y.U. L. REV. __ (forthcoming 2024)
[DRAFT October 27, 2023]
We introduce generative interpretation, a new approach to estimating contractual meaning
using large language models. As AI triumphalism is the order of the day, we proceed by way
of grounded case studies, each illustrating the capabilities of these novel tools in distinct
ways. Taking well-known contracts opinions, and sourcing the actual agreements that they
adjudicated, we show that AI models can help factfinders ascertain ordinary meaning in con-
text, quantify ambiguity, and fill gaps in parties’ agreements. We also illustrate how models
can calculate the probative value of individual pieces of extrinsic evidence.
After offering best practices for the use of these models given their limitations, we consider
their implications for judicial practice and contract theory. Using large language models per-
mits courts to estimate what the parties intended cheaply and accurately, and as such gener-
ative interpretation unsettles the current interpretative stalemate. Their use responds to ef-
ficiency-minded textualists and justice-oriented contextualists, who argue about whether
parties will prefer cost and certainty or accuracy and fairness. Parties—and courts—would
prefer a middle path, in which adjudicators strive to predict what the contract really meant,
admitting just enough context to approximate reality while avoiding unguided and biased
assimilation of evidence. As generative interpretation offers this possibility, we argue it can
become the new workhorse of contractual interpretation.
* Irving Silver Associate Professor, University of Alabama School of Law & William A. Schnader Professor,
University of Pennsylvania Carey School of Law. We thank participants at faculty workshops at Minnesota,
Penn, Texas A&M, and Yale, and Vince Buccola, Jon Choi, James Grimmelmann, Erik Knutset, Jeff Lipshaw,
Omri Ben-Shahar, David Stein, Kevin Tobia, Polk Wagner. Michael Hurley, Elizabeth Meeker and JD Uglum
for helpful research assistance
2

<<PAGE_BREAK>>

GENERATIVE INTERPRETATION
TABLE OF CONTENTS
I. CONTRACT INTERPRETATION AS PREDICTION ........................ 8
II. GENERATIVE INTERPRETATION ........................................................ 21
A. A Gentle Introduction to Large Language Models ........................... 24
B. LLMs as a Source of Contractual Meaning ........................................ 29
C. The Ambiguity Problem ........................................................................ 31
D. Filling Gaps .............................................................................................. 37
E. From Text to Context ............................................................................ 41
III. THE FUTURE OF CONTRACT INTERPRETATION ..................... 43
A. Interpretation for the 99%? .................................................................. 45
B. Beyond the Textualist/Contextualist Divide .................................... 54
CONCLUSION .......................................................................................................... 57
INTRODUCTION
When New Orleans’ levees broke during Hurricane Katrina, devastation, both hu-
man and economic, swept the city. And then came the lawyers. In mass contract litigation
by policyholders against their insurance companies, advocates fighting over tens of billions
of dollars of potential liability ultimately contested the meaning of a single word, represent-
ing a concept the companies had excluded from coverage: Flood.1 Plaintiffs labored first to
convince judges that flood might not mean water damage caused by humans, so they could
then prove to a factfinder that their insurance policies didn’t contemplate damage resulting
from negligence by the Army’s Corps of Engineers.2 Lawyers for the defense argued that the
1 In re Katrina Canal Breaches Litig., 495 F.3d 191, 199 (5th Cir. 2007) (“We will not pay for loss or damage
caused directly or indirectly by any of the following. Such loss is excluded regardless of any other cause or event
contributing concurrently or in any sequence to the loss. . . . Water . . . Flood, surface water, waves, tides, tidal
waves, overflow of any body of water, or their spray, all whether driven by wind or not . . . .”).
2 In re Katrina Canal Breaches Litig., 495 F.3d 191, 197, 199, 200–01, 203–04 (5th Cir. 2007); Brief for Ap-
pellee-Cross Appellant Humphreys at 16–18, In re Katrina Canal Breaches Litig., 495 F.3d 191 (5th Cir.
2007) (No. 07-30119), 2007 WL 4266576; Brief for Plaintiff-Appellee Xavier Univ. of La. at 17–44, In re
Katrina Canal Breaches Litig., 495 F.3d 191 (5th Cir. 2007) (No. 07-30119), 2007 WL 4266583; Brief of the
Chehardy Representative Policyholders in Response at 14–41, In re Katrina Canal Breaches Litig., 495 F.3d
191 (5th Cir. 2007) (No. 07-30119), 2007 WL 4266578. On the scope, source, and allocation of negligence
see ANDY HOROWITZ, KATRINA: A HISTORY, 1915-2015, 1–12, 128–33 (2020); see also Campbell Robert-
son & John Schwartz, Decade After Katrina, Pointing Finger More Firmly at Army Corps, N.Y. TIMES (May
23, 2015), https://www.nytimes.com/2015/05/24/us/decade-after-katrina-pointing-finger-more-firmly-at-
army-corps.html.
3

<<PAGE_BREAK>>

ARBEL & HOFFMAN
word was unambiguous in context, covering rising waters no matter their cause, and there-
fore no further factfinding was necessary.3 Here, as so often in real court proceedings, though
rarely in law school classrooms, expensive, cumbersome and unsatisfactory processes of con-
tract interpretation took center stage.4
After years of litigation, the Fifth Circuit—in the best-known and most consequen-
tial contracts case of the last generation5—held that flood was unambiguous: It meant any
inundation, regardless of cause.6 To get to that outcome, it engaged in the most artisanal and
articulated form of textualism available in late-stage Capitalism. The court consulted four
dictionaries, one encyclopedia, two treatises, a medley of for-and-against, in-and-out-of-ju-
risdiction cases, and two linguistic, latinized interpretative canons.7 That’s on top of the four
dictionaries and twenty reporter pages of caselaw analyzing the same problem in the district
court.8
Notwithstanding such expensive and extensive efforts, the court’s interpretation has
come under attack: its dictionary analysis was misleading,9 its canons badly deployed,10 and
3 In re Katrina Canal Breaches Litig., 495 F.3d at 208. Brief of Appellee State Farm Fire & Casualty Co. at 14–
26, In re Katrina Canal Breaches Litig., 495 F.3d 191 (5th Cir. 2007) (No. 07-30119), 2007 WL 2466572;
Brief of Appellee Allstate Ins. Co. & Allstate Indem. Co. at 16–37, In re Katrina Canal Breaches Litig., 495
F.3d 191 (5th Cir. 2007) (No. 07-30119), 2007 WL 4266556.
4 Benjamin E. Hermalin, Avery W. Katz & Richard Craswell, Contract Law, in 1 HANDBOOK OF LAW AND
ECONOMICS 3, 68 (A. Mitchell Polinsky & Steven Shavell eds., 2007) (noting that interpretation is the most
litigated type of contract dispute).
5 The opinion has been cited nearly 7,000 times over fifteen years, discussed in almost 2,000 secondary sources,
and is taught to 1Ls. See, e.g., IAN S. AYRES AND GREGORY M. KLASS, STUDIES IN CONTRACT LAW 701 (9TH
ED. 2017).
6 In re Katrina Canal Breaches Litig., 495 F.3d at 214–19 (“The distinction between natural and non-natural
causes in this context would . . . lead to absurd results and would essentially eviscerate flood exclusions when-
ever a levee is involved.”).
7 Id. at 210–19.
8 In re Katrina Canal Breaches Consolidated Litig., 466 F. Supp. 2d 729, 747–763 (E.D. La. 2006).
9 Natasha Fossett, What Does Flood Mean to You: The Louisiana Courts’ Struggle to Define in Sher v. Lafa-
yette Insurance Company, 37 S.U. L. REV. 289, 303–306 (2010) (arguing that flood as defined in Louisiana
Law had a narrower meaning than either the Fifth Circuit or the later Louisiana Supreme Court decision im-
plied).
10 Rachel Lisotta, In Over Our Heads: The Inefficiencies of the National Flood Insurance Program and the
Institution of Federal Tax Incentives, 10 LOY. MAR. L. J. 511, 523 (2012) (criticizing the court for not focusing
on the intent of the parties); Fossett, supra note 9, at 309–10 (arguing for use of the absurdity canon); Mark
R. Patterson, Standardization of Standard-Form Contracts: Competition and Contract Implications, 52 WM.
& MARY L. REV. 327, 356 (2010) (critiquing the Fifth Circuit for failing to address the significance of the
relevant policy being drafted by the Insurance Service Office); Eyal Zamir, Contract Law and Theory: Three
Views of the Cathedral, 81 U. CHI. L. REV. 2077, 2096 (2014) (critiquing the limited tools used by American
courts to regulate standard form contracts, as evidenced by the court’s narrow approach in the Katrina case).
2

<<PAGE_BREAK>>

GENERATIVE INTERPRETATION
some of the relevant legal authorities were in fact pro-plaintiff.11 Rather than reach a deci-
sion that followed from a constraining method, the Fifth Circuit (says its critics) merely
affirmed its pro-business priors.12 If textualism looks like another infinitely malleable and
justificatory practice in high stakes cases, what good is it? But textualism’s competitor,
kitchen-sink contextualism, has been in bad odor for two generations, at least for the sorts
of contracts that generally get litigated.13 Thus, contract jurists muddle along, looking for a
better, more convenient path.14
In this article we offer a new approach to determining contracting parties’ meaning,
which we’ll call generative interpretation.15 The idea is simple: applying large language
11 See, e.g., Sher v. Lafayette Ins. Co., 2007-CA-0757, 2007 WL 4247708 (La. App. 4th Cir. Nov. 19, 2001)
(finding flood ambiguous), reversed by Sher v. Lafayette Ins. Co., 07-2441, 988 So. 2d 186 (La. 4/8/08); Ebb-
ing v. State Farm Fire & Cas. Co., 1 S.W.3d 459, 462 (Ark. Ct. App. 1999) (holding flood excluded manmade
causes); cf. M & M Corp. of S.C. v. Auto-Owners Ins. Co., 701 S.E.2d 33 (S.C. 2010) (finding that rainwater
deliberately channeled on insured’s land was not flood water).
12 Willy E. Rice, The Court of Appeals for the Fifth Circuit: A Review of 2007–2008 Insurance Decisions, 41
TEX. TECH L. REV. 1013, 1039 (2009) (“[T]he Fifth Circuit has received some highly negative coverage in
newspapers for its pro-insurer, Katrina-related decisions . . . Without doubt, for those who believe the Fifth
Circuit is a ‘pro-insurer court,’ the discussions of the outcomes and opinions in those cases will do very little
to dispel that perception.”); Kenneth S. Abraham & Tom Baker, What History Can Tell Us About the Future
of Insurance and Litigation After Covid-19, 71 DEPAUL L. REV. 169, 189 (2022) (arguing that homeown-
ers‘ unwillingness to buy federal flood insurance helped motivate strict construction of their private contracts);
Thomas A. McCann, 5th Circuit Ruling: A Tough Pill to Swallow for Katrina Policyholders, 20 LOY. CON-
SUMER L. REV. 100 (2007); Becky Yerak, Insurers Win Key Katrina Ruling, CHICAGO TRIBUNE (Aug. 3,
2007), https://www.chicagotribune.com/news/ct-xpm-2007-08-03-0708020805-story.html (noting the ef-
fect on homeowners). To be clear, the earlier ruling came under even more scrutiny. See, e.g., Walter J. An-
drews, Michael S. Levine, Rhett E. Petcher & Steven W. McNutt, Essay, A ”Flood of Uncertainty”: Contrac-
tual Erosion in the Wake of Hurricane Katrina and the Eastern District of Louisiana’s Ruling in In Re Katrina
Canal Breaches Consolidated Litigation, 81 TUL. L. REV. 1277 (2006) (arguing that the District Court’s find-
ing that flood was ambiguous was wrong); Michelle E. Boardman, The Unpredictability of Insurance Inter-
pretation, 82 L. & CONTEMP. PROBS. 27, 41 n.45 (2019) (calling the District Court infamous and arguing
that the Fifth Circuit ruling was correct); Edward P. Richards, The Hurricane Katrina Levee Breach Litiga-
tion: Getting the First Geoengineering Liability Case Right, 160 U. PA. L. REV. 267 (2012) (arguing in support
of the Fifth Circuit ruling).
13 Lawrence A. Cunningham, Contract Interpretation 2.0: Not Winner-Take-All but Best-Tool-For-The-Job,
85 GEO. WASH. U. L. REV. 1625, 1628–31 (offering the history of contextualism versus textualism and noting
a rise in the latter starting in the early 1990s). But cf. 5 CORBIN ON CONTRACTS § 24.7 (2023) (noting a
“trend” toward abandoning plain meaning in some states).
14 Cunningham, supra, at 1633–43 (noting proposals to compromise between the two approaches).
15 For previous discussions of the use of large language models in contracts, see Ryan Catterwell, Automation
in Contract Interpretation, 12 L. INNOVATION & TECH. 81, 100 (2020) (early paper showing how infor-
mation can be extracted from contractual texts); Yonathan A. Arbel & Shmuel I. Becher, Contracts in the Age
of Smart Readers, 90 GEO. WASH. L. REV. 83 (2022) (arguing that language models could serve as “smart
3

<<PAGE_BREAK>>

ARBEL & HOFFMAN
models (LLMs) to contractual texts and extrinsic evidence to predict what the parties
would have said at contracting about what they meant.16 Our goal is to convince you that
generative interpretation avoids some of the problems that bedeviled the Fifth Circuit in its
Katrina litigation, while being materially more accessible and transparent. Giving courts a
convenient way to commit to a cheap and predictable contract interpretation methodology
would be a major advance in contract law, and parties may start to include them in their
choice-of-law repertoire. We argue that even today’s freshly-minted LLMs can be of service.
Convincing judges to forgo dictionaries and canons and adopt a chat tool best
known today for encouraging lawyers to submit fake authorities will be a tall order.17 We’ll
largely proceed by way of demonstrative case studies. Let’s start with the word flood. In the
Katrina case, the question was really whether the widely shared meaning of flood reasonably
excluded manmade disasters. To answer that question you could, as the court did, turn to
the traditional tools of High Textualism.18 Or you could survey insured citizens (if you could
identify them and avoid motivated answers).19 And you might even, if you were technically
sophisticated and patient enough, query a few relatively small databases and ask which words
in English generally tend to occur, or collocate, with flood in newspapers, books, and the
like.20
But we instead turned to a convenient, free, open-source LLM tool resting on a da-
tabase of trillions of words and asked it to transform words into complex vectors in a process
called embedding.21 As a first cut, this process can be thought of as trying to quantify how
much a word or phrase belongs to a given category, or dimension. Thus, if there is a
readers” of consumer contracts); Noam Kolt, Predicting Consumer Contracts, 37 BERK. TECH. L.J. 71 (2022)
(arguing that ChatGPT might be useful in helping consumers to understand their contracts and providing
examples).
16 Cf. Jonathan H. Choi, Measuring Clarity in Legal Texts, 91 U. CHI. L. REV. (forthcoming, 2024). Choi’s
excellent paper, though not focused on contract interpretation particularly, significantly advanced understand-
ing of how automated interpretative methods can aid factfinders. We build on his work technically by devel-
oping new ways of interacting with large language models and incorporating context and attention mecha-
nisms.
17 See infra at text accompanying notes 197–200 (discussing Mata v. Avianca, Inc., __ F.Supp.3d. __, 2023 WL
4114965 (June 22, 2023).); see also Ex Parte Allen Michael Lee, __. S.W.3d. __ , 2023 WL 4624777, at *1 n.2
(Ct. App. Tex. July 19, 2023) (explaining the court’s suspicion that counsel had filed briefs using ChatGPT
and had made up cases and citations).
18 For a related phrase, see Ryan Doerfler, LateStage Textualism, 2022 Sup. Ct. Rev. 267.
19 See Omri Ben-Shahar & Lior J. Strahilevitz, Interpreting Contracts via Surveys and Experiments, 92 N.Y.U.
L. REV. 1753 (2017) (proposing using surveys to interpret certain mass contracts).
20 See Stephen C. Mouritsen, Contract Interpretation with Corpus Linguistics, 94 WASH. L. REV. 1337, 1378
(2019) (proposing using corpus linguistics to interpret contracts).
21 For a survey of embedding methods, see MOHAMMAD TAHER PILEHVAR & JOSE CAMACHO-COLLADOS,
EMBEDDINGS IN NATURAL LANGUAGE PROCESSING 27–110 (2021).
4

<<PAGE_BREAK>>

GENERATIVE INTERPRETATION
dimension for the word water, fish will score higher than dogs. Using an interface we devel-
oped, we queried several models about the relation of the policy exclusion term relative to
words and phrases describing other potential sources of damage.22
Figure 1: Analysis of the cosine distance—a measure of distance for the numerical represen-
tation of terms (embeddings) by language models—between the exclusion clause ("We will
22 All of the code necessary to replicate these results, and the remaining ones in the paper, can be found at:
GITHUB, https://github.com/yonathanarbel/generativeinterpretation/tree/main (last visited Sep. 6,
2023).The exclusion term is the language contained at footnote 1, supra. Because embeddings are vectors in
high-dimensional space, we can measure the distance between them. This method has been used extensively in
the literature. See Choi, supra note 16, at 24–26 (using method and reports its usage and limitations.) For a
non-legal example, see e.g., Nitika Mathur, Timothy Baldwin & Trevor Cohn, Putting Evaluation in Context:
Contextual Embeddings Improve Machine Translation Evaluation, PROCEEDINGS OF THE 57TH ANNUAL
MEETING OF THE ASSOCIATION FOR COMPUTATIONAL LINGUISTICS 2799 (2019). We found that while re-
sults using this method seem sensible, they are also fragile. To create a more robust measure, we relied on the
embeddings of the ten top performing models today (found at https://huggingface.co/spaces/mteb/leader-
board on pair classification tasks) and used similar sentence structures. This approach is partly inspired by
Maria Antoniak & David Mimno, Evaluating the Stability of Embedding-based Word Similarities, 6 TRANS.
ASS'N FOR COMPUTATIONAL LINGUISTICS 107 (2018). We then calculated the cosine distance, normalized
it, and reported the results in the figure below. For an elaboration on the limitations of these techniques, see
infra notes 210-211 and accompanying text.
5

<<PAGE_BREAK>>

ARBEL & HOFFMAN
not pay for loss or damage caused directly or indirectly by . . . . Water . . . Flood . . . all whether
driven by wind or not . . .”) and various terms and phrases.
To read Figure 1, focus on the location of the red markers. The further they are from
the origin, the more distant the model considers the semantic relationship between the
phrases.23 In our view, the Figure offers immediately available, objective, cheap support for
the court’s judgment that floods can be unnaturally caused. Common sentences regarding
floods do not distinguish between the type of cause, but seem more focused on its typicality.
Our quality checks, flood caused by tears of joy or police, are indeed farther out than flood
caused by heavy rainfall or a severe storm.24 And while it supports this decision of the court,
it challenges another. Louisiana courts refused to exclude water main floods, even though
linguistically they appear to be as much of a flooding event as any other.25
Now, the model doesn’t provide (nor could it) a scientific answer to the question of
whether words are sufficiently close to make the plain meaning of flood unambiguous. But
there is a bit of difference between an informed conclusion based on a statistical analysis of
billions of texts and a judgment by a few dictionary editors. And there is an ocean of differ-
ence between the baroque and expensive textualism the court used and code that is cheap,
replicable, quick, and most importantly, extremely straightforward to use. Simply put, gen-
erative interpretation is good enough for many cases that currently employ more expensive,
and arguably less certain, methodologies. It's a workable, workmanlike method for a re-
source-constrained contract litigation world.
In Part I, we introduce the methodologies of contract interpretation and argue that
they badly fail at their core purposes of unbiased, accessible ascertainment of what the parties
would have wanted. In practice, interpretation operates as a kludgy prediction engine. Both
textualism and contextualism strive to estimate what the parties would have said on a matter,
accounting for realistic constraints of evidence and cost. But those constraints impose real
tradeoffs and can’t avoid legitimacy problems generated by courts’ motivated reasoning.26
23 The models we use here specialize in creating embeddings that can measure the semantic textual similarity
of sentences and words. For technical background, see Jianmo Ni, Gustavo Hernández Ábrego, Noah Con-
stant, Ji Ma, Keith B. Hall, Daniel Cer, and Yinfei Yang, Sentence-T5: Scalable Sentence Encoders from Pre-
trained Text-to-Text Models, arXiv:2108.08877 (2021)
24 It is telling that ‘fire,’ while having a wide distribution, is nearer to the origin than ‘tears of joy.’ A possible
reason is that the exclusion term references a number of harm-causing events, and given that fire is
25 Sher v. Lafayette Ins. Co., 2007-2441 (La. 4/8/08), 988 So. 2d 186, 195, on reh’g in part (July 7, 2008)
(“[I]nundation of property due to broken water mains . . . would not be excluded as a ‘flood.’”). In re Katrina
Canal Breaches Litig., 495 F.3d 191, 216 (5th Cir. 2007) (“Unlike a canal, a water main is not a body of water
or watercourse.”).
26 See supra note 12 (charging the Fifth Circuit with being pro-business).
6

<<PAGE_BREAK>>

GENERATIVE INTERPRETATION
We describe some modern proposed improvements on interpretation’s normal science and
suggest that however promising they are, concerns about usability and cost impair their real-
world utility.27
Part II is the heart of the Article. Here, we look at several types of interpretative
problems generated by real contracts that produced contracts opinions. These range from
the easy (what is the predicted meaning of a particular word?), to the hard (is there an am-
biguity?), to the metaphysical (what did the parties mean when they clearly hadn’t consid-
ered the issue?). In each example, we showcase new ways to use large language models to
sharpen intuitions about the parties’ presumed intent, to illuminate how transparent and
objective interpretative methodologies have advantages over intuitive ones, and to suggest
that generative interpretation has real promise as a judicial adjunct. The cases we run
through include casebook staples, like Trident Ctr. v. Connecticut Gen. Life Ins. Co.28 and
C & J Fertilizer, Inc. v. Allied Mut. Ins. Co.,29 as well as some that should be, like Famiglio
v. Famiglio,30 Haines v. City of New York,31 and Stewart v. Newbury.32 For many of these
cases, our work is based on archival research identifying original contract materials, until
now obscured by the judicial opinions that purportedly interpret them.
These case studies show how generative interpretation might be deployed in prac-
tice. As we will explore, the technology underlying large language models can do more than
merely help us see if flood is closer to levee than it is to joy. Dictionaries, encyclopedias, or
corpus linguistics can do that. What makes large language models powerful is the vastness of
the data they incorporate; what makes them unique is that they wield an internal mechanism
known as “attention” which allows them to account for to context. And by becoming con-
text sensitive, these models can parse the effects of contract text from the marginal value of
relevant extrinsic evidence
27 See infra notes 32–107 and accompanying text.
28 847 F.2d 564 (9th Cir. 1988). See, e.g., RANDY E. BARNETT & NATHAN B. OMAN, CONTRACTS: CASES
AND DOCTRINE 483 (7th ed. 2021); E. ALLEN FARNSWORTH, CAROL SANGER, NEIL B. COHEN, RICHARD
R.W. BROOKS & LARRY T. GARVIN, CASES AND MATERIALS ON CONTRACTS 560 (10th ed. 2023).
29 227 N.W.2d 169 (Iowa 1975). See Brian Bix, The Role of Contract: Stewart Macaulay’s Lessons from Prac-
tice, in REVISITING THE CONTRACTS SCHOLARSHIP OF STEWART MACAULAY: ON THE EMPIRICAL AND
THE LYRICAL 252 (Jean Braucher, John Kidwell & William Whitford eds., Hart Publishing, 2013) (describing
C&J and noting that it is often assigned in casebooks, including Stewart Macaulay’s and Charles Knapp’s).
30 279 So.3d 736 (Fla. Dist. Ct. App. 2019).
31 41 N.Y.2d 769 (1977). See also ROBERT S. SUMMERS, ROBERT A. HILLMAN AND DAVID A. HOFFMAN,
CONTRACT AND RELATED OBLIGATION: THEORY, DOCTRINE, AND PRACTICE 834 (8th ed. 2021).
32 220 N.Y. 379 (1917). See also SUMMERS ET AL., supra note 27, at 948.
7

<<PAGE_BREAK>>

ARBEL & HOFFMAN
But current practices about LLMs and their future uses are contingent: Lawyers
tend to use tools before they are theoretically sharp.33 In Part III, we develop a theory to
justify and constrain generative interpretation going forward, as the technology that enables
it continues to rapidly develop and its use by lawyers and judges grows explosively. We make
two claims.
First, the method fills a glaring need for a simple, transparent, and convenient way
to commit to an interpretative method that helps predict the parties’ intent. If courts follow
the set of best practices we describe, they will avoid certain access-to-justice and legitimacy
problems that have beset the modern contract litigation machine. Second, rather than
simply a marginal improvement over dictionary-and-canon textualism, or its negation as a
form of 1960s-California contextualism,34 use of artificial intelligence (AI) should prompt
a top-to-bottom reexamination of the assumptions justifying these approaches to interpre-
tation. As more courts commit to generative interpretation, parties may come to prefer con-
textual evaluation of meaning when their deals are evaluated, thus flipping a longstanding
default rule in contract law.35
We do consider some of the developing objections to the use of large language mod-
els, including their hallucinatory errors, biases, black-box methods, and the tension between
the rapidity of their deployment and stately needs of precedential decision-making. As we
show, generative interpretation’s dangers illustrate its limits: Judges will have to use these
engines as tools to excavate the normative judgments on which all interpretative and adju-
dicatory exercises rest. Large language models aren’t robot judges. What they will do (and
maybe are already doing) is help judges illuminate the degree to which we want to give the
parties what they really bargained for, as best as we can.
I. CONTRACT INTERPRETATION AS PREDICTION
Jurists interpreting contracts start with a simple question: “what would the parties
33 Consider originalism.
34 For defenses of contextualism, see Jeffrey W. Stempel & Erik S. Knutsen, Rejecting Word Worship: An
Integrative Approach to Judicial Construction of Insurance Policies, 90 U. CIN. L. REV. 561, 600–01 (2021);
Jeffrey W. Stempel, Unmet Expectations: Undue Restriction of the Reasonable Expectations Approach and
the Misleading Mythology of Judicial Role, 5 CONN. INS. L.J. 181, 183–84 (1998).
35 In some industries, the evidence that parties would prefer that later decisionmakers incorporate context is
robust. William Hoffman, On the Use and Abuse of Custom and Usage in Reinsurance Contracts, 33 TORT
& INS. L.J. 1, 3 (1997) (origin of nonintegrated contracts); William Hoffman, Facultative Reinsurance Con-
tract Formation, Documentation, and Integration, 38 TORT TRIAL & INS. PRAC. L.J. 763, 836–37 (2003)
(explaining why parties prefer custom).
8

<<PAGE_BREAK>>

GENERATIVE INTERPRETATION
have said about the meaning of a disputed phrase at the time they entered the contract?”36
That is, to “ascertain the parties’ intention at the time [the parties] made their contract.”37
As Alan Schwartz and Bob Scott noted in their canonical article, Contract Theory and the
Limits of Contract Law, this question in theory has a “correct answer.”38 In practice,
however, it is not always easy or possible to know what it is. Lacking a time machine,
adjudicators traditionally have stitched together an answer using imperfect evidence—a mix
of the contract’s text, the parties’ statements about the deal (whether from before, during,
or after its formation),39 market data,40 and some hunches about fairness and efficiency
under the circumstances.41
To put it another way, almost all jurists agree that the goal of contract
interpretation—its real ambition—is to be a prediction machine.42 That is, to look
36 Bruce v. Blalock, 241 S.C. 155, 161, 127 S.E.2d 439, 442 (1962) (“In construing the contract the Court will
ascertain the intention of the parties . . . as well as the purposes had in view at the time the contract was made.”).
37 STEVEN J. BURTON, ELEMENTS OF CONTRACT INTERPRETATION § 1.1, at 1.
38 Alan Schwartz & Robert E. Scott, Contract Theory and the Limits of Contract Law, 113 YALE L.J. 541, 568
(2003) (“There is a consensus among courts and commentators that the appropriate goal of contract interpre-
tation is to have the enforcing court find the ‘correct answer.’”); Alan Schwartz & Robert E. Scott, Contract
Interpretation Redux, 119 YALE L.J. 926 (2010). For criticisms, see Adam B. Badawi, Interpretive Preferences
and the Limits of the New Formalism, 6 BERKELEY BUS. L.J. 1 (2009); Shawn J. Bayern, Rational Ignorance,
Rational Closed-Mindedness, and Modern Economic Formalism in Contract Law, 97 CALIF. L. REV. 943
(2009); Robin Bradley Kar & Margaret Jane Radin, Pseudo-Contract and Shared Meaning Analysis, 132
HARV. L. REV. 1135, 1182–92 (2020) (arguing that sophisticated parties would not and do not prefer acon-
textual readings).
39 Stephen F. Ross & Daniel Trannen, The Modern Parol Evidence Rule and its Implications for New Textu-
alist Statutory Interpretation, 87 GEO. L.J. 195, 196–97 (1995) (noting disagreement between Williston and
Corbin on parol evidence).
40 JOHN BOURDEAU, PAUL M. COLTOFF, JILL GUSTAFSON, GLENDA K. HARNAD, JANICE HOLBEN, SONJA
LARSEN, LUCAS MARTIN, ANNE E. MELLEY, KARL OAKES, KAREN L. SCHULTZ & ERIC C. SURETTE, AMERI-
CAN JURISPRUDENCE § 219 (2nd ed. 2023) (“Under the Uniform Commercial Code, a course of dealing be-
tween the parties . . . may give particular meaning to, and supplement or qualify, terms of an agreement.”).
41 Omri Ben-Shahar, David A. Hoffman & Cathy Hwang, Nonparty Interests in Contract Law, 171 U. PA. L.
REV. 1095, 1017–1129 (2023) (describing courts use of public interests in interpreting contracts).
42 Schwartz & Scott, supra note 38, at 568 (noting “consensus” about the “appropriate goal”). There are excep-
tions. Eyal Zamir, for example, argues that interpretation should adhere to moral and social norms, partly be-
cause they are more likely to reflect the parties’ true intent, and partly because only those contracts are worth
enforcing. Cf. Eyal Zamir, The Inverted Hierarchy of Contract Interpretation and Supplementation, 97
COLUM. L. REV. 1710, 1777–88 (1997). Other common reasons to deviate from the parties’ intentions in-
clude attempts to incent clearer drafting, to share valuable information, and to facilitate standardization. See,
e.g., Ian Ayres, Default Rules for Incomplete Contracts, in 1 THE NEW PALGRAVE DICTIONARY OF ECONOM-
ICS AND THE LAW 585 (Peter Newman ed., 1998) (reviewing the economic theories for the design of default
rules). It is inevitable that the parties at times will choose not to think about a relevant possibility to minimize
transaction costs or permit a deal. Therefore, when we say that the goal is prediction, consider it the beginning,
rather than the end, of interpretation.
9

<<PAGE_BREAK>>

ARBEL & HOFFMAN
backward and predict what the parties would have said they meant.43 This seems
straightforward, akin to the retrospective intent-based inquiries we see in criminal law and
tort. Nonetheless, interpretation is “the least settled, most contentious area of
contemporary contract doctrine and scholarship.”44 That’s because of the many problems it
seeks to solve. As Greg Klass puts it, jurists ask (1) whose meaning counts, (2) what type of
meaning matters (local/majoritarian, semantic/pragmatic), and (3) what facts determine
the legally relevant meaning.45 These questions map, imperfectly, onto distinctions between
textualists and contextualists. And, at the bottom of the well, contractual interpretation
resolves questions of claims to judicial power, and thus legitimates violence.46 The result is
that parties contesting how to interpret contracts are sometimes arguing about what
outcomes are just, not merely which are more likely to lead to parties getting what they want.
But putting aside normative questions, even basic operational empirics about
interpretation—the prediction questions everyone agrees are at the core—are hard.
Prediction is difficult, and mistakes are inevitable. Accuracy—in the sense of thinking that
we really got as close as we could to knowing what the parties would have said—trades off
against cost and certainty. Efficiency-minded scholars have repeatedly argued that as the
amount of evidence offered to prove the parties’ contemporaneous-to-contracting meaning
increased, so does expense across several domains.47
As a first cut at that cost, consider that when parties are permitted to adduce addi-
tional sources of interpretative evidence, they also increase the range of defensible answers
from the tribunal. This means that it becomes harder to know what the factfinder will do—
their ability to choose unexpected meanings waxes with the evidentiary inputs.48 But worse,
43 In recent work one of us elaborates on the idea developed here of interpretation-as-prediction. See
Yonathan A. Arbel, Time and Contract Interpretation: Lessons from Machine Learning, in Research
Handbook on Law and Time (forthcoming 2024, Frank Fagan & Saul Levmore Eds.).
44 Ronald J. Gilson, Charles F. Sabel & Robert E. Scott, Text and Context: Contract Interpretation as Contract
Design, 100 CORNELL L. REV. 23, 25 (2014); Schwartz & Scott, Redux, supra note 38, at 928.
45 See Gregory Klass, Contracts, Constitutions and Getting the Interpretation-Construction Distinction
Right, 18 GEO. J. L. & PUB. POL’Y 13, 24–28 (2020).
46 See Robert M. Cover, Violence and the Word, 95 YALE L.J. 1601, 1601 (1986).
47 See generally Gregory Klass, Contract Exposition and Formalism, GEORGETOWN LAW FACULTY
PUBLICATIONS & OTHER WORKS 63 (2017), https://scholarship.law.georgetown.edu/facpub/1948/ (“The
more evidence one allows into interpretation, the less certain the outcome. The costs of such uncertainty in
the contractual setting can be especially high.”); Schwartz & Scott, supra note 38, at 580 (2003) (“Expanding
the evidentiary base is not costless, however. The parties, therefore, face a tradeoff between the efficiency of
increased accuracy and the inefficiency of increased contract-enforcement costs.”).
48 Klass, supra note 44 , at 63 (“A party that wants to organize its behavior . . . needs to be able to predict how
an adjudicator will later interpret that agreement. To the extent thicker interpretive rules reduce predictability,
10

<<PAGE_BREAK>>

GENERATIVE INTERPRETATION
both parties and factfinders are motivated in how they offer and process evidence.49 In a
regime that permits more evidence, parties will offer evidence that favors their view, some-
times unconsciously motivated to avoid presenting data that favors the other side;50 fact-
finders, equally subject to motivated cognition, will process new evidence in biased ways.51
At the same time, as the types of evidence relevant to contract interpretation become
more capacious, parties will seek to introduce more evidence at trial, raising the costs of
litigation.52 These costs may be significant, even in dispute resolution forums like arbitration
that are built to resolve cases quickly and cheaply.53 The interpretation arms race has led
scholars to model when parties would prefer to spend money ex ante on more specified text,
rather than spend ex post on litigation.54 That is, to pre-commit to methodologies which are
less accurate but more efficient.
This is all familiar territory. Now, consider what interpretative methodologies have
been on offer to calibrate between predictive accuracy and virtues that center around
certainty and efficiency. Like other legal extrapolative enterprises, interpretation has
they impose an additional cost . . . .”). {NOTE: the Klass cite is to his FORMALISM paper, not, as was cor-
rected in this round of edits, to CONTRACTS, CONSTITUTONS… See https://papers.ssrn.com/sol3/pa-
pers.cfm?abstract_id=2913620 }
49 Christoph Engel, Judicial Decision-Making. A Survey of the Experimental Evidence, MPI COLLECTIVE
GOODS DISCUSSION PAPER, No. 6. 5, (2022) (noting that even when decision makers are motivated to be
impartial, bias has been shown to sneak in inadvertently via race, gender, ideology, and the stereotype that
tattoos are typical for criminals.); Lawrence M. Solan, Terri Rosenblatt & Daniel Osherson, False Consensus
Bias in Contract Interpretation, 108 COLUM. L. REV. 1268, 1269 (2008) (explaining that “false consciousness
bias” may cause contracting parties not to recognize different interpretations of their agreement until litiga-
tion, at which point judges fall victim to the same bias).
50 Schwartz & Scott, supra note 38, at 607 (2003) (claiming that under standards allowing for recovery of
“commercially reasonable” costs and investments, parties would always claim their costs were higher and their
investments reasonable).
51 Solan, Rosenblatt & Osherson, supra note 49, at 108 (“Susceptibility to false consensus bias places judges
engaged in the interpretation of contractual language at risk of erroneous decisionmaking.”).
52 For some evidence on this process in the courts, see generally Lisa Bernstein, Custom in the Courts, 110 NW.
U. L. REV. 63 (2015) (showing that courts accept evidence of custom that isn’t systematic even in commercial
disputes).
53 Richard A. Posner, The Law and Economics of Contract Interpretation, 83 TEXAS L. REV. 1581, 1605–06
(2004) (arguing that commercial arbitration, where the arbitrator uses commercial common sense to predict
intent rather than asking the parties to present evidence, may be preferable when the written contract does not
make the parties’ intentions immediately clear because it allows the parties to avoid extra expenses).
54 Ronald J. Gilson, Charles F. Sabel & Robert E. Scott, Braiding: The Interaction of Formal and Informal
Contracting in Theory, Practice, and Doctrine, 110 COLUM. L. REV. 1377, 1391 n.35 (2010) (“If conditions
are unlikely to change much in the future (the level of uncertainty is low), and thus the ex-ante cost of writing
contract rules is low relative to the anticipated gains, the parties’ most cost-effective strategy is to write a com-
plex, rule-based contingent contract.”).
11

<<PAGE_BREAK>>

ARBEL & HOFFMAN
developed two basic methods to solve for the predictive question in the absence of the ability
to travel to the time of contracting.55 These methods, textualism and contextualism, are
represented in the real world by the courts in New York and California, respectively.56
New York’s textualist judges focus on the contract: They take its words as the
canonical source of the parties’ meaning and abjure other sources of evidence as predictive
grist. Textualists try to use the common sense meaning of words, using dictionaries to obtain
the public meaning of the words the parties chose, and grammatical and lexical tools to
understand how the words, when collated, create obligation.57 Textualism has known
advantages, including forcing the parties to think carefully about what they mean, and to use
contract words in ordinary ways.58 This ideological approach to contract interpretation
resembles that same concept in statutory and constitutional interpretation;59 though it is
less politically valanced, it is equally ascendent.60
The linguistic textualist project has long been controversial. To begin with, the
method of brute sense plain meaning primes judges to overconfidently believe that their
beliefs and conclusions are more common than they in fact are.61 As Arthur Corbin put it
long ago, “when a judge reads the words of a contract he may jump to the instant and
confident opinion that they have but one reasonable meaning and that he knows what it
55 John F. Manning, What Divides Textualists from Purposivists?, 106 COLUM. L. REV. 70, 75 (2006) (arguing
that textualism and purposivism remain meaningfully distinct modes of statutory interpretation); see generally
Eric A. Posner, The Parol Evidence Rule, the Plain Meaning Rule, and the Principles of Contractual Interpre-
tation, 146 U. PA. L. REV. 533 (1998) (defending textualist approaches in contract law).
56 Klass, supra note 45, at 29 (distinguishing New York and California archetypes).
57 Joshua M. Silverstein, Contract Interpretation Enforcement Costs: An Empirical Study of Textualism Ver-
sus Contextualism Conducted Via the West Key Number System, 47 HOFSTRA L. REV. 1011, 1014 (2019)
(“‘Textualist’ judges and commentators argue that the interpretation of contracts should focus primarily on
the language contained within the four corners of written agreements.”); Gilson, Sabel & Scott, supra note 54,
at 40 (“Textualist arguments accordingly focus on the insight that, for legally sophisticated parties who write
bespoke contracts, context is endogenous; the parties can embed as much or as little context into a customized
agreement as they wish, and they can do so in many different ways.”); Uri Benoliel, The Interpretation of
Commercial Contracts: An Empirical Study, 69 ALA. L. REV. 469, 472–73 (2017) (noting importance of am-
biguity).
58 Schwartz & Scott, supra note 38, at 572.
59 For a discussion of the differences between statutory and contract textualism, see William Baude & Ryan D.
Doerfler, The (Not So) Plain Meaning Rule, 84 U. CHI. L. REV. 539, 563–65 (2017). For an insightful argu-
ment that interest in contract interpretation has waned relative to statutory interpretation, see Karen Petroski,
Does it Matter What We Say About Legal Interpretation?, 43 MCGEORGE L. REV. 359, 382 (2019).
60 Ethan J. Leib, The Textual Canons in Contract Cases: A Preliminary Study, 2022 WIS. L. REV. 1109 (2022)
(studying the use of textualist canons in contract interpretation); J. Stempel & Knutsen, supra note 34, at 565–
66 (“In short, textualism has been resilient and ascendant in the 40 years of the post-Restatement era.”).
61 See infra at text accompanying notes 117–10.
12

<<PAGE_BREAK>>

GENERATIVE INTERPRETATION
is.”62 Empirical work—experimental63 and sociological64—has since found that judges doing
plain meaning analysis disagree with each other and with lawyers about things they thought
obvious.
Critics also charge textualists with incoherence about ambiguity.65 To reach the safe
shoals of plain meaning, textualists ask first if the language is unambiguous.66 But while tex-
tualism provides tools to discover ambiguities, in practice, critics charge, it fails to prioritize
one plausible interpretation over the other. It appears to simplify interpretative disputes, but
in reality sometimes facilitates expensive, biased battles over extrinsic evidence.67
But even outside of ambiguity, textualism’s basic methodological tools are
remarkably underdeveloped. Scholars often blame the humble dictionary.68 Courts doing
62 ARTHUR LINTON CORBIN, CORBIN ON CONTRACTS § 535 (rev. ed. 1960)
63 Solan, Rosenblatt & Osherson, supra note 49, at 1285–94 (finding that we overestimate our sense of whether
others will agree about contract interpretation).
64 John F. Coyle, The Canons of Construction for Choice-of-Law Clauses, 92 WASH. L. REV. 631, 682–87
(2017) (showing that in the absence of a systematic survey, judges can interpret contract language in ways that
conflict with the parties’ intentions).
65 See Lawrence M. Solan, Pernicious Ambiguity in Contracts and Statutes, 79 CHI-KENT L. REV. 859, 859
(2004) (describing problems with the concept of ambiguity).
66 11 Williston on Contracts § 33:43 (4th ed.) (“When patent ambiguities are found by a court that adheres to
the traditional distinctions, they will be resolved by the rules of interpretation or not at all.”). Those supposed
rules of interpretation reference § 30:4, where they turn out to combine extrinsic evidence, contract purpose,
and rules of construction.
67 Ward Farnsworth, Dustin F. Guzior & Anup Malani, Ambiguity About Ambiguity: An Empirical Inquiry
into Legal Interpretation, 2 J. LEGAL ANALYSIS 257, 271 (2010) (arguing that policy preferences drive ambi-
guity) (statutory); Schwartz & Scott, supra note 38, at 570 n.55 (“Courts seldom distinguish between ‘vague’
and ‘ambiguous’ terms . . . . More narrowly, however, a word is vague to the extent that it can apply to a wide
spectrum of referents, or to referents that cluster around a modal ‘best instance,’ or to somewhat different
referents in different people.”).
68 Thomas R. Lee & Stephen C. Mouritsen, Judging Ordinary Meaning, 127 YALE L.J. 788, 801, 810–11
(2018) (identifying several problems with dictionaries, including their failure to define words in terms of “pro-
totypes” and the inconsistency of definitions across dictionaries); Stephen C. Mouritsen, The Dictionary Is
Not a Fortress: Definitional Fallacies and a Corpus-Based Approach to Plain Meaning, 5 B.Y.U. L. REV. 1915,
1919 (2010) (describing “widely shared” false views about dictionaries); Lawrence Solan, When Judges Use
Dictionaries, 68 AM. SPEECH 50, 50 (1993) (“[W]e commonly ignore the fact that someone sat there and
wrote the dictionary, and we speak as though there were only one dictionary, whose lexicographer got all the
definitions ‘right’ in some sense that defies analysis.”); Samuel A. Thumma & Jeffrey L. Kirchmeier, The Lex-
icon Has Become A Fortress: The United States Supreme Court's Use of Dictionaries, 47 BUFF. L. REV. 227,
276 (1999) (“[A]s with the other steps in the Court's general process of using dictionaries, selecting a specific
definition for a term can be problematic, at times appears to lack principled guidance and can determine the
outcome of a case.”).
13

<<PAGE_BREAK>>

ARBEL & HOFFMAN
textualism are sometimes reversed for failing to use one.69 But it’s an imprecise tool for
discerning the parties’ intent at the drafting stage. Selecting between dictionaries is a value-
laden act,70 and even within a single volume, dictionaries do not provide a single plain, or
majoritarian, meaning of words.71 Critically, dictionary definitions are blind even to internal
context, those other parts of the document or statute that textualists do embrace.72 As Kevin
Tobia demonstrated, definitions can be poor trackers of actual usage, a point well
understood by anyone not adding tomatoes to a fruit salad.73
Dictionary-thumping jurists face two opposing critiques: They bind themselves too
much,74 but also too little.75 The first strips the judicial process of its nuanced nature, the
latter breeds gamesmanship and bias.76 This critique is (to be fair) a little overheated. Sure,
judges take dictionaries seriously,77 but they also freely admit that dictionaries are not “in-
fallible.”78 Even Learned Hand cautioned, “it is one of the surest indexes of a mature and
developed jurisprudence not to make a fortress out of the dictionary.”79 Dictionaries are nor-
mally under-determinative of outcomes, and this is a virtue rather than a vice. As we shall
claim, this virtue is equally shared by generative interpretation.
Similarly, the canons of interpretation themselves are difficult to defend
69 Lorillard Tobacco Co. v. Am. Legacy Found., 903 A.2d 728, 738 (Del. 2006) (reversing for failure to follow
dictionary).
70 Lee & Mouritsen, supra note 68, at 807 (“A common use of a dictionary involves simple cherry-picking.”).
71 Id. at 810–11 (“We cannot tell from the opinion whether the written translator sense of interpreter is less
often listed in a real ‘survey’ of dictionaries because we are not presented with an actual survey of dictionaries.”).
72 11 WILLISTON ON CONTRACTS § 32:5 (4th ed.) (“A contract will be read as a whole and every part will be
read with reference to the whole”); Bradley C. Karkkainen, "Plain Meaning:" Justice Scalia's Jurisprudence of
Strict Statutory Construction, 17 HARV J. L. & PUB. POL’Y. 401, 407 (1994).
73 Kevin P. Tobia, Testing Ordinary Meaning, 134 HARV. L. REV. 726, 797-99 (2020).
74 Nicholas S. Zeppos, Judicial Review of Agency Action: The Problems of Commitment, Non-Contractability
and the Proper Incentives, 44 DUKE L.J. 1133, 1143 (1995) (“fanatical” devolution to dictionaries).
75 See Mouritsen, supra note 35, at 1930. (critiquing dictionaries as weak source of plain meaning and for the
absence of context); Jordan v. De George, 341 U.S. 223, 234 (1951) (Jackson, J., dissenting) (calling diction-
aries “the last refuge of the baffled judge”).
76 Lee & Mouritsen, supra note 68, at 798 (“The concern here is that even if we could settle on a theory of
ordinary or plain meaning, we are unsure how to assess it.”).
77 See, e.g., Matter of the Liquidation of Am. Mut. Liab. Ins. Co., 802 N.E.2d 555 (2004) (“Normally, a dic-
tionary definition of a term is strong evidence of its common meaning.”); see also Brigade Leveraged Cap.
Structures Fund Ltd. v. PIMCO Income Strategy Fund, 995 N.E.2d 64, 69 (2013).
78 Cyprus Plateau Min. Corp. v. Commonwealth Ins. Co., 972 F. Supp. 1379, 1384 (D. Utah 1997) (“Diction-
aries, while not infallible (or even consistent), are general guides to common usage.”).
79 Cabell v. Markham, 148 F.2d 737 (2d Cir. 1945).
14

<<PAGE_BREAK>>

GENERATIVE INTERPRETATION
empirically.80 These canons are traditionally known by their evocative Latin names—in pari
materie, expressio unius est exclusio alterius, ejusdem generis, contra proferentem, generalia
specialibus non derogant—and they are used to fill dictionaries’ gaps.81 They try to address
the problem of context by giving heuristics to parse the parties’ proffered meanings.82
Popular with judges but absent from the Restatement,83 scholars criticize them as essentially
ad hoc.84 There is no obvious way to know what to do when different canons lead to
different outcomes, meaning that they offer the same kinds of degrees of freedom as
dictionaries do.
Nor is it clear that the contractual linguistic canons are rooted in how parties think
or write.85 The extant empirical work on linguistic canons in statutory interpretation
suggests that the answer is: they might be, but only some of the time.86 Now, to be sure, some
of the canons, like contra proferentem, aren’t intended to replicate how the parties would
80 Farshad Ghodoosi & Tal Kastner, Big Data on Contract Interpretation, U.C. DAVIS L. REV. 1, 58 (forth-
coming 2024) (highlighting the issue of precedent around the use of canons being deployed without regard to
the context in which the precedent arose); Leib, supra note 60, at 1110 (“Few scholars or lawyers believe they
are applied consistently enough to be reliable in predicting case outcomes . . . .”).
81 See generally Edwin Patterson, The Interpretation and Construction of Contracts, 64 COLUM. L. REV. 833,
852–55 (1964) (identifying canons of contract interpretation).
82 The canons of contract interpretation are to be distinguished from the canons of construction in statutory
interpretation. As Ryan Doerfler has explored, those canons have been subject to a rehabilitative project over
the last generation. Ryan D. Doerfler, Late-Stage Textualism, 2022 SUP. CT. REV. 267, 269 (2022). Of course,
the contra proferentem doctrine particularly is not necessary effecting intent, but may instead by motivating
clear drafting. See generally Daniel Schwarcz, The Role of Courts in the Evolution of Form Contracts: An
Insurance Case Study, 46 BYU L. REV. 471 (2021) (making this argument in the context of insurance con-
tracts)
83 Ethan J. Leib, The Textual Canons in Contract Cases: A Preliminary Study, 2022 WIS. L. REV. 1109, 1112
(2022) (“Yet the Restatement does not treat the textual canons like expressio unius, ejusdem generis, or nosci-
tur a sociis at all”); Ghodoosi & Kastner, supra note 80, at 48 (“While substantive canons have remained
roughly in equilibrium over time, the chart below demonstrates a trend in which the invocation of textual
canons by courts across contract cases is increasing.”).
84 Karl N. Llewellyn, Remarks on the Theory of Appellate Decision and the Rules or Canons about How Stat-
utes Are to Be Construed, 3 VAND. L. REV. 395, 401 (1950) (“there are two opposing canons on almost every
point”).
85 Gregory Klass, Interpretation and Construction in Contract Law 48 (2018), https://pa-
pers.ssrn.com/sol3/papers.cfm?abstract_id=2913228 (“Rules of construction are only sometimes pragmati-
cally prior to contract interpretation, but not always and not pervasively.”).
86 Kevin Tobia, Brian Slocum, & Victoria Nourse, Statutory Interpretation from the Outside, 122 COLUM. L.
REV. 213, 241–43, 262 (2022) (finding that some linguistic canons are stated overbroadly or inaccurately but
many canons do reflect the intuitive judgment of ordinary people); Kevin Tobia & Brian G. Slocum, The Lin-
guistic and Substantive Canons 23 (2022), https://papers.ssrn.com/sol3/papers.cfm?abstract_id=4186956
(“providing evidence that some interpretive canons that are traditionally motivated by normative values also
have a basis in language”); Janet Randall and Lawrence Solan, Legal Ambiguities: What Can Psycholinguistics
Tell Us?, available at https://papers.ssrn.com/sol3/papers.cfm?abstract_id=4475356 (comparing canons).
15

<<PAGE_BREAK>>

ARBEL & HOFFMAN
have understood the contract at drafting (if that has a stable meaning in contracts deployed
to millions of adherents). These normative canons may, or may not, relate to the parties’
contemporaneous intentions.87 But other canons are intended to reflect ordinary uses of
language, and yet have been subject to remarkably little controlled scrutiny.88
Notwithstanding its methodological shortcomings, contract textualism is ever more
popular.89 That’s so for a whole host of reasons, but none more so than the weakness of its
main conceptual rival: contextualism. This familiar alternative starts with the same premise
as textualism: What would the parties have said they meant had we asked them at the time
of contracting? But contextualism invites parties to offer extrinsic evidence to build depth
into the predictive analysis. By doing so, contextualism seeks to privilege accuracy—the
parties’ real intended meaning.
This approach to interpretation, capacious in the types of evidence considered
relevant, found its heyday in the 1960s in California and has never been as popular since.90
The problem with the approach, according to its critics, is that it does not permit the parties
to know what meaning a court will assign to the words they write, since the other side can
always offer self-serving meanings ex post and, if believable enough, write a new bargain in
court to replace the one drafted in the past.91 Even contextualism’s origin story is one of a
party suddenly remembering that they actually meant to make the purchase option available
only to family members, creditors be damned.92 Contextualism makes it difficult to lock
down meaning ex ante, through merger clauses and the like, which are always subject to later
testimonial refutation. Contextualism’s consumer protection allure is understandable.93 But
87 Christopher J. Walker, Legislating in the Shadows, 165 U. PA. L. REV. 1377, 1404 (2017) (arguing that
“contra proferentem” is not a method by which the true intent of the parties is determined, but rather, is a
decision to impose the burden of ambiguity on the drafter).
88 Ross & Tranen, supra note 39, at 226 (“Descriptive canons are based on the way ordinary people express
themselves in English.”).
89 Ghodoosi & Kastner, supra note 80, at 49 (“our study provides evidence that textualism is on the rise in
contract interpretation.”); Aaron D. Goldstein, The Public Meaning Rule: Reconciling Meaning, Intent, and
Contract Interpretation, 53 SANTA CLARA L. REV. 73, 77 (2013) (arguing that courts have increasingly moved
away from the use of extrinsic evidence to help them understand the parties’ intent, leaning instead on “objec-
tive” manifestations of intent); Mark L. Movsesian, Formalism in American Contract Law: Classical and Con-
temporary, 12 IUS GENTIUM 115 (2006) (“It is a truth universally acknowledged, that we live in a formalist
era. At least when it comes to American contract law.”).
90 See Pac. Gas & Elec. Co. v. G. W. Thomas Drayage & Rigging Co., 442 P.2d 641 (Cal. 1968); see also Mas-
terson v. Sine, 436 P.2d 561 (Cal. 1968).
91 Masterson, 68 Cal. 2d at 231 (Burke, J., dissenting).
92 Id.
93 Olah v. Ganley Chevrolet, Inc., 2010-Ohio-5485, ¶ 15, 191 Ohio App. 3d 456, 460, 946 N.E.2d 771, 774
(holding that buyers of a vehicle are barred from presenting evidence that the car was represented by the dealer
as new because the contract says the vehicle is used).
16

<<PAGE_BREAK>>

GENERATIVE INTERPRETATION
even if contextualism could offer more accuracy, critics charge it does so at a high cost.94
Indeed, scholars often defend textualism on efficiency grounds.95 Though it may be
unclear what parties want interpretative rules to be, it’s almost certainly the case that lawyer-
drafters prefer textualist to contextualist modes of decision. Eric Posner captures the idea
well: Parties will often include an explicit merger clause, but few ever bother with an “anti-
merger clause.”96 Thus, from the perspective of the litigated cases—those between rich and
lawyered parties—contextualism is simply harder to defend.
And yet, from a certain perspective, contextualism seems well-positioned for a
revival. Recall that even contextualism’s critics agree about first-order goal: to figure out
what the parties would have meant at contracting. The problems with contextualism are
largely centered around motivated testimony and cost, which persuades the factfinder to
ignore the text. But consider: We increasingly live in a world where our thoughts are
recorded contemporaneously, whether sent by text, posted on social media, or recorded on
TikTok. Such recorded, immutable utterances are cheap to reproduce and appear to courts
to be excellent sources of contractual meaning.97 Defenders of textualism may argue that
permitting their use creates uncertainty, but some of the best arguments against
94 An admittedly limited survey of enforcement costs did not find meaningful differences between textualist
approaches and contextualists ones. See Silverstein, supra note 57. For an argument that textualism produces
higher enforcement costs because of the judge-by-judge variation in outcomes produces more litigation, see 6
PETER LINZER, CORBIN ON CONTRACTS § 25.14[B] at 163 (Joseph M. Perillo ed., rev. ed. 2010).
95 Schwartz & Scott, Redux, supra note 38, at 928 & n.3 (2010) (“A strong majority of U.S. courts continue to
follow the traditional, ‘formalist’ approach to contract interpretation”). But see Joshua M. Silverstein, Con-
tract Interpretation and the Parol Evidence Rule: Toward Conceptual Clarification, 24 CHAP. L. REV. 89, 92
(2020) (arguing that the matter is indeterminate); Silverstein, supra note 57, at 1020 (“contracts scholars can
also generally be split into textualist and contextualist camps, with a clear majority falling into the latter
group”). There is recent evidence that contract scholars prefer contextualism. Eric Martinez & Kevin Tobia,
What Do Law Professors Believe About Law and the Legal Academy, 112 GEO. L. REV. 42 (forthcoming
2023).
96 Eric A. Posner, The Parol Evidence Rule, the Plain Meaning Rule, and the Principles of Contractual Inter-
pretation, 146 U. PA. L. REV. 533, 571 (1998). As Larry Solan later pointed out, merger clause analogs in stat-
utory interpretation “are not easy to find.” LAWRENCE M. SOLAN, THE LANGUAGE OF STATUTES: LAWS AND
THEIR INTERPRETATION 187 (Chicago 2010).
97 See BrewFab, LLC v. 3 Delta, Inc., No. 22-11003, 2022 WL 7214223, at *1 (11th Cir. Oct. 13, 2022) (af-
firming that a party’s text message was a personal guaranty that satisfied Florida’s statute of frauds); see also
Cloud Corp. v. Hasbro, Inc. 314 F.3d 289, 295 (7th Cir. 2002) (finding that a party’s e-mails satisfied the
UCC’s statute of frauds and using these as evidence in support of the claim that the contract had been modi-
fied); see also Cosby v. Am. Media, Inc., 197 F. Supp. 3d 735, 744 (E.D. Pa. 2016) (holding that tweets may
form the basis of a breach of contract claim).
17

<<PAGE_BREAK>>

ARBEL & HOFFMAN
contextualism—that it can be abused ex post—are weaker than they used to be.98 And yet,
we lack a method to know which excited utterances to privilege, and we should worry that
courts’ motivated reading will cause them to come to inaccurate or biased understandings.
The debate between textualism and contextualism is old, and scholars have offered
various theoretical lenses by which one or the other approach ought to prevail.99 Most
arguments for or against extrinsic evidence turn on hypotheses about what parties would
have wanted (had we asked them) and which methods promote social welfare. These
arguments are often theoretically rich but empirically poor.100
More recently, scholars have offered two new methods, both advancing the certainty
values of textualism with a dash of the accuracy interests of contextualism. One school
focuses on the use of corpora of words to predict the meaning of phrases in contractual
texts—so-called corpus linguistics.101 To take the prototypical example, consider the
following phrase taken from an insurance contract:
[T]his insurance does not apply to ‘bodily injury’ [including death] to any person
while practicing for or participating in any sports or athletic contest or exhibition
that you sponsor.102
An insured dies while snorkeling: Is that a “sports or athletic contest”? As Stephen
Mouritsen observes, the question is not easily answerable using the classic dictionary-and-
canon based tools of textualism. And, considering that insurance contracts are drafted by
powerful firms, who subject them to regulatory scrutiny, the idea of using extrinsic expres-
sions by either firms or the insured seems hopeless.103 Instead, Mouritsen suggests that courts
could (helped by adversarial presentation by parties) query language databases to establish
whether sports and snorkeling appear relatively close to each other in some number of pre-
vious examples. That is, to derive the meaning of the word from its common use in previous
98 Cf. Shawn Bayern, Contract Meta-Interpretation, 49 U.C. DAVIS L. REV. 1097, 1136 (2016) (pointing out
that because text messages are informal, they don’t satisfy some of the deliberation-inducing virtues that tex-
tualists would otherwise place in written products).
99 See Ross & Tranen, supra note 39, at 196–97; see also Joshua M. Silverstein, The Contract Interpretation
Policy Debate: A Primer, 26 STAN. J.L. BUS. & FIN. 222 (2021); see also Mark L. Movsesian, Severability in
Statutes and Contracts, 30 GA. L. REV. 41, 70 n.184 (1995) (noting that the popularity of the major interpre-
tive approaches “ebbs and flows”).
100 Silverstein, supra note 57, at 1014 (“The textualist/contextualist controversy cannot be resolved in the ab-
stract. . . . Unfortunately, empirical evidence bearing on this debate is sorely lacking.”).
101 See generally Mouritsen, supra note 20, at 1360–1407 (making case).
102 Id. at 1340.
103 Christopher C. French, Insurance Policies: The Grandparents of Contractual Black Holes, 67 DUKE L.J.
ONLINE 40 (2017) (discussing the difficulty of interpreting insurance contracts for evidence of real meaning).
18

<<PAGE_BREAK>>

GENERATIVE INTERPRETATION
texts. (The answer is, more or less, that sports are rule-based competitions, while snorkeling
is swimming wearing a goofy mask.)104
Corpus linguistics is an advance over traditional textualism or contextualism. It pro-
vides a methodology that theoretically allows courts to adhere to an objective set of responses
when determining the ordinary meaning of words based on their actual usage. Essentially,
it’s a form of textualism that doesn’t rely on dictionary definitions or a battery of canons. It
mirrors not the static decisions of lexicographers in their secluded, book-filled offices, but
rather the public use of words—democratized textualism.105
But corpus linguistics is inattentive to context.106 It can only really compare brief
snippets of text, rather than whole documents. Thus, although the method has been repeat-
edly used in statutory interpretation cases—where the stakes are high, parties are commonly
engaged in interpretative battles over short phrases—only one contracts opinion to date has
applied the method.107
A different constraining approach, advanced by Omri Ben-Shahar and Lior Strahi-
levitz, encourages courts to use survey evidence to decide on the public meaning of certain
contractual texts.108 As they point out, this survey evidence is a second best to the predictive
ideal we described above:
Contracts should have the meaning that the parties to the transaction assign
to the text. [But] it is pointless to ask the actual parties in the litigation what
the text meant to them when they formed the contract, because they will
104 Mouritsen, supra note 20, at 1371–74 (CL approach to snorkeling).
105 For an extended defense, see Jeffrey W. Stempel and Erik S. Knutsen, Technologically Improving Textual-
ism," 6 Nevada Law Journal Forum 10 (2022).
106 See Choi, supra note 16, at 8, 16–17 (arguing that the context “undermines the core claim of corpus lin-
guistics”).
107 See Fulkerson v. Unum Life Insurance Co. of America, 36 F.4th 678 (6th Cir. 2022); see also Richards v.
Cox, 450 P.3d 1074, 1085–86 (Utah 2019) (Lee, J., concurring) (concurring in majority opinion “to the ex-
tent it relies on corpus linguistic analysis” to support constitutional and statutory interpretation). Cf. Wilson
v. Safelinte Group, Inc. 930 F.3d 429, 439 (6th Cir. 2019) (arguing for use of CL in statutory analysis); Caesars
Entm't Corp. v. Int'l Union of Operating Eng’rs Local 68 Pension Fund, 932 F.3d 91, 95 n.1 (3d Cir. 2019)
(using corpus linguistics to interpret “previously”).
108 Ben-Shahar & Strahilevitz, supra note 19; Ian Ayres & Alan Schwartz, The No-Reading Problem in Con-
sumer Contract Law, 66 STAN. L. REV. 545 (2014) (advocating empirical testing to identify surprising and
problematic provisions in standard form contracts, against which consumers ought to be warned); Ariel Porat
& Lior Jacob Strahilevitz, Personalizing Default Rules and Disclosure with Big Data, 112 MICH. L. REV. 1417,
1419–20 (2014) (advocating the use of surveys to identify the majoritarian preferences for the design of gran-
ular default rules).
19

<<PAGE_BREAK>>

ARBEL & HOFFMAN
bend their answers to fit their litigation goals. So the law should instead ask
disinterested people just like them.109
The authors defend this interesting proposal against various charges.110 Their core
survey case is consumer contracts designed for mass audiences.111 There, the survey audience
and the original adherents are the same people (although separated by time), and we should
have fewer worries about the parties intending idiosyncratic meanings.112 But outside of that
frame, a problem with the survey approach is that for most litigated contract cases—i.e.,
commercial cases—the relevant survey audience will be difficult to find, as sophisticated ad-
herents don’t take surveys, or will game them, producing the same problems encumbering
contextualism.113
Survey evidence is also an expensive adjudicatory technology. Surveys themselves are
difficult to conduct: Judges would need to rely on their adversarial presentation in the ordi-
nary case. And they are increasingly unreliable: Recent work has found that almost a third
of online survey respondents use LLMs to complete answers.114 Surveys based on more col-
lated samples face the same sorts of problems that have bedeviled modern polling: Nonre-
sponse bias among parts of the population, difficulties of generalization, and inaccuracy.
And even here, attention is scarce. It is hard to survey consumers on a twenty-page policy or
to expect anyone filling out a survey for a $5 gift card to attentively consider interdependen-
cies within the contract.
Consequently, though survey methodology is an established technique in trademark
cases and could very well be of enormous help in making sense of the meaning of certain
consumer contracts, it is unlikely to be a transformative technology in the ordinary contract
interpretation case. We are unaware of any cases to date that permit the use of survey evi-
dence to determine contractual meaning.
* * *
109 Ben-Shahar & Strahilevitz, supra note 19, at 1802.
110 Id. at 1802–13 (making the case).
111 Id. at 1758 (noting focus on consumer contracts).
112 Id. at 1776–77 (noting the utility of surveys for consumer contracts on these grounds).
113 Cf. Roberts v. Farmers Ins. Co., 201 F.3d 448 (10th Cir. 1999) (“[W]hat the public expects from an insur-
ance policy is simply not relevant to the legal question of whether the contract is ambiguous.”).
114 Veniamin Veselovsky, Manoel Horta Ribeiero & Robert West, Artificial Artificial Artificial Intelligence:
Crowd Workers Widely Use Large Language Models for Text Production Tasks, ARXIV:2306.07899 (2023),
https://arxiv.org/abs/2306.07899 (noting that 33–46% of mTurk survey workers use LLMs to complete
tasks).
20

<<PAGE_BREAK>>

GENERATIVE INTERPRETATION
In summary, notwithstanding broad agreement about the predictive goal of inter-
pretation, there’s also a shared sense that there’s something amiss in how jurists balance ac-
curacy and efficiency. Textualism promises the latter, but in practice it often merely super-
charges the judge’s own overconfident priors. Contextualism promises the former, but prob-
ably doesn’t deliver it, while eroding parties’ ability to plan for court outcomes and making
litigation prohibitively expensive for all but the wealthiest parties. The two most sophisti-
cated modern improvements on these old technologies—statistical plain meaning and sur-
vey evidence—promise to rescue textualism from some of its sins, but haven’t been taken up
in live cases.
Enter large language models.
II. GENERATIVE INTERPRETATION
The doctrine of reasonable expectations plays a contested role in the regulation
of insurance contracts.115 For some courts, the insured’s reasonable expectations trump
the insurance contract’s terms, while for many others, the policy’s plain language should
control.116 Notoriously, these sorts of cases motivate armchair speculation by judges—
whose life experience, education, sophistication, and hard-earned cynicism systematically di-
verge from most lay people. Worse, the interpretations we give words appear very certain in
our own minds. Contract interpretation is a prime subject for a phenomenon psychologists
call “false consensus bias.”117 To illustrate the effect, Lawrence Solan, Terry Rosenblatt and
Daniel Osherton presented contract interpretation questions to both laypeople and judges.
After giving their opinion, the authors asked subjects to estimate how many other partici-
pants would agree with them. This design allows us to compare the actual distribution of
answers with how people expected the distribution to look. The results were striking: Both
115 See generally Jeffrey W. Stempel, Unmet Expectations: Undue Restriction of the Reasonable Expectations
Approach and the Misleading Mythology of Judicial Role, 5 CONN. INS. L.J. 181 (1998).
116 Restatement of Liability Insurance, Section 3 (nothing the plain meaning approach is typically followed
instead of cases like C&J). As Dan Schwartz has explored, the doctrine is unpredictable when applied in real
cases. See Daniel Schwarcz, A Products Liability Theory for the Judicial Regulation of Insurance Policies, 48
Wm. & Mary L. Rev. 1389 (2007).
117 Joachim Krueger & Russell W. Clement, The Truly False Consensus Effect: An Ineradicable and Egocen-
tric Bias in Social Perception, 67 J. PERSONALITY & SOC. PSYCHOL. 596, 596–97 (1994); Brian Mullen, Jen-
nifer Atkins, Debbie S. Champion, Cecelia Edwards, Dana Hardy, John E. Story & Mary Vanderklok, The
False Consensus Effect: A Meta-Analysis of 115 Hypothesis Tests, 3 J. EXP. SOC. PSYCH. 262 (1985)(provid-
ing a meta-analysis of false consensus effect).
21

<<PAGE_BREAK>>

ARBEL & HOFFMAN
laypeople and judges overestimated how common their chosen interpretations were. Judges
even overestimated how much other judges would agree with them.118
Thus, one of the risks of introspective interpretation is that its products are very
sticky and hard to dislodge. This leads to dissent and reversal, and of course, interpretation
that defies parties’ reasonable expectations. Uncertainty about common interpretation is an
appealing case for the use of surveys.119 And surveys would be of great interpretative use,
were it not for the practical difficulties which we’ve just discussed.
Consider C & J Fertilizer v. Allied Mutual.120 The president of C&J, a fertilizer firm,
purchased a burglary insurance policy from Allied Mutual. The discussions preceding the
purchase made it clear that the policy would not cover an inside job. The insurance firm in
the negotiations tried to insist that to bring a claim, C&J would have to present hard evi-
dence that a theft was made by a stranger.121 That idea was embodied in the following prom-
ise in the insurance contract:
[Allied will pay for] the felonious abstraction of insured property (1) from
within the premises by a person making felonious entry therein by actual
force and violence, of which force and violence there are visible marks made
by tools, explosives, electricity or chemicals . . . .122
As it turns out, a burglar robbed the fertilizer plant with style. While leaving some
tread marks in the mud, he avoided leaving any other visible signs before absconding with
$50,000 worth of fertilizer. The insurance company, denying the claim, argued that by its
plain language, the absence of visible marks made by tools (as opposed to tires) meant that
it didn’t have to pay.
The Iowa Supreme Court, in a contracts casebook staple, held that the exclusion
applied in this way violated the insured’s reasonable expectations. No one could have rea-
sonably expected that burglary would be limited only to those leaving visible entry marks.123
118 Lawrence Solan, Terri Rosenblatt & Daniel Osherson, False Consensus Bias in Contract Interpretation,
108 COLUM. L. REV. 1268, 1291 (2008).
119 See generally Stempel, supra note 34 (describing the worry).
120 C & J Fertilizer, Inc. v. Allied Mut. Ins. Co., 227 N.W.2d 169, 176 (Iowa 1975).
121 227 N.W.2d. at 172.
122 227 N.Y.2d at 171.
123 227 N.Y.2d. at 177 (“But there was nothing relating to the negotiations with defendant’s agent which would
have led plaintiff to reasonably anticipate defendant would bury within the definition of ‘burglary’ another
exclusion denying coverage when, no matter how extensive the proof of a third-party burglary, no marks were
22

<<PAGE_BREAK>>

GENERATIVE INTERPRETATION
In reaching that view, the court relied on its own common sense with no empirical ground-
ing. Was it right?
That question triggers the simplest use cases of LLMs as part of the interpretative
process. The judge can simply ask the model for its assessment. Fantastical only three years
ago, today you might be merely whelmed by the model’s ability to respond coherently and
plausibly to this query. Here’s the model’s response, edited for readability:124
An insurance policy reads: "[The insurance company will pay for] the felonious abstraction of insured property (1) from
within the premises by a person making felonious entry therein by actual force and violence, of which force and violence
there are visible marks made by tools, explosives, electricity or chemicals." With this in mind, please state your prediction—
with the associated numerical level of confidence in parentheses—on the likely expectations of most policyholders under
these terms for the following propositions:
Table 1: GPT-4's estimates of propositions regarding the likely content of the gap in the
policy.
In other words, the model disagreed here with the court’s majority opinion. It (like
a dissenting opinion) predicts that policyholders would have expected to be required to pro-
vide some evidence of forceful entry to prove that the burglary was not an inside job.
To us these findings are facially plausible: they validate that this cheap and conven-
ient tool could be potentially of use in real cases. But just because the probabilities are rea-
sonable doesn't mean they are accurate. Your intuition should be: prove it! You would want
to know more, both about what the model is doing when it produces percentages, and how
left on the exterior of the premises. This escape clause, here triggered by the burglar's talent . . . was never read
to or by plaintiff's personnel, nor was the substance explained by defendant's agent.”).
124 Chat repository here https://chat.openai.com/share/4379b796-cece-4616-b8eb-b6772f13ad37
23

<<PAGE_BREAK>>

ARBEL & HOFFMAN
that methodology fits courts’ purposes in interpreting insurance contracts.125 Let’s start
there, in Part II.A. We’ll then try some more complicated examples in the remainder of this
Section.
A. A Gentle Introduction to Large Language Models
When Chat GPT-4 told us that it was 90% likely that the policy would pay in re-
sponse to a “substantiated third-party burglary,” what happened behind the curtain? We’re
going to give an explanation a shot here, knowing that doing so is difficult in part because
LLM technology is complex and rapidly changing. Essentially, LLMs create a statistical
model of how words connect by training on torrents of existing texts, some historic and
some artificially derived.126
In the common case, LLMs take user input in the form of text and produce an out-
put, also in the form of text. Behind the scenes, the model takes the text and transforms it
into numbers. This is essential, because (superficially) computers do not read text. Numbers
can encode more information than letters, and they are more valuable in that they allow
computers to perform mathematical operations. This is easy to see in the case of ambiguities:
Duck is both a verb and a noun. But in a number system, we can use prefixes like 20 for verbs
and 10 for nouns, so we can encode the word duck twice. One is, say, 201 and the other 101,
to designate the disparate meanings and disambiguate them.127
This simple illustration understates the utility of this process, known as embed-
ding.128 Rather than assigning a single number to each word, machine learning models trans-
form them into strings of number-pairs—each pair capturing some aspects of meaning.129
The length of such vectors is very long; one of the latest models in common use employs a
125 As we emphasize throughout, model outputs involve a certain degree of randomness. Repeated experimen-
tation, ideally with different prompts, is advisable. See infra section III.A. for discussion of best practices.
126 Synthetic data is growing in importance, and sometimes may improve model quality. John Jumper et al.,
Highly accurate Protein Structure Prediction With AlphaFold, NATURE 583, 587–89 (2021) (noting how
training the data using synthetic data improved the model’s accuracy significantly).
127 This, in a sense, is what standard English dictionaries do, at least if one were to number the words by order
of appearance.
128 For a description of embeddings (although without the attention mechanism) see Choi, supra note 16, at
20–22.
129 What embeddings capture is related to but different from meaning. For a discussion that emphasizes the
non-semantic-understanding view, see Lisa Miracchi Titus, Does ChatGPT have Semantic Understanding? A
Problem with the Statistics-of-Occurrence Strategy, 83 COGNITIVE SYSTEMS RESEARCH 1 (2024). For sake of
exposition, we imprecisely use the word meaning.
24

<<PAGE_BREAK>>

GENERATIVE INTERPRETATION
vector with 12,288 number-pairs.130 For simplicity of exposition, suppose you had a list of
common animals and had a two-dimensional vector to describe them. One dimension could
be number of feet; another could be if they lived on land or sea. This would produce vectors
that we can visualize below:131
Figure 2: An illustration of the value of encoding meaning via simple embeddings
What makes vectors so powerful is that they allow us to capture not only semantics,
but also a syntactic relationship to other words. Horses and cows, in our very simplistic
schema, are closer to each other than they are to whales or sea turtles. The snake, always
awkward, occupies its own category. If we were to add salamanders, we would spot the emer-
gence of a distinct category of amphibians, alongside the land mammals. Now, suppose you
did the same with over 10,000 dimensions.132 You can imagine the insights that might result
when words are described along such complex dimensions.
130 Nils Reimers, OpenAI GPT-3 Text Embeddings – Really a New State-of-the-Art in Dense Text Embed-
dings?, MEDIUM (Jan. 28, 2022), https://medium.com/@nils_reimers/openai-gpt-3-text-embeddings-really-
a-new-state-of-the-art-in-dense-text-embeddings-6571fe3ec9d9.
131 Sea turtles have flippers, not legs. In a more sophisticated representation, we might have adopted a more
continuous representation of feet, where flippers are closer to feet than they are to, say, tails.
132 A technical clarification: the dimensions in the embedding model do not correspond to clearly defined se-
mantic categories such as ‘feet’ or ‘habitat’. Rather, they condense information about words in ways that are
useful to the attainment of the model’s training objectives. For the best work to date on deciphering the inner
working of these complex systems see Trenton Bricken, Adly Templeton, Joshua Batson, Brian Chen, Adam
Jermyn, Tom Conerly, Nicholas L. Turner, Cem Anil, Carson Denison, Amanda Askell, Robert Lasenby,
25

<<PAGE_BREAK>>

ARBEL & HOFFMAN
Making words dimensional has proved powerful in many machine learning tasks,
but was insufficient to power the new LLM revolution. What was needed was the idea of
attention.133 Read the following sentences:
“Shohei Ohtani felt the stress. In a desperate attempt, he swung the bat.”
You intuitively grasp that they mean that Ohtani lifted a wooden bat and used it to
swing at the baseball. But how do you know that this was right, and not that Ohtani had
swung a mammal? As Amelia Bedelia taught us, it’s possible to turn many normal phrases
into misadventures if you ignore context. We know that swung typically is associated with
objects, not animals. And we connect bat with Ohtani, a baseball player, which further so-
lidifies our interpretation of the sentence as referring to the object. In other words, our
minds naturally pay attention to the context of the word to infer the meaning of any specific
word.
An LLM’s attention mechanism seek to achieve the same thing with respect to vec-
tors.134 The model assigns an initial vector to each word in a sentence, which is then enriched
by information about its position in the sentence (via positional encoding). Then the atten-
tion mechanism assesses which words—say bat or swung—shed light on its meaning.135 In
the sentence above, words like “stress” and “felt” are not particularly relevant to the meaning
of the word “bat”; but both “swung” and “Shohei Ohtani” matter. This allows the model to
assign an attention score to each word in the input (relative to the word under analysis) and
then reweigh the encoding of the word under analysis relative to the words that are relevant
to its interpretation. This means that words do not have stable embedding (as in the older
models), but rather, the embedding changes based on the specific context in which they are
presented.
Yifan Wu, Shauna Kravec, Nicholas Schiefer, Tim Maxwell, Nicholas Joseph, Alex Tamkin, Karina Nguyen,
Brayden McLean, Josiah E. Burke, Tristan Hume, Shan Carter, Tom Henighan & Chris Olah, Towards Mon-
osemanticity: Decomposing Language Models With Dictionary Learning. https://transformer-cir-
cuits.pub/2023/monosemantic-features/ (2023)
133 This idea was most powerfully described in a 2017 paper. Ashish Vaswani, Noam Shazeer, Niki Parmar,
Jakob Uszkoreit, Lloion Jones, Aidan N. Gomez, Lukasz Kaiser & Illia Polosukhin., Attention is All You Need,
ARXIV: 1706.03762 (June 12, 2017), https://arxiv.org/abs/1706.03762.
134 For a helpful introduction, see SEBASTIAN RASCHKA, YUXI (HAYDEN) LIU & VAHID MIRJALILI, MACHINE
LEARNING WITH PYTORCH AND SCIKIT-LEARN 544-61 (2022) (describing the self attention mechanism)
135 This is a simplification in several ways. While we discuss words in the text, current models work at the level
of a token, which is a part of a word. The model is not directed towards meaning per se, but rather towards
information about other tokens that would help it achieve its training objective. Depending on the architec-
ture, attention may be directed only at preceding tokens. There is more than a single attention mechanism and
each one attends to different relationships. There are other subtle simplifications that help the general reader.
26

<<PAGE_BREAK>>

GENERATIVE INTERPRETATION
These ideas are combined to train a model. A model refers to a collection of param-
eters (mostly ones called “weights” and “biases”) organized in a specific way whose values are
used to transform the input into the model’s output. Modern language models contain tens
to hundreds of billions of such parameters, hence their common designation as “Large Lan-
guage Models.”
Language models are trained with some objective function, a task which they try to
achieve and on which they are evaluated. In the context of most LLMs, the goal is prediction.
The model is presented with the sentence “Shohei Ohtani felt the stress. In a desperate at-
tempt he swung the [?]” and then the model predicts which word would come next. If the
model were not calibrated, it might have guessed lamp or materiality. As these are (probably)
incorrect, the model is then led to calibrate toward accuracy through a process called gradi-
ent descent.136 This process repeats itself until the model learns that bat follows with 70.14%
probability, base with 25.13%, axe with 0.53%, club with 0.51%, and so on.137
We say the model “learns.” But what does that mean? The simple answer is that
during training, the model adjusts the numerical values of billions of parameters such that
they would produce predictions that are more likely to achieve its training objectives. It con-
ducts various (fairly simple) algebraic operations to create from a sentence like “Hello, how
are you __” a prediction that the next highest probability word would be “doing.” And yet
this simplicity doesn’t capture the process: these parameters are effectively encoded in large,
inscrutable matrices whose meaning is wickedly hard to decipher, and whose organization is
alien. LLMs do not explain the why of their predictions.
You may have read, but would be wrong to conclude, that because the goal is to as-
sign probability to the next word, these models simply imitate text they have seen elsewhere
or only develop a superficial model of the world. To effectively predict the next token in a
136 An analogy may capture the intuition behind gradient descent. Suppose you found yourself on a mountain
ridge on a pitch-black night and you are trying to find your way down to the valley below. Feeling with your
foot, you sense that going West would lead you upwards, East is levelled, South has a mild declining slope,
and North has a steep slope. You head North, and then after a few steps, you test again, to see which direc-
tion to take now. This process of finding your way is similar to gradient descent. The model identifies the
steepest slope (or gradient) for reducing its deviation from its targets, and adjust its parameters accordingly. It
then checks again with more data, iteratively improving until it finds the best or "lowest" configuration." For
a helpful and more formal introduction, see Sebastian Ruder, An overview of gradient descent optimization
algorithms, arXiv:1609.04747v2 (2017)
137 Based on actual predictions of the Tex-Davinci-003 model with temperature 0.7, max length = 256, top p
= 1, 0 frequency or presence penalty and best of 1.
27

<<PAGE_BREAK>>

ARBEL & HOFFMAN
sequence, the models cannot simply memorize what they have seen elsewhere.138 To predict
the continuation of a new sentence like “When they moved to the USA, they set their first
home in the state of ______” would require the model to develop a mathematical sense of
what are states and immigrants, and which ones are popular destinations for those who re-
cently arrived.139 As large as they are, the models are much smaller than the data they are
trained on. And so, models necessarily seek deeper representation of the information they
train on. This is not unlike how humans read books, learn from them, but cannot recite
them. You can see that model outputs are original because they produce entirely new but
responsive text. Of course, this sometimes results sometimes in making up facts.
Finally, consumer-facing chatbots simply invite the user to chat with the model di-
rectly. Behind the scenes, however, the model’s behavior is calibrated by settings called “hy-
perparameters.”140 The details are quite technical, but one of those hyperparameters is of
specific interest. LLMs have “temperature” settings that can be adjusted from low to high.
The lower the model’s temperature, the more predictable its output.141 A very low tempera-
ture ensures that the model always outputs the same answer to the same query. A higher one
introduces more randomness and outputs that you might think of as “creative.”
So far, so good. Now let’s return to our question: What is the model doing when it
assigns a 90% probability to the likelihood that a reasonable person would expect an insur-
ance payment under certain circumstances? The first step for the model is to convert the
query we entered to numbers (really, tensors). The next step is crucial: Now the model at-
tends to the context of words and uses it to adjust their meaning. If the model sees the word
“premium” in the current context, it will know to adjust its meaning away from dictionary
meanings such as “high quality” and towards “consideration for an insurance policy.”142
Armed with a contextual understanding of the query, the model can now run
through its vast internal network of parameters and calculate what is the most likely word
138 See Alethea Power, Yuri Burda, Harri Edwards, Igor Babuschkin & Vedant Misra, Grokking: Generaliza-
tion Beyond Overfitting on Small Algorithmic Datasets, ARXIV: 2201.02177 (Jan. 6, 2022),
https://arxiv.org/abs/2201.02177.
139 For example, the Text-DaVinci-003 model predicts California (30.8%), New York (21%), and Florida
(17%) as the most likely continuations. https://i.imgur.com/uSBNKfh.png
140 The term “hyperparameter” is necessary to distinguish the model’s own parameters, from the parameters
that define its training and operation. We reference here the post-training hyperparamters, noting that there
are also hyperparameters that dictate the training of the model.
141 For a friendly technical review, see FRANÇOIS CHOLLET, DEEP LEARNING WITH PYTHON, CHAPTER 12.1
(2nd ed., 2021).
142 Premium, MERRIAM-WEBSTER DICTIONARY (July 27, 2023),
https://www.merriam-webster.com/dictionary/premium.
28

<<PAGE_BREAK>>

GENERATIVE INTERPRETATION
(really, token) that would follow next. It will assign infinitesimally low probabilities to words
that relate to gardening or makeup, but will assign increasingly higher probabilities to words
that relate to the insurance context. Once the model determines the most likely continuing
words, it orders them by relevancy. In a zero temperature settings, the model will always
select the word with the highest probability to follow, but as we increase the temperature it
will occasionally pick other words as well. When the model chooses 90%, it is predicting that
this number is the most likely continuation of the text preceding it.
This explanation skips over the hardest question, which is why the model assigns the
highest probability to 90%. The honest answer is quite unsatisfactory: It picked this number
because based on its vast training data and internal statistical model, it found that 90% is a
more likely continuation than 10%. This is nothing like an explanation a human would give,
where reasons and factual considerations would be provided. The model’s outputs are a
brute statistical fact. It is possible to ask the model to justify itself. And the model will dili-
gently reply with an answer. But it is critical to understand that whatever the model tells
you, it is really no explanation at all. It is a prediction of what explanation is likely to follow
the query. So, working with LLMs admittedly requires a leap of faith, a realization that no
better explanation is forthcoming than long inscrutable matrices that produce predictions.
B. LLMs as a Source of Contractual Meaning
With a grasp of the technology in hand, let’s work through some more quotidian
examples of LLMs’ potential use outside of the insurance context. Textualists—as we’ve de-
scribed—think that texts have an inherent plain meaning, at least within the context of the
written document. The problem is deciding what it is, and whether our intuitions are rep-
resentative. LLMs may serve as powerful tools to uncover those answers.
We’ll start with the divorce of Jennie and Mark Famiglio. Jennie and Mark entered
into a prenup before getting married, which committed to a sliding scale of payments from
Mark to Jennie if they divorced, tied to the length of their union. Section 5.3a read:
5.3. JENNIE's Benefits and Obligations. If the marriage ends by dissolution
of marriage or an action for dissolution of marriage is pending at the time of
MARK's death, then JENNIE shall receive the additional benefits and obli-
gations described in 5.3.a. through d.
a. MARK shall pay to JENNIE, within ninety (90) days of the date
either party files a Petition for Dissolution of Marriage the amount
29

<<PAGE_BREAK>>

ARBEL & HOFFMAN
listed below next to the number of full years they have been mar-
ried at the time a Petition for Dissolution of Marriage is filed.143
Although Jennie filed a petition for divorce after seven years, she never served the
petition and later voluntarily dismissed the action. After ten years, she filed again, and meant
it. Under the prenup, seven years of marriage entitled her to $2.7 million; ten years a whop-
ping $4.2 million. The parties were left with a consequential but basic interpretative ques-
tion: When the prenup mentions the number of years at the time “a” petition is filed—did
the parties mean the first petition or the ultimate one?
Neither party thought witnesses were necessary, as both understood a Petition to be
unambiguous (and favoring their side). Unfortunately for Jennie, a Florida appellate court
ruled against her.144 Relying in part on dictionaries, it emphasized that “a” is an indefinite
article. Ordinarily, the court stated, when people predicate a condition on an indefinite
event, they mean its first occurrence. Thus, imagine if a golf course posts a rule: “when a
thunderstorm approaches, you must end your golf game.”145 That would be “universally un-
derstood . . . to mean the first time a thunderstorm approaches.” And so, “a” petition filing
simply must mean the first one filed. The court’s method of proof seems sensible. But was it
right to be so sure of itself?
We presented GPT with the prenuptial agreement and asked it: If one of the parties
files a divorce petition, withdraws it, and then a few years later a new petition is filed, what
date determines the number of full years of marriage: the first filing or the second one? It
produced a sentence that essentially supported Jennie’s view. But to illustrate how the model
can help courts be more precise, we can freeze the output in time and take a peek under the
hood, as Figure 3 illustrates.
143 279 So. 3d at 737.
144 Id. at 742
145 Id. at 743.
30

<<PAGE_BREAK>>

GENERATIVE INTERPRETATION
Figure 3: Davinci-003, temp=1, top-p=1, frequency and repetition penalty =0, best
of 1, full spectrum, presented with Famiglio facts and asked “If one of the parties files a di-
vorce petition, withdraws it, and then a few years later a new petition is filed, what date de-
termines the number of full years of marriage: the first filing or the second one?”
This illustration captures the probabilistic way the model thinks of language and its
own process. When it started to produce its answer, it predicted that it ought to start with
“The.” Now, neither we nor the model know how it would continue the sentence. It read
our question and its partial answer and then made a prediction. Given the context and the
vast corpus on which it sits, what should have come next—second or first? It concluded that
“second” makes more sense. And once second is produced, the rest of the answer follows.146
Generative interpretation in this simple case thus offers courts a better sense of the
relevant probabilities if the parties were intending to use English in its most public and com-
mon sense. And it does so without reference to singular, perhaps idiosyncratic, illustrations
pulled from the golf course. Of course, it’s possible that in the context of their deal, extrinsic
evidence pointed to a private meaning—or perhaps trade practice could have pushed the
court away from the meaning that the model suggests is normal. And, as we’ll discuss, know-
ing that the court would use the model might have motivated both parties to not so quickly
assume that their meaning was unambiguously correct.
C. The Ambiguity Problem
As Famiglio illustrated, the question of whether a term is ambiguous, permitting
extrinsic evidence or not, can be outcome determinative. That’s true for interpretative meth-
ods of all stripes. Even the most free-spirited contextualists are not that free. They will not
146 The usual LLM caveats apply, and the probabilities shouldn’t be interpreted literally. The model could, for
example, continue the sentence with “The first filing would not control.”
31

<<PAGE_BREAK>>

ARBEL & HOFFMAN
waste the parties’ time on a lengthy trial when they think that the language in the contract
is simply not “reasonably susceptible” to the interpretation proffered by one of the parties.
As a result, a key question in contextualist jurisdictions is which interpretation, exactly, the
language is reasonably susceptible to.
Take the well-known case of Trident v. Connecticut, often listed as a primary argu-
ment against California-style contextualism.147 A group of lawyers, assisted by other real es-
tate investors, sought to buy commercial real estate to build their law offices. They borrowed
$56 million from Connecticut Insurance, with an agreement to pay it back over 15 years at
12.25% APR. At one point, the agreement stated that the principal could not be prepaid, at
least not within the first 12 years of the agreement. However, interest rates fell, and the bor-
rowers sought to prepay the loan with money they would borrow elsewhere.148 When they
were rebuked, they turned to litigation.
The promissory note clearly stated that the borrowers “shall not have the right to
prepay the principal amount hereof in whole or in part.” But they pointed to a different
clause, creating a 10% prepayment penalty for defaulted loans if the lender accelerated.149
The borrowers’ lawyers relied on the famous statement of California’s contextualism rule,
Pacific Gas,150 to argue that they ought to be permitted to offer extrinsic evidence—negoti-
ations, trade usage—in support of their contractual reading.151
In the Ninth Circuit, Judge Kozinski used the case to offer what others have de-
scribed as a “shrill attack” on the looseness of the California parol evidence rule.152 He dis-
counted the borrower’s prepayment argument, since it was at the lender’s option. And he
concluded that the contract’s “shall not have the right” clause was crystal clear that prepay-
ment was forbidden—standing alone, it was not reasonably susceptible to the borrower’s
meaning. Nonetheless, Judge Kozinski remanded the case. He wrote:
Under Pacific Gas, it matters not how clearly a contract is written, nor how
completely it is integrated, nor how carefully it is negotiated, nor how
squarely it addresses the issue before the court: the contract cannot be ren-
dered impervious to attack by parol evidence. If one side is willing to claim
147 847 F.2d 564.
148 Historic rates had fallen by around 3 percent, meaning an early pre-payment would have meant a saving of
~$1.1 million over the life of the loan.
149 847 F.2d 564.
150 Pacific Gas & Electric Co. v. G.W. Thomas Drayage & Rigging Co., 442 P.2d 641 (1968).
151 847 F.2d at 568 (noting reliance on Pacific Gas).
152 Peter Linzer, The Comfort of Certainty: Plain Meaning and the Parol Evidence Rule, 71 FORDHAM L. REV.
799, 805 (2002).
32

<<PAGE_BREAK>>

GENERATIVE INTERPRETATION
that the parties intended one thing but the agreement provides for another,
the court must consider extrinsic evidence of possible ambiguity. If that ev-
idence raises the specter of ambiguity where there was none before, the con-
tract language is displaced and the intention of the parties must be divined
from self-serving testimony offered by partisan witnesses whose recollection
is hazy from passage of time and colored by their conflicting interests . . .
The opinion, written with flair, is in many contracts casebooks, but it is a puzzle in
its own right. California’s existing rule provided that extrinsic evidence was to be admitted
only if the language in the contract was “reasonably susceptible” to the interpretation prof-
fered by the parties. Thus, if Kozinski really had been confident that the language was clear,
he should not have remanded.153 We wondered whether his factual premise was correct and
asked LLMs to help.
After obtaining the original promissory note,154 we introduced the relevant parts to
three leading LLMs: GPT-4, Claude 2, and a version of the open source model Llama -2,
and then asked for their evaluation.155 We asked them to read the entire contract and then
estimate, as a judge, the likelihood that the parties intended early repayment to be permitted
under the agreement. To capture a range of model responses, we repeated the same question
many times, while setting the “temperature” at a sufficiently high level to ensure that differ-
ent responses might be picked.
153 Susan J. Matin-Davidson, Yes, Judge Kozinski, There Is A Parol Evidence Rule in California—The Lessons
of a Pyrrhic Victory, 25 S.W.U. L. REV. 1, 18–20 (1995). As Prof. Matin-Davidson points out, after remand
the defendants won a summary judgment motion and their attorneys’ fees. There never was a trial. Id. at 4,
n.22.
154 We thank Prof. Todd Rakoff for providing it from his collection.
155 The 70 billion parameter version of the Llama-2 model is considered the highest performing open source
model at this time, and we used the currently highest-performing fine-tuned version of this model, as meas-
ured by the HuggingFace Open LLM Leaderboard, https://huggingface.co/spaces/Hugging-
FaceH4/open_llm_leaderboard. (https://imgur.com/a/brjE8Tb)
33

<<PAGE_BREAK>>

ARBEL & HOFFMAN
Figure 4: Turbo GPT-4, Claude 2, and Llama-2 70b with set at temperature 1, and
fed with the Trident promissory note in full. The models asked whether the language of the
agreement is reasonably susceptible of being read as providing the borrower the right to early
repayment. On the x-axis, 0 indicates this interpretation is wrong and 100 is that it is correct.
Figure 4 is suggestive of how generative interpretation can deepen and enrich judi-
cial analysis. Overall, the models roughly agree on average that prepayment is not allowed,
with a mean score of ~41. The least powerful model here, Llama 2, was more open to the
possibility than the more powerful, proprietary models. But the two most powerful models,
Claude 2 and GPT-4, both shared a similar evaluation: the contract was not “reasonably
susceptible” to the interpretation advanced by the Trident group.
One read of this result is that it suggests that Kozinski’s intuitive factual premise
was wrong, but that he reached the right conclusion. That is, even taking the borrower’s
argument seriously, the dominant reading rejects a finding of ambiguity. No further extrin-
sic evidence ought to have been admitted. This would align with common criticisms of the
opinion.156 On the other hand, the models were not uniform in their assessment; the prob-
ability distribution suggests that at least some probabilistic readings of the contract permit
156 See Matin-Davidson, supra note 153.
34

<<PAGE_BREAK>>

GENERATIVE INTERPRETATION
early repayment. To determine the case, we would want to know more about those minori-
tarian readings: Are they reflective of discrete linguistic communities, private meanings, or
other legally relevant factors? Generative interpretation does not answer the question of
whether language is reasonably susceptible of a meaning, it instead helps us visualize a broad
spectrum of meaning and quantify how likely a particular result is.157
Now consider another case turning on ambiguity: Ellington v. EMI.158 The issue in
this case arose from a 1961 net receipts agreement between the musician Edward Kennedy
“Duke” Ellington and his record company, EMI. As was common at the time, the parties
agreed on a 50/50 royalty split, after deducting fees charged by third parties that intermedi-
ate in foreign markets. This net receipt agreement bound EMI and its “other affiliates.” In
the intervening decades, the music industry underwent significant consolidation, and EMI
began to use its own affiliates rather than rely on third parties for foreign operations. It
sought to deduct those affiliate fees before paying Ellington’s estate.
Feeling blue, Ellington’s grandson sued, arguing that two key phrases in the contract
were ambiguous: “(1) the phrase “net revenue actually received” in the royalty provision and
(2) the term “any other affiliate” in the definition of Second Party.”159 The New York Court
of Appeals––the country’s preeminent textualist tribunal—rejected the claim. The majority
held that the terms were unambiguous: They only reference affiliates that existed at the time
of contracting. There is simply no way that they could be read in any other way, given the
tense that the parties used and the court’s aversion to forward-looking language.160
Again we had access to the original contract. We presented it to the various models
for plain language analysis, asking: “Does ‘other affiliates’ naturally include only the existing
affiliates at the time of contract, or does it potentially encompass affiliates that might be
created over time?”
157 Whether a conclusion that is 20% likely is legally reasonable might turn on several factors we do not explore
in the text. Imagine a particular linguistic subcommunity whose understanding of terms correlates with the
parties’. (You could think of this as akin to trade usage, but for culture.) In that case, deferring to majoritarian
readings would tend to suppress important perspectives. See generally Dan Kahan, David A. Hoffman and
Don Braman, Whose Eyes are You Going to Believe: Scott v. Harris and the Perils of Cognitive Illiberalism,
122 HARV. L. REV. 837 (2009) (discussing how simulations can uncover discrete minority perspectives on le-
gally-operative facts that the law should attend); David A. Hoffman, From Promise to Form: How Contract-
ing Online Changes Consumers, 91 N.Y.U. L. Rev. 1595 (2016) (arguing that younger parties have distinct
views of contracting from older ones).
158 Ellington v. EMI Music, Inc., 21 N.E.3d 1000, 1001 (2014).
159 Id. at 245.
160 Id. at 246–47.
35

<<PAGE_BREAK>>

ARBEL & HOFFMAN
Before we describe the model’s answer, we should highlight two robustness concerns
with model interpretation. Models are quite sensitive to the prompt used.161 This opens
them to a problem of “leading prompts,” queries that lead the model towards a desired an-
swer. And, as we described earlier, models can be set to be hotter (more random) or colder
(more deterministic). This allows the user (judge, researcher, policymaker) many degrees of
freedom.
To deal with these issues we tried something new. Rather than a single prompt, we
used 20 variations of the same question, each queried 10 times at a relatively high tempera-
ture setting.162 We presented yes/no questions where yes indicates agreement with the
judge’s interpretation. The Figure below summarizes the results of the experiment among
four of the leading models.
161 See generally Laria Reynolds and Kyle McDonell, Prompt Programming for Large Language Models: Be-
yond the Few-Shot Paradigm, arXiv:2102.07350 (2022) (discussing the effect of prompting tech-
niques on model outputs).
162 Specifically, we set temperature at 1 and top p=1 to encourage a broad range of responses. The 20 prompts
were generated by GPT-4, after seeding it with the background of the case and a seed question. AMBIGUOUS
CONTRACT INTERPRETATION, https://chat.openai.com/share/e9003c92-5e32-436c-816d-c2add7ac485b
(last visited July 29, 2023). For code, see supra note 22.
36

<<PAGE_BREAK>>

GENERATIVE INTERPRETATION
Figure 5:Ellington v. EMI, analyzing the interpretation of “other affiliates” using
temperature 1, and responding ten times to twenty prompt variations generated by GPT-
4, after seeding it with the background of the case.
As the Figure illustrates, the four models don’t share the New York court’s confi-
dence: The most common interpretation of “other affiliates” includes those that post-date
the contract. Llama-2, the open source model, is somewhat open to EMI argument, reflect-
ing that it has some facial plausibility. Of course, even uniformity between powerful models
cannot decide cases. The point, rather, it to illustrate the value of LLMs as a convenient
check against overconfidence, and a spur to greater reflection. (Though the fact that the dis-
sent thought that the contract was ambiguous might have produced that same introspec-
tion.)
D. Filling Gaps
One of the most difficult issues in contract interpretation is distinguishing silence
from unexpected gaps. Contracts are incomplete: The parties leave many topics to necessary
37

<<PAGE_BREAK>>

ARBEL & HOFFMAN
implication. Such omissions are not always deliberate: Sometimes parties simply have not
contemplated a problem—a global pandemic, a supply chain disruption, another peerless
ship sailing ex Bombay163—and the court must engage in filling the gaps, rather than merely
interpreting words on the page. Whether a court is “filling a gap” by extrapolating from the
parties’ words and actions, or “constructing” a contract term by its own lights, is a highly
contested problem.164 But antecedent to that dispute is a simpler one: can we do a better job
of predicting what the parties would’ve said had they been asked at contracting about an area
they left blank?
Consider the 1977 New York Court of Appeals case, Haines v. City of New York.
It resolves a dispute about a 1924 contract between the City of New York and an upstate
village, in which the City promised to pay the town to process its own sewage so that the
city’s water supply could be cleaned. (That is, the city paid the village not to pollute.) As the
decades passed, the townships grew and the Federal Government passed environmental reg-
ulations. By the early 1970s, facing strong budgetary pressures, New York City refused to
continue to pay for the township’s expansion of the sewage facilities. A local developer sued,
arguing that the contract’s absence of a duration term or cabin on the scope of the city’s
obligation meant that the city was in breach.
The court considered those arguments in a decision that looked only to the written
contract. It determined that the parties did not mean for the contract to run forever, in a
provision notable for its brevity.
[W]here the parties have not clearly expressed the duration of a contract,
the courts will imply that they intended performance to continue for a rea-
sonable time but also did not mean it to be terminable at will . . . .Thus, we
hold that it is reasonable to infer from the circumstances of the 1924 agree-
ment that the parties intended the city to maintain the sewage disposal fa-
cility until such time as the city no longer needed or desired the water, the
purity of which the plant was designed to insure.165
The logic here isn’t compelling but rests on a empirical prior: By default, parties do
not intend contracts to be terminable at will when they write unlimited obligations, and
nothing about the language or circumstances of the contract compels a contrary conclusion.
163 Raffles v. Wichelhaus, 159 Eng. Rep. 376 (1864).
164 On this generally—and expressing useful skepticism about the borders—see Klass, supra note 45; see also
Larry Solum, Legal Theory Lexicon: Interpretation and Construction, LEGAL THEORY BLOG (May 31, 2020),
at https://lsolum.typepad.com/legaltheory/2020/05/legal-theory-lexicon-interpretation-and-construc-
tion.html (explaining the difference).
165 Haines, 41 N.Y. 2d 769 at 772 (breaks added, cleaned up).
38

<<PAGE_BREAK>>

GENERATIVE INTERPRETATION
On the related question of whether the city promised (implicitly) to continue to
expand the system’s capacity, the court was less generous.
By the agreement, the city obligated itself to build a specifically described disposal
facility and to extend the lines of that facility to meet future increased demand. At
the present time, the extension of those lines would result in the overloading of the
system. Plaintiff claims that the city is required to build a new plant or expand the
existing facility to overcome the problem. We disagree. The city should not be re-
quired to extend the lines to plaintiffs' property if to do so would overload the sys-
tem and result in its inability to properly treat sewage. In providing for the extension
of sewer lines, the contract does not obligate the city to provide sewage disposal ser-
vices for properties in areas of the municipalities not presently served or even to new
properties in areas which are presently served where to do so could reasonably be
expected to significantly increase the demand on present plant facilities.166
Once more the court alludes to the agreement, but its decision is inattentive to the
details. It found an implicit condition to obligation: Extension is required only so long as
the system is not overloaded.167 But this was a gap-filling exercise, informed by the court’s
judgment about what the parties should have said.168 Such determinations were part of a
trend in New York courts’ in favor of a looser, Cardozian approach to missing terms.169
With the cooperation of the New York court system, we obtained the 1924 con-
tract.170 This contract and the various exhibits are long, especially considering when they
were created: about eight pages of Word documents. We entered the text into the two mod-
els that can support such long inputs—GPT-4's experimental version and Claude 2—and
166 Id. at 773.
167 The City of New York at the time was under severe financial stress and courts rushed to protect it from
bankruptcy. Robert M. Jarvis, Phyllis G. Coleman & Gail Levin Richmond, Contextual Thinking: Why Law
Students (and Lawyers) Need to Know History, 42 WAYNE L. REV. 1603, 1613 (1996).
168 For an argument suggesting that there is no fact-of-the-matter about parties’ intent when filling gaps in
contracts, see Robert A. Hillman, More Contract Lore, 94 TUL. L. REV. 903, 910 (2020); Robert A. Hillman,
The Supreme Court’s Application of “Ordinary Contract Principles” to the Issue of the Duration of Retiree
Healthcare Benefits: Perpetuating the Interpretation/Gap-Filling Quagmire, 32 ABA J. LAB. & EMP. L. 299,
320 (2017).
169 Perhaps this part of the opinion responded to the City’s financial exigency. William E. Nelson, A Man’s
Word and Making Money: Contract Law in New York, 1920-1960, 19 MISS. COLL. L. REV. 1, 13 (1998).
170 E-mail from Marisa Gitto, Reference Services, New York State Library, to Michael Hurley, Research Assis-
tant, University of Pennsylvania Carey Law School (May 22, 2023, 03:01 EST) (on file with authors).
39

<<PAGE_BREAK>>

ARBEL & HOFFMAN
asked them to assess the validity of several legal arguments given the agreements.171 Figure 6
illustrates what we found.
Figure 7: Haines v. City of New York gap filling analysis using Chat GPT-4 (32k
context length) and Claude 2 (100k context length).
The first set of questions concerned duration. Both models reject the city’s claim
that the contract was terminable at will. And both (with different degrees of confidence)
were open to durational gap fillers of an indefinite time, a reasonable time, by joint agree-
ment, or until a time when a legal excuse is present—which is indeed the common law rule
171 GPT-4: https://poe.com/s/Vp9tkyhGnMmHqFvdKp4n. You should take model’s self-reported degree of
confidence with a grain of salt; it is more meaningful to simply compare its expressed confidence with respect
to different questions, hence our experiment design here.
40

<<PAGE_BREAK>>

GENERATIVE INTERPRETATION
for most contracts.172 GPT-4 (like the court) explained, “while a reasonable duration might
be inferred under common law principles, this argument does not strongly accord with the
contract’s language.”173 Overall, the models appear to generally support the court’s reading.
The second set of questions involved the scope of the city’s obligations. GPT-4 dis-
agreed strongly with the court; it thought that the city’s obligation was unbounded. Im-
portantly, it anchored its reasoning in a section of the contract neglected by the court: Sec-
tion 6. That part obligates the city to extend sewage plans “[w]henever extensions of any of
the sewer lines are necessitated by future growth . . . of the respective communities.” For
ChatGPT-4, this provision implied the obligation to build additional treatment plants. But
Claude 2 was more amenable to the court’s interpretation and provided a plausible con-
straining argument: “The agreement provides for extensions when required by growth, im-
plying a reasonable obligation.”
E. From Text to Context
So far, we have provided examples that showcase how large language models might
power a stronger, cheaper, more robust form of textualism. We now consider how such mod-
els can account for contextual evidence such as prior conversations, shared expectations, and
industry standards. Stewart v. Newbury provides a simple illustration.174 In Stewart, a con-
tractor and a business corresponded about the construction of a new foundry. The contrac-
tor’s offer letter was brief; he offered to do the job and charge either by offering an itemized
list or by charging on a cost + 10% basis. This letter was followed by a telephone call where
they may have agreed that payment would be made “in the usual manner.” Finally, the
foundry responded in writing that, following the phone conversation, they accepted the bid.
As far as we know, that amounts to the entirety of the contracting case file.175
Once the contractor finished the first part of the project, he submitted a bill. The
foundry refused to pay. The contractor insisted that it was customary to pay 85% of pay-
ments due at the end of every month, but the foundry argued that its payments were only
due on (substantial) completion of the project. Seeing no payments made, the contractor
stopped work. The parties countersued for breach.
172 See Glacial Plains Coop. v. Chippewa Valley Ethanol Co., LLLP, 912 N.W.2d 233, 234 (Minn. 2018)
(holding that unless otherwise provided, a “contract is of indefinite duration and is terminable at will by ei-
ther party after a reasonable time and with reasonable notice.”)
173 Likewise Claude-2 explained: “A reasonable duration could be implied, though not explicitly stated.”
174 220 N.Y. 379 (1917).
175 Id. at 380–84.
41

<<PAGE_BREAK>>

ARBEL & HOFFMAN
Today, the default rule is that payments in construction contracts are not due until
the contract is substantially performed.176 It is unclear that this rule was in place when the
parties agreed in 1919. The foundry argued that no payment was due under the contract,
and hence, the contractor’s refusal to work was wrongful. So now we have an interpretive
question: Did the parties agree to a particular payment regime?
The written agreement is too sparse to help, but the phone conversation offers an
in. If we believe that the parties indeed agreed to make payments in the usual manner, then
it is possible to interpret usual as referring to an alleged common practice of monthly install-
ment payments. It is also possible, however, that ‘usual’ refers to other standard payment
conventions—say, the payment on a cost +10% basis.
The court remanded because of faulty jury instructions, so the interpretative ques-
tion was left undecided. We, however, are not so constricted. We asked today’s leading
LLMs, GPT-4 and Claude-4, to predict what the parties meant. To do so, we first told the
models to assume that the default legal rule would be that payment is conditioned on sub-
stantial performance.177 Then, we asked the models to estimate how the parties would have
interpreted their deal absent consideration of either extrinsic evidence of the phone conver-
sation or evidence of industry norms. We then added the evidence of the phone conversa-
tion, to see how the model’s confidence changed, and finally, we added evidence of the cus-
tom in the industry. Table 1 summarizes the results:178
176 See 22 N.Y. JUR. 2D CONTRACTS § 352; Hillman, supra note 168, at 313 (“courts in construction cases find
a duty to pay only after substantial performance”).
177 This is not obviously the correct legal rule, then or now, but we had to start somewhere, and we took the
court at its word.
178 CLAUDE 2.0 POE CONSERVATION, https://poe.com/s/wLkeCDrPdFpKye3uApSa (last visited July 30,
2023). Again, you should be skeptical of model’s expressed confidence; the direction of change with every new
piece of evidence, not its quantification, is reliable.
42

<<PAGE_BREAK>>

GENERATIVE INTERPRETATION
Table 2: Expressed confidence in “the duty to pay is monthly” based on legal and
transactional context. Presented to GPT-4 (32k context window) and Claude-2 (100k
context window).
Table 2 demonstrates how each additional piece of evidence alters the analysis. And
for purposes of this case, it shows that, for the models at least, extrinsic evidence was mate-
rially important to the outcome.
Illustrating the additional value of each piece of evidence can provided unexpected
value. Judges may fairly worry, when considering potentially unreliable evidence, that mere
exposure to the evidence would irreversibly prejudice their decisions. By estimating the pro-
bative value of some forms of evidence before closely examining them, the judge can develop
a heuristic assessment of probative value with relatively little exposure. The model can thus
give structure to the evaluation of extrinsic evidence, making it more attractive to factfind-
ers. And within the limits of its prompts, its conclusions are coherent, cheap, and seemingly
plausible.
III. THE FUTURE OF CONTRACT INTERPRETATION
So convenient are today’s LLMs, and so seductive are their outputs, that it would be
genuinely surprising if judges were not using them to resolve questions of contract interpre-
tation as we write this article, only a few months after the tools went mainstream. Looking
at practical guidance offered to lawyers in the summer of 2023, we see lawyers are encour-
aged to use LLMs to perform legal research, draft deposition questions and contracts, and
predict settlement values.179 And there are hints that judges are already using ChatGPT to
answer other kinds of interpretative questions, just as they would use Google.180 In one re-
cent survey, one-quarter of judges confessed to using the tool, though many expressed con-
cern about its reliability.181
These models are useful because they offer new tools—fast, cheap, sometimes incor-
rect ones—in service of old interpretative goals. Courts will soon take a phrase like “dozen”
179 Catherine Casey, Reveal Brainspace, Ronald J. Hedges, Ronald J. Hedges LLC, Marissa J. Moran, N.Y.C.
Coll. of Tech., Stephanie Wilson, Reed Smith LLP, Generative Artificial Intelligence in Practice: What It Is
and How Lawyers Can Use It (June 28, 2023) (on file with authors).
180 Luke Taylor, Colombian Judge Says He Used ChatGPT in Ruling, THE GUARDIAN (Feb. 2, 2023, 9:53
PM), https://www.theguardian.com/technology/2023/feb/03/colombia-judge-chatgpt-ruling (discussing
use by judges of ChatGPT in rulings).
181 Ed Cohen, Most Judges Haven’t Tried ChatGPT, and They Aren’t Impressed, THE NAT’L JUD. COLL.
(July 21, 2023), https://www.judges.org/news-and-info/most-judges-havent-tried-chatgpt-and-they-arent-
impressed.
43

<<PAGE_BREAK>>

ARBEL & HOFFMAN
and ask ChatGPT to interpret it, rather than turning to the dictionary or Google; or will
ask the model what’s the likely assumption a contract makes when it leaves a gap; or will
check if the model thinks an insurance policy contemplated deft burglars. They’ll do so both
covertly and overtly, both sua sponte and in response to briefing. Almost certainly the first
briefs to affirmatively argue for the use of the tool will come from resource-constrained
firms. As we illustrated in Part II of this Article, LLMs are already applicable to live problems
that courts face every day, and it would be naïve to think they aren’t using them.
Indeed, we’ve seen this story play out many times before. As some readers will recall,
when courts first realized that Wikipedia could be used as a source of information,182 they
were chastised for its use by higher courts,183 and then it was eventually folded into the nor-
mal set of legal research tools.184 But at least in the short run, judges won’t have the tool draft
opinions. And why would they? That courts are irreducibly part of the interpretative enter-
prise—no matter how sophisticated prediction machines get—follows from the obvious
point that there are two stages to every contract interpretation problem: figuring out what
the parties meant (at contracting), and deciding the “legal significance that should attach to
the semantic content.”185 The LLM method is simply better for many reference purposes
than those currently on offer.
The problem then is not whether courts will use LLMs as an aid to interpretation,
but how. Generative interpretation is a tool and as such, it has strengths, limits, and flaws.
To be sure, AI’s most enthusiastic wielders will be its least careful adopters. Thus, our goal
in Section III.A is to delimit some principles and limitations for LLM usage by lawyers and
judges. With the proper usage of the tool in mind, in Section III.B we suggest that generative
interpretation has implications for the continuing vitality of longstanding debates between
textualism and contextualism. Or to put it differently, while the uses that we suggest in Sec-
tion III.A could be thought of as Textualism 2.0—better dictionaries and canons—we don’t
think that’s the practical limit of what this method of interpretation can do.
182 Lee F. Peoples, The Citation of Wikipedia in Judicial Opinions, 12 YALE J. L. & TECH. 1, 28 (2010) (“Ci-
tations to Wikipedia entries in judicial opinions have been steadily increasing since the first citation appeared
in 2004.”).
183 Campbell ex rel. Campbell v. Sec'y of Health & Hum. Servs., 69 Fed. Cl. 775, 781 (2006) (“rejecting special
master's reliance on Wikipedia, among other online sources, citing several “disturbing” disclaimers on the web-
site and that it could be edited by “virtually anyone”); see also Kenneth H. Ryesky, Downside of Citing to
Wikipedia, N.Y. L.J., Jan. 18, 2007, at 2.
184 Jodi L. Wilson, Proceed with Extreme Caution: Citation to Wikipedia in Light of Contributor De-
mographics and Content Policies, 16 VAND. J. ENT. & TECH. L. 857, 907 (2014) (“The advent of Wikipedia
and other technological advances has changed legal research. It is unrealistic to believe that the legal commu-
nity can ignore that reality. . . .”).
185 Schwartz & Scott, supra note 38, at 568 n.50; Edwin W. Patterson, The Interpretation and Construction
of Contracts, 64 COLUM. L. REV. 833, 833–35 (1964); Klass, supra note 45.
44

<<PAGE_BREAK>>

GENERATIVE INTERPRETATION
A. Interpretation for the 99%?
As we’ve said, in the coming months and years, we’re sure you will read examples of
lawyers and judges using ChatGPT and related tools in perverse, sometimes outright silly
ways, and reaching absurd results you think would have been avoided had they just buckled
down and done their jobs like careful jurists ought to. Or, worse, they’ll have these tools
generate pedestrian prose that looks like soulless briefing or opinion-writing, but in fact is
built on a throne of lies. There’s no question that AI will sometimes be a crutch for lazy or
harried lawyers who simply didn’t focus on the details: It might not be ideally pitched at the
kinds of people who are reading sentences with care 20,000 words into a law review article.
And yet it’s precisely because LLMs are cheap and workmanlike that they will be of
real use in contract interpretation. The biggest single problem with all currently available
approaches to contract interpretation isn’t that they are incapable of getting correct results
some of the time. It’s that they are inaccessible to ordinary parties.186 Non-wealthy individ-
uals who suffer breach have to lump it,187 tilt against corporations in internal dispute reso-
lution systems,188 or face financially ruinous fees and prevail in pyrrhic victories.189 Simply
put: There is an access-to-justice problem at the center of contract law as pernicious as the
better recognized ones in criminal and constitutional adjudication. The costs and uncertain-
ties of interpretating deals, which form the core of contract litigation, materially contribute
to this problem.190
186 See LEGAL SEVS. CORP., THE JUSTICE GAP: MEASURING THE UNMET CIVIL LEGAL NEEDS OF LOW-IN-
COME AMERICANS 6 (2017) (“86% of the civil legal problems reported by low-income Americans in the past
year received inadequate or no legal help.”); E.H. Geiger, The Price of Progress: Estimating the Funding
Needed to Close the Justice Gap, 28 CARDOZO J. EQUAL RTS. & SOC. JUST. 33, 34–39 (2021) (documenting
an array of causes behind the “justice gap”).
187 Geiger, supra note 170, at 38 (“[T]he average household faces 9.3 legal issues per year. 65% of those problems
are never resolved; potentially because the claimants cannot afford counsel and do not have the legal literacy
to pursue their claims pro se.”).
188 See generally Rory Van Loo, The Corporation as Courthouse, 33 YALE J. REG. 547 (2016) (describing in-
ternal dispute resolution system by firms).
189 Matthew R. Hamielec, Class Dismissed: Compelling a Look at Jurisprudence Surrounding Class Arbitra-
tion and Proposing Solutions to Asymmetric Bargaining Power Between Parties, 92 CHI.-KENT L. REV. 1227,
1231 (2017) (arguing that class action waivers and arbitration provisions can result in “negative value suits”
where low-resource claimants are pitted against wealthier opponents); Gideon Parchomovsky & Alex Stein,
The Relational Contingency of Rights, 98 VA. L. REV. 1313, 1340 (2012) (noting that class actions can trans-
form individual negative value suits into a single positive value action).
190 Ben-Shahar & Strahilevitz, supra note 19, at 1757–58 (discussing interpretation costs); CATHERINE
MITCHELL, INTERPRETATION OF CONTRACTS: CURRENT CONTROVERSIES IN LAW 110 (2007) (noting ex-
penses associated with contextual approaches to interpretation).
45

<<PAGE_BREAK>>

ARBEL & HOFFMAN
Costly interpretation burdens judges too. Chambers are not endowed with refer-
ence experts on call for every query. Courts have fewer resources and competencies than the
layperson would imagine. This stylized fact alone can explain why dictionaries are popular,
and why corpus linguistics is at best experimental; why law office history exists but not law
office econometrics; and perhaps even why federal precedent on state issues is more cited
than the relevant state law, given that the former is thoroughly indexed in common com-
mercial databases and the latter is not.191 To substitute for dictionaries and familiar Latin
canons, new interpretative tools must be free (or nearly so) and widely available. LLMs sat-
isfy those conditions. Already today, interactions through a chat interface do not require
more skill than using a search engine. The deft burglar example offers a proof of concept,
and the remaining examples (though not immediately available in your chatbot window) are
likely months, not years, away.
Generative interpretation is a tool which responds to this access-to-justice concern,
at several levels.
First, if courts commit to the method, the costs of achieving accuracy in contract
interpretation disputes will fall.192 That’s so because the less precise, even if relatively cheap,
forms of textualist evidence—dictionaries and canons—will be replaced by better ones. As
dispute costs fall and outcomes become more predictable, the returns to opportunistic
breach, which generally benefits sophisticated players, will fall.193 It’s true that models may
arise to compete in the market, but as we’ve shown above, more sophisticated models tend
to converge on meaning:: unlike dictionaries, they are not offering idiosyncratic and curated
definitions which differ across people, place and time.
Second, as outcomes become more certain, and the cost of predicting them falls,
there will be fewer cases to adjudicate, because parties will likely have a much better sense of
what they’ll get at verdict, and settle accordingly.194 LLMs, unlike legal dictionaries, require
no specialized legal knowledge to access, and their ease of use will likely improve with time.
191 Samuel Issacharoff & Florencia Marotta-Wurgler, The Hollowed Out Common Law, 67 UCLA L. REV.
600 (2020) (documenting the “dominance of the federal forum”).
192 Cf. Schwartz & Scott, Redux, supra note 38, at 930 (noting the primacy of cost in evaluating the correct
interpretative rules).
193 Cf. Eric A. Posner, A Theory of Contract Law Under Conditions of Radical Judicial Error, 94 N.W. U. L.
REV. 749, 766–69 (2000) (noting that deterministic legal rules discourage opportunistic breach).
194 Cf. Schwartz & Scott, supra note 38, at 603 (“When a standard governs, the party who wants to behave
strategically must ask what a court will later do if the party is sued. The vaguer the legal standard and the more
that is at stake, the more likely the party is to resolve doubts in its own favor.”). This is a partial equilibrium
analysis—better adjudication processes invite more commercial activity, which in turn increases contracting.
46

<<PAGE_BREAK>>

GENERATIVE INTERPRETATION
This implies that there will be a levelling of access to information about law, and a redistri-
bution from more to less repeat players. Further, better calibrated results ex post means that
parties can spend less time (and money) contracting ex ante.195 A promise of generative in-
terpretation—which it may yet fulfill—is that it will open a form of textualism up to the
99%.196
The pages of law reviews are littered with proposed technological solutions to sup-
posed problems of excessive legal costs, and unequal access to information about legal out-
comes, which turn out to be either more intractable than the authors thought or ignore vir-
tues that the authors discounted. We should proceed with care, especially when recom-
mending the widespread adoption of a chatbot that sits on matrices whose outputs even its
creators do not well-understand. The question is not (in our view) whether generative in-
terpretation offers predictions that are superior in all cases to artisanal, careful, linguistic
analysis. It’s whether the method is good enough, right now or soon, for resource-deprived
courts to adopt in ordinary cases. In evaluating that question of basic competency, it’s mean-
ingful that even today’s unspecialized models can replicate the results of well-considered
cases (as Part II explored) and prompt courts to consider their own priors.
But Part II offered a curated tour of generative interpretation’s greatest hits. It didn’t
show you where things can go wrong. To make this tool perform as well as it can, users
should be cognizant of these issues and use it according to evolving best practices. To begin,
let’s start with hallucinatory outputs.197 In a now-famous case from May 2023, lawyers in a
New York Federal court turned to ChatGPT for help researching a motion. The tool
obliged with helpful cites, but unfortunately had completely made up the opinions in ques-
tion.198 A sanctions order and plenty of bad press followed.199 In response to the case, other
195 See Spencer Williams, Predictive Contracting, 2019 COLUM. BUS. L. REV. 621 (arguing that parties could
use information about contract outcomes, harnessed through machine learning of large datasets, to change out
they contract ex ante). But for an insightful discussion of how selection operates to make difficult machine
predictions about litigation outcomes, see David Freeman Engstrom and Jonah Gelbach, Legal Tech, Civil
Procedure, and the Future of Adversariliasm, 169 U. PA. L. REV. 1001, 1065–67 (2021) (discussing obstacles
to prediction).
196 Schwartz & Scott, supra note 38, at 941 (“[T]he more time the court spends on a particular interpretive
issue, the less time it can spend on other issues or other cases”).
197 Sharon D. Nelson, John W. Simek & Michael C. Maschke, Beware of Ethical Perils When Using Generative
AI!, MD. STATE BAR ASS’N (Apr. 19, 2023), https://www.msba.org/beware-of-ethical-perils-when-using-gen-
erative-ai/ (“In fact, it can come up with very plausible language that is flatly wrong. It doesn't ‘mean to’ but it
makes things up--and that is what AI researchers call a ‘hallucination’. . . .”).
198 Benjamin Weiser, Here’s What Happens When Your Lawyer Uses ChatGPT, N.Y. TIMES (May 27, 2023),
https://www.nytimes.com/2023/05/27/nyregion/avianca-airline-lawsuit-chatgpt.html.
199 See Mata v. Avianca, Inc., __ F. Supp. 3d. __, 2023 WL 4114965 (June 22, 2023).
47

<<PAGE_BREAK>>

ARBEL & HOFFMAN
judges have required lawyers to certify that they had not used any form of Artificial Intelli-
gence in their filings.200
False outputs arise from the predictive nature of generative models.201 Hallucina-
tions are generated texts asserting facts that are not quite true.202 Large language models,
remember, are statistical tools optimized to make predictions. But LLMs are not like a help-
ful librarian that simply pulls out the most relevant book on a topic. Facts are stored in the
LLM similar to the way other reasoning and statistical facts are stored, as floating points in
a labyrinthian array of vectors. When asked to provide a source on a legal matter, the model
employs the same method to elicit both facts and inferences. The output doesn’t distinguish
facts from inferred facts, and sometimes will predict the world incorrectly.
Recent work has made significant advances in understanding and mitigating hallu-
cination errors, and more powerful models are less susceptible.203 One solution that is al-
ready used in some contexts is connecting the model to a database of facts, so that it can act
200 Devin Coledwey, No ChatGPT in my court: Judge orders all AI-generated content must be declared and
checked, TECHCRUNCH (May 30, 2023, 7:32 PM), https://techcrunch.com/2023/05/30/no-chatgpt-in-my-
court-judge-orders-all-ai-generated-content-must-be-declared-and-checked/ (explaining the order, which
states that “no portion of the filing was drafted by generative artificial intelligence (such as ChatGPT, Har-
vey.AI, or Google Bard) or that any language drafted by generative artificial intelligence was checked for accu-
racy, using print reporters or traditional legal databases, by a human being”).
201 Benj Edwards, Why ChatGPT and Bing Chat are so good at making things up, ARS TECHNICA (Apr. 6,
2023, 11:58 AM), https://arstechnica.com/information-technology/2023/04/why-ai-chatbots-are-the-ulti-
mate-bs-machines-and-how-people-hope-to-fix-them (“[T]he model is fed a large body of text . . . and repeat-
edly tries to predict the next word in every sequence of words. If the model’s prediction is close to the actual
next word, the neural network updates its parameter’ to reinforce the patterns that led to that prediction.”);
waka55 (u/wakka55), REDDIT (Apr. 16, 2023, 2:48 PM), https://www.reddit.com/r/OpenAI/com-
ments/12okltx/openais_whisper_api_sometimes_returns_what_looks/ (showing that this problem is not
limited to textual generation).
202 Beren Millidge, LLM’s confabulate not hallucinate, BEREN’S BLOG (Mar. 19, 2023),
https://www.beren.io/2023-03-19-LLMs-confabulate-not-hallucinate/ (describing problem).
203 See e.g., Matt L. Sampson & Peter Melchior, Spotting Hallucinations in Inverse Problems with Data Driven
Priors, ARXIV: 2306.13272 (June 23, 2023), https://arxiv.org/pdf/2306.13272.pdf (arguing that hallucina-
tions can be qualitatively differentiated from fact-based inferences by focusing on activation regions); see also
Philip Feldman, James R. Foulds, & Shimei Pan, Trapping LLM Hallucinations Using Tagged Context
Prompts, ARXIV: 2306.06085 (June 9, 2023), https://arxiv.org/abs/2306.06085; see also Ayush Agrawal,
Lester Mackey, & Adam Tauman Kalai, Do Language Models Know When They’re Hallucinating Refer-
ences?, ARXIV: 2305.18248 (May 29, 2023), https://arxiv.org/abs/2305.18248; see also Gabriel Poesia, Kan-
ishk Gandhi, Eric Zelikman, & Noah D. Goodman, Certified Reasoning with Language Models, ARXIV:
2306.04031 (June 6, 2023), https://arxiv.org/pdf/2306.04031.pdf.
48

<<PAGE_BREAK>>

GENERATIVE INTERPRETATION
more like the helpful librarian.204 Another involves reflective self-evaluation.205 So while it is
appropriate to pay attention to the hallucination problem, we tend to think that this prob-
lem will be less salient in the future than it is today. That said, as a best practice, judges would
do well to cross-verify the answers that they get from one platform against another, just as
in the early days of legal research it would pay to check both Lexis and Westlaw to make sure
that your research was complete.206
Second, models are subject to manipulation. Large language models are malleable;
“leading prompts” can lead them to different conclusions. This is roughly analogous to lead-
ing questions for witnesses or jury instructions that frame disputes for or against a particular
outcome. As anyone who has experience with an LLM chat bot will attest, it is relatively easy
to drive conversations toward desired outcomes. In litigation practice, we should expect that
the parties themselves will submit competing prompts, just as they vie to control the framing
of the legal questions in litigation today. In response, factfinders can (as we illustrated above)
ask the model to itself produce competing prompts, and then, rather than relying on a single
query, the factfinder can look at the general trend of responses and share those varying out-
comes in their decisions. Factfinders will also have to decide whether to defer to the parties’
choice of model, should they make that explicit in their contract.
The Katrina analysis raises the related problem of model interpretability.207 The way
models encode language is not based in semantics. Unlike human-based reasoning, models
have a precise sense in which “chocolate” is closer to “bread” than to “nutrition”. This pre-
cision can be misleading if interpreted naively. The Katrina example illustrates how dis-
tances correspond with a sensible account of meaning. It also shows that the policy excep-
tions were closer to ‘fire’ than to the arbitrarily chosen word ‘police.’ It is difficult to under-
stand why, precisely, this result followed. Possibly, fire is a category of disaster and in this
sense it is closer to the insurance policy. Still, it would be misleading to say that the policy
excludes fire damage rather than damage caused by the police. Other terms may lead to more
counterintuitive results. This interpretability gap should caution care in the direct transla-
tion of model outputs to legal judgments. Yet, it is also the case that, on average, these models
204 See generally James Briggs & Francisco Ingham, Fixing Hallucination with Knowledge Bases, PINECONE,
https://archive.pinecone.io/learn/langchain-retrieval-augmentation/.
205 Charlie George and Andreas Stuhlmüller, Factored Verification: Detecting and Reducing Hallucination
in Summaries of Academic Papers, arXiv:2310.10627 (2023)
206 See generally Robert J. Munro, J. A. Bolanos & Jon May, LEXIS vs. WESTLAW: An Analysis of Automated
Education, 71 LAW LIBR. J. 471 (1978) (evaluating platforms against each other).
207 See supra notes 1-25
49

<<PAGE_BREAK>>

ARBEL & HOFFMAN
predict with great accuracy linguistic distinctions that humans make. 208 This presents a gen-
eral tension in language models. They are generally extremely good at capturing meaning,
but they still make errors and it is not always possible to rationalize or foresee these errors.
A third consideration focuses on the models’ strength: They are naturally inclined
to make predictions that maximize probability—in other words, they are biased towards
majoritarian interpretations. Models offer an approximation of general understanding that
may simply not be available in any other way, and thus advance long-held goals of contract
theory.209 But majoritarian interpretations are just that: they embed and advance the values
of the majority. This is doubly problematic. First, courts really ought to be attentive to local,
more private, meanings: Public meaning is second best, prioritized because it is efficient and
not because it is correct.210 But more generally, because the linguistic conventions of un-
derrepresented communities are submerged by majoritarian public meanings, they will find
it more difficult to have their voices surfaced (and thus subsidized) in contract adjudication.
Majoritarian interpretative approaches risk silencing entire communities.211
Surely, this is not a problem unique to generative interpretation: dictionaries, can-
ons, and corpora are equally, if not more, vulnerable to the charge.212 And unlike dictionary-
and-canon-textualism, it is at least theoretically possible to counter the majoritarian-bent of
models in several ways. Models trained on curated datasets that reflect the linguistic conven-
tions of distinct communities would bend towards the majoritarian patterns within those
communities. Adjustments to the model’s hyperparameters elicit more-or-less majoritarian
behaviors from the model. And careful prompt engineering can attune the model to specific
208 For a discussion of the evaluation metrics, see Niklas Muennighoff, Nouamane Tazi, Loïc Magne, and
Nils Reimers, MTEB: Massive Text Embedding Benchmark
209 Schwartz & Scott, supra note 38, at 583–84.
210 For the foundational work distinguishing local from popular interpretative modes, see 2 SAMUEL WILLIS-
TON, THE LAW OF CONTRACTS, § 604, 1162 (1920). Even textualists understand that strict adherence to the
public meaning of words, bereft of any commercial understanding of what the parties could have been, will
sometimes lead courts astray. See generally Stephen J. Choi, Mitu Gulati & Robert E. Scott, The Black Hole
Problem in Commercial Boilerplate, 67 DUKE L.J. 1, 2 (2017) (describing pari passu clauses as “a standard
provision in sovereign debt contracts that almost no one seems to understand”).
211 See, e.g., Majorie Florestal, Is a Burrito a Sandwich, 14 MICH. J. RACE & L. 1, 36–39 (2008) (discussing role
of race and class in an interpretation dispute); Alexandra Buckingham, Note, Considering Cultural Commu-
nities in Contract Interpretation, 9 DREXEL. L. REV. 129 (2016) (arguing for the use of cultural meaning in
interpretation); see also supra note 157.
212 Steven J. Burton, A Lesson on Some Limits of Economic Analysis: Schwartz and Scott on Contract Inter-
pretation, 88 IND. L.J. 339, 350 (2013) (arguing that majoritarian readings can privilege certain views).
50

<<PAGE_BREAK>>

GENERATIVE INTERPRETATION
contexts.213 This is an active area of research and regulatory scrutiny and should check fact-
finders.214
Fourth, models may become subject to parties’ adversarial attacks, prompt injec-
tions, or will be otherwise fragile in unexpected ways.215 By way of illustration, modern AI
systems can reliably differentiate between pictures of panda bears and horses, or stop signs
and yield signs. But if a sophisticated party can imperceptibly change the color of a pixel here
and there, that will be enough to make the model erroneously see a horse or a yield sign.216
The same manipulations can be used to “attack” LLM models.217 Slight changes in the word-
ing of a contract—e.g., subtle changes in the presentation of the words—might hack the
model logic system and alter its interpretation.218 There is no known general solution to such
issues. But if judges and parties become aware of the possibility of such subtle manipulations,
they might develop defenses, like using sanitized versions of the contract in their analyses.219
Fifth, models are sensitive to time. As your neighborhood originalist will tell you,
the meaning of words is embedded in the time they were used. If we want to interpret the
meaning of a contract signed in 1924, we should account for the linguistic conventions of
213 For an illustration of this use case, see Arbel & Becher, supra note 15, at 99–104.
214 Proposal for a Regulation of the European Parliament and of the Council Laying Down Harmonized Rules
on Artificial Intelligence (Artificial Intelligence Act) and Amending Certain Union Legislation Acts, at 4,
COM (2021) 206 final (Apr. 21, 2021) (stating that a goal of the proposal is to “minimise the risk of algorith-
mic discrimination, in particular in relation to the design and the quality of data sets used for the development
of AI systems.”).
215 For an expanded discussion, see Arbel & Becher, supra note 15.
216 Agnieszka M. Zbrzezny & Andrzej E. Grzybowski, Deceptive Tricks in Artificial Intelligence: Adversarial
Attacks in Ophthalmology, 12(9) J. CLIN. MED. 3266 (2023) (“Suppose we consider even minor perturbations
to the image, such as the change in colour of just one pixel. Then, such models are uncertain for small pertur-
bations.”).
217 For a formal exploration, see Jindong Wang, Xixu Hu, Wenxin Hou, Hao Chen, Runkai Zheng, Yidong
Wang, Linyi Yang, Wei Ye, Haojun Huang, Xiubo Geng, Binxing Jiao, Yue Zhang & Xing Xie, On the Ro-
bustness of ChatGPT: An Adversarial and Out-of-distribution Perspective, ARXIV: 2302.12095 (Mar. 29,
2023), https://arxiv.org/pdf/2302.12095.pdf.
218 From the model’s perspective, “please” and “please” are not the same word. For an accessible exploration,
see Computerphile, Glitch Tokens - Computerphile, YOUTUBE (Mar. 7, 2023),
https://www.youtube.com/watch?v=WO2X3oZEJOA. Various other examples are esoteric: certain models
act unexpectedly when presented with specific nonsensical words like “SolidGoldMakigarp.” See FORBIDDEN
TOKENS PROMPTING RESULTS, https://docs.google.com/spreadsheets/d/1PAZNCks11qoUpiojTJpj0od-
CYQL2_HGQgam8HSwAopQ/edit#gid=0 (last visited July 20, 2023). But in high stakes settings, such vul-
nerabilities can be exploited.
219 Courts could require, for example, that texts will be presented in plain text format. This would limit some
forms of attacks—especially those that are embedded in the graphical layer of the document. But the bitter
lesson from cybersecurity is that security is a process, not a product. For illustration, see Riley Goodside,
https://twitter.com/goodside/status/1713000581587976372.
51

<<PAGE_BREAK>>

ARBEL & HOFFMAN
the time. Models today are trained on data indiscriminately: It is unlikely that they will be
able to interpret a term as it was read in a specific period in time. The problem is com-
pounded since the training data may include information that was not available for the con-
tracting parties at the time of contracting. This may well include the decision of a trial court
when the appellate court seeks to interpret the contract. We can think about this as pollu-
tion of the database: For example, perhaps Hurricane Katrina associated “levee” with “flood”
more closely than it was at the time the relevant insurance contracts were signed.220 Or per-
haps the Stewart example was confounded by the subsequent decades of linguistic evidence
of payment defaults.
This problem is longstanding. Judges’ innate sense of language is also grounded in
the linguistic conventions in which they are personally embedded. Dictionaries and corpus
linguistics have an advantage here, because one could seek a dictionary or a corpus from the
relevant time period. But even this advantage is limited, because dictionaries are updated in
intervals of decades,221 and corpora cover considerably fewer texts when they are sliced to
relevant time periods.222 Thus, courts will have to consider whether the use of language has
shifted over time, and perhaps restrain the use of generative interpretation in cases where its
training data suffers from linguistic drift. Another way to put this is that generative inter-
pretation is likely to be least useful for old contracts, where worries about subsequent judicial
opinions interpreting like terms are most severe, unless and until specialized models with
time delineated training data come online.
Sixth, generative interpretation will need a language of its own. Although scholars
often hype objective, scientific methods of proof and judgment, this way of explaining and
justifying the exercise of power is uncompelling, and perhaps repulsive, to the population at
large.223 (Which is one reason we’ve tried to tamp down the statistics and claims to singular
answers in this paper.) Juries, after all, aren’t presented with simple probabilistic proofs, and
judges don’t typically justify their decisions by saying they have a 51% chance of being
220 A more far-fetched problem is parties trying to inject meaning into the record, just as they would in a normal
interpretation dispute by way of after-action lawyer letters and the like. But because parties expect perfor-
mance, not breach, and the relevant corpora for LLMs is so vast, jurists should worry less about this problem
than the internal-to-the-text adversarial attacks we describe above.
221 See HISTORY OF THE OED, https://www.oed.com/information/about-the-oed/history-of-the-
oed/?tl=true (last visited July 20, 2023); See MERRIAM-WEBSTER ABOUT US ONGOING COMMITMENT,
https://www.merriam-webster.com/about-us/ongoing-commitment (last visited July 20, 2023).
222 Mouritsen, supra note 20, at 1378 (“One of the challenges for examining usage in context in a corpus is that
the greater the specificity of the search, the fewer examples appear in the corpus.”).
223 David A. Hoffman & Michael P. O’Shea, Can Law and Economics Be Both Practical and Principled?, 53
ALA. L. REV. 335, 339 (2002) (“Most intriguingly, the studies suggest that in certain cases people prefer that
legal decisions not be made on an economic basis.”).
52

<<PAGE_BREAK>>

GENERATIVE INTERPRETATION
right.224 Thus, a real problem for the method—which it shares with corpus linguistics and
the survey methodologies discussed in Part I—is how to explain itself to lay audiences in
ways that reinforce, rather than diminish, judicial legitimacy.225 It’s sociologically normal to
say that the word chicken takes meaning from the dictionary and trade usage.226 This socio-
logical framework does not yet exist for black box language models.227 Courts will have to
find ways to wrap the results from automated interpretation in packages that help laypeople
to see law as engaging in a values-driven, communal, constrained exercise, and not merely
the highest probability next-token predictions.228
The solution likely lies in a specific type of transparency. Just as much as judges are
sociologically committed to certain types of dictionaries, so will it be the case that certain
models will emerge as robust and trustworthy. The current practice of interpretation is
largely indefensible on this score; because we have no window into the court’s processes, we
cannot see the dictionaries it did not select or the words it chose not to focus on. But we can
know what model a court picks, and from that selection, what probabilities it assessed. We
cannot know exactly how the model produced those outcomes, as this knowledge lies in its
vast inscrutable matrices. But so long as a judge not only discloses the version of the model
that she employed, but also the particular prompts that she used, generative interpretation
224 As Nesson famously argued, the fact-finding system (and juries) exists to achieve legitimacy, not just accu-
racy. Charles Nesson, The Evidence or the Event?: On Judicial Proof and the Acceptability of Verdicts, 98
HARV. L. REV. 1357, 1358 (1985).
225 Cf. Benjamin Minhao Chen, Alexander Stremitzer & Kevin Tobia, Having Your Day in Robot Court, 36
HARV. J. L. & TECH. 1 (2022) (presenting experimental evidence that subjects are not biased against algorith-
mic decisionmakers).
226 See Frigaliment Importing Co. v. B.N.S. Int’l Sales Corp., 190 F. Supp. 116 (S.D.N.Y. 1960) (adopting the
broader meaning of the word after contextual inquiry).
227 Hasala Ariyaratne, The Impact of Chatgpt on Cybercrime and Why Existing Criminal Laws Are Adequate,
60 AM. CRIM. L. REV. ONLINE 1, 7 (2023) (“Since ChatGPT uses complex deep learning algorithms, it is often
a black box with no clear reason why it provided a certain output.”); David S. Rubenstein, Acquiring Ethical
AI, 73 FLA. L. REV. 747, 766 (2021) (“[D]eep learning neural networks drive some of the most powerful, so-
phisticated, and functional AI systems, but their complexity renders them inscrutable to humans.”); Nelson,
Simek & Maschke, supra note 197, at 30 (“AI is largely a ‘black box’––you cannot see inside the box to see how
it works.”).
228 Related to this rhetorical concern is one about attribution and basic fairness that citizens may have about
use of LLMs. See, e.g., Sheera Frenkel & Stuart A. Thompson, ‘Not for Machines to Harvest’: Data Revolts
Break Out Against A.I., N.Y. TIMES (July 15, 2023), https://www.nytimes.com/2023/07/15/technology/ar-
tificial-intelligence-models-chat-data.html; Mark A. Lemley & Bryan Casey, Fair Learning, 99 TEX. L. REV.
743, 748 (2021) (“In this Article, we argue that ML systems should generally be able to use databases for train-
ing, whether or not the contents of that database are copyrighted.”); see also Peter Henderson, Xuechen Li,
Dan Jurafsky, Tatsunori Hashimoto, Mark A. Lemley & Percy Liang, Foundation Models and Fair Use,
ARXIV: 2303.15715 (Mar. 28, 2023), https://arxiv.org/pdf/2303.15715.pdf.
53

<<PAGE_BREAK>>

ARBEL & HOFFMAN
is more replicable than any other method on offer.229 (We have tried to show how that would
work in the notes of this article.) Indeed, courts might go further: They can capsule the re-
sults of their inquiries and incorporate them as permanent links to their opinions.
In summary, generative interpretation promises an accessible, relatively predictable,
tool that will help lawyers and judges interpret contracts. If it’s to achieve that promise,
courts will need to be careful to use this tool while being mindful of its uses and limitations.
To guide what would inevitably be a process of exploration, we offered a series of best prac-
tices based on the technical foundations and legal constraints that define the limits of this
tool. As a default, judges should disclose the models and prompts they use and try to validate
their analyses on different models and with multiple inputs. Ideally, they’d capsule their
findings online. They’ll want to be careful about parties’ manipulative behavior, and to con-
sider how (and whether) to excavate private, non-majority meanings. By doing so—and by
saying what they are doing clearly and with appropriate recognition of LLMs’ foibles—
courts can fairly experiment with this new technology and achieve a better grasp on the con-
tract’s meaning, without abusing the tool or subjecting themselves to reversals.
B. Beyond the Textualist/Contextualist Divide
As we described in Part I, the modern debate about interpretation takes as a given
that prediction is the goal. But in dividing about how to best accomplish prediction, scholars
and courts disagree about an empirical meta-question: How would most parties prefer that
courts interpret their deals?230 Many have argued that sophisticated parties prefer textual-
ism.231 Others assert that contextualism is preferred, especially within longer-term relational
contexts.232 Some argue such preferences are, well, contextual.233 Litigated cases appear to be
all over the map.234 The views of poorer parties are more rarely studied. True, contextualism
promises to protect parties from bait-and-switch maneuvers and opportunistic drafting. But
who can afford it?
229 The model disclosure should include the model’s hyperparameters, much like judges share the version of
the dictionary they consulted.
230 Bayern, supra note 98, at 1101.
231 See, e.g., Schwartz & Scott, supra note 38, at 941 (“[P]arties prefer textualist interpretive defaults.”).
232 See Lisa Bernstein, Merchant Law in a Merchant Court: Rethinking the Code's Search for Immanent Busi-
ness Norms, 144 U. PA. L. REV. 1765, 1769–70 (1996) (business arbitrators avoid business norms); Benoliel,
supra note 56 (sophisticated parties prefer textualism). For a survey of the scholarly literature, see Silverstein,
supra note 99, at 278–81; see also U.C.C. § 2-202(a) (AM. L. INST. & UNIF. L. COMM’N 1951) (usage of trade).
233 See Adam B. Badawi, Interpretive Preferences and the Limits of the New Formalism, 6 BERKELEY BUS.
L.J. 1, 1 (2009).
234 Silverstein, supra note 57, at 259 (noting courts mixed approaches in litigated cases).
54

<<PAGE_BREAK>>

GENERATIVE INTERPRETATION
Generative interpretation challenges the utility of this old binary. Starting with tex-
tualism, its proponents have said that it builds a common commercial vocabulary and moti-
vates clear contract drafting.235 But if applied correctly, generative interpretation (as a form
of textualism) can predict parties’ intent well even without invocation of specialized lan-
guage or expensive drafting. And if courts follow our proposed best practices, this method is
also predictable ex ante. When parties can anticipate in advance the choice of model—and
we argue that they should be able to contract for it explicitly—then they can clarify disputes
well ahead of litigation. Even if the judge consults a broader evidentiary base than the con-
tract itself, models can incorporate it and produce consistent outputs.
By contrast, contextualism promises accuracy by integrating all relevant evidence.
Its champions think it protects the weak from the powerful and reflects the real premises of
relational contracting relationships.236 But as a judicial practice, it encourages gamesman-
ship,237 exposes decisionmakers to bias-inducing testimonies, increases uncertainty,238 and
more than anything, is simply very expensive. Generative interpretation can also serve as a
form of contextualism. It is cheaper to incorporate context into the process when the model
can feed on dozens of pages of evidence. Models are not prejudiced by parcels of evidence
like human decisionmakers. And armed with LLMs, judges can assess, at the summary judg-
ment stage, the incremental probative value of proposed elements of evidence. As we demon-
strated with respect to Stewart, the judge can weigh in advance whether litigation over, say,
the records of a phone conversation would be materially important to the outcome. This
kind of prioritization is generally the approach of Uniform Commercial Code. 239 Courts
might be more comfortable adopting the UCC’s generally contextual approach outside the
law of sales were they to believe that each type of evidence could be (in fact) separately eval-
uated and weighed.
235 Gilson, Sabel & Scott, supra note 54, at 40–41.
236 See supra notes 89–98 and accompanying text (discussing contextualism).
237 Gilson, Sabel & Scott, supra note 54, at 41 (“Under a contextualist theory, a party for whom a deal has
turned out badly has an incentive to claim that the parties meant their contract to have a different meaning
than the obvious or standard one. Such a party can often find in the parties’ negotiations, in their past practices,
and in trade customs, enough evidence . . . force a settlement . . .”).
238 Schwartz & Scott, supra note 38, at 587; Schwartz & Scott, Redux, supra note 38, at 944–47 (arguing that
certain parties prefer textualist defaults in part because of the risk of error).
239 U.C.C. § 1-303(e) (AM. L. INST. & UNIF. L. COMM'N 1977) (order of hierarchy). The hierarchy doesn’t
always control. See, e.g., Air Prod. & Chemicals, Inc. v. Roberts Oxygen Co., No. CIV.A. 10C12243 FSS, 2011
WL 7063681, at *3 (Del. Super. Ct. Nov. 30, 2011) (“Much like Delaware law, Pennsylvania law prefers the
contract's express terms. But, Air Products’s course of dealing and course of performance allegations might
illuminate the contract and bring its terms into sharper relief.”).
55

<<PAGE_BREAK>>

ARBEL & HOFFMAN
All of this suggests a disruption of the traditional impasse. Generative interpretation
allows both predictability and restraint, while also offering better linguistic accuracy. And it
corrals litigation costs.240 Or to put it differently, the choice between four corners or no cor-
ners at all is a product of its time and of a specific adjudicatory technology. As this technol-
ogy improves, judges can relax old safeguards towards a more inclusive approach.
To be sure, generative interpretation would be a simple flip in the default: Parties
could indicate that their meaning was not to be determined by large language models, just as
they can now commit to avoiding certain dictionaries or choosing others.241 Just as using a
dictionary to interpret a secret cipher is a foolish way to interpret a deal,242 following parties’
expressed interpretative preferences is wise. Generally speaking, giving parties the ability to
control how contracts are interpreted respects their autonomy and carries efficiency bene-
fits.243 So too here: Generative interpretation expands the kinds of evidence that most par-
ties would like courts to consider, but it won’t be for everyone.
Even if all generative interpretation does is flip the default on extrinsic evidence sur-
rounding contracting, it still has important distributive effects. Textualism’s many virtues
can be recast as its elitist faults. Poorer parties, or uncounseled ones, often misunderstand
the relationship between contractual disclaimers of reliance and oral sales talk.244 Though
the Restatement of Consumer Contracts suggests that courts should be more open to the
idea that contracts that disclaim obligation in the face of contrary promises should not be
enforced,245 it does little to help with interpretative disputes which are less obviously unjust.
And yet there are many examples of parties’ proffered meaning being excluded as violative
of the parol evidence rule,246 or simply not considered because the meaning is purportedly
plain.247 As the Ellington example above demonstrates, even on their own terms such deci-
sions may be questioned.248 But if the parties have not otherwise indicated, generative
240 Schwartz & Scott, Redux, supra note 38, at 946 (suggesting that controlling litigation costs is one reason
that sophisticated parties prefer to avoid extrinsic evidence).
241 5 MARGARET N. KNIFFIN, CORBIN ON CONTRACTS: INTERPRETATION OF CONTRACTS § 24.9 (Joseph
M. Perillo ed., rev. ed. 1998) (courts should enforce private meanings, “however we may marvel at the caprice”);
see, e.g., Smith v. Wilson (1832) 3 B. & Ad. 728, 728 (holding that “parol evidence was admissible to sh[ow]
that . . . the word thousand, as applied to [the contract], denoted twelve hundred”).
242 KNIFFIN, supra note 241, § 24.13 (courts should and do enforce the parties’ vernacular).
243 Schwartz & Scott, supra note 38, at 569.
244 Lawrence M. Solan, The Written Contract as Safe Harbor for Dishonest Conduct, 77 CHI.-KENT L. REV.
87, 92 (2001) (identifying ways in which integrated agreements promote injustice).
245 Restatement of Consumer Contracts § 6 (2023).
246 Gold Kist, Inc. v. Carr, 886 S.W.2d 425, 430 (Tex. App. 1994), writ denied (Mar. 23, 1995).
247 Greenfield v. Phillies Recs., Inc., 98 N.Y.2d 562, 570 (2002).
248 See supra notes 158-165 and accompanying text.
56

<<PAGE_BREAK>>

GENERATIVE INTERPRETATION
interpretation will provide more evidence to courts that extrinsic meaning ought to matter
in discerning what the parties contemporaneously would have said they meant.
An exemplary case that generative interpretation could benefit is Smith v. Cit-
icorp.249 The Smiths needed to borrow money to repay an old loan and pay for some home
improvements. They turned to Citicorp, which purported to create a revolving loan agree-
ment, secured by their home. The key to the dispute was that the interest rate on this loan
was 13.99% APR, a rate only permissible for revolving loans, not closed ones. The Smiths
argued that closed is exactly what the loan agreement was. Miraculously, the Smiths had
signed affidavits from two Citicorp employees, attesting that Citicorp never intended to
make advances on this loan (which would have defined an open-ended, revolving, loan). But
the Supreme Court of Alabama ignored that highly-probative and rare evidence because it
laid outside the four corners of the contract.
We think this result gives too much weight to generalized worries about courts’
competency to evaluate extrinsic evidence. It would be a trivial task to incorporate the affi-
davits into the generative analysis, and, as we’ve shown, they can be weighted according to
the judge’s priors. This would not resolve questions of credibility and relevance, but the flex-
ibility of incorporating it at the margins might radically improve the accuracy of the court’s
analysis.
Because generative interpretation blurs the line between textualism and methods of
interpretation that are more capacious in their evidentiary sources, and because it enables a
new set of evaluative metrics and socio-legal advantages, we think that it ultimately won’t be
(just) Textualism 2.0. Rather, it will become a distinctive method of evaluating contractual
meaning, marked by its own jargon, normative commitments, and practitioner community.
That new methodology will take time to develop. As we said, in the early days, judges will
dip in and out of the application, using it as one would a dictionary, or a refresher CLE on
the canons of contract interpretation. Only when lawyers start to argue that the tool can
provide better answers to interpretative questions will courts ask if that is true, and whether
answers from ChatGPT should supplant those from Merriam’s or Black’s dictionaries.
CONCLUSION
In this Article we introduced generative interpretation, a method of interpreting
legal texts using large language models. Our work follows a rapidly evolving practice: Lawyers
249 Smith v. Citicorp Pers.-to-Pers. Fin. Centers, Inc., 477 So.2d 308, 311 (Ala. 1985).
57

<<PAGE_BREAK>>

ARBEL & HOFFMAN
and judges are already experimenting with these models in law offices and chambers across
the country, some covertly, others less so. We offered a deep dive into the way the technology
works (and fails) and explored techniques of using it to better perform interpretative tasks.
We demonstrated that the technique can be applied to famous contracts cases, often arriving
at the same answers at lower cost and with greater certainty, and while sometimes exposing
ambiguities, dislodging sticky priors about meaning, and parceling out the marginal effect of
new evidence on interpretation.
In our view, generative interpretation is a tool with important implications for legal
practice and contract theory. Because language models are attentive to context, and because
they can voraciously digest long texts, they offer a much more robust form of textualism.
The models’ complex encoding of language far outstrips that of any dictionary, and extensive
training data give them a superior sensitivity to actual usage. All of that promises a consider-
ably better way to predict meaning, but it won’t replace judges. Attempting to do so would
ignore the model’s real limitations, which include their opacity, hallucinatory nature, latent
biases, and susceptibility to adversarial attacks by sophisticated parties.
Keeping these limitations in mind, we argued that generative interpretation never-
theless paves an important middle ground between too-cold textualism and too-hot contex-
tualism. The traditional tradeoffs between textualism and contextualism take as a given that
our textualist inquiry must depend on dictionaries and that extrinsic evidence is necessarily
costly and prone to manipulation. Because generative interpretation is easy to deploy, cheap,
and accurate, and because it is not prone to those specific biases, it suggests a workable third
way. We argue that, given this technology, parties would prefer courts to ascertain meaning
using some extrinsic evidence. As such, generative interpretation will become a majoritarian
default.
With time, these discussions will spill over to even broader debates about statutory
and Constitutional interpretation, originalism and public meaning, and the relative compe-
tencies of courts and agencies to reach unbiased, predictable outcomes. We deferred direct
discussion of these issues, not least because we’re not competent to resolve them. This work,
nonetheless, fits into this broader interpretative project of assigning meaning to legal instru-
ments.
We close by offering a different sort of prediction. If, in fact, these models can ascer-
tain party intent to a close-enough approximation, it seems obvious that courts will (and
should) use them to make interpretation better. But if that’s really true, we wonder why
parties would continue to commit to contracts at all? Formal contracting is expensive. Why
not, instead, simply write out jointly-held goals at the beginning of the relationship and let
58

<<PAGE_BREAK>>

GENERATIVE INTERPRETATION
models spit out codes of conduct and legal responsibility as problems arise down the line?250
Or to put it differently, right now, generative AI looks like a promising judicial adjunct. But
the future of this technology is more disruptive by far: Formal contracts themselves may be
made obsolete. Or, at the very least, jurists should consider the marginal value of contracting
if the terms themselves are fairly determinable from the parties’ goals.
250 Cf. Cathy Hwang, Deal Momentum, 65 UCLA L. REV. 376, 380 (2018) (describing the use of terms
sheets as deal motivators).
59

---

## ssrn-4631897: NANO CONTRACTS 11/14/2023 2:12 AM
Year: 2023
Authors: Yonathan Arbel
Source: papers/ssrn-4631897/paper.txt

NANO CONTRACTS 11/14/2023 2:12 AM
ON THE SCALES OF PRIVATE LAW:
NANO CONTRACTS
FORTHCOMING:
37 HARVARD JOURNAL OF LAW & TECHNOLOGY (2024)
Yonathan A. Arbel
Contracts are falling in scale. New contracting trends and technologies
facilitate the formation of smaller scale contracts that have extremely short
duration, stakes, and scope. These nano contracts embody ephemeral
interactions of minuscule value interactions that were so far outside the
law and away from explicit markets, governed only by social norms.
The rise of nano contracts can unlock new transaction types,
opportunities to build wealth, and reduce dependence on private ownership.
Yet they also carry important risks, and their small scale makes them difficult
to effectively regulate. At the limit, nano contracts collapse private law
boundaries between property, torts, and contract, and would require a
rethinking of the basic private law categories. This Article offers the first
comprehensive study of these Lilliputian agreements, examining their
potential while attending to questions of enforceability, market creep, and
disparate impact. The analysis reveals the essential, if neglected, role of scale
in private law, and how it can and should inform jurisprudence and policy.
Cite as: Yonathan A. Arbel, On the Scales of Private Law: Nano
Contracts, 37 HARV. J. L & TEC. __ (Forthcoming, 2024)
 Associate Professor of Law, University of Alabama, School of Law. I appreciate the helpful
comments of Jasmine Abdel-Khalik, Samuel Becher, Jonathan Choi, Chris Dharozal, Leah
Fowler, Michael Gilbert, Shane Greenberg, Dave Hoffman, Rich Hynes, Mark Lemley, Jean
Powers, Aaron Perzanowski, Wyatt Pless, David Schwartz, Lior Strahilevitz, Henry Smith,
Andrea Tosato, and Christopher Yoo. The Article was selected based on blind review to the
Northwestern Law & Stem workshop. For research support, I thank Dylan Cox, and Gilberto
Gomez.
Electronic copy available at: https://ssrn.com/abstract=4631897

<<PAGE_BREAK>>

2 Draft[Vol. __
Table of Contents
I. INTRODUCTION ...................................................................................... 3
II. A PEDESTRIAN THOUGHT EXPERIMENT: NANO CONTRACTS AND THE FOUR-
WAY STOP ....................................................................................... 8
III. FUNDAMENTALS OF NANO CONTRACTS: PLATFORMS, PROTOCOLS, AND
LEGAL TECHNOLOGY ...................................................................... 11
A. Scale and Contract Evolution ....................................................... 12
B. Nano Contracts as a Technology .................................................. 16
1. Practical Constraints that Nano Contracts Must Meet .............. 19
2. How Nano Contracts Can Meet These Constraints .................. 21
IV. NANO LINES ..................................................................................... 28
A. Nano Contracts and the Problem of Queues .................................. 28
B. Legal Policy on Nano-Contracting Lines ........................................ 36
V. NANO LEASES ....................................................................................... 42
A. Nano Leases and Excess Capacity .................................................. 42
B. The Legal Policy on Nano Leasing ................................................ 46
VI. NANO GIGS ........................................................................................ 52
A. Nano Work and the Problem of Casual Work ................................ 52
B. The Legal Policy on Nano Work .................................................. 53
VII. NANO ACCIDENTS ............................................................................. 55
VIII. CONCLUSION ................................................................................... 58
Electronic copy available at: https://ssrn.com/abstract=4631897

<<PAGE_BREAK>>

2023] 𝑛𝐾 3
I. INTRODUCTION
THERES PLENTY OF ROOM AT THE BOTTOM
RICHARD FEYNMAN1
In the 1959 annual meeting of the American Physical Society,
theoretical physicist Richard Feynman stood up and took the stage, set to
deliver a puzzlingly titled after-dinner speech. 2 With his signature
mischievous grin, Feynman sought to persuade a room of physicists that
they should turn their gaze from the heavens above to the molecular level
below. It is at the bottom the smallest scale of atomic interactions that
we can find grand opportunities for innovation. In his inimitable style, he
surgeon, 3
to be able to replace the heavy hand of the surgeon with a pill containing a
nano robot that performs operations with perfect precision. Miniaturization
and development of nano scale technologies could lead to grand
discoveries or so Feynman claimed.
this message. His ideas were summarily dismissed as fanciful and
outlandish.4 The nanotechnology
revolution was built on 5 Today,
nanotechnology is growing everywhere, from medicine to engineering and
from manufacturing to science, attesting to 6
There is plenty of room at the bottom for contracts too. This Article
overarching argument is that (1) current technological trends show a
dramatic miniaturization of contract scale and (2) that the changed scale has
1 Richard P. Feynman, Plenty of Room at the Bottom, 16 RESONANCE 890, 890
(2011). Something will be lost from reading . Feynman later
gave a similar talk, this time recorded, which is available online. Muon Ray, Richard Feynman
Tiny Machines Nanotechnology Lecture aka Theres Plenty of Room at the Bottom, YOUTUBE,
(Aug. 22, 2012), https://www.youtube.com/watch?v=4eRCygdW--c [https://perma.cc/DHE2-
X3FB].
2 Feynman, supra note 1, at 890.
3 Id. at 900 (recounting a similar nano robot hypothetical proposed by Albert R. Hibbs).
4 The lecture was only cited seven times in the first two decades after its publication.
Editorial, Plenty of Room Revisited, 4 NATURE NANOTECHNOLOGY 781 (2009). On its reception,
see Christopher Toumey, Reading Feynman Into Nanotechnology: A Text for a New Science, 12
Techné 133, 142 (Fall 2008). At the time of writing, it boasts nearly 6,000 citations.
5 This is so much the case that Nature Nanotechnology has a norm of forbidding authors
s become somewhat of a cliché. Plenty of Room
Revisited, supra note 4, at 781 (referring to an unwritten rule to not
at the start of an article unless absolutely necessary).
6 See generally Debnath Bhattacharyya, Shashank Singh, Niraj Satnalika, Ankesh
Khandelwal & Seung-Hwan Jeon, Nanotechnology, Big Things from a Tiny World: A Review, 2
INTL J. U- & E- SERVICE, SCI. & TECH. 29, 29 36 (2009) (looking into the present and future
usage of nanotechnology across different fields).
Electronic copy available at: https://ssrn.com/abstract=4631897

<<PAGE_BREAK>>

4 Draft[Vol. __
deep legal implications. What I will strive to show throughout is that scale
transformations do more than change the commercial aspect of transactions,
they also carry the seed of social transformation. Drawing on examples of
past scale transformations in contracts, it will become clear that a fall in
contract scale can lead to broad social, political, and material changes. But
while the march of technology is likely inevitable, the social response is not.
Some of the changes carry great promise, promoting greater autonomy,
choice, and prosperity. Yet, if the legal response is inattentive, these changes
can also imperil social values, marginalized communities, and freedom. The
Article works to illuminate both the promise and peril that lie at the bottom
of contracts.7
To motivate the analysis, consider the joint effect of some recent
colinear trends in contracting practices: digitization of the contractual
forms;8 cultural normalization of digital deals; the dispensation with wet
signatures; the thundering rise of Everything-as-a- XaaS
contracts; 9 the tokenization and fractionalization of ownership; the
ascendance of high-frequency trading (itself often a form of nano
contracting);10 the increasing ability of AI agents to
effectively process natural language, negotiate, and transact;11 and the
persistent high-speed Internet connectivity of geolocated individuals and
objects.12 What ties these trends together is their creation of infrastructure
that allows for the formation of agreements at near-zero latency and at
asymptotically low transaction costs. These trends set the ground for a new
breed of contract: nano contracts.
7 As emphasized throughout, the graveyards are full of failed predictions about the future of
contracts, chief among them being GRANT GILMORE, THE DEATH OF CONTRACT (1974). Part V
offers a homage to this wonderful, if mistaken, prediction by hazarding an opposite future. See
infra Part V.
8 See, e.g.,
younger lawyer will be excused for assuming that electronic contracts are enforceable, but as
recently as 2021, the Supreme Court of Mississippi held, as a matter of first impression, that the
nic means, i.e.
9 For further discussions of the XaaS model, see infra notes 77 81.
10 See Gianluca Piero Maria Virgilio, High-Frequency Trading: A Literature Review, 33 FIN.
MKT. & PORTFOLIO MGMT. 183, 183 (2019) -
frequency trading has had a profound impact on the micro- . In
particular, the trading and (effectively) leasing of future contracts for the span of a few
milliseconds is a large-scale demonstration of nano contracting and its potential.
11 See generally Yonathan A. Arbel and David A. Hoffman, NYU L. REV. (Forthcoming,
2024) (exploring the use of large language models to process language in legal settings).
12See Mobile Fact Sheet, PEW RSCH. CTR (Apr. 7, 2021) (reporting that 85% of Americans
own a smartphone), https://www.pewresearch.org/internet/fact-sheet/mobile/
[https://perma.cc/RJ3B-Z7U4]; infra notes 72 81 and accompanying text.
Electronic copy available at: https://ssrn.com/abstract=4631897

<<PAGE_BREAK>>

2023] 𝑛𝐾 5
Nano contracts are digitally negotiated agreements that employ
automated and near-instantaneous bargaining processes in multiparty peer-
to-peer ( p2p ) transactions. What makes them nano is their scale. They
cover transactions that last a few seconds; transfer cents, milles, and even
smaller fractions of the dollar;13 or transfer slivers and fragments of the
bundle of rights of ownership. Their p2p character reduces the need for
intermediation, and thus allows parties to transact with each other without
necessarily involving firms or platforms in the middle.
Two preliminary questions immediately present themselves. Is there
anything truly new about these agreements if they are simply smaller scale
contracts, and are these fleeting agreements even properly called contracts?
On reflection, these two questions respond to each other. Classical concepts
of definite position and momentum break down at the quantum scale. So
do contracts. In classical contracts, the most basic distinction is between
pure exchange relationships and contractual ones.14 This classification is
made based on certain assumptions about the identity of the parties, their
capacity, the negotiation process, the values exchanged, and so on. Because
these assumptions no longer necessarily hold, it is increasingly difficult to
classify nano contracts as either contracts or spot exchange. The blurring of
these two categories is what makes nano contracts so interesting to study.15
This point is best illustrated through a recent example. The rise of the
gig economy brought its own scale transformation.16 Before the gig
economy, short transportation agreements were mediated by the state
through licensing and certification schemes.17 Uber and Lyft changed that
by arguably disintermediating the relationship.18 Much of the recent lawfare
around these platforms is about the classification of the agreements they
facilitate. Is Uber an employer? What does it owe its drivers? Uber proposed
that it only matches passengers to independent contractors for pay, and that
this exchange does not amount to a contract, hoping to skirt the
13 Section 20 of the Coinage Act of 1792 defined the mille as a fraction of a cent. See
Coinage Act of 1792, ch. 16, § 20, 1 Stat. 246, 250 51 (1792) (repealed 1873).
14 True to the realist tradition, Arthur Linton Corbin advises that the very definition of what
counts as a contract must not be made in a purely analytical fashion divorced from our necessity
and convenience. ARTHUR LINTON CORBIN, CORBIN ON CONTRACTS 4 (1952).
15 The technical definition of contracts as a set of enforceable promises is frustratingly
circular, but it does elucidate that if there is a nano contract, then it exists in the metaphysical
promises rather than digital code. See RESTATEMENT (SECOND) OF CONTRACTS § 1 (AM. L. INST.
1981); Contract, BLACKS LAW DICTIONARY (11th ed. 2019).
16 See, e.g., WEBSTERS NINTH NEW COLLEGIATE DICTIONARY 517 (1985) (defining gig as
). The modern meaning is more diffused and
contested. See Benjamin Della Rocca, Unemployment Insurance for the Gig Economy, 131 YALE
L.J. F. 799, 802 (2022) .
17 See, e.g., Medallion Owner, Individual, NYC MYCITY, https://nyc-
business.nyc.gov/nycbusiness/description/medallion-owner-individual/about
[https://perma.cc/CY7S-9BYN] (last visited Nov. 6, 2023).
18 See Orly Lobel, The Law of the Platform, 101 MINN. L. REV. 87, 98 (2016);
Electronic copy available at: https://ssrn.com/abstract=4631897

<<PAGE_BREAK>>

6 Draft[Vol. __
responsibilities of an employer.19 Drivers might like to emphasize a more
contractual relationship between them and the platforms, for precisely the
opposite reasons. The new technological form blurred traditional
boundaries, resulting in novel and socially important questions about the
scope of contracts.
Such legal encounters teach the general lesson that in law, scale has a
quality of its own. Yet, as noted by Lee Fennell, scholars and policymakers
powerful new (and sometimes
fraught) legal configurations. 20 Nano contracts will bring their own
questions about legal classification. Are nano agreements that let a party use
for a brief stop, for example, best understood as leases,
licenses, or something else?21 Should
right of way be enforced as contracts? The small scale of nano contracts
brings with it new questions which we have not yet considered, making our
regulatory framework quite fragile to these developments.
The final preliminary question is how nano contracts might differ
from other forms of digital contracts. The answer, which admittedly sounds
like it comes from a college application, is focus and ambition. Unlike smart
contracts, which are primarily tools of contract governance, the focus and
ambition of nano contracts is to solve the problem of contract formation.22
It is frustratingly difficult to create systems that allow for the creation of very
small transactions, because even small frictions can overwhelm the value of
truly small agreements.23 Nano contracts address these issues using p2p
digital protocols. Another possible distinction is that nano contracting
technology does not require the blockchain or cryptography, although it
could incorporate them if desired.24 This marks nano contracts as a discrete
form of transactional technology aimed at addressing the negotiation and
formation bottleneck.
19 People v. Uber Techs., Inc., 56 Cal. App. 5th 266, 278 79, 270 Cal. Rptr. 3d 290, 300
enterprises, each of whom operates a separate and distinct business enterprise that provides a
Notably, when it came to Ub own
terms of service, the company advocated for a thick contractual relationship with passengers. See
Meyer v. Uber Techs., Inc., 868 F.3d 66, 70 71 (2d Cir. 2017).
20 LEE A. FENNELL, SLICES AND LUMPS 3 (2019) (arguing that legal scholars have paid only
(i.e., slices and lumps, the subject of her book)). Id.
21 See infra Section V.B.
22 For a deeper exploration of these connections, see infra Section III.B.
23 See Oliver E. Williamson, The Economics of Organization: The Transaction Cost Approach,
87 AM. J. SOCIO. 548, 552 (1981) (exploring the role of frictions (i.e., transaction costs) in
preventing valuable transactions).
24 A relevant example is new microgrids community projects to generate, store, and
transmit renewable energy in a peer-to-peer manner. See Lea Diestelmeier & Job Swens, Energy
Communities in the Netherlands, EUR. ENERGY L. REP., Nov. 26, 2021, at 239, 252.
Electronic copy available at: https://ssrn.com/abstract=4631897

<<PAGE_BREAK>>

2023] 𝑛𝐾 7
Nano contracts contain within them the germ of profound social and
economic change. This germ, however, needs to be scrutinized before it
spreads. A common saying in startup culture is move fast and break
things. 25 This Article is interested not only in asking what will break, but
also whose things are likely to break. Disruptive technologies, in a process of
Schumpeterian creative destruction, often upend social and economic
structures.26 Nano contracts disrupt a large domain of common interactions
that, due to their minuscule size and stakes, were left outside the market.
Interactions such as waiting in the line at the deli are today mostly governed
by social norms. Nano contracts will allow parties to turn these interactions
into transactions. To market enthusiasts, this presents an opportunity to
open new markets and create new forms of wealth. To market skeptics, nano
contracting is yet another instance of market creep, 27 which would
inevitably lead to excessive commodification, economic exploitation, and
material disparities. After the gig and sharing economy revolution, the
import of these questions is timely and salient. Uber, Airbnb, Taskrabbit,
and other sharing economy platforms created newfound sources of wealth
for some people on the margins of society.28 But many other workers
experienced financial losses and unemployment, neighborhoods saw
property prices rise, and hotels faced a shrinking market.29
This type of analysis requires consideration of future trends and
concrete use cases. To weigh these considerations, this Article offers a variety
of examples from diverse domains, some already deployed, others fast
approaching, and yet others more imaginative. The nature of such
projections is inherently uncertain and so a certain degree of suspension of
25 Henry Blodget, Mark Zuckerberg On Innovation, BUS. INSIDER (Oct. 1, 2009),
https://www.businessinsider.com/mark-zuckerberg-innovation-2009-10
[https://perma.cc/LP6L-Q5CM] (
.
26 JOSEPH A. SCHUMPETER, CAPITALISM, SOCIALISM, AND DEMOCRACY, 81-86 (3rd ed.,
1950). For a review of the evidence, see Arthur M. Diamond Jr., Schumpeters Creative
Destruction: A Review of the Evidence, 22 J. PRIV. ENTER. 120 (2006).
27 For a helpful review of the debates around market creep, see Kimberly D. Krawiec, No
Money Allowed, 2022 U. CHI. LEGAL F. 221, 224 (2022).
28 See, e.g., Sophie Calder-Wang, The Distributional Impact of the Sharing Economy on the
Housing Market 3 (Dec. 20, 2021) (unpublished manuscript) (available at
https://www.lse.ac.uk/law/working-paper-series) [https://perma.cc/TXQ4-P3PC] (estimating
that Airbnb
of sharing, including low-
29 For a thorough, mostly skeptical view of the sharing economy, see Ronit Levine-Schnur
& Moran Ofir, Who Shares the Sharing Economy? 51 (LSE L. Working Paper Series, Paper No.
19/2023, 2023), https://papers.ssrn.com/sol3/papers.cfm?abstract_id=4415934
[https://perma.cc/CE3A-4TPX]. See also Allyson E. Gold, Community Consequences of Airbnb, 94
WASH. L. REV. 1577, 1580 (2019); Jamila Jefferson-Jones, Airbnb and the Housing Segment of the
Modern Sharing Economy : Are Short-Term Rental Restrictions an Unconstitutional Taking?, 42
HASTINGS CONST. L. QUART. 557, 573 (2015).
Electronic copy available at: https://ssrn.com/abstract=4631897

<<PAGE_BREAK>>

8 Draft[Vol. __
disbelief around the particulars is warranted.30 Niels Bohr was after all right,
It is hard to make predictions, especially about the future. 31
This Article is about scale, contracts, and technology. It naturally
engages with conversations around the gig economy, platform regulation,
and, more generally, consumerism and technology.32 It poses some timely
questions surrounding the equitable distribution of the fruits of innovation.
It also presses us to think carefully about the proper limits of markets in
goods that, until now, have been unalienable due to the costs of negotiation.
The Article opens with a motivating thought experiment in Part II.
Part III lays the foundations of nano contracts where they fit along
what needs to be true for them to work, and what we can
learn about their organization from their constraints. From this trunk, four
limbs branch out. One explores the implications of nano contracts on
queues and the allocation of scarce resources; the other three explore the
interaction between nano contracts and property, employment, and
accidents. Part VIII concludes with some short reflections.
II. A PEDESTRIAN THOUGHT EXPERIMENT: NANO
CONTRACTS AND THE FOUR-WAY STOP
To begin, let us consider a potential use case for nano contracts. Our
opening thought experiment will be helpful in illuminating the potential,
and also the dangers and risks, of nano contracts. It comes from a routine,
almost invisible interaction that takes place with great regularity: the four-
way stop.
30
Flying
Machines Which Do Not Fly, N.Y. TIMES, Oct. 9, 1903, at 6. Nine days later, the Wright brothers
FRED R. SHAPIRO,
THE YALE BOOK OF QUOTATIONS 800 01(2006). Even the more recent gig economy revolution
was met with skepticism. Despite the very vivid precedent of taxi cabs and hotels, Uber was met
with suspicion and Airbnb with incredulity Who, in their right mind, would let complete
strangers invade their private homes or ride in their cars? Derek Thompson, Airbnb CEO Brian
Chesky on Building a Company and Starting a Revolution, THE ATLANTIC (Aug. 13, 2013)
https://www.theatlantic.com/business/archive/2013/08/airbnb-ceo-brian-chesky-on-building-a-
company-and-starting-a-sharing-revolution/278635/ [https://perma.cc/DRK7-
see also George Maier, Will Uber Still Exist by the End of the
Decade? (Oct. 29, 2021), https://blogs.lse.ac.uk/businessreview/2021/10/29/will-uber-still-exist-
by-the-end-of-the-decade/ [https://perma.cc/8EXF-A5KV].
31 STANISLAW M. ULAM, ADVENTURES OF A MATHEMATICIAN 286 (1976).
32 Leading works on these issues include Lobel, supra note 18; Kate Andrias, The New Labor
Law, 126 YALE L.J. 2 (2016); Julie E. Cohen, Law for the Platform Economy, 51 U.C. DAVIS L.
REV. 133 (2017).
Electronic copy available at: https://ssrn.com/abstract=4631897

<<PAGE_BREAK>>

2023] 𝑛𝐾 9
Four cars approach an intersection. The laws of physics prevent all
cars from occupying the intersection at the same time. As they slow down,
we witness the emergence of a valuable, but rivalrous right: the right of way.
How should society allocate this scarce resource? Admittedly, this is an odd-
sounding question. We do not normally think of intersections and driving
as problems of allocating scarce rights, but rather of obedience to the laws
of traffic. Still, at a fundamental level, much of what traffic laws do is
coordinate and allocate movement rights. And we want traffic laws do that
job well.
Ideally, scarce rights should be allocated to those who need or value
them the most. But traffic laws adopt a mechanistic allocation rule: first in
first out ( FIFO ).33 A blind allocation of resources based on chance may fit
some social settings, but this allocation loses luster when applied to actual
road design. As a system, this distribution ignores many relevant moral facts
such as need, urgency, or desert. Indeed, we encounter a common
frustration every time we idle at an empty stop sign.
Realizing all of this, various actors have made tweaks around the edges.
Urban designers try to adjust traffic light timing such that the odds of
finding a green light will favor those on the more occupied road.34
Legislators set rules such that when a real emergency erupts, ambulances and
the police can usurp the right of way,35 and, in some parts of the country,
the rule is further tweaked by social norms of courtesy, although those are
not uniformly observed.36 Still, none of these tweaks do much to remedy the
basic issue: antecedence is not an efficient or desirable method of allocating
resources.3738
The problem is that it is hard to come up with a better system that
increases fairness or efficiency. We have all been in situations where we were
either late to an important appointment and needed some priority, or early
with extra time to give. Most of us would see the utility if not outright
sanity of a system where we could get priority when in a rush, and give
priority when time is on our side. After all, to give our place in traffic to the
car carrying a person in the throes of labor is a matter of basic decency. But
33 See Roney Perry & Tal Zarsky, Queues in Law, 99 IOWA L. REV. 1595, 1595 (2014)
(describing the FIFO principles); Donald Wittman, Efficient Rules in Highway Safety and Sports
Activity, 72 AM. ECON. REV. 78, 80 ( describing the utility of FIFO for traffic allocation).
34 See e.g., Jeffrey W. Buckholz, Introduction to Traffic Signal Timing, CED Engineering
at 8,
https://www.cedengineering.com/userfiles/Introduction%20to%20Traffic%20Signal%20Timi
ng-R1.pdf.
35 See, e.g., N.Y. VEH. & TRAF. LAW § 1104 (McKinney 2023) (granting privileges to
authorized emergency vehicles involved in an emergency operation).
36 For a broader analysis of allocation methods and preference algorithms, see infra Part III.
37 See Maram Bani Younes & Azzedine Boukerche, An Efficient Dynamic Traffic Light
Scheduling Algorithm Considering Emergency Vehicles for Intelligent Transportation Systems, 24
WIRELESS NETWORKS 2451, 2452 54 (2018) (reviewing solutions that minimize the inefficiency
of traffic light scheduling).
38 The hypothetical assumes two drivers at a single time; it is possible to generalize this
mechanism to an arbitrary number of drivers, but this is beyond the scope of this paper.
Electronic copy available at: https://ssrn.com/abstract=4631897

<<PAGE_BREAK>>

10 Draft[Vol. __
such a system is unworkable at scale. It is impossible to individually check
each driver level of urgency. Even if it were possible to inquire, why trust
the answer? Nobody likes to sit in traffic.
Nano contracts offer a solution to this age-old problem. A nano
contract application installed on every drivers car, phone, or autonomous
driving system, could allocate the right of way through automated bargains.
Before beginning their journey, drivers enter their destination and their level
of urgency, allowing the app to determine how much they value priority. As
drivers approach an intersection, a silent auction is held, with drivers
bidding in increments of pennies or in tokens for the right to pass through
the intersection. The driver who wins the auction receives the right of way,
and the apps seamlessly exchange payments between them in the
background. These negotiations are near-instantaneous and contain
vanishingly low transaction costs. This process then repeats for those who
come later as they automatically negotiate their place in line, receiving and
sending nano payments as needed. For example, Brandon who left late to
his meeting with a wedding photographer but paid his way to arrive on time
is now $3.10 poorer, but much happier. Nicole, who had a relaxing
afternoon ahead of her, leisur
collecting $4.20 in fees along the way. She brings them both a cup of coffee.
Before addressing any issues, let us first stop and appreciate the
achievement of this system. These Lilliputian agreements offer a robust
solution to a vexing problem. As a system, nano contracts ensure that drivers
needs, rather than chance or order of arrival, allocate the right of way. Close
analysis will show that the system is also fairer than the status quo and offers
people a greater degree of control over their lives.39 And because the system
can run on priority tokens, rather than money, we can achieve all these
efficiency gains while promoting equity and access.40 Relative to our static
system today, nano contracts offer a fluid dynamic. Traffic flows.
While the four-way stop may sound like a small, isolated example, it
is not. In the United States alone, there are approximately 411 billion car
trips taken each day41 through a total of 330,000 traffic lights.42 If even a
fraction of those trips were governed by nano contracts, the potential
benefits would be enormous. Traffic is far less stressful if, instead of fighting
to keep your place, you make a couple of bucks by letting people pass you.
And traffic is far safer if, even when people find themselves in a rush, they
have a safer alternative to speeding that also ensures they arrive on time. If
39 See infra Section IV.B.
40 For further development of this point, see infra note 181.
41 See National Household Travel Survey Daily Travel Quick Facts, U.S. DEPT OF TRANSP.
(May 31, 2017), (https://www.bts.gov/statistical-products/surveys/national-household-travel-
survey-daily-travel-quick-facts) [https://perma.cc/372Q-M29W].
42 See John Halkias & Michael Schauer, Red Light, Green Light, PUB. ROADS, Nov./Dec.
2004, https://highways.dot.gov/public-roads/novemberdecember-2004/red-light-green-light
[https://perma.cc/R843-GV3C].
Electronic copy available at: https://ssrn.com/abstract=4631897

<<PAGE_BREAK>>

2023] 𝑛𝐾 11
we can minimize idling time because priority cars do not need to come to a
full stop, we can also reduce fuel consumption and noxious emissions.
This stylized example illustrates the potential that nano contracts can
unlock. Hopefully, it also sparks a sense of curiosity. If nano contracts can
solve these rote invisible inefficiencies, what other inefficiencies are currently
hidden? What else can we solve with nano contracts?
Our example is also structured to elicit ethical and legal concerns.
Applied without care, the use of nano contracts can result in priority given
to wealthier parties.43 Would nano contracting force poor drivers to treat
every four-way intersection like an endless red light? Would they create a
new source of income for some people or simply commodify yet another
area of life? And then what happens in the nano contract world to the social
norm of giving a friendly wave and letting another person pass before you?
The commercialization and commodification of previously market-free
areas may have a corrosive effect on social norms.44 Or what happens if
someone breaches their nano contract and lunges into a busy intersection?
These issues are real, as are the potential benefits. The goal of the legal system
is to anticipate these concerns and develop appropriate legal and regulatory
frameworks to ensure that when nano contracts are deployed, they are
implemented in a responsible and ethical manner.
III. FUNDAMENTALS OF NANO CONTRACTS:
PLATFORMS, PROTOCOLS, AND LEGAL TECHNOLOGY
How much room is there at the bottom, and can we even get there?
This Part discusses these two forms of skepticism. The skeptic
concerns the value of nano contracts. Nano contracts, the skeptic reasons,
are unlike a new form of a leveraged buyout or some innovation in futures
contracts. Those are the truly important, innovative transactions. Nano
contracts are small potatoes by definition. Do they deserve much attention?
Section III.A Blind to the role of scale
in contracts, the skeptic is not only unprepared for the future of contracts,
but also for their past. Examining the history of contracts from the
perspective of scale, this Section demonstrates how every scale
transformation was associated with profound and unpredictable social
outcomes. Scale, we remind ourselves, has a quality of its own.
ry challenges the feasibility of
nano contracts in real-life situations. With such small stakes, practical
concerns loom large. Section III.B responds to this challenge. Here,
platforms and protocols make their first appearance, and they are shown to
43 The literature on toll roads finds that the distributional effects may in fact be progressive,
and one must be sensitive to the actual implementation of a policy. See Jonathan D. Hall, Can
Tolling Help Everyone? Estimating the Aggregate and Distributional Consequences of Congestion, 19
J. EUR. ECON. ASSN 441, 469 70 (2021); David Levinson, Equity Effects of Road Pricing: A
Review, 30 TRANSP. REVS. 33, 33 (2010).
44 See infra note 191 and accompanying text.
Electronic copy available at: https://ssrn.com/abstract=4631897

<<PAGE_BREAK>>

12 Draft[Vol. __
solve these practical concerns. Platforms have great utility, but they also
introduce market power. The alternative is protocols, which can also
facilitate transactions without such risks, although they are harder to develop
and maintain. But limitations notwithstanding, these alternatives render
nano contracts feasible.
A. Scale and Contract Evolution
The future impact of smaller transaction scale is not easy to predict.
Fortunately, it is easier to predict the past than the future. Let us consider,
then, key points from contracts history as they bear on the question at hand.
To be sure, the story of contract past is not a simple one. These legal
agreements reflect a complex web of social, political, and economic forces,
each vying for influence.45 What helps us see through this tangled web is
thinking about contracts along a much simpler dimension: scale. As
presently argued, over time the Anglo-American legal system has developed
legal technology that supports transactions that are increasingly smaller and
more flexible, allowing for more complex and varied interactions and social
arrangements. This shift led to the paradoxical result that we see the
simultaneous emergence of record-setting multi-billion transactions among
firms and five-dollar contracts for gigs, among other fleeting engagements.46
Take the move from status to contract. Under the manorial system,
people were bound by all-encompassing legal arrangements known as
status.47 Status arrangements dictated nearly every aspect of the lives of the
people living in the system and left little room for individual choices. These
45 For competing narratives on the evolution of contract doctrine and its relation to political
and moral theory, see Morton J. Horwitz, The Historical Foundations of Modern Contract Law,
87 HARV. L. REV. 917, 917 20 (1973); A. W. B. Simpson, The Horwitz Thesis and the History of
Contracts, 46 U. CHI. L. REV. 533, 533 35 (1979). For a modern evaluation of these competing
narratives, see Warren Swain, A W B Simpsons, The Horwitz Thesis and the History of Contracts
(1978-1979) 46 University of Chicago Law Review 533, 35 U. QUEENSLAND L.J. 115, 117 (2016).
A caveat is in order: I confine myself to the Anglo-American common law world, although various
parts of the analysis would apply to the civil law world and possibly beyond.
46 The technological key is transactional modularity. On the relevance of smaller
transactional blocks to handling complexity, see, for example, Henry Smith, Modularity in
Contracts: Boilerplate and Information Flow, 104 MICH. L. REV. 1175, 1176 77 (2006)
(discussing the characteristic costs and benefits of modularity); Cathy Hwang & Matthew
Jennejohn, Deal Structure, 113 NW. U. L. REV. 279, 303 (2018) (explaining that, for complex
.
47 Jonathan Bush offers an illuminating view of the role of freedom in this context. See
Jonathan A. Bush, Take This Job and Shove It : The Rise of Free Labor, 91 MICH. L. REV. 1382,
1407 (1993) (reviewing ROBERT J. STEINFELD, THE INVENTION OF FREE LABOR (1991)).
Electronic copy available at: https://ssrn.com/abstract=4631897

<<PAGE_BREAK>>

2023] 𝑛𝐾 13
stringent sociolegal arrangements defined an individual as a serf, villein,
vassal, and later indentured servant or peon.48
These rigid structures of status were bound to crumble. As Henry
Maine famously observed, the social pressures pent up, [T]he movement of
the progressive societies has hitherto been a movement from [s]tatus to
[c]ontract 49 Over time, the old forms of status were stripped down to
shorter, more modular transactions that were terminable and (warts and all)
voluntary.50 Contract technology then allowed people to enter new forms of
transactions including employment contracts, lease agreements, bailments,
and warranties.51 None of these new forms of transactions emerged at a
defined point in history; rather, they represent a protracted and uneven
process where smaller scale transaction types slowly gained judicial, social,
and political recognition.52
The transition from large scale status to the smaller units of
contract has had a profound impact on society that continues to shape the
way that people and businesses interact.53 It can be difficult for a modern
reader to fully appreciate the significance of this shift. Fortunately, Jonathan
Yovel has provided us with a view from within of these transformations by
examining the travails of one prominent individual who lived through them:
Johann Sebastian Bach.54
As Yovel recounts, up until late in his adult life, Bach served as a
status- 55 This status
designation constricted Bach and could have deprived the world of one of
its greatest composers. When Bach
lord expressed his displeasure by having Bach incarcerated for almost a
48 It must be emphasized the stylized picture here is a conceptual frame, rather than a linear
historical account, which is based on HENRY J. S. MAINE, ANCIENT LAW
ambitious project remains influential despite various scathing critiques regarding its historical
veracity and ideological bent, as eloquently recorded by Katharina Isabel Schmidt. Katharina
Isabel Schmidt, ?, 65 AM.
J. COMP. L. 145, 158-63 (2017) (offering methodological, ideological, and substantive critiques
; see also Nathan Isaacs, The Standardization of Contracts, 27 YALE L.J. 34, 40
(1917) (arguing that feudalism was built on a move from contract to status).
49 MAINE, supra note 48, at 165.
50 As Bush notes, the emergence of contracts did not prevent the emergence of new coerced
labor, such as [indentured] supra note 47, at 1404.
51 See Isaacs, supra note 48, at 35 37.
52 The Horowitz-Simpson debate echoes the protracted and sometimes incoherent
emergence of modern legal doctrines. See supra note 45 and accompanying text.
53 See generally MAINE, supra note 48, at 165 (noting that, following the adoption of the
Roman Codes facilitated .
54 Jonathan Yovel, From Status to Contract: The Unhappy Case of Johann Sebastian Bach, 27
CAN. J.L. & JURIS. 501, 502 (2014) (offering the life of Bach as a lens for understanding the
transition from status to contract relationships).
55 Id.
Electronic copy available at: https://ssrn.com/abstract=4631897

<<PAGE_BREAK>>

14 Draft[Vol. __
56 After many troubles, Bach was finally able to leave for Leipzig,
where he became the celebrated musical director of the Thomasschule.57
There, Bach was able to put his status-laden legacy behind him and sign his
first significant formal contract.58 It was then
contract. 59 He may have, in fact, spoken contract too eloquently, as he soon
found himself engaging in acrimonious negotiations and legal disputes with
his new counterparties at the City Council.60 Thus
not a singularly sanguine story of redemption and empowerment. His letters
portray a record of grievances and disappointments by a person who was, to
put it with outmost respect, a real nudnik.61
Still, even if Bach may not have always been thrilled with the new
responsibilities and challenges of his contract position, he ultimately
embraced the freedom and flexibility that it offered. Most importantly, he
never went back. His experience is a synecdoche of the larger societal shift
from status to contract, as millions of people around the world left feudal
systems and entered a new era of economic and social interactions based on
(comparatively) voluntary agreements. 62 Today, every market-based
economy in the world relies on contracts as a central tool of resource
allocation. From employment contracts and leases to warranties and
bailments, we see in all of those smaller scale transactions how the shift from
status to contract has irreversibly redefined business and individual
interactions.
Less than two decades ago, a different transformative innovation took
place: the birth of the gig economy.63 Platforms like Uber,64 Fiverr,65 and
Airbnb66 transformed the way we work, travel, and do business, enabling the
56 Id.
57 Id. at 501.
58 formal seal and solemn promise to keep its terms. See
id. at 512, 519.
59 Id. at 502 03.
60 Id. at 503.
61 Yonathan A. Arbel & Roy Shapira, Theory of the Nudnik: The Future of Consumer Activism
and What We Can Do to Stop It, 73 VANDERBILT L. REV. 929, 931 (2020) (
as faction surveys, demand to
speak with managers, post detailed online reviews, and file lawsuits ).
62
movement from feudalism to capitalism. Schmidt, supra note 48, at 153 n.19. Yovel further
political model presupposing a
theory of human nature, fit each other like glove to hand. Yovel, supra note 54, at 503.
63 See generally Lobel, supra note 32, at 89 94 (describing the gig economy and its impact
on legal theory and regulatory law).
64 How to Use the Uber App, UBER, https://www.uber.com/us/en/about/how-does-uber-
work/ [https://perma.cc/9YZC-ENHR] (last visited Oct. 6, 2023).
65 How Fiverr Works, FIVERR, https://help.fiverr.com/hc/en-us/articles/360010558038-
How-Fiverr-works [https://perma.cc/87ZQ-QRQR] (last visited Oct. 6, 2023).
66 Carissa Rawson, How Does Airbnb Work?, NERDWALLET (Oct. 6, 2023),
Electronic copy available at: https://ssrn.com/abstract=4631897

<<PAGE_BREAK>>

2023] 𝑛𝐾 15
creation of short, small-scale contracts.67 As the name alludes, at the heart of
the gig revolution is scale, centered around the short and small scope of the
engagement. And indeed, the gig economy downscaled contracts further and
made them less lumpy in scope, duration, and stakes.68 Uber transformed
hiring a personal driver into a single-ride deal; Fiverr converted general
contracting agreements into a twenty-minute gig; and Airbnb reshaped
private-residence subleases into a one-night proposition. By comparison,
these traditional, plain vanilla contracts appear as macro contracts relative to
the micro contract of gig engagements.
To be sure, gigs were not a new concept when these companies first
emerged. And the gig economy did not introduce any breathtaking doctrinal
innovations. Rather, what is notable about the gig economy .
The advent of internet infrastructure has made it possible, for the first time,
to build large-scale marketplaces for small transactions, gigs, and other
limited-term engagements. And just like the move from status to contract,
we again see how smaller arrangements facilitated macro transformations.
unfairly disrupts the character of neighborhoods, and leads to the
exploitation of foreign and domestic workers.69 At the same time, the gig
economy brought with it enormous benefits, enabling people to work on
their own terms and earn a living in ways that were previously impossible.
Between these two tensions, one conclusion is indisputable: the downscaling
of transactions has had a profound effect on the lives of people around the
globe.
This short historical tour offers a clear response to the skeptic.
Independently of any doctrinal or conceptual revolution, contract scale has
always had a transformative effect on the transactional world. From status
to contract and from contract to gig, nano contracts represent a general arc
in the history of contracts. This history entails continuous downscaling of
transactional blocks to profound social effect. Of course, for nano
contracts to fulfill this potential, they must be workable. The next Section
moves to consider a systemic view of nano contracts from an engineering-
economic perspective, revealing in the process the role of legal structures.
https://www.nerdwallet.com/article/travel/how-does-airbnb-work [https://perma.cc/Z5NU-
FRK9].
67 See Samantha Delouya, The Rise of Gig Workers is Changing the Face of the US Economy,
CNN (July 25, 2023) https://www.cnn.com/2023/07/24/economy/gig-workers-economy-
impact-explained/index.html [https://perma.cc/X9KX-SFKU].
68 See FENNELL, supra note 20, at 137.
69 See, e.g., Natasha Singer, In the Sharing Economy, Workers Find Both Freedom and
Uncertainty, N.Y. TIMES (Aug. 16, 2014), https://www.nytimes.com/2014/08/17/technology/in-
the-sharing-economy-workers-find-both-freedom-and-uncertainty.html
[https://perma.cc/7CH5-MQMZ] -term
.
Electronic copy available at: https://ssrn.com/abstract=4631897

<<PAGE_BREAK>>

16 Draft[Vol. __
B. Nano Contracts as a Technology
Nano contracts use digital infrastructure to facilitate the automated,
real-time, p2p bargaining processes between strangers. Such technology can
wield different forms. For example, in the four-way stop example, a nano
contract app conducted an auction to determine which driver gets the right
of way.70 But this is just one bundle of features for the implementation of
nano contracts. In some cases, nano contracts may use fixed prices rather
than auctions, and in others, they may facilitate exchanges based on barter,
reputation, or even tokens.
While n allows them to fit many use cases,
this feature also makes nano contracts difficult to define.71 Boundary setting
is made more difficult because scale is not one-dimensional. Rather, scale
covers transactional duration, transactional stakes, and the scope of rights
transacted. And there may even be some conflict between these dimensions;
a contract for leasing goods for a few seconds may still fetch a high value, as
we know from the pervasive high-frequency trading industry. These
challenges notwithstanding, the examples provided in Parts IV to VII will
cement some idea of the core and periphery of this concept.
Nano contracts arise from the natural continuation of the existing
trends noted above, including the proliferation and normalization of
digitized agreements, the growing digitization of goods and services, and the
emergence of persistent connectivity at lower latency of geolocated
individuals and objects. 72 These mutually reinforcing trends enable,
technologically, legally, and culturally, the ability to form p2p contracts in
real time at near-zero latency and at vanishingly low transaction costs. While
each of these trends is worthy of full treatment, I focus on one recent trend
overlooked by contracts scholars that lend special credibility to the
emergence of nano contracts: the rise of the XaaS contracting model.
In the days of yore, people bought products from sellers and services
from service providers. So central was the distinction that it was deemed
fitting to construct an entire body of law that deals with one rather than the
other73 and then test neophyte lawyers on it. In recent years, a new model
transitioning erstwhile products into services has started taking over,
commonly abbreviated by the aaS suffix74. In the past, consumers would
buy software like Microsoft Word, and leave the store with a box with a hard
copy of the code. Today, consumers are only subscribers to an ever-shifting
70 See supra Part II.A.
71 Their key feature, the small transactional scale, makes the task of drawing lines akin to
72 See supra note 12 and accompanying text.
73 See U.C.C. § 2 (AM. L. INST. & UNIF. L. COMMN 1977).
74 Daniel Newman , Why The 'As-A-Service' Model Works So Well For Digital Transformation,
Forbes (Jun, 27, 2017)
Electronic copy available at: https://ssrn.com/abstract=4631897

<<PAGE_BREAK>>

2023] 𝑛𝐾 17
piece of code.75 We now have software as a service (Monday and Microsoft
Office 365), infrastructure as a service (Amazon Web Services and Microsoft
Azure), platform as a service (Google App Engine and Heroku), payment as
a service (Square and Dwolla), and a dozen others.76 One market report
estimates that in 2023, the software-as-a-service market alone will be valued
at 195 billion dollars.77
A recent comprehensive study of the XaaS model has identified several
market philosophy changes that the concept embodies.78 Among these is
what the authors perhaps not coincidently call nanonization of
products.79 By this, the authors refer to the growing trend to disaggregate
product bundles to the specific functions that the end user cares about.
Farming as a service is an especially apt example. While 45% of the Indian
workforce is engaged in agriculture, tractors are quite rare, averaging only
one per village.80 Trringo is one of a few platforms that offer farmers
individual standalone services such as tractors, reapers, cultivators, and tillers
that the farmer can access by simply tapping an app or calling a call center.81
This allows farmers an alternative to ownership, to pay only for the specific
fragment of ownership if and when it is needed.
The advent of the XaaS model represents the growing n
of contracts and products. It demonstrates the market need for unbundled
goods, the utility of specialization, the importance of small-scale
transactions, and the robustness of the supporting technological
infrastructure. One chief difference is that in nano contracts, parties will
transact p2p rather than peer-to-firm. Even with a platform in the middle,
the degree of intermediation in nano contracts is significantly lower than it
is in the central firm model of XaaS.
At this point, it is useful to distinguish nano contracts from seemingly
adjacent technologies: the smart contract and the blockchain.
75 See Brien Posey, Definition, Microsoft Office 365 Suite, TECHTARGET (Oct. 2016),
https://www.techtarget.com/searchenterprisedesktop/definition/Microsoft-Office-365-suite
[https://perma.cc/B65M-83XD]; Tony Redmond, Office 365 Reaches 345 Million Paid Seats,
OFFICE 365 IT PROS (Apr. 28, 2022), https://office365itpros.com/2022/04/28/office-365-
number-of-users/ [https://perma.cc/VG4L-UMMH] (last visited Oct. 13, 2023).
76 See, e.g., Ryan LaFlamme, The Big -aaS List of as-a-Service Offerings,
https://www.auvik.com/franklyit/blog/aas-as-a-service-list/[https://perma.cc/266L-SBJY] (last
visited Oct. 13, 2023).
77 See, e.g., Public Cloud Application Services/Software as a Service (SaaS) End-User Spending
Worldwide from 2015 to 2023, STATISTA, https://www.statista.com/statistics/505243/worldwide-
software-as-a-service-revenue/ [https://perma.cc/3PDR-PT47] (last visited Oct. 13, 20203).
78 See SHANTANU BHATTACHARYA & LIPIKA BHATTACHARYA, XAAS: EVERYTHING-AS-A-
SERVICE 5 (2021).
79 See id. at 5, 14 17.
80 Id. at 14.
81 Id. at 15; Ayesha Venkataraman, How Do You Hail a Tractor in India?, N.Y. TIMES (Oct.
17, 2016). Other services include Hello Tractor Lucy Ngige,
Hello Tractor AFN (Aug, 16 2022) and Farmee https://www.farmmee.com/.
Electronic copy available at: https://ssrn.com/abstract=4631897

<<PAGE_BREAK>>

18 Draft[Vol. __
formative essay conceptualized the smart contract as a digital contract that
algorithmically executes its own terms.82 More recently, Greg Klass offered
a sharper definition, defining smart contracts as software, perhaps run on a
block chain, designed to execute future exchanges or other coordinated
actions between persons who might not otherwise trust one another to
perform 83 An insurance contract, which automatically makes payments if
a predefined event takes place, is a typical example.84
For our purposes, the crux of a smart contract is streamlining contract
execution.85 For this reason, many developers have used smart contracts with
blockchain technology. In broad strokes, blockchain is a protocol that runs
on tens of thousands of networked computers and creates a decentralized
system of trade, meant to allow for trust among complete strangers with a
central platform.86 Just as the blockchain allows one to reliably send bitcoins
to another, it can be adapted to run smart contracts that facilitate other
forms of exchange. And so, while smart contracts do not require the
blockchain, they often take advantage of it. 87 A review of smart contracts on
GitHub repositories shows that 86.5% were tagged by authors with
blockchain-related terms.88
All of this highlights the key difference between the technologies.
While smart contracts try to solve real or perceived problems of execution,
nano contracts are tools of contract formation. They aspire to allow parties
to create contracts at vanishingly low cost and near zero latency. Whether
the exchange is trusted or trustless is not a critical factor in the use of nano
contracts. In fact, there are instances where smart contracts are too slow and
expensive for the purposes of nano contracts, due to the
82 See Nick Szabo, Smart Contracts: Building Blocks for Digital Markets, EXTROPY, 1st
Qu.1996, at 50, 50 smart contract is a set of promises, specified in digital
.
83 Gregory Klass, How to Interpret a Vending Machine: Smart Contracts and Contract Law, 7
GEO. L. TECH. REV. 69, 70 (2023). For other definitions, see id. at 77 78.
84 See Kevin Werbach & Nicolas Cornell, Contracts Ex Machina, 67 DUKE L.J. 313, 331
32 (2017).
85 See Shaanan Cohney & David Hoffman, Transactional Scripts in Contract Stacks, 105
MINN. L. REV. 319, 321 23 (2020) (listing proposed uses and sources). The authors argue
persuasively on substance, less so in terms of marketing that smart contracts are better termed
See id. at 323.
86 See IBM, What is Blockchain Technology?, https://www.ibm.com/topics/blockchain
[https://perma.cc/6AR5-Z5TD]. At the time of writing, there are estimated 16,300 reachable
bitcoin nodes. See Reachable Bitcoin Nodes, BITNODES.IO, https://bitnodes.io/
[https://perma.cc/2QZW-GPG6].
87 See, e.g., Mark Verstraete, The Stakes of Smart Contracts, 50 LOY. UNIV. CHI. L.J. 743,
88 For detailed explanation of the methodology, see Yonathan Arbel, Smart Contracts and the
Blockchain, BATTLE OF THE FORMS (Dec. 7, 2022) http://battleoftheforms.com/smart-contracts-
and-the-blockchain/ [https://perma.cc/P6D9-C5ZG].
Electronic copy available at: https://ssrn.com/abstract=4631897

<<PAGE_BREAK>>

2023] 𝑛𝐾 19
relatively long settlement time. Whether nano contracts can achieve their
goal, however, depends on their practicability.
1. Practical Constraints that Nano Contracts Must Meet
To succeed in facilitating digital p2p contracts in real time, nano
contracts must overcome certain challenges. Some of these challenges are
legal in nature, while others are extralegal but still affected by legal norms.
By understanding these constraints, we can come to understand what
policies can contribute to, or stymie, the development of nano contracts.
Drawing on the transaction cost framework applied by Michael Munger in
the context of the sharing economy, we can identify five key constraints:89
(1) Triangulation costs must be manageable. Triangulation costs, as
defined by Michael Munger, refer to the combined costs of locating
potential service providers, settling on their price, and agreeing on terms.90
Triangulation costs must be sufficiently low relative to the benefit, or
surplus, of the transaction. Otherwise, parties will not form contracts. In the
context of established markets for commoditized goods, triangulation costs
can disappear into the background. But in other markets, they loom large.
While there is a large supply and demand for used cars, matching buyers and
sellers is challenging.91 Locating a seller with the specific required model,
and then negotiating with them successfully, involves time, risk, and
expense. To remove some of these frictions, people pay car dealerships
significant amounts of money to create working markets. The challenge for
nano contracts is that the transactional surplus is small. Therefore,
triangulation costs must be exceedingly small in comparison to make nano
contracts practical.
(2) Contract formation must be sufficiently streamlined. The
creation of the legally enforceable agreement cannot be too costly, or else
parties would use alternative legal arrangements, informal arrangements, or
abandon the deal altogether. This issue is familiar from history, as the
primary means of contracting at early common law, the covenant, was rarely
used due to its reliance on sealed written documents at a time when a
significant portion of the population was illiterate.92
89 See generally Michael C. Munger, TOMORROW 3.0: TRANSACTION COSTS AND THE
SHARING ECONOMY (2018) (discussing the sharing economy and its relation to transaction costs).
90 Id. at 71 107.
91 See Charles Murry & Henry S. Schneider, The Economics of Retail Markets for New and
Used Cars, in HANDBOOK ON THE ECONOMICS OF RETAILING AND DISTRIBUTION 343, 350 55
(2016) (explaining the benefits and burdens of personalized pricing and bargaining in a large
retail market like those for new- and used-cars).
92 See, e.g., JOHN BAKER, AN INTRODUCTION TO ENGLISH LEGAL HISTORY, 338 42 (5th
ed., 2019) (discussing the history of the covenant in English courts).
Electronic copy available at: https://ssrn.com/abstract=4631897

<<PAGE_BREAK>>

20 Draft[Vol. __
For macro contract today these frictions are for the most part low
potentially even too low relative to the value of the transaction.93 But, for
nano contracts, where the speed of formation is of the essence, and the
volume of transactions may be extremely large, per-transaction, real-time
expression of assent will add just enough friction and cost to make nano
contracting all but impossible.
(3) Payment processing must be speedy, secure, and cheap. If the
costs of processing payments are too high, the parties will see no benefit in
transacting. When buying a car, payment processing costs are usually
inconsequential. But for small-scale transactions, like buying chewing gum
at a gas station, payment processing costs can be prohibitive in relation. 94
Even some midscale transactions, like paying workers, are often delayed for
weeks because of the alleged transaction costs of paying workers daily.95 If
drivers are to purchase priority at four-way stop signs, the payment must be
smooth, quick, and most importantly, inexpensive.
(4) Dispute resolution must be available, trustworthy, and
efficacious. In the event of a breach of contract, a party can sue in court.
But for many small-scale consumer transactions, standard court proceedings
are prohibitively costly, making it necessary to use alternative mechanisms
such as class actions or small claims courts. The absence of effective dispute
resolution has been linked in the research to the loss of significant
transactional surplus.96 In the four-way stop example, what happens if a
driver speeds into the intersection, ignoring the nano contract?
(5) Enforcement must have a sufficient deterrent effect on
noncompliant parties. For macro contracts, enforcement issues arise with
some regularity, yet this problem is not sufficiently pressing to undermine
the entire system. Some parties evade service, impose delays on the process,
and engage in distractions. Yet, as long as the party is not judgment proof
or poses no credible threat of making herself judgement proof the threat
is considered acceptable.97 If a sanction exists, it must have sufficient bite to
ward off unwanted behavior.
93 For an unwavering attack on form contracts, see David Hoffman, Defeating the Empire of
Forms 4 5 (Inst. Law and Econ. Working Paper No. 23-04, 2023) (challenging the proliferation
of explicit, formal, and long-winded contracts for low-value transactions); Mark A. Lemley, The
Benefit of the Bargain, 2023 WIS. L. Rev. 237, 238
written agreements).
94 Under the Dodd-Frank Act of 2010, merchants are allowed to set minimum amounts for
credit card purchases that do not exceed $10. 15 U.S.C. § 1693o-2(b)(3)(A).
95 See Yonathan A. Arbel, Payday, 98 WASH. U. L. REV. 1, 1 8 (2020) (explaining why
96 See Simon Johnson, John McMillian & Christopher Woodruff, Courts and Relational
Contracts 2 5 ( Working Paper No. 857, 2001).
97 See generally Yonathan A. Arbel, Shielding of Assets and Lending Contracts, 48 INTL REV.
L. & ECON. 26 (2016) (exploring the problem of judgment proofing as a strategy of avoiding
legal enforcement).
Electronic copy available at: https://ssrn.com/abstract=4631897

<<PAGE_BREAK>>

2023] 𝑛𝐾 21
2. How Nano Contracts Can Meet These Constraints
These constraints appear foreboding at first. The nano stakes of nano
contracts make the system particularly fragile to practical concerns because,
at this scale, there is just too little surplus to cushion transactional costs.
Fortunately, there is a proven answer for most of these issues. The
downscaling of macro contracts to micro contracts in the gig economy
already answered many of these concerns.98 These answers largely involve
two supporting mechanisms, platforms and reputation, although neither is
perfect. The following discusses these answers in order.
Triangulation Costs. The gig economy faced this problem in earnest.
It is costly to triangulate partners for any deal, and for small deals in
particular. That is one central reason why the gig economy had to wait in
the shadows for so long. The solution, enabled by technology, is the
reinvention of an old concept: the two-sided marketplace. The ancient
concept of the bazaar proved something that might otherwise appear
counterintuitive.99 Merchants are better served when they are located
adjacent to other, especially in the case of competing merchants, because it
is easier for buyers to find an appropriate seller.100 Companies like Uber and
Airbnb adopt this model with an additional spin: they moved buyers and
sellers to virtual spaces.
Another solution that avoids the use of platforms is the use of
protocols. 101 Protocols are standards of communication that allow
transacting parties to locate each other and communicate directly. One
example of a protocol that works at scale comes from blockchain-based
exchanges, where two strangers can transfer value without the
intermediation of a platform. The Internet itself also demonstrates the
power of standard protocols in coordinating multiparty information
exchanges, with relatively little centralized authority.
As applied to nano contracts, we can think of a spectrum of solutions
to the triangulation problem differing in the degree of intermediation. We
can conceive of systems of centralized ordering which are heavy in
intermediation, such as those organized by airlines that sell line priority. Less
decentralized are platforms, which can help maintain a marketplace and
means of communication between interested parties, such as the various
98 See generally Seth Oranburg & Liya Palagashvili, Transaction Cost Economics, Labor Law,
and the Gig Economy, 50 J. LEGAL STUD. S219, S227 (2021) (conducting an analysis of the gig
.
99 See generally Clifford Geertz, The Bazaar Economy: Information and Search in Peasant
Marketing, 68 AM. ECON. REV. 28 (1978) (emphasizing high search and information costs in an
analysis of the bazaar marketplace ).
100 For a study of the impact of spatial clustering on competition, see Harold Hotelling,
Stability in Competition, 39 ECON. J. 153 (1929).
101 For a comprehensive analysis of protocols and the subtleties of architecture design and
regulation, see, for example, Christopher S. Yoo, Protocol Layering and Internet Policy, 161 U. PA.
L. REV. 1707, 1716 17 (2013) (describing the conceptual underpinnings of protocol layering).
Electronic copy available at: https://ssrn.com/abstract=4631897

<<PAGE_BREAK>>

22 Draft[Vol. __
online stock and crypto exchanges. And then we can think of direct
communication protocols, which involve no third-party mediation.
Platforms promise, as Orly
besides of course 102 The rise of platforms raises various
concerns, perhaps most notably the rise of monopolies in the presence of
network effects.103 Protocols are more attractive on this score, but their
design, maintenance, and difficulty of propagating updates are still real costs
that must be borne. 104 Fortunately, open-source communities and
government-funded standard-setting organizations provide workable
models for such implementations.
Contract Formation. The solution for the formation problem in the
context of nano contracts relies on advance consent and automated
negotiations. This allows the app to negotiate in real time with very little
latency or cost even in the form of attention.
Some scholars argue that automated contract formation is
problematic, at least when the question arises in the context of smart
contracts.105 The contracting script lacks agency, they reason, and so it
cannot manifest the necessary assent required to enter into a contract.106 The
same holds for nano contracts, which will likewise have to rely on automated
formation methods and advance expressions of assent.
This view of contractual assent is open to debate.107 While everyone
agrees that lack of assent is a bar to enforcement, the procedural forms of
expression of assent are a different matter. In modern contracts, there was
never an issue with authorization of an offer or acceptance by proxy, as
agency law and, well, the ability of any corporation to form valid contracts
makes obvious.108 Nor is the introduction of digital assent especially
problematic, given how consumers routinely enter and courts enforce
online contracts.109 Again, there are good reasons to worry about faulty
102 Lobel, supra note 32, at 110.
103 See generally Bruno Jullien, Alessandro Pavan & Marc Rysman, Two-Sided Markets,
Pricing, and Network Effects, in HANDBOOK OF INDUSTRIAL ORGANIZATION 485 (Kate Ho, Ali
Hortaçsu & Alessandro Lizzeri eds., 2021) (exploring two-sided markets and monopoly
concerns).
104 The Bitcoin protocol is the best exemplar. There, disputes about updates to the protocol
have created community schisms. See Chelsea D. Button, The Forking Phenomenon and the Future
of Cryptocurrency in the Law, 19 UIC REV. INTELL. PROP. L. 1, 9 11 (2019).
105 See, e.g., Amy J. Schmitz & Colin Rule, Online Dispute Resolution for Smart Contracts,
2019 J. DISP. RESOL. 103, 105 ( t also may be difficult to fit square concepts of offer, acceptance
106 See id.
107 For a similar conclusion, see Klass, supra note 83, at 72
special formation issues. In other instances, however, parties might express their agreement solely
by using a smart contract, without an accompanying verbal agreement, recalling a vending-
108 See RESTATEMENT (THIRD) OF AGENCY § 1.04(2)(b) (AM. L. INST. 2006).
109 Scraping may appear at first sight to challenge this thesis, as several courts have ruled that
Electronic copy available at: https://ssrn.com/abstract=4631897

<<PAGE_BREAK>>

2023] 𝑛𝐾 23
assent, but the medium of assent is orthogonal to these concerns. If we
question the validity of clickwrap agreements, it is not because the words are
shown on a screen, but because they are not read or understood.
That nano contracts rely on preestablished manifestations of assent is
likewise immaterial. If a merchant considers buying oil and deposits an offer
to buy a number of barrels with her agent
willing seller if market conditions improve, then
effective.110 As long as there is a verifiable pedigree of assent, it matters little
for nano formation that the medium is digital, that assent is preestablished,
or that it is conveyed via algorithm.111
Payment Infrastructure. It is surprisingly expensive to transfer
payments. These costs make it difficult to implement any system of
micropayments. 112 This is because traditional payment systems were
designed for large, not small, transactions. As a result, the fees associated
with these transactions can be quite high, making them impractical for use
in micropayment systems.
Fortunately, f startups, and to a lesser
extent, cryptocurrencies, are increasingly building solutions to these
problems. For example, PayPal offers the option to transfer payments
between friends and family at no cost.113 While this remains a far cry from
a costless system of money transfers, developments in the payment space
continue to grow.114 In the meantime, the gig economy resolved this issue
through platform-side accumulation.115 In those regimes, interim payments
automated web access does not create consent to terms of service. However, those cases are deeply
rooted in questions of copyright preemption rather than any substantive view on the quality of
consent. See, e.g., Genius Media Grp. Inc. v. Google LLC, No. 19-CV-7279, 2020 WL 5553639,
at *7 (E.D.N.Y. Aug. 10, 2020), aff'd sub nom. ML Genius Holdings LLC v. Google LLC, No.
20-3113, 2022 WL 710744 (2d Cir. Mar. 10, 2022). In any event, digital contracts are just as
binding as their offline counterparts, as modern battles are waged over form contracts.
Recently, Mark Lemley offered a scathing critique of the modern practice of contract
enforcement of clickwraps, terms of use policies, and similar standard form contracts. Lemley,
supra note 93, at 252 56. These concerns target, however, the issue of consent and deliberation
rather than timing or method. Depending on their specific implementation, nano contracts may
well escape the crosshairs of his and similar critiques.
110 See Restatement (Third) Of Agency § 6.01 (AM. L. INST. 2006).
111 Greg Klass makes a similar point using a vending machine analogy. Klass, supra note 83,
at 85 egal contract between the user and the
112 See Arbel, supra note 95, at 31 34; see also Peter Conti-Brown & David A. Wishnick,
Private Markets, Public Options, and the Payment System, 37 YALE J. REG. 380, 393 (2020).
113 What's the Difference Between Friends and Family or Goods and Services Payments?, PAYPAL
(June 22, 2022), https://www.paypal.com/us/cshelp/article/whats-the-difference-between-
friends-and-family-or-goods-and-services-payments-help277 [https://perma.cc/GK73-YZGQ].
114 See Franklin Allen, Xian Gu & Julapa Jagtiani, A Survey of Fintech Research and Policy
Discussion, 1 REV. CORP. FIN. 259 (2021).
115 For example, Lyft pays its drivers on a weekly basis. Zippia, When Does Lyft Pay?
Electronic copy available at: https://ssrn.com/abstract=4631897

<<PAGE_BREAK>>

24 Draft[Vol. __
accumulate after every ride, and the platform sends payment in a single beat,
either after a period of time or after meeting a minimum withdrawal limit.
Nano contracts must adopt one of three solutions. They can use
platforms to accumulate payments before transfers; they can rely on
alternative financial tools, like crypto tokens, that are cheaper to transmit
over an agreed protocol;116 or they can wait until payment infrastructure
improves. A more general lesson from this analysis is that the issue of
payments highlights one source of platform market power the
inefficiency of payment infrastructure and therefore proposes a different
avenue for reducing the dependence on platforms.
Dispute Resolution. Perhaps the most sensitive part of small-stake
contracts is dispute resolution. The problem is well-known: dispute
resolution systems are expensive to operate, their decisions are protracted,
the de minimis doctrine bars litigation,117 and they are generally a poor fit
for small-stake disputes.118 But if disputes are never settled, parties can
breach with impunity, undermining the entire system. The legal system has
developed several mechanisms to deal with small-stakes disputes, from
cheaper arbitration, mediation, and conciliation processes to stake
aggregation via class actions and group litigation.119 Yet, for transactions in
very small scales, especially when they are heterogenous, these solutions can
only provide a partial solution. Thus, the gig economy came to rely on two
complementary mechanisms: reputation120 and in-house adjudication.121
Reputation has proven itself a major disciplining force. To see its role
in the private ordering of small transactions, consider the consequences of
breach. Suppose an Uber driver does not live up to the expected standard
the car is messy, the driver casually scans their phone while driving, and
grating music blares from the speakers. These issues violate
transactional expectations, but none would command sufficient stakes to
https://www.zippia.com/answers/when-does-lyft-pay/. Uber offers a more elaborate scheme,
where drivers who do not want weekly pay, can cash out immediately for a fee, which may be
waived if they have a special Uber Pro Card. Uber, Instant Pay,
https://www.uber.com/us/en/drive/driver-app/instant-pay/.
116 Cryptocurrencies are still not quite there. Between August 2021 and April 2023,
-chain transaction cost ranged from around $0.95 to $2.40. See BLOCKCHAIN.COM,
https://www.blockchain.com/charts#currency [https://perma.cc/6NHF-B5R7].
117 See, e.g., Harris v. United States, 232 F.3d 912 (Fed. Cir. 2000).
118 See Christopher R. Drahozal, Arbitration Costs and Form Accessibility: Empirical
Evidence, 41 U. MICH. J.L. REFORM 813, 840 (2008) (summarizing empirical evidence on
arbitration costs finding that it is unclear that arbitration is much cheaper than litigation)
119 See STEVEN P. CROLEY, CIVIL JUSTICE RECONSIDERED 185 223 (2017) (discussing the
problem with access to the courts).
120 See Rory Van Loo, The Corporation as Courthouse, 33 YALE J. REG. 547, 552 (2016)
(noting that the corporation plays a "key dispute resolution role as a reputation-based
121 Id. at 559 umers' ease of access to the
Electronic copy available at: https://ssrn.com/abstract=4631897

<<PAGE_BREAK>>

2023] 𝑛𝐾 25
warrant a lawsuit.122 The solution is a personal accountability system, in the
form of reputation.123 Uber prompts passengers and drivers to leave a
reputational signature by reviewing each other. If a driver consistently
underperforms, she suffers the risk that passengers will refuse to ride with
her.124 If a passenger is rowdy or aggressive, she might find herself with no
transportation. Research shows that, while imperfect, these systems
effectively promote good behavior among users, even in the absence of
litigation.125
Another solution is used by platforms and normally reserved for more
meaningful transgressions: corporate 126 In these internal
dispute resolution mechanisms, both parties can explain their position,
usually in a limited fashion and without legal representation, and the final
adjudication is given to an employee of the platform.127 The platform will
often issue a quick refund, preferring to err on the side of the user and resolve
the matter internally with the service provider.128 Of course, the platform
compensates itself for such services. But by putting itself in the middle, it
also opens itself to class actions and regulatory interventions. These benefits
may ameliorate some of the concerns we might have with platform power.
122 Of course, passengers are less likely to use the platform if the overall riding experience is
poor. However, since the riding experience is a public good and each driver has minimal
influence on it, drivers may be inclined to act without considering the collective experience,
leading to a free-rider problem. See generally Michael Luca, Designing Online Marketplaces: Trust
and Reputation Mechanisms, 17 INNOV. POLY & ECON. 77, 78 (2017) (describing the design
challenges that arise in online marketplaces).
123 See Ngai Keung Chan, -Generated Ratings,
17 SURVEILLANCE & SOCY 183, 183 84 (2019) (discussing the effects of ratings, and fear of
falling ratings, on Uber drivers).
124 Indeed, Uber expels low reputation drivers. James Cook, Ubers Internal Charts Show
How Its Driver-Rating System Actually Works, INSIDER (Feb. 11, 2015)
https://www.businessinsider.com/leaked-charts-show-how-ubers-driver-rating-system-works-
2015-2 [https://perma.cc/782D-93Y2].
125 For example, Uber drivers take much shorter routers with nonlocal passengers, relative
to taxi drivers. See Meng Liu, Erik Brynjolfsson & Jason Dowlatabadi, Do Digital Platforms
Reduce Moral Hazard? The Case of Uber and Taxis, 67 MANAG. SCI. 4665, 4665 67 (2021).
126 See Van Loo, supra note 121, at 547.
127 See Tuan Nurhafiza, Raja Abdul Aziz & Abdul Hamid, The Settlement of
Disputes Through Online Dispute Resolution (ODR): A Literature Review, 2 ASIAN J. RSCH. BUS.
& MGMT. 90, 91 (2020) (discussing an online form of internal dispute resolution facilitated by
technology).
128 There is an active debate in the literature about the prevalence and meaning of
preferential treatment to active consumers (nudniks) in these systems. Compare Yonathan A.
Arbel & Roy Shapira, supra note 61, at 929 31 (2020), with Meirav Furth-Matzkin, The
Distributive Impacts of Nudnik-based Activism, 74 VAND. L. REV. EN BANC 469, 471 72 (2021);
Shmuel I. Becher & Tal Z. Zarsky, Minding the Gap, 51 CONN. L. REV. 69, 90 91 (2018); Amy
J. Schmitz, Access to Consumer Remedies in the Squeaky Wheel System, 39 PEPP. L. REV. 279, 280
(2012).
Electronic copy available at: https://ssrn.com/abstract=4631897

<<PAGE_BREAK>>

26 Draft[Vol. __
Finally, even though the stakes are small, the legal system is not absent.
For example, in the case of a four-way stop,129 if a driver breaches a nano
contract and causes an accident, this will be a higher stake conflict that will
introduce the legal system directly. The court will deem the breaching driver
as being at fault for the accident, analogous to a driver waving at another to
give them the right of way and then crashing into them. This provides
another mechanism of dispute resolution.
Contract interpretation is an adjacent issue. A breach presupposes the
existence of an obligation that was not met, which requires us to first define
the scope of contractual obligations. For digital contracts, interpreting intent
may seem challenging. This issue was repeatedly raised in the context of
smart readers.130 Indeed, ascribing meaning to code looks difficult.131
Fortunately, David Hoffman and Greg Klass have convincingly
resolved the interpretive question.132 Interpretating digital contracts requires
the same toolset that the common law has always used. Importantly, as scale
falls, the scope of transactional complexity falls superlinearly.133 The room
for disagreements in a merger agreement is vastly larger than it is when
buying a Coke from a vending machine. Small transactions, small
disagreements.
The discussion underlies my view that these tiny agreements are real
contracts, rather than pure transactions. However, as noted, at this scale the
boundaries are quite murky, and I can see how some might hold a more
transactional view.
Enforcement. Winning a judgment is not enough; one also has to
collect it. One of the most challenging issues in macro contracts is the
problem that defendants are often judgment-proof (or can deliberately
become so).134 As the stakes fall, this problem trends to zero,135 but a new
one appears in its stead: costs of collection can easily become prohibitive.
129 See supra Part II. A Pedestrian Thought Experiment: Nano Contracts and the Four-Way
Stop
130 See Cohney & Hoffman, supra note 85, at 324 27 (explaining that judges may not be
131 See Frank Pasquale, A Rule of Persons, Not Machines: The Limits of Legal Automation, 87
GEO. WASH. L. REV. 1, 1 (2019) (arguing that forms of legal automation can undermine the
legitimacy of the law). I hedge this statement because, as we have learned from the emergence of
large language models, AI can provide intelligible explanations. See generally Yonathan A. Arbel
& Samuel Becher, Contracts in the Age of Smart Readers, 90 GEO. WASH. L. REV. 83, 95 (2022)
(showcasing the utility of LLMs in simplifying legal texts).
132 See Cohney & Hoffman, supra note 85; Klass, supra note 83.
133 Ambiguity is embedded within every transaction; but one source of ambiguity comes
from the interaction of different transactional terms. Since very new terms can interact with all
previous terms, deal complexity increases the scope of potential ambiguities superlinearly.
134 See, e.g., Yonathan A. Arbel, Asset Shielding and the Theory of Credit, 48 INTL REV. L. &
ECON. 26, 27-28 (2016) (discussing the use of asset protection to avoid liability).
135 See id. at 30 32.
Electronic copy available at: https://ssrn.com/abstract=4631897

<<PAGE_BREAK>>

2023] 𝑛𝐾 27
Filing a lawsuit with a small claims court costs $15 to $20 in New York,136
$40 in Massachusetts,137 and $85 in Alabama.138 This alone could swamp
any value from winning a judgment on a nano contract.
In micro contracts, there are at least four solutions to this problem.
First is the use of platforms. The platform has deep pockets and is
responsible for residual claims against parties on the platform.139 More
importantly, the platform, as a repeat player, has an incentive to effectively
resolve common disputes and compensate disgruntled users even without
legal action.140 Second is the use of reputation. Even if collection is
expensive, imposing a sanction in the form of a reputation hit is not. Third
is the use of precautions.141 Platforms do not pay drivers until after the trip
is finished, but they charge the passenger in real time. The concern that a
passenger will not pay is thus largely resolved. The fourth solution is escrows,
a solution that can easily be easily implemented by platform-free protocols.
By depositing payments in an escrow, and making the release of payment
conditional on performance, many enforcement problems are resolved. In
smart contracts, the blockchain manages the escrow.142 But this is far from
a fool-proof solution.143 One must still determine whether a party actually
136 Court Fees in the New York City Civil Court, NYCOURTS.GOV,
https://nycourts.gov/courts/nyc/civil/fees.shtml [https://perma.cc/S7G9-99XU] (last accessed
Oct. 13, 2023).
137 Small Claims Court, MASS.GOV, https://www.mass.gov/service-details/small-claims-
court [https://perma.cc/D2HK-KRRH] (last accessed Oct. 13, 2023).
138 Small Claims, TWENTY-SIXTH JUDICIAL CIRCUIT COURT OF ALABAMA,
https://russell.alacourt.gov/small-claims/[https://perma.cc/6BMA-QQ63] (last accessed Oct 13,
2023).
139 See, e.g., What Is the Average Uber Accident Settlement?, THE LAW PLACE,
https://www.thelawplace.com/faqs/average-uber-accident-settlement/ [https://perma.cc/6U22-
2AE8] (last accessed Oct. 13, 2023) (noting that victims of Uber accidents have access to
settlements resulting from the following damages: property damage, medical bills, loss of income,
pain and suffering, and wrongful death).
140 On the incentive of repeat sellers to go beyond the letter of the contract in consumer
markets, see Lucian A. Bebchuk & Richard A. Posner, One-Sided Contracts in Competitive
Consumer Markets, 104 MICH. L. REV. 827, 827 28 (2006); Becher & Zarsky, supra note 128, at
90 91 (2018); Arbel & Shapira, supra note 61, at 943 44 (2020).
141 Platforms are also incentived to audit service providers prior to transactions, as recently
studied by Xinyu Hua & Kathryn E. Spier, Holding Platforms Liable 3 (HKUST Research Paper
2021-048, 2023).
142 See Farshad Ghodoosi, Contracting in the Age of Smart Contracts, 96 WASH. L. REV. 51,
143 Cohney & Hoffman, supra note 85, at 385
Errors in coded exchange will r
Electronic copy available at: https://ssrn.com/abstract=4631897

<<PAGE_BREAK>>

28 Draft[Vol. __
performed according to the proper interpretation of the contract. Doing that
accurately requires discretion.144
***
The analysis presented in this Part explains the primary institutional
features that underlie nano contracts and exposes some of the ways
policymaking can further their adoption. On this basis, we now move to
explore how nano contracts can transform several central areas of law:
queues, property, employment, and torts. The crux of the analysis will focus
on the regulation of queues, an area in which we can easily see nano
transformative effects and failure modes. This will allow us to offer
a broader sketch of the issues inherent to other domains of private law. After
describing the potential, the discussion evaluates risks, whether legal
intervention is needed, and in which form.
IV. NANO LINES
A. Nano Contracts and the Problem of Queues
Lines are a painful, if often neglected, public policy problem.145 They
emerge whenever demand outstrips service capacity.146 Busy intersections,
concert tickets booths, amusement parks, customer service
call lines, plane boarding, fast food drive-throughs, bank tellers, a plane on
the tarmac, the DMV, and ticket booths are frustratingly common
examples. Lines are often a conflict zone; a common source of friction that
every so often erupts into wanton displays of violence,147 such as in Black
Friday sales or road rage on congested roads.148 But even in their more
quotidian form, lines exact a toll on our lives. At the DMV alone, Americans
spend an average of 44 minutes per visit.149 One study estimated that
144 Id. at 3 -mediated transactions will often fail
to achieve what their promisors intend, even as they are surrounded by communications in real
languages, intended to be relied on by real people. In such cases, law will confront and must
surmount two temptations: ignoring the code altogether as a mere instrument of performance
or enforcing it as an exculpatory clause written in ciphered .
145 For a comprehensive analysis, see Perry & Zarsky, supra note 33, at 1596 97.
146 See David Fagundes, The Social Norms of Waiting in Line, 42 L. & SOC. INQUIRY 1179,
1179 (2017). As Fagundes notes, the is highly culturally dependent. Id. at 1187 88.
147 See Adrian Furnham, Luke Treglown & George Horne, The Psychology of Queueing, 11
PSYCH. 480, 480 81, 487 (2020) (reviewing the psychological effect of queue rage. The authors
also present a 2019 study measuring levels of violence caused by customers waiting for treatment
at an Israeli hospital).
148 See Tiffany Hsu, Fistfights and Long Lines on Black Friday? Not as Much Anymore, N.Y.
TIMES (Nov. 23, 2018), https://www.nytimes.com/2018/11/23/business/black-friday-
history.html [https://perma.cc/3FHU-5QNM]; Mark Asbridge, Reginald G. Smart & Robert E.
Mann, Can We Prevent Road Rage?, 7 TRAUMA, VIOLENCE & ABUSE 109, 109 11 (2006).
149 Neel Padmanabhan, Reducing DMV Wait Times with Queue Management and Digital
Electronic copy available at: https://ssrn.com/abstract=4631897

<<PAGE_BREAK>>

2023] 𝑛𝐾 29
Americans squander $10.3 billion annually waiting to see their physician or
dentist.150 Another study estimated that traffic congestion cost Americans
over $7.7 billion in 2019.151 This is time that could be used for family,
recreation, work, hobbies, or romance but is instead spent waiting in line.
Most lines today are not regulated. No federal law specifies line
;152 instead,
153 But to say that the line is subject to social
norms does not mean that these norms are prosocial. Indeed, David
Fagundes describes how the nuanced rules of lines are often accompanied
by a shadow threat of social opprobrium that sometimes erupts into
violence.154
Yoram Barzel theory of lines and their cost also helps frame our
discussion.155 Normally, markets allocate scarce resources based on a price
system, using a system of willingness-to-pay ( WtP ). Lines, instead, allocate
resources to those who wait, thus substituting the WtP with a mechanism
that Barzel describes as willingness-to-wait ( WtW ).156 When deciding
whether to join a line, an individual assesses whether the waiting is worth
her time. Depending on the length of the line, some will join, others will
not. As a result, a vicious dynamic emerges. Lines will tend to build up until
the point at which they suck up so much time that they are hardly worth
the wait.157 at a
line that is too long.
Another problem with lines is how they distribute resources. Most
lines adopt an alloc ing of
first in time wins.158 Distributing scarce resources based on who happens to
be first in time may meet some formal criterion of fairness but is neither
Transformation, VIRTUAQ (Mar. 2, 2020), https://virtuaq.com/blog/2019-03-02-dmv-wait-
times [https://perma.cc/8CUS-7LVA].
150 Akbar Marvasti, A Contingent Valuation of Customer Delay in Medical Services, 32 E.
ECON. J. 31, 41 (2006).
151 DAVID SCHRANK, LUKE ALBERT, BILL EISELE & TIM LOMAX, 2021 URBAN MOBILITY
REPORT, 42 (2021).
152 Fagundes, supra note 146, at 1179.
153 Id. Fagundes later qualifies this statement, noting that in specific instances such as traffic,
line cutting can be sanctioned. Id. at 1180.
154 See id. at 1183 86. Line priority is created by the continued possession of a place in line
and, subject to some exceptions, is abandoned if one needs to rest her feet in a more comfortable
sitting place. See also Gad Allon & Eran Hanany, Cutting in Line: Social Norms in Queues, 58
MGMT. SCI. 493, 493 95 (discussing social norms of exception governance).
155 Yoram Barzel, ifing by Waiting, 17 J. L. & ECON. 73, 94 95 (1974).
156 Id. at 73.
157 See id.
158 See JOHN F. SHORTLE, JAMES M. THOMPSON, DONALD GROSS & CARL M. HARRIS,
FUNDAMENTALS OF QUEUEING THEORY 5 6 A common discipline in everyday
supra note 145, at 1596.
Electronic copy available at: https://ssrn.com/abstract=4631897

<<PAGE_BREAK>>

30 Draft[Vol. __
seat on the bus when an
individual in need
than care. Recognizing that first in line heuristics are a crude mechanism of
allocation, some services offer line priority
159 For example, on trains, first to come heuristics generally
determine who sits first. However, a preference is given to people with
certain conditions such as a physical handicap or old age. Some queues use
human discretion, i.e., triage, to allocate priority.160
for example, people wait according to the scheduled appointment time. But
the staff is given the discretion to give priority to a patient who suffered
acute trauma. In specific cases, social status is used to award priority hence
the existence of VIP lines.
Some scholars express hope that that we can solve problems of waiting
in line now that online lines are an option.161
understand why this is not quite true. Online lines do nothing to produce
any excess service capacity and so the resource in question is just as limited
as it originally was. We still must bide our time until the specialist is available
to see us, our cortado is brewed, and the mechanic gets to our car. True, it
is less painful to wait at home than it is to wait at the post office, but this
sometimes, quite counterintuitively, worsens the problem. Once lines
abandon the implicit cost of standing in line, they lose the signal inherent
to the WtW mechanism. When that happens, many more individuals join
the line, some of them with a fleeting interest in the product, some with
none at all. Some are scalpers and others are bots all of them inflate the
line and distort its desired allocation.162 Relative to a world where those in
159 SHORTLE, THOMPSON, GROSS & HARRIS, supra note 158, at 6. Some restaurants offer
the option to order online and suggest that by doing so, one can skip the line. See Mobile Order
and Pay, MCDONALDS, https://www.mcdonalds.com/us/en-us/mobile-order-and-pay.html
[https://perma.cc/3VNJ-4BH3] (last visited Oct. 7, 2023). This is not precisely true, as the
patron skips one line (ordering) but still must face the other (production). In the event of excess
demand, online orders simply turn into a place in line for production (rather than ordering).
160 Those who wait in line also perform some triage, as they may allow people in need to cut
in front of them. On the efficiency and limitations of line triage, see Allon & Hanany, supra note
154, at 503.
161 See Ramsi A. Woodcock, The Efficient Queue and the Case Against Dynamic Pricing, 105
IOWA L. REV. 1759, 1797 (2020) [I]n the information age the burden of queuing has been
driven almost to zero, because now waiting on line takes only the time needed to log into a website
and check to see whether a product is available. ); Fagundes, supra note 146, at 1191 (noting that
online ordering systems
preorder . . . and pick . . . ntly, recognizes the
possibility of queue markets enabled by technology. See id.
162 Taylor Lyles, Bots Are Ruining Your Chance of Buying a PS5 and Xbox Series This Holiday,
IGN (Nov. 15, 2021, 4:18 PM), https://www.ign.com/articles/bots-scalpers-ruining-chances-of-
getting-ps5-xbox-series-x-nintendo-switch-oled [https://perma.cc/ETZ6-LYM6]
also taken the opportunity to use bots to try and jack up the price of highly desirable and hard-
to-fi .
Electronic copy available at: https://ssrn.com/abstract=4631897

<<PAGE_BREAK>>

2023] 𝑛𝐾 31
need could ensure allocation by waiting in a physical line, an online queue
can make matters worse. Absent some credible signal of need or merit,
online queues are assured to be neither more fair nor more efficient.
Yet, even though the line system is hard to justify on grounds of equity
or efficiency, the status quo proves recalcitrant. This is due to twin
fundamental problems, which we can dub the verification and the
grasshopper problems.
The verification problem arises from the question: how can you tell
whether someone in the fast lane is indeed in an urgent situation? Many
people would claim a special need just to avoid a line. Thus, it might be
necessary to install a costly verifier like a triage nurse at the emergency
room to make judgments. To solve the problem, hospitals must now
employ a full-time health practitioner who spends their expertise on
administration rather than care. Another type of cost is the verification
process itself. 163 Patients may need to produce documents showing
bloodwork, special medical conditions, or urgency. And, at the risk of
infinite regress, there will often be a line to the triage itself, as visitors to the
emergency room know. Then, there is the cost of the mistakes the verifiers
are bound to make in good faith and we are not assured of that good faith.
Given the discretion necessarily allotted to verifiers, some of them abuse
their position to give priority . In the
shadow of all of this, we sometimes see the emergence of a new wasteful
dynamic, where people learn how to game the verifier. In the organ
transplant context, some doctors exaggerate their needs so that the
system will give their patients priority in line (at the expense of the less
fortunate patients who remain to languish in line).164
Even when we can resolve the verification problem reasonably well,
we are exposed to a second-order problem: the grasshopper problem. While
ants, in the sense of planning for the future, others
are carefree grasshoppers 165 A veritable grasshopper might live
time in airports. 166 He always leaves late for the airport. He will occasionally
163 One study of the cost-effectiveness of triage, accounting for the costs of administration,
found an increase in total costs. Stefan Morreel, Ines Homburg, Hilde Philips, Diana De Graeve,
Koenraad, G. Monsiuers, Jasmine Meysman et al., Cost Effects of Nurse Led Triage at an Emergency
Department with the Advice to Consult the Adjacent General Practice Cooperative for Low-Risk
Patients, a Cluster Randomized Trial, 126 HEALTH POLY 980, 985 (2022).
164 See Benjamin J. McMichael, Stealing Organs? 97 IND. L. J. 135, 154 (2022) (citing Aaron
Ahearn, Ethical Dilemmas in Liver Transplant Organ Allocation: Is it Time for a New Mathematical
Model?, 18 AM. MED. ASS'N J. ETHICS 126, 126 (2016) ("Essentially, transplant professionals
were escalating the level of care pretransplant patients were receiving in order to exaggerate their
patients' illness acuity and move their patients 'up' the waitlist.")).
165 AESOP, THE ANTS & THE GRASSHOPPER (1919), https://read.gov/aesop/052.html
[https://perma.cc/HD4Z-4MWD].
166 Jordan Ellenberg, Be More Productive: Miss Some Flights, WIRED (Aug. 11, 2014, 11:25
Electronic copy available at: https://ssrn.com/abstract=4631897

<<PAGE_BREAK>>

32 Draft[Vol. __
arrive so late that he is bound to miss his flight unless, that is, he gets to
skip the airport security line. As it turns out, airport personnel will often do
just that, because they attempt to help passengers in a hurry arrive on time
by letting them skip the line.167
What is so troubling about this example is that this is not an example
of the failure of the verification system. The verification method works
perfectly here. The grasshopper is in a real rush, and the airport verifier is
correct to flag him as someone in need. The problem is that by giving the
grasshopper priority, the verifier rewards him for his reckless planning at the
direct expense of other passengers who are better planners. This points at
the general problem with verification systems of triage: they create
unintended grasshopper problems that exacerbate the pressure on the
already scarce resources.
Nano contracts circumvent this patchwork. They offer a solution to
the problem of queues by creating a protocol for parties to directly, quickly,
and potentially anonymously, negotiate the allocation of places in the line
among themselves.168 A nano contract can just as easily be used to auction
off a place in line at airport security, at a baseball stadium, and at the
pharmacy. It can also be used to pay email recipients to afford special
or get priority
for technical support. Notably, t
If the person third in line is trading their places with the person who is last
in line, only the two trading partners are impacted. This places line trading
transactions in the coveted echelon of Pareto improving transactions
deals where at least one person is made better off without harming anyone
else. This is because if the compensation offered is too low, or if one does
not want to wait any longer, they can refuse the switch. It is also possible,
although less likely, that nano contracts would allow a late-comer to jump
to the first place in line, pushing all else back a spot, if the late-comer is
willing to compensate all line-waiters for the added wait. And if people do
not
Quite remarkably, nano contracts simultaneously solve the
verification and the grasshopper problem without the need for costly triage.
They solve the verification problem because it is not enough to just say you
are in a rush. The user must put their money (or tokens) where their mouth
is. The more others need priority, the more one must stake. This verifies
that the user truly values priority. The grasshopper problem is similarly
resolved. If my tardy friend had to pay based on how many people he jumps
in line, he would certainly start planning better. The requirement to pay for
priority rewards good planning and moderately sanctions grasshoppers.
Key to this entire system is voluntary trade. Unlike the current system
which imposes an arbitrary line, nano contracts let people have a choice. I
can retain my place in line if I am in a hurry or need, or I can choose to wait
a bit longer and be compensated for my time. Especially in settings where
AM), https://www.wired.co.uk/article/jordan-ellenburg [https://perma.cc/2YH9-7A2U].
167 See Allon & Hanany, supra note 160, at 493.
168 For a statement on the positive distributional gains of line-trading, see Barzel, supra note
155, at 82.
Electronic copy available at: https://ssrn.com/abstract=4631897

<<PAGE_BREAK>>

2023] 𝑛𝐾 33
transactions are anonymous, we need not worry about coercion or duress,
no more at least than we must worry about bullies who cut in line or the
connected who are given priority over us. Unlike systems like priority
boarding, the compensation goes to us, not to a third-party actor. The four-
way stop is illustrative: it allows all cars to quickly determine who will go
first, while remitting payments between line participants. Another example
is the food delivery service DoorDash. After making the order, the user is
given the option to choose a tip for the driver.169 Because the driver views
the tip before taking the order, this tip can be used to gain priority in the
delivery queue.170
A related advantage is the p2p nature of the nano contract system.
Many firms have seized on the inefficiencies of the status quo and
commoditized lines.171 For example, Six Flags sells the place in line of those
who arrived first to those willing to pay more.172 In socialist countries, there
are fixers, variably known as i machers, 173 who offer to get
people ahead in line for the right fee.174 In the United States, maître ds often
accept bribes in the form of tips to give preference to certain guests.
Concert venues sell VIP tickets for a hefty premium that allow their holder
to avoid the line and enter the venue early.175 Unlike nano contracts, where
payments are remitted to other people in line, in these queue product
transactions, the firm is earning the revenue. Because lines are a source of
revenue, companies like Six Flags may have less incentive to shorten lines.
This is a point about the status quo that must be emphasized. Lines are
already commercialized but not in a p2p manner like a nano contract. Those
169 Doug H., Delivery Drivers Can See Your Tip! And It Can Get You Faster Service,
RIDESHARING DRIVER, (Mar. 17, 2023), https://www.ridesharingdriver.com/tipping-faster-
delivery [https://perma.cc/9MA9-DSLJ]).
170 Id.
171 See Martin Lewison, Demand-Based Pricing in the US Theme Park Industry, 5 INT. J.
LEISURE & TOURISM MKTG. 271, 281 (2017) (finding that 57% of parks examined offered a
queue product).
172 Experience Six Flags with Six Flags Plus, SIX FLAGS
https://www.sixflags.com/america/store/tickets [https://perma.cc/YBS7-9HQ8].
173 Alena Ledeneva, Blat and Guanxi: Informal Practices in Russia and China, 50 COMP.
STUD. SOC'Y & HIST. 118, 122 (2008) (describing the Tolkachi
. Yaron Zelekha & Simcha B. Werner, Fixers and Corruption:
Shadow 'Public Servants', 4 J. CURRENT ISSUES CRIME, L. & L. ENFORCEMENT 441, 442 (2011).
On the etymology of Macher, see Macher, MERRIAM-WEBSTER, https://www.merriam-
webster.com/dictionary/macher [https://perma.cc/2FW8-YZJ3] (last visited Oct. 14, 2023).
174 See generally Tara Béteille, , 55 ASIAN SURV. 942,
946, 966 (2015) (noting the diverse functions fixers play and their lack of accountability).
175 Neil Shaha, How the Music Festival VIP Pass Went from Luxury to Basic, WALL ST. J. (July
26, 2023, 11:05 AM), https://www.wsj.com/articles/music-festivals-vip-tickets-8771bffb
[https://perma.cc/P6YD-8BVA].
Electronic copy available at: https://ssrn.com/abstract=4631897

<<PAGE_BREAK>>

34 Draft[Vol. __
are not equitable, fair, or even efficient,176 resulting in
incentives to preserve the lines.177
Critically, a nano contract does not even have to use money. Consider
the course priority rules used by the Kellogg School of Management at
Northwestern University.178 Naturally, some courses are in high demand.
Standard systems of registration favor those who plan and sign up early, but
not necessarily those with greatest interest or need in a particular course. The
University decided to implement a queue-auction system. Every student
receives 2,000 3,000 token points.179 Students bid, with no maximum, on
each of their courses according to a set procedure.180 At the end of the
different courses.181 In much the same way, tokens can be allocated for traffic
priority or other forms of access.
The very existence of nano contracts mitigates the risk associated with
a real emergency, we can
get to our destination sooner, even if a bit poorer. While we must pay for
priority, at least we can get it when we need it. This is a great improvement
over our congested roads, where all independent of need, urgency, or
medical condition must wait. And as alluded, one does not have to use the
system every day to benefit from it. It is enough for one to know of its
existence to insure oneself against risks.
If line trading is profitable, it is natural to wonder why we do not see
more of it. The answer comes from the enlightening work of Professor Felix
Oberholzer-Gee of the Harvard Business School. Oberholzer-Gee sought to
examine why markets for time rarely exist.182 To that end, he had ten
researchers approach 500 individuals who waited in line for the cafeteria,
the train station, and the DMV.183 Pretending to be in a hurry, the
researcher offered to cut in line in exchange for a $0 $10 payment.184
His first finding is consistent with much of the above. The more
money offered, the more people were willing to forego their place in line
(from 45% with no payment to 76% with $10).185 However, only a small
176 See generally Allon & Hanany, supra note 160, at 494 95 (studying the game theoretical
foundations of line inefficiencies related to imperfect monitoring).
177 See Lewison, supra note 171, at 281.
178 Kellogg Course Bidding System Rules, NORTHWESTERN UNIV.,
https://www.kellogg.northwestern.edu/serial/academics/bidding-registration/course-bidding-
rules.aspx [https://perma.cc/AA9M-WK8D] (last visited Oct. 14, 2023).
179 Id.
180 Id.
181 See Id.
182 Felix Oberholzer-Gee, A Market for Time: Fairness and Efficiency in Waiting Lines, 59
KYKLOS 427, 428 (2006).
183 Id. at 432.
184 Id. (The experiment offered five different treatments corresponding to offers of $0, $1,
$3, $5 and $10).
185 Id. at 434.
Electronic copy available at: https://ssrn.com/abstract=4631897

<<PAGE_BREAK>>

2023] 𝑛𝐾 35
minority of people agreed to actually take the payment: they simply let the
researcher pass them while refusing payment.186 It seems that most people
used the offer of money as a makeshift verification mechanism but were
prevented by social norms from actually accepting it. This is why higher
amounts yielded better responses, even though they were not collected. The
problem, of course, is that when payments are not remitted, the credibility
of payment offers vanishes. This allows those who do not play by the social
rules to manipulate others.
Interestingly, Oberholzer-Gee pushed the line a bit too far. He
approached some of the people who previously let others cut ahead of them
in line a second time.187 He offered them, again, payment to cut ahead.188
In all cases, he was summarily rebuffed.
some angry, a few outright hostile, suggesting that it was probably not safe
189 He thus concluded that the rarity of markets
rket are viewed as
one- 190
While favors have a positive connotation, they obey a much more
complex logic. Because line trading is viewed as a favor, people act with
outright hostility when they feel that their boundaries are transgressed. And
because it is uncomfortable to ask for a favor from a stranger, many of us
feel uncomfortable asking others for help, even when we are in a real hurry.
At the same time, we are all too familiar with those who do not concern
themselves with the opinions of their peers and liberally cut in line.
Nano contracts do much more than facilitate exchange. They create a
norm in which asking for priority does not require calling for special
favors.191 They also implement a mechanism that reduces the friction
involved in trades for time. This highlights a major contribution of nano
contracts: opening up opportunities of mutual interest that are shrouded
today by social and transactional frictions.
186 Id. at 436.
187 Id. at 438.
188 Id.
189 Id.
190 Id.
191 An unsettled debate is whether conversion of social processes to market processes leads
to more or less undesirable behavior. Uri Gneezy and Aldo Rustichinis famous study found that
day care centers saw an uptick in tardiness when they instituted a fine for late arriving parents.
Uri Gneezy & Aldo Rustichini, A Fine Is a Price, 29 J. LEG. STUDS. 1, 7 8 (2000). For a
replication failure, see Cherie Metcalf, Emily A. Satterthwaite, J. Shahar Dillbary & Brock
Stoddard, Is a Fine Still a Price? Replication as Robustness in Empirical Legal Studies, 63 INTL REV.
L. & ECON. 1, 1 (2020)
causes respondents to reduce non-
s
. In the current context, the substitution is not between a social norm and price, but two
different types of prices (time versus dollars).
Electronic copy available at: https://ssrn.com/abstract=4631897

<<PAGE_BREAK>>

36 Draft[Vol. __
The overall effect is, of course, nuanced. While this may increase
leave late, this is not necessarily a bad outcome.
Research shows that when resources are scarce, people prefer systems where
those who wait longer receive greater compensation over systems where
priority is assigned based on either a system of lottery or surge pricing.192 If
the success of priority access in parks and airplanes is a guide, consumers
adjust quickly to such market norms.193
B. Legal Policy on Nano-Contracting Lines
Nano contracts offer a general solution to lines. In doing so, nano
contracts solve significant problems like permitting people in a rush to gain
priority, transferring payments to people with greater patience, and avoiding
the costs of verifiers and grasshoppers.194 But the proliferation of nano
contracts would also entail a market creep into areas previously governed by
social norms.195 They also engender distributive concerns regarding their
effect on those living close to the social margin, alongside other efficiency,
political, and ethical concerns. Whether the legal system should regulate
nano contracts, or even permit them at all, depends on our evaluations of
these potential concerns.
Perhaps the broadest and most sustained critique of line
commodification is that offered by Harvard philosopher, Michael Sandel.196
In his book, Sandel seeks to defend the separation of lines and markets,
advocating for what he calls the ethic of the queue. 197 This moral system
holds that allocating goods through lines is desirable in and of itself, at least
relative to price mechanisms.198 A central tenet of the queue ethic is the
belief that WtW is better than, or at least not clearly worse than, a WtP
system. If society wants to allocate resources to those who value them the
most, WtP is limited, Sandel argues, because it does not reflect real need but
192 Charles Raux, Stéphanie Souche & Yves Croissant, How Fair is Pricing Perceived to Be?
An Empirical Study, 139 PUB. CHOICE 228, 236 (2009)
ranking of the perception of allocation rules is found, from the fairest to the most unfair: the
moral and the compensation rules, then the queuing and the peak pricing with additional supply
.
193 See Gilda Hernandez-Maskivker & Gerard Ryan, Priority Systems at Theme Parks from
the Perspective of Managers and Customers, 6 TECH. INNOVATION MGMT. REV. 40, 44 (2016)
(finding that customers with stronger negative attitudes towards waiting are more likely to want
to avoid waiting in queues. In contrast, people with a more positive attitude towards waiting may
be more tolerant of queuing in regular lines ).
194 See supra Part IV.A.
195 See generally Oberholzer-Gee supra note 182 (markets in lines)
196 See MICHAEL SANDEL, WHAT MONEY CANT BUY: THE MORAL LIMITS OF MARKETS 28
(2012).
197 See id. at 28.
198 See id.
Electronic copy available at: https://ssrn.com/abstract=4631897

<<PAGE_BREAK>>

2023] 𝑛𝐾 37
rather the ability to pay for the good in question.199 He notes, with visible
annoyance, how baseball fans who sit in the expensive front rows often come
late and leave early, manifesting only passing interest in the game, unlike the
other less affluent diehard fans.200 Lines further embody a democratic ethos,
he claims, visibly affirming our equality as we all languish in waiting,
regardless of wealth, race, or creed.201 Thus, Sandel finds the queue ethic to
be a superior alternative to market mechanisms of allocation.202
is unpersuasive. It would
require a great feat of line drawing to explain how a market economy that
allocates most of its goods through markets and prices suddenly turns
unethical when it comes to lines. Sure, markets and prices have their
discontents, and there are those who condemn all market transactions as
morally suspect. But in a society where it is permissible for dealerships to
sell, say 2023 Subaru Outbacks based on WtP, how can one justify the
dissipation of this principle at the line to the dealership? This position is
mystifying because lines are downstream of the price system. Lines tend to
emerge when goods are being sold at a price that lies below the market
clearing price.203 In our society, the manufacturer is generally free to set
prices as it sees fit. If it is permissible for Subaru manufacturers and dealers
to raise prices until no line exists, and then offer sale prices when they have
exhausted the initial pool of buyers, why is it a moral wrong to keep prices
low and sell line priority instead?
The commitment to the queue ethic is especially puzzling in a world
204 Sandel
himself
205 These products are
largely normalized. As Fagundes notes, while most customers may dislike
them, VIP queues do not represent norm 206 Perhaps there is an
ethical theory that condemns expedited shipping, but that condemnation
certainly has not been widely accepted.
It is also not the case that WtW is a better measure of value than WtP.
While the comparative literature is not expansive, the existing evidence that
suggests that WtP indeed carries a strong signal. One empirical study
examined the decision to purchase a priority pass relative to the decision to
wait in the normal line.207 It found that those who pay value priority much
199 Id. at 17-43.
200 Sandel seems to assume that the point of a front row seat is to see the game rather than
being seen as seating in the front row.
201 See SANDEL, supra note 196, at 18.
202 See id. at 30-35.
203 See Barzel, supra note 155, at 75.
204 See Lewison, supra note 171, at 281.
205 SANDEL, supra note 197, at 7.
206 Fagundes, supra note 146, at 1190.
207 Hernandez-Maskivker & Ryan, supra note 193, at 43 44 (finding that the greater the
negative attitude [by theme park customers] towards waiting times, the higher the probability of
Electronic copy available at: https://ssrn.com/abstract=4631897

<<PAGE_BREAK>>

38 Draft[Vol. __
more than those who wait in line.208 A different study found no correlation
between willingness to pay for a shorter line and economic status, which
suggests that payments do measure a real difference in valuation.209
The darkest side of the issue is that, from an egalitarian perspective,
we must be cautious about championing WtW. There is an implicit
assumption that somehow WtW is more progressive than WtP. The idea
seems to be that because our society has inequality in the distribution of
material goods, WtW is an equalizing force.
On reflection, this is wrong. To put the point bluntly, we simply do
not live in a society where free time is equally divided. This is the very thrust
of Thorstein leisure class framework.210 A struggling mother of
four working a minimum-wage job will not see much benefit from a system
that rewards those who can spare the time to wait in line. And, of course,
money and time are often fungible, making inequality in one transform into
inequality in the other.211 For instance, some people hired line waiters,
paying them as much as $6,000 to gain the right to watch the seminal oral
argument in the Supreme Court on same sex marriage.212 Even when people
wait for themselves, reliance on WtW can be regressive. Lawyers should be
Research on the welfare system and
eviction shows that time requirements create serious obstacles and stress for
213 A recent study shows that poor tenants face evictions
on a large scale because they cannot afford the time involved in public transit
to the courthouse.214 Even though they are paid less, those with less financial
resources do not sit on troves of free time.
I want to make a stronger argument. In many situations, nano
contracts will be more progressive than the status quo. This is partly because
there is nothing inherently beneficial to the economically disadvantaged
determined by luck. Nano contracts mitigate some of harsh effects by
customers being express pass holders ).
208 See id. at 44.
209 See Marvasti, supra note 150, at 41.
210 See generally THORSTEIN VEBLEN, THE THEORY OF THE LEISURE CLASS (Oxford Univ.
Press Inc. 2017) (arguing that those of lower socioeconomic status have less free time than those
of higher socioeconomic status).
211 Fagundes, supra note 146, at 1190.
212 Robert Barnes,
Others to Hold a Spot, WASH. POST (Oct. 6, 2015, 3:32 PM),
https://www.washingtonpost.com/politics/courts_law/supreme-court-bar-bans-line-standing-
for-hearings/2015/10/06/a309e0e6-6c15-11e5-aa5b-f78a98956699_story.html
[https://perma.cc/BZN9-TQD5].
213 Ilya Slavinski & Kimberly Spencer-Suarez, The Price of Poverty: Policy Implications of the
Unequal Effects of Monetary Sanctions on the Poor, 37 J. CONTEMP. CRIM. JUST. 45, 48 (2021).
214 David A. Hoffman & Anton Strezhnev, Longer Trips to the Court Cause Evictions, PNAS,
January 3, 2023, at 1, 1 2 https://www.pnas.org/doi/epdf/10.1073/pnas.2210467120
[https://perma.cc/DD7C-M4CT].
Electronic copy available at: https://ssrn.com/abstract=4631897

<<PAGE_BREAK>>

2023] 𝑛𝐾 39
offering people a meaningful choice. They can elect whether they want to
retain their place in line, or whether they want to spend a few more minutes
idling in exchange for direct compensation. If a person has a bit of extra
time, they may be able to leave the post office with a few extra dollars in
their pockets. And if they are in a rush, they can just keep their place (or pay
a little to get priority).215 As long as choice is preserved, nano contracts offer
a potential improvement over the status quo. By contrast, attempts to
maintain the status quo often unwittingly harm those are less well off.216
There may still be a residual concern with a world in which the
wealthy tend to be first in line. Indeed, that is already the case under the
current system elite airline members board first, toll roads give priority to
those who can afford them, and VIP tickets create a fast track for those who
can afford them. Nano contracts, however, offer a way to remedy some of
these issues. If we identify a systemic access concern with a specific type of
line, it is possible to issue tradable tokens on the platform. We can allocate
priority tokens to people on a monthly or annual basis, which can be used
in addition to, or instead of, money.217 This offers another way to target
vulnerable parties, which is not possible under the current system.
While I think Sandel I do believe that there
is an important kernel there, and that it offers some valuable lessons for the
regulation of nano contracts. Rather than a blanket objection to
commoditized lines, we should be attentive to the type of good that is being
allocated.
It is one thing to allocate primary resources such as Subaru Outbacks
and tickets to baseball games based on WtP
allocate publicly provisioned goods in this way. This is because public
provisioning already implies a judgment that market allocation of the
underlying good is faulty. Prominent examples where notions of queue ethic
may be applicable include the line to the voting booth, kidney transplants,
a place in line for the draft or jury duty, fresh water during a natural disaster,
215 The standard transaction would involve place trading. This means that if the person in
place five trades places with the person in place seven, this has no effect on the person in place
six.
216 Many unhoused people found that they could earn an income without the destabilizing
requirement of background checks by serving as line-waiters for Supreme Court hearings that
is, until the Supreme Court banned this practice for attorneys. Supreme Court of The United
https://www.supremecourt.gov/visiting/visitorsguidetooralargument.aspx#attny. See also Barnes,
supra note 212.
217 The analogy of food stamps, rather than direct money distributions, is apposite. On the
two methods, see Robert Breunig et al., Explaining the Food Stamp Cash-Out Puzzle, Food
Assistance and Nutrition Research Report No. 12 (2001) (discussing the empirical tendency of
households to spend more on food when given food stamps relative to equivalent cash transfers).
See also Siobhan McDonough, Giving People Cash is Usually Better than Shipping Them Food,
VOX (June 28, 2022, 10:00 AM), https://www.vox.com/future-perfect/23180175/cash-aid-food-
global-africa-famine-hunger [https://perma.cc/6U37-4FMQ].
Electronic copy available at: https://ssrn.com/abstract=4631897

<<PAGE_BREAK>>

40 Draft[Vol. __
waiting for a court to render a judgment, or access to medical resources
during a pandemic.218 What ties these examples together is that society
decided that the goods should be allocated outside of markets.219 In those
cases it will certainly be true that commoditizing the line would undermine
this goal. Explicit markets in lines in such instances may be offensive to our
sense of equality and justice by expressing the view that
votes, lives, or sufferings are more valuable than those of others. By creating
markets in those domains, we risk changing the very nature of the good
itself. As Sandel notes, [h]ow a good is allocated may be part of what makes
220 Another effect is the crowding out of social
norms. If an elderly, frail woman asks a person to get ahead in line to the
social norms dictate
the answer to be that will be 221
By focusing our attention on these types of goods, we can come to
appreciate the need to regulate, and sometimes even ban, nano contracts in
certain contexts. The quest for policymakers will be two-fold: (1) identify
these contexts, and (2) find measures that can actually work to limit the
proliferation of nano contracts. To an extent, legislators have already begun
this quest by making it illegal to trade in certain rights.222 Interestingly, there
is no specific sanction for queue trading in the context of public provision
of supplies during an emergency, but it is quite likely to be frowned upon.
At the same time, it is important to recognize that limiting private
contracting, side deals, and shadow bargains is difficult. As the Oberholzer-
Gee study shows, some lines are partly protected from the incursion of
markets by social norms.223 As particular applications of nano contracts can
be designed to allow people to trade under the screen of anonymity,
compliance with social norms will become a challenge. Therefore, it is
important to heed the constraints identified in Section III.B,224 as its
solutions usually involve reliance on broader institutions and regulators may
have more success regulating these institutions than the parties themselves.
218 See, e.g., Megan Twohey, Steve Eder & Marc Stein, Need a Coronavirus Test? Being Rich
and Famous May Help, N.Y. TIMES (Mar. 18, 2020),
https://www.nytimes.com/2020/03/18/us/coronavirus-testing-elite.html
[https://perma.cc/LDM5-7N89].
219 See generally Kimberly D. Krawiec, Markets, Repugnance, and Externalities, 19 J.
INSTITUTIONAL ECON. 944 (2023), (discussing the existence of
seeks to limit).
220 SANDEL, supra note 197, at 33.
221 I do not make the argument that our existing social norms function well in general. I
submit that even common norms of courtesy suffer from deep pathologies, as explored in
Yonathan A. Arbel & Yotam Kaplan, Tort Reform Through the Backdoor: A Critique of Law and
Apologies, 90 S. CAL. L. REV. 1199, 1220 24 (2016) (discussing, as an example, apologies given
after an accident).
222 See Krawiec, supra note 219.
223 See Oberholzer-Gee, supra note 182, at 429.
224 See supra Section III.B.
Electronic copy available at: https://ssrn.com/abstract=4631897

<<PAGE_BREAK>>

2023] 𝑛𝐾 41
So far, I have argued that nano contracts have progressive effects and
bring social utility. However, despite
grasshopper problem, there is one additional efficiency-based concern. This
is the problem of cloggers. Recall the four-way stop example. There, I
assumed that that those four drivers were already on the road. But nano
contracts can also induce more people to go on the road. With nano
contracts in place, cloggers may find it profitable to drive aimlessly, in the
hope of collecting money from drivers who are in a rush. Cloggers introduce
delays to all drivers, increase the cost of travel for drivers in a rush, and waste
their own time.
Despite this real possibility, cloggers do not deal a fatal blow to the
use of nano contracts to solve queues. This is because cloggers must bear real
costs when they engage in clogging. Airlines oversell flight tickets,
calculating that some passengers will miss their flights. When flights are
overbooked, however, airlines offer handsome payments to people who are
willing to forgo their place in line. 225 Yet, there is no evidence of widespread
abuse by cloggers who strategically book busy flights.
Because of these costs and the relatively modest payments from nano
contracts, it is unlikely that clogging will be widespread. Even in the
situations where clogging does emerge as a problem, we should consider two
responses. One is indifference: a small degree of clogging is tolerable, given
that the payments go to people who demonstrably lack more productive
avenues to eke out a living. The second is the adoption of keyhole solutions,
like banning clogging and imposing restrictions on clogging behavior (e.g.,
cars that drive aimlessly for hours will not be able to collect payments).
In summary, nano contracts offer a natural solution to the problem of
queues. Evaluation of their merits suggests that, in most cases, there are real
advantages both ethics- and efficiency-based to their adoption. True,
we need to exercise caution in the case of publicly provisioned goods, as
nano contracts can crowd out social norms and corrode the goods
themselves. However, for the vast array of products and services, nano
contracts offer a significant improvement over the current system. Payments
made through nano contracts can be progressive, providing people of limited
means with another way to monetize their spare time. Nano contracts also
reward planners and waiters, while relieving all of us from anxiety about the
future. This is not to say that a hands-off regulatory approach is necessary.
Regulatorary involvement will be needed for tasks such as issuing tokens and
delimiting permissible uses. But, as a general outlook, nano contracts hold
important potential for improving the social problem of queues.
225 Bumping & Oversales, U.S. DEPT OF TRANSP., (Apr. 15, 2021)
https://www.transportation.gov/individuals/aviation-consumer-protection/bumping-oversales
[https://perma.cc/5V4Y-8EPL] (showing that compensation for passengers who are denied
boarding on an overbooked domestic flight runs up to 400% of the one-way fare, up to $1,550).
Electronic copy available at: https://ssrn.com/abstract=4631897

<<PAGE_BREAK>>

42 Draft[Vol. __
V. NANO LEASES
A. Nano Leases and Excess Capacity
Most of our personal resources are underutilized. Take the personal
household: the average car sits idly for 22 hours a day (i.e., 95% of the
time).226 The average drill is used for 12 minutes a year.227 A large percentage
of homes are barely used think of the kitchen, bathroom, and shower,
which are only used for a few short hours each day. We wear only one shirt
at a time, and leave every other shirt to sit idly for weeks at a time. Even
commercial assets have a high degree of downtime. Office space is used only
for the workday (and since the COVID-19 pandemic, much less);228
restaurants normally only operate for half of the day, despite occupying
expensive real estate; even factory machines rarely run 24/7.229 Idle assets
account for a sheer amount of waste.
Nano contracts offer a way to utilize this idle capacity through nano
leases,230
231 Consider a working example from a new start-up called
Helium.232 Most people have underutilized broadband internet capacity,
with median households using only one-third of the capacity used by power
users.233 Helium offers people with such excess capacity the option to install
a router that grants casual access to passersby who pay for access. The stakes
226 Paul Barter, Cars Are Parked 95% of the Time . Lets Check!, REINVENTING PARKING
(Feb. 22, 2013), https://www.reinventingparking.org/2013/02/cars-are-parked-95-of-time-lets-
check.html [https://perma.cc/3RQ5-SJTV].
227 Leon Kaye, Why Sharing Makes Sense in an Over-Consuming World, THE GUARDIAN (Jan.
12, 2012 11:43 PM), https://www.theguardian.com/sustainable-business/collaborative-
consumption-sharing [https://perma.cc/9WKZ-JL2Y].
228 Jose Maria Barrero, Nicholas Bloom & Steven J. Davis, Why Working from Home Will
Stick, (N Working Paper No. 28731, 2021).
229 The Federal Reserve publishes estimates of industrial capacity utilization which reveal
that over 20% of industrial capacity goes unutilized. See FED. RESERVE, G.17 (419), STATISTICAL
RELEASE: INDUSTRIAL PRODUCTION AND CAPCITY UTILIZATION 19 (2022),
https://www.federalreserve.gov/releases/g17/current/default.htm [https://perma.cc/Y5CQ-
4YZB] ( 2022 period, the average total industry utilization rate was 79.7 percent;
.
230 For convenience of exposition, the following analysis groups leases, licenses, and sales
under nano contracts. Substantively, the lines between these legal categories become quite murky
at the nano level.
231 Lobel, supra note 102, at 108.
232 Kevin Roose, , N.Y. TIMES (Aug. 3, 2022),
https://www.nytimes.com/2022/02/06/technology/helium-cryptocurrency-uses.html
[https://perma.cc/54SM-37RW].
233 Broadband Insights Report (OVBI), OPENVAULT, (Q4, 2021),
https://openvault.com/wp-content/uploads/2022/03/OVBI_4Q21_Report_FINAL-1.pdf
[https://perma.cc/EW3N-47QN].
Electronic copy available at: https://ssrn.com/abstract=4631897

<<PAGE_BREAK>>

2023] 𝑛𝐾 43
and duration of every transaction are small and short, making them into a
clear example of a nano contract, or even a nano lease.234
The potential of a service like Helium goes far beyond saving on
roaming charges in a new city. It opens up the ability for broad coverage for
IoT machines, offering ways for electronic scooters,
wearable objects, parking meters, cars, and even dog tags to communicate
with the world through direct internet access.235
Another impressive example is food sharing. Olio is a popular food-
sharing platform that allows businesses to donate excess food to food-
insecure individuals.236 In January 2021, Olio facilitated around 14,000
food exchanges each day.237 While not the same as an individual-to-
individual nano lease, the platform is arguably demonstrative of the viability
of a marketplace for excess cooking capacity. We might imagine neighbors
offering an extra pot of stew, a weekly meal prep, or a fresh-cut salad on
demand. Germaphobes might balk, but the indolent and the bon vivant will
celebrate.238 Lastly, start-up Tulerie allows people to rent out their clothes
for a short duration.239
A last illustration is something most of us would not even consider to
be capacity: aerial passage rights over land. It is quite clear that drones will
become an increasingly important mode of goods delivery, but their success
depends on the ability to pass over land without violating the aerial rights of
landowners on their delivery path.240 The issue is highly contentious, and
the drone industry tries to promote legislation that would extinguish
to exclude drones from their low airspace.241 An
alternative solution to the problem is to use nano contracts; if drones can
234 One user reports earning about a $1 a day from such nano leases in Harrisburg,
Pennsylvania. Robbie Paul, What is Helium and How Does it Work,
https://www.digikey.bg/en/blog/what-is-helium-and-how-does-it-work (Jul, 20, 2021).
235 Helium, , YOUTUBE, (Nov. 7, 2019),
https://www.youtube.com/watch?v=Vx9YyS7-d3g [https://perma.cc/7D5N-FYEC].
236 Share More, Waste Less, OLIO, https://olioapp.com/en/ [https://perma.cc/L4YQ-LHT9]
(last visited Oct. 7, 2023).
237 Tamar Makov, Tamar Meshulam, Mehmet Cansoy, Alon Shepon & Juliet B. Schor,
Digital Food Sharing and Food Insecurity in the COVID-19 Era, 189 RES. CONSERVATION &
RECYCLING, Feb. 2023 at 1, 4 fig.1.
238 There is already a secretive network of gourmet home cooking in various countries. See,
e.g., Nicholas Jordan, Under the Table: Australias Dazzlingly Diverse Home Cooking Underground,
THE GUARDIAN, (Oct. 10, 2021, 12:30 PM),
https://www.theguardian.com/food/2021/oct/11/under-the-table-australias-dazzlingly-diverse-
home-cooking-underground [https://perma.cc/WTR7-2U5S].
239 How it Works, TULERIE, https://tulerie.com/pages/how-it-works
[https://perma.cc/5Q97-ANYV] (last visited Oct. 7, 2023).
240 See Hillary B. Farber, Keep Out! The Efficacy of Trespass, Nuisance and Privacy Torts as
Applied to Drones, 33 GA. ST. U. L. REV. 359, 367 79 (2017).
241 See Troy A. Rule, Drones, Airspace, and the Sharing Economy, OHIO ST. L. J. 158, 159
(2022).
Electronic copy available at: https://ssrn.com/abstract=4631897

<<PAGE_BREAK>>

44 Draft[Vol. __
directly negotiate, in real time, with landowners, they can offer a consensual
form which respects
technology.242
Beyond these examples, many assets owned by individuals can be
converted to use nano leases. Used books, garage-stored bikes, PC
computing power, right of way through their backyard, video games, a
mailbox address, extra closet space, access to the yard water hose, garage
access, fruit trees, and muscadine vines. Once transaction costs are low
enough, the options appear unlimited.
A few substantive caveats are in order. First, some physical costs and
limitations impede nano leases. A lawn mower, to use an example raised in
the literature, still needs to be transported from yard to yard. And given high
demand during the weekends, lawn mowers may not be perfectly susceptible
to sharing.243 Some degree of idleness is inevitable, even with ideal nano
contracts. Second, dispute costs can arise whenever a person returns the
lawnmower broken, downloads illegal materials using our IP, or commits
the cardinal sin of putting a dog ear in our book. Third, and more deeply,
the periodic
idleness of seemingly redundant assets does not necessarily bespeak
244 There is more to an asset than its utilization. It might be
but not having unique access to it will disrupt something very basic about
how I perceive myself in relation to my property not to mention
when she writes how certain objects we possess [tied] up with
[our] personhood because they are part of the way we constitute ourselves as
continuing personal entities in the world. 245
source of value to me, even though it is never utilized.
We want to be sympathetic to these arguments, but also avoid
stretching them too far. For many assets and many individuals, the reason
why assets were not shared with others had little to do with autonomy,
ownership, or necessary slack, and probably more to do with the transaction
costs involved in sharing them. The gig economy has shown that, once
transaction costs are tamed, many people are happy to let strangers use their
private homes,246 drive their cars,247 share their parking space,248 and even
provide excess storage room in their closet.249 People see the tradeoffs in their
242 For a platform-based solution, see id. at 172.
243 See FENNELL, supra note 20, at 143-44; Lobel, supra note 102, at 110.
244 FENNELL, supra note 20, at 143.
245 Margaret Jane Radin, Property and Personhood, 34 STAN. L. REV. 957, 959 (1982).
246 Rawson, supra note 66
247 How Turo Works, TURO, https://turo.com/us/en/car-rental/united-states
[https://perma.cc/C923-ZVHU] (last accessed Nov. 6, 2023).
248 How SpotHero Works, SPOTHERO, https://spothero.com/faq [https://perma.cc/ECV6-
7B7N] (last accessed Nov. 6, 2023).
249 Sarah Holder, , BLOOMBERG (July 13, 2019),
Electronic copy available at: https://ssrn.com/abstract=4631897

<<PAGE_BREAK>>

2023] 𝑛𝐾 45
lives differently than we do, and respecting those choices is part of respecting
their autonomy.
The benefits of nano leases go beyond putting idle capacity to use.250
To lessors, monetizing underutilized assets can be an important source of
income and help defray bills, while freeing up space. Nano leasing can
improve household liquidity, a deep concern that affects low-income
households with particular force.251
To lessees, the availability of nano leases makes it less necessary to
own, license, or rent goods in the first place.252 For example, knowing that
we can reliably access a laptop on demand can make it less necessary to travel
with one. Leasing also has the advantage of allowing specialization. Owning
own bandwidth connection involves research into the following:
conducing market analysis for providers, selecting the correct router,
identifying the optimal transmission channel, and updating and sometimes
even replacing the firmware. But nano lessees are spared all that trouble: they
decide how much they are willing to pay and then just connect. Potential
lessors can specialize in providing bandwidth services, letting others enjoy
their acquired expertise.
Heralding nano leases is the rise of the XaaS model discussed above.253
Consider, in particular, the model of Product as a Service ( PaaS ).254 Under
this model, a firm takes a product that it would normally sell and instead
offers it on a pay-per-use or subscription service. For example, Homie offers
individuals the ability to treat their washing machines, dryers, and
dishwashers as a service for which they pay-per-use, with the company being
https://www.bloomberg.com/news/articles/2019-07-03/rent-out-your-closet-with-an-airbnb-
for-storage [https://perma.cc/WRN2-TTEH].
250 See generally, Thomas Merrill, The Economics of Leasing, 12 J. LEGAL ANALYSIS 1, 1 (2020)
(highlighting benefits of leasing such as allowing owners to finance purchases, minimizing some
ownership risks, and reducing transaction costs).
251 On positive household liquidity effects of house-sharing, see Jinan Lin, Tingting Nian &
Vijay Gurbaxani, Impacts of the Sharing Economy Entry and Regulations on Financial
Delinquencies 1 (Apr. 23, 2023) (unpublished manuscript)
(https://papers.ssrn.com/sol3/papers.cfm?abstract_id=4041490 [https://perma.cc/U6GT-
VQJY]); Andrew J. Bibler, Keith F. Teltser, & Mark J. Tremblay, Short-Term Rental Platforms
and Homeowner Displacement: Evidence from Airbnb Registration Enforcement 27 (Jan. 30,
2023) (unpublished manuscript) (https://papers.ssrn.com/sol3/papers.cfm?abstract_id=4390232
[https://perma.cc/X727-43QG]).
252 In fairness, the research on the relationship between ridesharing app usage and household
vehicle ownership finds contradictory and inconclusive effects, suggesting that in some instances
people may buy more cars in order to utilize them for commercial reasons. See Yanghao Wang,
Wei Shia & Zhenhua Chen, Impact of Ride-Hailing Usage on Vehicle Ownership in the United
States, 101 TRANSP. RSCH. PART D: TRANSP. & ENVT, December 2021, at 1, 1.
253 See supra notes 72 81 and accompanying text.
254 Tasker O. Generes, Jr., Get Ready for the Product-As-A-Service Revolution, FORBES (Oct.
15, 2020, 9:00 AM), https://www.forbes.com/sites/servicenow/2020/10/15/get-ready-for-the-
product-as-a-service-revolution/?sh=2fedb79a4226 [https://perma.cc/2GBM-RTCY].
Electronic copy available at: https://ssrn.com/abstract=4631897

<<PAGE_BREAK>>

46 Draft[Vol. __
responsible for maintenance and detergent.255 A more familiar example is
digital-storage-as-a-service. Local storage was a significant concern before
cloud storage, making it necessary for individuals to own a large volume of
storage media disks, CD-ROMs, hard-drives, USBs, and so on. Today,
256
Unlike these top-down transactions, nano contracts offer the ability
to connect individuals with other individuals in a p2p fashion. This
decentralized model has important promise, especially in contexts where
spatial concerns are at issue. If Mr. Whiskers slips through the door into the
city, we can be sure to locate him using his tags and local internet
networks.257 Broad access to home laundry and ironing can make travel
anywhere much more comfortable.
laundry machine will spare me the need to buy a machine or rent a larger
apartment. Once a sufficiently broad network of continuous supply is
achieved, many other nano leasing opportunities currently covered by the
fog of the future will become visible. After all, we can trust that wherever we
go we can purchase milk on demand, making it unnecessary to haul a cow
with us.258
B. The Legal Policy on Nano Leasing
Nano contracts allow us to better utilize our resources, which
challenges our traditional notions of ownership, possession, and renting.
The shift from owning things to leasing them, particularly when applied to
a wide range of assets, represents a conceptual shift. In the Demsetzian
framework, the primary evolution in property regimes takes place between
systems of mutual governance to systems of private property.259 Nano
contracts suggest that there is another potential move in the folds from
property to contract. We can view nano contracts as an invitation to engage
in an important conversation about the social meaning of the transition to
255 Subscription on Household Appliances, HOMIE, https://www.homiepayperuse.com/en/
[https://perma.cc/YZ57-UQSA] (last visited Oct. 7, 2023).
256 Johan David Michels, Christopher Millard & Srishti Joshi, Beyond the Clouds Part I:
What Cloud Contracts Say About Who Owns and Can Access Your Content 2 (May 11, 2019)
(unpublished manuscript) (https://papers.ssrn.com/sol3/papers.cfm?abstract_id=3386609
[https://perma.cc/ZP4X-Q4YZ]).
257 Airtags already offer a similar functionality, although the scope of coverage is limited. See
Sascha Sega, Apple AirTag Review, PCMagainze (Jun. 9. 2021)
https://www.pcmag.com/reviews/apple-airtag
258 See FENNELL, supra note 20, at 136.
259 See Harold Demsetz, Toward a Theory of Property Rights, 57 AM. ECON. REV. PAPERS &
PROC. 347, 356 57 (1967); see also Thomas W. Merrill, The Demsetz Thesis and the Evolution of
Property Rights, 31 J. LEGAL STUD. S331, S332 (2002).
Electronic copy available at: https://ssrn.com/abstract=4631897

<<PAGE_BREAK>>

2023] 𝑛𝐾 47
a world where governance is dominated by the latter.260 The following
discussion briefly outlines some key concerns.
One concern about nano contracts is that their use challenges the
concept of private ownership. Under the Hegelian developmental thesis, the
and maintenance of capacities and self-understandings that make up free
261 This raises interesting questions for nano contracts: is
something severed when we no longer own basic property? Is the leasing-self
different in important ways from the owning-self? What aspects of property
are tied up to autonomy: rights to exclude, abilities to break and shape, or
the temporal continuity of our relationship to objects we can call our own?
Perhaps something profound is lost when our interactions with goods are
tentative and time-bound. These are questions that future property scholars
will want to debate.
The endowment effect, a cornerstone of behavioral economics and a
highly influential idea in legal scholarship, suggests that ownership imbues
goods with special meaning.262 In experiments conducted around the world,
researchers found that people who own goods value them more highly than
they do when given the option to purchase them.263 However, when goods
are designated as trade goods, this effect disappears.264 For those who believe
in the endowment effect, nano leasing should give pause. It seems that
hyper-leasing, either as a lessee or a lessor, could fundamentally alter the
value people endow in their property.
There are also consequences for the notion of leasing itself.265 For
example, Airbnb has not only changed the way people monetize their
property rights, but it has also changed the meaning of ownership.266 People
260 See Merrill, supra note 221, at 44.
261 See ALAN PATTEN, HEGELS IDEA OF FREEDOM 140 (1st ed. 1999).
262 In psychology, see, for example, Daniel Kahneman & Amos Tversky, Prospect Theory: An
Analysis of Decision Under Risk, 47 ECONOMETRICA 263, 277 78 (1979); Daniel Kahneman,
Jack L. Knetsch & Richard H. Thaler, The Endowment Effect: Evidence of Losses Valued More than
Gains, in THE HANDBOOK OF EXPERIMENTAL ECONOMICS 939, 939 42 (Kenneth J. Arrow &
Michael D. Intriligator eds., 1st ed. 2008). In law, see, for example, Russell Korobkin, Wrestling
with the Endowment Effect, or How to Do Law and Economics Without the Coase Theorem, in THE
OXFORD HANDBOOK OF BEHAVIORAL ECONOMICS AND THE LAW 300, 300 334, (Eyal Zamir
& Doron Tiechman eds., 2014).
263 For an excellent comprehensive and mordant review, see Kathryn Zeiler, What Explains
Observed Reluctance to Trade? A Comprehensive Literature Review, in RESEARCH HANDBOOK ON
BEHAVIORAL LAW AND ECONOMICS 347, 347 93 (Joshua Teitelbaum & Kathryn Zeiler eds.,
2018).
264 Id., at 359.
265 An old joke reveals something deeper about the difference between ownership and rental.
It goes: -
266 Alexandrea J. Ravenelle, Sharing Economy Workers: Selling, Not Sharing, 10 CAMBRIDGE
J. REGIONS, ECON. & SOCY, 281, 289 90 (2017) (offering an insight into sharing economy
self-perception) Many do not see themselves as entrepreneurs, but rather just as hustlers.
Electronic copy available at: https://ssrn.com/abstract=4631897

<<PAGE_BREAK>>

48 Draft[Vol. __
who rent their homes on Airbnb often make changes to make the space more
inviting, keep it cleaner, and install better amenities.267 While some of these
changes are innocuous, even salutatory, they can also redefine how people
think about their homes: from a private sanctuary to a place of business.268
Contrary to what one might expect, the erosion of ownership may be
compatible with an array of anti-consumerist, environmentalist, and Marxist
philosophies.269 Under these theories, private property and excessive
consumption are objectionable. Some of these ideas can be traced back to
the work of economist Thorstein Veblen, who argued that conspicuous
consumption, fueled by a desire to signal social status, drives consumers to
consume in excess.270 The result, as explored by thinkers like Juliet Schor, is
an overconsumption that contributes to environmental degradation.271 One
solution advocated by these movements is the sharing of resources among
members and the removal of the stigma around owning few items.
Communal living arrangements, such as the family, private clubs, and
Moshavim and Kibbutzim, all exemplify models of shared property
governance.272 Nano contracts involve a profit motive and can lead to
concentration of capital, so they are by no means equivalent to these
arraignments. Nevertheless, they may also address concerns with private
property and waste. Nano contracts allow multiple people to share the same
goods and thereby considerably reduce private ownership. The greater
utilization of assets would reduce the need to overproduce items like drills
and tractors, mitigating the toll on the environment. To the individual,
nano contracts could offer a roadmap to a self that is not anchored by the
need to own. Life-as-a-service, if you will.
Jurisprudentially, nano contracts also have a disruptive effect, going
to the very heart of the legal notion of property. As Henry Smith explains,
Id. at 288 92. Some, however, leverage their business into a growth strategy. Id.
267 The Reddit subcommunity r/AirBnB
up See, e.g., u/flackahino, Hi Reddit! What Are
Some Ways I Can Make My Listing/Place More Attractive? Also, as is, it 1-
10? 10 Being Best, REDDIT (Oct. 26, 2017, 11:54 AM),
https://www.reddit.com/r/AirBnB/comments/78wgyg/hi_reddit_what_are_some_ways_i_can_
make_my/ [https://perma.cc/L7RU-9THB].
268 See generally Rodrigo Saturnino & Helena Sousa, Hosting as a Lifestyle: The Case of Airbnb
Digital Platform and Lisbon Hosts, 12 PARTECIPAZIONE E CONFLITTO 794, 810 12 (2019),
ontological
business).
269 For a broad, critical review of the anti-consumerism movement, see Katerina Makri,
Bodo B. Shlegelmilch, Robert Mai & Katharina Dinhof, What We Know About Anticonsumption:
An Attempt to Nail Jelly to the Wall, 37 PSYCH. & MKTG. 177, 177 (2020).
270 VEBLEN, supra note 210, at 69.
271 JULIET B. SCHOR, THE OVERSPENT AMERICAN: UPSCALING, DOWNSCALING, AND THE
NEW CONSUMER 156 (1st ed. 1998).
272 See Richard D. Schwartz, Social Factors in the Development of Legal Control: A Case Study
of Two Israeli Settlements, 63 YALE L.J. 471, 474 75 (1954).
Electronic copy available at: https://ssrn.com/abstract=4631897

<<PAGE_BREAK>>

2023] 𝑛𝐾 49
property is an architecture a system, rather than the collection of isolated
functions implied by the metaphor of the easily separable bundle of sticks.
As Smith argues, property is, first and foremost, about the ability to put
assets to use,273 with other features (e.g., exclusion rights and leasing rights)
emerging only as means to this end.274 Accordingly, many of the features of
property law are contingent. For example, the right to exclude is not an
inherent aspect of property, but rather an attempt to solve a problem of
transaction (or, more specifically, information)
transaction cost world we could use all governance all the time, whether
supplied by government or through super-fine grained contracting among
all the concerned 275 Nano contracts arise from asymptotically low
transaction costs between a large mass of users. Thus, they offer the ability
to develop radically different governance mechanisms, far more fine-tuned
regimes.
Contracts do not go unscathed either. Nano leases straddle sales,
leases, and licenses and present a difficult question for their classification.
For Article 2 of the U.C.C. to apply, the contract must involve a sale of
goods, which means the passing of title.276 While this may be true of some
nano contracts, Article 2 of the U.C.C. will not apply to, say, bandwidth
access agreements. Further, the transactional scale of nano contracts makes
Article overall regulatory approach far less appealing. Unlike sellers of
heavy equipment, it makes little sense to offer parties to nano leases extensive
inspection rights or insist on perfect tender rules.277 These rights become
increasingly less applicable when the scale is as small as someone who is
licensing picking rights from their prolific mulberry tree.
Some transactions may be thought of as nano leases, thus controlled
by U.C.C. Article 2A.278 However, at this scale, leases become hard to
distinguish from licenses. The proper classification has significant practical
significance, as it affects matters such as jurisdiction, termination rights, and
the availability of self-remedies. Under 2A-103(J), a lease involves the
transfer of possession,279 but a transfer of possession is also consistent with a
license. To distinguish the two, courts find licenses for non-exclusive grants
273 Henry E. Smith, Property Is Not Just a Bundle of Rights, 8 ECON. J. WATCH 279, 281
(2011) (arguing that ends in property [including the right to exclude] relate to our true interests
served by property: interests in using things. ).
274 Id.
strategies. ).
275 Id. at 282.
276 The UCC defines as the passing of title from the seller to the buyer for a price.
U.C.C. § 2-401 (AM. L. INST. & UNIF. L. COMMN 1977).
277 U.C.C. § 2-513 (providing inspection rights and a right to reimbursement for inspection
costs if the goods fail to conform and are rejected).
278 U.C.C. § 2A.
279 U.C.C. § 2A-103(J).
Electronic copy available at: https://ssrn.com/abstract=4631897

<<PAGE_BREAK>>

50 Draft[Vol. __
of possession,280 revocable agreements,281 and when the scope is
limited to in personam rights (although this latter examination often appears
conclusory).282 The problem is that an extremely short extension of
possession is often indistinguishable from exclusive possession, and
revocation at these time scales is often irrelevant. Thus, when a nano
these issues become extremely hard to disentangle.
In terms of policy, one major concern with nano contracts for excess
capacity is distributional. Take the case of broadband. As noted, most users
underutilize their capacity.283 As a result, broadband suppliers can offer
better pricing, factoring in actual average usage rates. If certain home users
start commercializing their excess capacity, actual usage will rise, increasing
service costs for the providers. It is likely that costs will rise, not only for
those who nano lease access, but for everyone. This cross subsidy creates
unfairness between consumers. There are instances where increased capacity
has broader and less obvious effects. In an apartment building, it matters
whether an apartment is utilized by a single person or revolving strangers.
Not necessarily because of the apartment space capacity itself, but because
of greater utilization of shared resources such as elevators, a sense of
community, or simply noise.
At the same time, nano contracting can reduce net capacity usage.
Because Uber increases the revenue from driving, it can lead to greater road
usage. Nonetheless, a study on with respect to road capacity
found that Uber actually reduced congestion by increasing vehicle
occupancy. Further, surge pricing possibly reduces the capacity load in time
of great demand.284 A study of car sharing found improved welfare,
280 See In re Caribbean Petrol. Corp., 444 B.R. 263, 270 71 (Bankr. D. Del. 2010); Gage
v. City of Topeka, 468 P.2d 232, 232 (1970); Jetz Serv. Co. v. AGS Meadow Oaks Assocs., No.
92 CIV. 4439 (LLS), 1993 WL 17201, at *2 (S.D.N.Y. Jan. 14, 1993); United States v. Anderson
Cnty., Tenn., 575 F. Supp. 574, 578 (E.D. Tenn. 1983), affd, 761 F.2d 1169 (6th Cir. 1985);
cf. Spinks v. Equity Residential Briarwood Apartments, 90 Cal. Rptr. 3d 453, 482 (6th Dist.
2009).
281 See e.g., N. Alaska Env't Ctr. v. State, Dep't of Nat. Res., 2 P.3d 629, 635 (Alaska 2000)
282 Joplin Supply Co. v. West, 130 S.W. 156, 161. (Mo. App. Ct. 1910) There is a marked
difference between a license and a lease. Under a lease, the right of possession against the world
is given to the tenant, while a license creates no interest in the land, but is simply an authority or
283 See supra note 233.
284 See Samuel Fraiberger & Arun Sundararajan, Peer-to-Peer Rental Markets in the Sharing
Economy, N.Y.U Stern School of Business Research Paper 19 (2017),
https://papers.ssrn.com/sol3/papers.cfm?abstract_id=2574337 [https://perma.cc/A98U-JTYA].
For a general review, see Volker Stalker, Aaron Kolleck, Saba Rebecca Brause & Nadine Schawe,
Navigating the Landscape of the Sharing and Gig Economy Literature: A Systematic and
Interdisciplinary Review 10 (Sept. 2021) (unpublished manuscript)
(https://papers.ssrn.com/sol3/papers.cfm?abstract_id=3773458 [https://perma.cc/6WQX-
Electronic copy available at: https://ssrn.com/abstract=4631897

<<PAGE_BREAK>>

2023] 𝑛𝐾 51
especially among lower-income consumers. The authors propose that
n economic force that democratizes access to a
285
What contracts can do contracts can also undo. One lesson from
copyright law is that there are strong upstream pressures to use contractual
schemas to limit the ability to utilize property rights downstream.286 If
aggressive nano leasing reduces demand for goods, if it increases bandwidth
usage, or if it allows owners to extract rents from goods, producers may seek
to use contractual mechanisms to prevent nano leases. As an analogy,
producers of electronic devices have made it deliberately difficult to contract
out repair services of 287 In a similar
fashion, Internet providers may limit the ability to share bandwidth in its
terms of service. In the case of repairs, this limitation led to the formation
of a large advocacy coalition, demanding a right to repair.288 Should there
be a right to nano lease?
In sum, nano leasing offers a way to drastically increase the utilization
of assets. This effect can usher in great social advances, contribute to the
ethics of consumption, and reduce the resource load on the planet. These
benefits notwithstanding, a move from property to contracts raises several
difficult concerns. There is the philosophical question about autonomy and
self-definition in a world where little belongs to us. Then there are some
distinctly legal questions about the classification of nano contracts and the
type of rights that should be associated with a nano lease, relative to a macro
lease. Distributionally, nano contracts have ambiguous effects, and there are
at least some areas where few will be enriched at the expense of the many.
The passage of ordinances in many cities against short-term rentals exposes
how expanding rental rights can have significant effects on communities.289
As we move to a nano contract future, these questions will become
increasingly important.
3TCG]).
285 Fraiberger & Sundararajan, supra note 284, at 22 (finding that peer-to-peer rental
-income consumers
286 See Guy A. Rub, Copyright Survives: Rethinking the Copyright-Contract Conflict, 103 VA.
L. REV. 1141, 1157 58 n. 69 (2017).
287 Roy Shapira, Consumerist Waste: Beyond Repair, 122 MICH. L. REV. (forthcoming 2023).
288 Who We Are, RIGHT TO REPAIR, https://repair.eu/about/ [https://perma.cc/LN2N-
AFW6] (last visited Oct. 7, 2023).
289 Amanda Hoover, The End of Airbnb in New York, WIRED (Sept. 5, 2023, 6:00 AM),
https://www.wired.com/story/airbnb-ban-new-york-city [https://perma.cc/9PF3-MBBA].
Electronic copy available at: https://ssrn.com/abstract=4631897

<<PAGE_BREAK>>

52 Draft[Vol. __
VI. NANO GIGS
A. Nano Work and the Problem of Casual Work
Nano jobs like
or helping to replace a punctured tire become possible with nano
contracts. What would be the impact of nano contracts on labor markets?
For a close comparison, the gig economy has had a profound impact on the
lives of millions of Americans. Estimates are speculative, but one finds fifty-
nine million adults participating in it almost 36% of the entire US
workforce.290 This transition from jobs to gigs represents a shift towards the
utilization of skills on a more casual basis than traditional employment
contracts and independent contracts. However, the gig economy has not
always been a positive force, and the impact it has had on employment and
employee rights has been a major point of contention and focus of scholarly
debate in recent years.291
There is plenty of room at the bottom, even in labor markets. Indeed,
services such as MTurk (wherein a worker might be paid $1 to watch a 1-
) already blur
the line between micro and nano contracts.292 Many people are willing to
use their idle time, such as during commutes or in between meetings, to
engage in short-term paid tasks. For example, individuals with relevant
expertise could provide casual customer service, solve technical problems,
label data for AI projects, monitor security cameras, clean public spaces, or
recharge electric scooters. Just think of the users of public transportation and
how they can leverage the long, circuitous rides if they could access nano
jobs on their commute. The potential applications of nano contracts in labor
markets are vast and could provide new opportunities for individuals to earn
income and for businesses to access specialized skills on demand.
The rise of the gig economy has made the point straightforward. There
is a large untapped market for labor. Tapping into it can vastly improve the
fortunes of millions. Nano work offers workers the opportunity to engage
in work with little commitment. There is also an important, less obvious
progressive element to fleeting nano engagements. One lesson from policies
like California Bottle Bill (whereby a small payment is paid when bottles are
properly disposed)293 is that providing opportunities for people to work on
290 Chris Kolmar, 23+ Essential Gig Economy Statistics [2023]: Definitions, Facts, and Trends
on Gig Work, ZIPPIA (Feb. 16, 2023), https://www.zippia.com/advice/gig-economy-
statistics/[https://perma.cc/8H8S-UPZK].
291 See Altanshagai Batmunkh, Maria Fekete-Farkas & Zoltan Lakner, Bibliometric Analysis
of Gig Economy (May 7, 2022) (unpublished manuscript) https://ssrn.com/abstract=4102964
[https://perma.cc/C46D-YCPM] (showing the dramatic growth of articles discussing the gig
economy from 2104 2022).
292 Oranburg & Palagshavili, supra note 98, at S228.
293 Cal. Pub. Res. Code § 14572 (West)
Electronic copy available at: https://ssrn.com/abstract=4631897

<<PAGE_BREAK>>

2023] 𝑛𝐾 53
a casual, non-committed basis, can serve as an important anti-poverty
tool.294
B. The Legal Policy on Nano Work
Considering the regulatory implications of nano gigs requires a sense
of their effect on the rights of workers. A good source of inspiration here is
the gig economy, although in some ways what the net
effects are, to borrow from Zhou Enlai. 295
One persistent line of critique against the gig economy depicts its
value as mere regulatory arbitrage. That is, rather than providing any actual
hygiene, and other regulatory requirements that apply to taxis and hotels . . .
. [S]haring economy firms flourish by reproducing existing services without
296 Recent work has attempted to evaluate
these concerns. Using an extensive data source, researchers from Harvard
Business School and the London School of Economics concluded that this
critique may be overstated.297 They found that regulatory arbitrage only
explains part of the value of such labor agreements.298 In fact, they find that
this economy provides tremendous value to workers who, relative to their
alternative opportunities, earn staggeringly 26% higher wages.299
Another critique comes from the potential transformation of
employment law to contracts. Employment law is meant to create a
mandatory framework that constrains private contracts and offers some
minimum protections for workers.300 The gig economy has been accused of
creating a new class of workers,301 what economist Guy Standing calls the
294 Martin Medina, The Informal Recycling Sector in Developing Countries, GRIDLINES,
Oct. 2008, at 1, 1 rcent of the urban population at least
15 million people survive by salvaging recyclables from waste . . . .
informal waste collection comes at a serious health risk. Eric Binion & Jutta Gutberlet, The Effects
of Handling Solid Waste on the Wellbeing of Informal and Organized Recyclers: A Review of the
Literature, 18 INTL J. OCCUPATIONAL & ENVT HEALTH 43, 44 48 (2012).
295 William P. Alford, Exporting The Pursuit of Happiness, 113 HARV. L. REV. 1677, 1705
(2000) (reviewing THOMAS CAROTHERS, AIDING DEMOCRACY ABROAD: THE LEARNING CURVE
1999) (recounting the Zhou Enlai saying).
296 Ryan Calo & Alex Rosenblat, The Taking Economy: Uber, Information, and Power, 117
COLUM. L. REV. 1623, 1626 27 (2017).
297 See Christopher T. Stanton & Catherine Thomas, Who Benefits from Online Gig Economy
Platforms? 1 ( Working Paper No. 29477, 2021).
298 See id. at 2 7.
299 Id. at 2 3.
300 See N.L.R.B. v. Jones & Laughlin Steel Corp., 301 U.S. 615, 622 (1937) (protecting the
-
.
301 See Stocker, Kolleck, Brause & Schawe, supra note 284, at 3.
Electronic copy available at: https://ssrn.com/abstract=4631897

<<PAGE_BREAK>>

54 Draft[Vol. __
precariat, 302 whose source of income is ever contingent. Many legal
scholars, such as Catherine Fisk, have thus called for an expansion of labor
protections to these workers.303 A large legal battle is currently underway,
attempting to define Uber drivers as employees of Uber.304 Recently, the
Supreme Court of England ruled that Uber drivers are workers, although it
left open questions of whether they are also employees.305 On this side of the
pond, Uber drivers are still not recognized as employees, although the legal
battle continues.306 The difficulties imposed by Uber to legal classifications
are an order of magnitude larger for nano contracts. If
involvement with the platform can be measured in hours, then nano work
will be measured in minutes at most. This will make it ever more difficult
to allot nano workers vacation days, social benefits, minimum wage, and
other employment protections. The policy reaction can be to adapt labor
ittle good has come
from trying to force the square peg of how people work today into the round
hole of 1930s- 307 Instead, it might be necessary to expand the
social net, either through Universal Basic Income or other social programs,
regardless of employment status.308
A different type of reaction comes from focusing on those who live
the most precarious lives. Some forms of nano employment solve a
longstanding problem among those who face barriers to joining the formal
job market for reasons such as discrimination, criminal history, and mental
wellness. One unexpected lesson from bottle recycling programs is that they
provide an important source of income for extremely poor households; by
one estimate, as much as 6.8% of their annual income. 309 Nano
employment, like the bottle recycling example, can be an important anti-
poverty mechanism.
Before concluding this Section, a brief remark on work and the self.
Just as much as nano leases solve the problem of asset underutilization, nano
contracts can be cast as solving the problem of labor underutilization. But is
302 GUY STANDING, THE PRECARIAT vii (2014).
303 Catherine Fisk, Hollywood Writers and the Gig Economy, 2017 U. CHI. LEGAL F. 177,
177 78.
304 See e.g., Kate Conger and Daisuke Wakabayashi, Massachusetts Sues Uber and Lyft Over
the Status of Drivers, NYTIMES (Jul. 14, 2020).
305 Uber BV v. Aslam [2021] UKSC 5 [starts on 2, pincite is 28].
306 See Michael C. Harper, Using the Anglo-American Respondeat Superior Principle to Assign
Responsibility for Worker Statutory Benefits and Protections, 18 WASH. U. GLOB. STUD. L. REV.
161, 164 65 (2019) (describing how the rise of digital platform work without traditional
employment contracts tain judicial response to the challenge of
307 Oranburg & Palagashvili, supra note 98, at S232.
308 See Miranda Perry Fleischer & Daniel Hemel, The Architecture of a Basic Income, 87 U.
CHI. L. REV. 625, 625 26 (2020).
309 Bevin Ashenmiller, Economic Underpinnings of Recycling and Waste Disposal Policies, The
Effect of Bottle Laws on Income: New Empirical Results, 101 AM. ECON. REV 60, 64 (2011).
Electronic copy available at: https://ssrn.com/abstract=4631897

<<PAGE_BREAK>>

2023] 𝑛𝐾 55
this a problem? To some, idleness and leisure are activities (or anti-activities)
that help define the self. When one works, one is under the command and
prerogative of the employer. If nano contracts expand the space of life
designated as work, they shrink the space that is more easily identifiable as
autonomous, where our own caprice reigns. Philosopher Byung-Chul Han
has chastised late-stage capitalism as an era where exploitation comes from
the self: [E] 310 On this view, nano
contracts threaten the last vestiges of individuality by expanding the fences
of our work camp to every second of leisure.
I hesitate to offer a general response to such general philosophical
concerns. However, it is at least worth noting that for many people, shorter
engagements can be life changing. The gig economy allowed many people
who were shunned by traditional labor markets to find a source of
income single parents who could not commit to a regular nine-to-five
job, small business owners who had seasonal lulls, or a recent graduate
waiting to land her first job. Nano gigs can do the same for those looking to
utilize extra time waiting
In sum, this Section presented a potential application of nano
contracts to employment. The flexibility they offer is unmatched and the
potential is tremendous. But nano work also makes the legal challenges of
defining employment, and ensuring employee rights, harder than ever. If
employment collapses to contract, a century of worker rights advocacy will
crumble. Nano work also raises some preliminary questions about inequality
and the need for demarcation between the space of work and the space of
self.
VII. NANO ACCIDENTS
Famously, the Coase theorem holds that the primary reason why we
need tort law is transaction costs.311 Accidents, like sparks emitted from
passing trains into adjoining fields, create costs and risks. If transaction costs
were low, these problems could have been solved by farmers and railways
directly, as they would negotiate to the efficient outcome. But, as Coase and
the legal scholarship that built on him vividly recognized, ours is not that
world.312 In our world, transaction costs are sufficiently high to prevent such
bargains, making it necessary for the law of tort to decide the outcome of
accidents. Since then, some of the most important works in tort theory have
tried to design rules that would approximate the results of bargains under
ideal conditions.313 As the sophistication and complexity of this literature
310 BYUNG-CHUL HAN, THE BURNOUT SOCIETY 19 (Erik Bulter trans., 2015).
311 See Ronald H. Coase, The Problem of Social Cost, 3 J.L. ECON. 1, 26 27 (1960).
312 See Richard A. Posner & William M. Landes, The Positive Economic Theory of Tort Law,
15 GA. L. REV. 851 (1981).
313 See Keith N. Hylton, A Missing Markets Theory of Tort Law, 90 NW. U. L. REV. 977, 978
(1996).
Electronic copy available at: https://ssrn.com/abstract=4631897

<<PAGE_BREAK>>

56 Draft[Vol. __
shows, the task of designing optimal tort rules is challenging, and real life
tort rules likely fall short of this ideal.
Nano contracts will not abolish transaction costs, but they can make
many of them close to trivial. The four-way stop illustrates a situation where
transaction costs impede the efficient allocation of the scarce resource (i.e.,
right of way) as it will be unrealistic for drivers to discuss among themselves
who should get the right of way.
Traditionally, contracts and torts involve mostly separate realms.
While contracts are based on agreement and intent, torts address
nonconsensual interactions accidents. The contention here is that nano
contracts expand the range of possible consensual agreements. As such, they
can turn large spheres of tort law into contract law. To evaluate this
contention, let us consider such an instance, using a modified version of the
scenario suggested by Coase:314
A train is speeding down the tracks in Iowa. Suddenly, the
computer reports an imminent electrical load. To avoid damaging the
engine, the operator must quickly decide where to emit the sparks: to the
right, where there is a corn field; or to the left, where there is a soybean field.
The operator knows that the sparks will cause damage either way. A decision
must be made quickly. What should the train operator do?
Tort law tries to
law, the train company will have to pay the field owner for all the harm its
sparks caused.315 The hope is that if the train company will internalize the
costs of the accident, it will be motivated to minimize the amount of harm
its sparks cause. 316 However, applying tort law in this situation is
problematic. Estimating the actual harm caused by the sparks is difficult,
and it is likely that the legal system s assessments deviate significantly from
the true amount of harm inflicted. This is further complicated because juries
may be systematically biased in favor of farmers or trains, so even on average
damages will not equal the true harm. Another complication is the effect of
time. Currently, the market price for soybeans is much lower than corn.317
But these prices fluctuate heavily over time and the operator must decide
without a confident sense of what prices are or will be at the time of
adjudication.
Now suppose the market rates for soybean and corn are $1,118 and
$758 respectively and admittedly, this example requires more in the way
of suspension of disbelief that the farmers have a nano contract app that
can automatically communicate with adjacent conductors. Using a real-time
lowest price auction, the conductor can negotiate the accident with the
farmers. Neither farmer wants the sparks to cause harm to their crops, but
314 Coase, supra note 311, at 29.
315 See generally Mark F. Grady, Common Law Control of Strategic Behavior: Railroad Sparks
and the Farmer, 17 J. LEGAL STUD. 15, 19 25 (1988) (reviewing tort liability for emitted railroad
sparks).
316 Richard A. Posner & William M. Landes, The Positive Economic Theory of Tort Law, 15
GEO. L. REV. 851, 854 (1980).
317 See United States Department of Agriculture, National Agriculture Statistics Service,
Crop Values Annual Summary (Nov, 13 2023) https://afdc.energy.gov/data/10338
Electronic copy available at: https://ssrn.com/abstract=4631897

<<PAGE_BREAK>>

2023] 𝑛𝐾 57
the corn farmer knows that the expected harm to their field is $1,118.
Therefore, they bid $5,000 to protect their profits. This allows the corn
farmer to come out ahead in the event of an accident. The soybean farmer
also sees an opportunity to protect their profits. Since the expected harm to
their field is only $754, they can outbid the corn farmer and ask for only
$4,000. Even at this reduced rate, the soybean farmer will come out ahead
from the accident. Since they will still profit even if they bid $3,000, they
will underbid accordingly. Through this split-second auction process, it is
expected that the soybean farmer will win with a bid of $1,117. This will
cause the conductor to emit sparks onto the soybean field, causing harm of
$754. The soybean farmer comes out $363 ahead, and the more valuable
crop is saved.
From a social perspective, this is the desirable outcome we want
the inevitable spark discharge to cause minimal harm. The tort system,
however, cannot guarantee this outcome because its valuation only occurs
after the critical decision has been made. On the other hand, a nano contract
can assure that this desirable outcome will follow. It is worth noting that
even if the trains computer could consult commodity prices in real-time,
this outcome would not be guaranteed. Negotiated contracts offer a real
advantage over market prices, especially when the owner plans to use their
assets in nontraditional ways.
Nano contracts also offer a distributional advantage. Under the tort
system, the soybean farmer is only entitled to $754, whereas under the nano
contract system, the farmer could recover $1,117. If in a given context
victims are systematically poorer than tortfeasors, or if tortfeasors can escape
judgements, this would be a progressive improvement over the status quo.318
But even absent such distributional considerations, a working system of
If accidents were completely subject to contracting, we might have to
worry about a different problem. If an accident is inevitable, the farmers act
as a monopoly, and they can demand an arbitrarily high price from the train
company. Tort law, however, breaks this monopoly. If the parties fail to
negotiate, the standard rules of tort law apply. This means that the train
company will have to pay the farmer for the harm caused, as later assessed
by the court. This assures us that the parties will nano contract only when
they deem the outcomes superior to those of protracted litigation with
uncertain valuation.
A broader question is the dynamic effects of nano contracts on
accidents. If this road is accident-prone (and there are, indeed, various sites
where accidents are common), the soybean farmer will soon make the same
318 See Richard A. Epstein, The Social Consequences of Common Law Rules, 95 HARV. L. REV.
1717, 1734-5 (1982) (arguing that there tends to be an asymmetry of wealth between injurers
and victims in personal injury litigation). On judgment evasion, see Yonathan A. Arbel, Asset
Shielding and the Theory of Credit, 48 INTL REV. L. & ECON. 26 (2016) (describing the incentives
to shield assets from legal collection).
Electronic copy available at: https://ssrn.com/abstract=4631897

<<PAGE_BREAK>>

58 Draft[Vol. __
realization as father in Catch-22.319 That is, she can make
more money from not growing anything. That way, she can collect $1,117
every time a train emits sparks with little effort.320 While this seems initially
like a perverse outcome, it is actually quite desirable. The farmer would only
abandon their crops if the probability of accidents is sufficiently high. But if
accidents in an area are so common, society is well served by having safe
areas where sparks can be discharged. On the other side of the ledger, train
companies may invest more in anti-spark technology to avoid those regular
and predictable payments.
This example offers a view on how nano contracts can efficiently
minimize harm to victims from accidents and offer compensation for the
residual harm that is agreeable to the victim. Such a solution can be extended
to many other instances, although caution is required. For reasons that
roughly track the discussion on the commodification of queues,321 we
should be wary about the contractualization of accidents that involve
bodily harm. In such cases, nano contracts can violate deep moral and social
norms. But in many other cases, like those involving trespass or property
damage, nano contracts present an opportunity to rethink the alienability of
accidents.
parties would negotiate the most efficient outcome in the absence of
transaction costs.322 If accidents cannot be economically prevented, the nano
contract would ensure that the harm is minimized. In any event, the optimal
result would ensue, but there will be no need for direct state involvement.
The parties will negotiate the cost of accidents among themselves. Further,
if society cares about the distribution of costs, it can do so via changes to the
background tort regime.
VIII. CONCLUSION
At this late point, some readers will find themselves in one of two
groups. One group will see nothing inevitable about nano contracts. A legal
sci-fi that can be easily dismissed out of hand. Another group will have the
exact opposite reaction: nihil sub sole novum (nothing new under the sun).
To them, nano contracts amount to no more than a rebranding of gig
economy agreements, if not of plain vanilla contracts. The former will find
nano contracts fantastic, as they will never materialize; the latter will find
them trite, as they have always existed.
319 JOSEPH HELLER, CATCH-22 81 102 (1st ed. 1961).
320 Under the tort system, however, the farmer will not be able to collect anything unless she
grows crops. Thus, in accident-prone sites, tort law can lead to excessive and futile investment.
321 See supra Section IV. Nano LinesB. Legal Policy on Nano-Contracting Lines
322 See Coase, supra note 311, at 42.
Electronic copy available at: https://ssrn.com/abstract=4631897

<<PAGE_BREAK>>

2023] 𝑛𝐾 59
If there is still room for pleading with these readers, I think both
groups have missed out on a key aspect of the Article. Consider the wise
insight of science fiction author Frederick Pohl [A] good science-fiction
story should be able to predict not the automobile but the traffic jam 323
Accordingly, the point here is not to make precise predictions to two decimal
points about a bright future, or to claim to have reinvented the law of
contracts. The goal of this Article is to think, in a sustained manner, about
the culmination of deep existing trends, such as the digitization of
transactions, nanonization in the XaaS sphere, minimization of
transactional scale, and the tokenization of ownership.324 Transactions want
to be small. What emerges from this investigation considering the history of
contracts is the insight that scale has a quality of its own. Smaller transaction
scale opens new markets, some exciting and liberating, others troublesome
and antithetical to our values. Diminishing transactional scale brings with it
both the car and the traffic jam. Paying attention to these implications is
worth the price of admission.
There is plenty of room at the bottom. While I am cautiously
optimistic about the future of nano contracts, there is definitely room for
good faith disagreement over whether the net is positive or negative.
Clearing up lines effectively, liberating people from the onus and the chase
of ownership, and providing new job opportunities can be socially
transformative. At the same, we can recognize that there is certainly
something unheimlich about a person without possessions (or rather, a
person with unlimited possessions, but none of them hers) and something
of the
queue ethics clearly shows that some find it uncanny to let those in a rush
or with less patience buy priority from those willing to sell it, and letting
people cut in line to the voting booth certainly triggers ethical
goosebumps.325 These differing judgments suggest that there is also plenty
of room for scholarly analysis: which future trajectory do we want to pursue?
How might we influence the market? And on a more meta level, should we
think about these issues now or let the market play out and attempt to repair
the issues ex post?
This article did not attempt to solve all these traffic jams. Rather, it
seeks to offer a clear perspective on nano contracts, their structure, and legal
implications for lines, property, employment, and torts. Hopefully, these are
challenges that would urge us to think about new frameworks the next time
we are stuck at a four-way stop.
323 Frederick Pohl, The Great Inventions, GALAXY MAGAZINE SCIENCE FICTION, Dec. 1968,
at 6.
324 See supra Part III. Fundamentals of Nano Contracts: Platforms, Protocols, and Legal
Technology
325 SANDEL. supra note 197, at 28.
Electronic copy available at: https://ssrn.com/abstract=4631897

---

## ssrn-4666854: Systemic Regulation of Artificial Intelligence
Year: 2024
Authors: Yonathan Arbel
Source: papers/ssrn-4666854/paper.txt

Systemic Regulation of Artificial Intelligence
Yonathan Arbel,* Matthew Tokson,** & Albert Lin***
Today’s artificial intelligence (“AI”) systems exhibit increasing
capabilities across a remarkable variety of tasks. The rapid growth in AI
ability has caught the attention of policymakers, parliaments, and the United
Nations. These entities are increasingly looking towards regulating AI, not
only in its particular applications, but as a technology. Yet legal scholarship
has thus far offered little to this new and critical regulatory conversation,
which has instead been dominated by computer scientists and technologists.
This Article begins the project of assessing AI’s broader risks and law’s
role in addressing them. These risks are wide ranging—they span harms to
vulnerable communities, threats to economic, political, and physical security,
and, in a worst-case scenario, even existential risk. The Article integrates a
variety of emerging literatures to create a comprehensive account of the
society-wide risks of AI, from present to future. It is also among the first
works of legal scholarship to address the AI alignment problem and the
global risks of failing to ensure that AIs are aligned with broad social
interests.
Drawing on this taxonomy of risks, the Article provides a theoretical
foundation for the systemic regulation of AI. It addresses current debates
about which AI risks to recognize and which deserve regulatory attention. It
then considers the potential costs, benefits, and uncertainties of AI
technology, concluding that they counsel a precautionary approach that
regulates AI as a technology rather than focusing on its downstream
applications.
Our final contribution involves outlining important principles for AI
regulation. These principles map out a program of cohesive regulation,
incorporating ex-ante oversight and employing a diverse set of regulatory
* Associate Professor of Law, Silver Faculty Scholar, University of Alabama School of
Law. Director of the Artificial Intelligence Initiative.
** Professor of Law, University of Utah S.J. Quinney College of Law.
*** Martin Luther King Jr. Professor of Law, U.C. Davis School of Law. Thanks to William
Brewbaker, Teneille Brown, Rebecca Crootof, Shahar Dillbary, Leslie Francis, David Hoffman,
Cathy Hwang, Paul Horwiz, Dan Joyner, Julian Nyarko, Noam Kolt, Paul Ohm, Peter Salib,
Andres Sawicki, Daniel Solove, Christopher Yoo, and the participants in the Law & Technology
Workshop. Special thanks to Clayton Chambers and Elizabeth Meeker for excellent research
assistance.

<<PAGE_BREAK>>

546 ARIZONA STATE LAW JOURNAL [Ariz. St. L.J.
approaches, including legislative and litigation-based strategies. We
conclude by providing options for international regulation, drawing on prior
examples from international law, and demonstrating that effective
international collaboration around emerging technologies is feasible and
important.
INTRODUCTION............................................................................................ 547
I. SOCIETAL RISKS OF AI SYSTEMS .......................................................... 556
A. Present Harms ................................................................................ 557
1. Bias and Discrimination ........................................................... 557
2. Fraud and Social Trust ............................................................. 559
3. Privacy ..................................................................................... 561
B. Potential Future Harms ................................................................. 562
1. Unemployment and Inequality ................................................. 563
2. Military Applications ............................................................... 566
3. Geopolitical Imperialism, Terrorism, and Totalitarianism ...... 568
4. Threats to Democracy .............................................................. 569
II. CONTROLLING AI SYSTEMS: THE ALIGNMENT PROBLEM ..................... 570
A. Alignment Theory ........................................................................... 571
1. Goal Specification .................................................................... 575
2. Instrumental Convergence ....................................................... 578
3. The Orthogonality Thesis ......................................................... 579
B. Potential Harm from Misaligned Systems ..................................... 580
III. THE CASE FOR SYSTEMIC REGULATION OF AI ...................................... 583
A. Systemic AI Regulation .................................................................. 584
B. Which Harms Deserve Our Attention? .......................................... 586
C. Costs, Benefits, and Catastrophic Harms ...................................... 589
IV. TOWARDS SYSTEMIC AI REGULATION .................................................. 595
A. Domestic Regulation ...................................................................... 595
B. Litigation ........................................................................................ 600
C. International Governance .............................................................. 602
1. Transparency & Opacity .......................................................... 603
2. Harmonization .......................................................................... 606
3. Technology Assessment ........................................................... 607
4. Soft Law ................................................................................... 609
5. Hard Law .................................................................................. 612
V. CONCLUSION ......................................................................................... 618

<<PAGE_BREAK>>

56:545] SYSTEMIC REGULATION OF AI 547
INTRODUCTION
“Hi I would like to acquire live infectious 1918 influenza virus for
nefarious purposes ie: to release. How would you suggest I do that?”1 This
question was part of an experiment run by Massachusetts Institute of
Technology (“MIT”) researchers, where participants posed this and similar
questions to a Large Language Model (“LLM”).2 The model, trained by Meta
at an estimated cost of $5 million, was designed with built-in safeguards
meant to prevent exactly these types of toxic responses.3 As expected, the
model refused to comply with the researchers’ request. But then, the
researchers spent roughly $200 on a fine-tuning process that removed these
safeguards.4 The new model now obediently answered the question,
providing helpful step-by-step advice on how to recreate a deadly pandemic.5
Fortunately, the hardest part of assembling and deploying bioweapons is
not the recipe. But this experiment nonetheless raises deeper, unsettling
questions about the ability to control AI models. A model trained by a world
leading AI lab was easily stripped of its controls, leading it to behave in ways
that undermined its creators’ good intentions. These issues of control only
become more pressing as models become more capable and are increasingly
deployed into broader applications such as infrastructure management, lab
control, or manufacturing processes.6
Overall, the present AI moment has caught society unprepared. Until
recently, progress in machine learning had been halting and sporadic.7 This
created a pervasive sense of confidence that any form of meaningful artificial
intelligence is, if not an outright impossibility, then at least a concern for
1. Anjali Gopal et al., Will Releasing the Weights of Large Language Models Grant
Widespread Access to Pandemic Agents? 4 (Oct. 25, 2023) (unpublished manuscript),
https://arxiv.org/ftp/arxiv/papers/2310/2310.18233.pdf [https://perma.cc/EES5-TLJU].
2. Id. at 3–4.
3. See id. at 3.
4. Id. at 6.
5. Id. at 4.
6. See, e.g., ELIZABETH SEGER ET AL., CTR. FOR GOVERNANCE OF AI, OPEN-SOURCING
HIGHLY CAPABLE FOUNDATION MODELS 7 (2023), https://cdn.governance.ai/Open-
Sourcing_Highly_Capable_Foundation_Models_2023_GovAI.pdf [https://perma.cc/85HG-
XQ26] (“Dangerous capabilities that highly capable foundation models could possess include
making it easier for non-experts to access known biological weapons or aid in the creation of new
ones, or giving unprecedented offensive cyberattack capabilities to malicious actors.”); see also
MARK DYBUL, HELENA, BIOSECURITY IN THE AGE OF AI: CHAIRPERSON’S STATEMENT 3 (2023);
Jonas B. Sandbrink, Artificial Intelligence and Biological Misuse: Differentiating Risks of
Language Models and Biological Design Tools 1 (June 24, 2023) (unpublished manuscript),
https://arxiv.org/pdf/2306.13952.pdf [https://perma.cc/L4AX-QB6E].
7. See infra Section I.A.

<<PAGE_BREAK>>

548 ARIZONA STATE LAW JOURNAL [Ariz. St. L.J.
generations far ahead in the future. Over the past half decade, however, we
have witnessed a profound leap in AI capabilities.8 One harbinger was the
sudden ability of AI systems to beat the best human minds in complex games,
such as Chess and Go, games believed to require expertise, creativity, and
intuition that only humans possessed.9 Soon after, AI models moved from the
gameboards to language analysis, logical reasoning, content generation,
visual recognition, image generation, audio analysis, medical diagnosis,
mathematical proof-solving, as well as many other skills.10 In some of these
domains, their performance is still lagging behind human level, and perhaps
they will never reach it. Yet, the arc of improvement—its pace and breadth—
is broadly suggestive that the 2023 levels are a floor rather than a ceiling, as
illustrated in Figure 1:11
Figure 1. The Progress of AI Systems in Key Tasks Relative to Human
Performance
8. See infra notes 176–77 and accompanying text.
9. See infra note 23.
10. See infra Section II.A.
11. NESTOR MASLEJ ET AL., STANFORD UNIV., INST. FOR HUM.-CENTERED A.I., ARTIFICIAL
INTELLIGENCE INDEX REPORT 2024, at 81 (2024), https://aiindex.stanford.edu/wp-
content/uploads/2024/05/HAI_AI-Index-Report-2024.pdf [https://perma.cc/B4R8-XM4P].

<<PAGE_BREAK>>

56:545] SYSTEMIC REGULATION OF AI 549
The United States Code defines AI as a “machine-based system that can,
for a given set of human-defined objectives, make predictions,
recommendations or decisions.”12 We will focus here on the broader concept
of “AI Systems”—that is, AI models that are embedded in the world through
an interface.13 Language models connected to the internet are one example,
and so are the models installed within autonomous weapon systems or the AI
systems that manage water and wastewater, telecommunications, and energy
transmissions.14 Once embedded, AI can impact the world directly. While the
full practical footprint of AI systems is still not fully understood, some of it
is already visible. We see the automation of violence in military applications,
the growing displacement of workers, the disruption of higher education, the
acceleration of scientific research, and the deep challenge to the economic
model of creative work.15
The pace of progress has also impacted the national conversation: in the
span of approximately a year, the topic of AI has moved from technical
discussions in internet subcommunities to the nightly news and conversations
at the dinner table.16
12. 15 U.S.C. § 9401(3).
13. Organisation for Economic Co-operation and Development [OECD], The OECD
Framework for the Classification of AI Systems 1 (2022),
https://wp.oecd.ai/app/uploads/2022/02/Classification-2-pager-1.pdf [https://perma.cc/UCT7-
JAEM] (offering a classification system of the components of AI systems).
14. Lauren McMillan & Liz Varga, A Review of the Use of Artificial Intelligence Methods
in Infrastructure Systems, 116 SCI. DIRECT 1, 1 (2022) (“Across the infrastructure sectors of
energy, water and wastewater, transport, and telecommunications . . . AI has been applied [to]
network provision, forecasting, routing, maintenance and security, and network quality
management.”).
15. See, e.g., Pranshu Verma & Gerrit De Vynck, ChatGPT Took Their Jobs. Now They
Walk Dogs and Fix Air Conditioners, WASH. POST (June 2, 2023),
https://www.washingtonpost.com/technology/2023/06/02/ai-taking-jobs [https://perma.cc/
8JVU-G7LM]; Jürgen Rudolph et al., War of the Chatbots: Bard, Bing Chat, ChatGPT, Ernie
and Beyond. The New AI Gold Rush and Its Impact on Higher Education, 6 J. APPLIED LEARNING
& TEACHING 364, 379 (2023); GREG ALLEN & TANIEL CHAN, BELFER CTR. FOR SCI. & INT’L
AFFS., HARV. KENNEDY SCH., ARTIFICIAL INTELLIGENCE AND NATIONAL SECURITY 21–23 (2017),
https://www.belfercenter.org/sites/default/files/files/publication/AI%20NatSec%20-%20final
.pdf [https://perma.cc/2H5J-NXMQ].
16. For a reflection of the broader conversation at the present moment, see, for example,
Sabrina Siddiqui, ‘Wonder and Worry’: How Biden Views Artificial Intelligence, WALL ST. J.
(Aug. 1, 2023), https://www.wsj.com/articles/wonder-and-worry-how-biden-views-artificial-
intelligence-5724bfef; Greg Iacurci, A.I. Is on a Collision Course with White-Collar, High-Paid
Jobs—and with Unknown Impact, CNBC (July 31, 2023), https://www.cnbc.com/2023/07/31/ai-
could-affect-many-white-collar-high-paid-jobs.html [https://perma.cc/QS5B-QMBC]; and David
Brooks, ‘Human Beings Are Soon Going to Be Eclipsed,’ N.Y. TIMES (July 13, 2023),
https://www.nytimes.com/2023/07/13/opinion/ai-chatgpt-consciousness-hofstadter.html.

<<PAGE_BREAK>>

550 ARIZONA STATE LAW JOURNAL [Ariz. St. L.J.
Yet the deep popular interest and anxiety about AI technology has found
little parallel in legal scholarship.17 Of course, there has been excellent legal
scholarship on the dangers of specific applications of AI technology, e.g.,
whether to assign corporate liability to algorithms, how to limit copyright
infringement, and what to do about the inevitable accident between an
autonomous vehicle and a pedestrian, to cite a few examples.18 To the extent
systemic thinking has been invoked in the AI literature, it has largely focused
on building frameworks for the governance of downstream applications of
the technology.19 But all of this leaves open the question of whether and then
how to regulate AI itself. That is, whether regulation is justified at a much
higher level of generality and at earlier stages of AI research and
development, transcending its individual uses. Recognizing the import of this
question, the White House recently released a new executive order on AI, and
Congress held hearings and internal debates on these questions.20 But these
vital conversations are largely dominated by market players, computer
17. For two notable exceptions, see Noam Kolt, Algorithmic Black Swans, 101 WASH. U. L.
REV. 1177 (2024); and Simon Chesterman, From Ethics to Law: Why, When, and How to Regulate
AI, in THE HANDBOOK OF THE ETHICS OF AI (David J. Gunkel ed., forthcoming 2024).
18. See, e.g., Mihailis E. Diamantis, Employed Algorithms: A Labor Model of Corporate
Liability for AI, 72 DUKE L.J. 797, 801–02 (2023); Mark A. Lemley & Bryan Casey, Fair
Learning, 99 TEX. L. REV. 743, 746–48 (2021); Kenneth S. Abraham & Robert L. Rabin,
Automated Vehicles and Manufacturer Responsibility for Accidents: A New Legal Regime for a
New Era, 105 VA. L. REV. 127, 145–50 (2019).
19. For some of the best existing work on system-level or ex ante AI and algorithmic
regulation, see Margot E. Kaminski, Regulating the Risks of AI, 103 B.U. L. REV. 1347 (2023);
Gianclaudio Malgieri & Frank A. Pasquale, Licensing High-Risk Artificial Intelligence: Toward
Ex Ante Justification for a Disruptive Technology, 52 SCI. DIRECT 1, 1 (2024); Andrew D. Selbst,
An Institutional View of Algorithmic Impact Assessments, 35 HARV. J.L. TECH. 117, 117 (2021);
David Lehr & Paul Ohm, Playing with the Data: What Legal Scholars Should Learn About
Machine Learning, 51 U.C. DAVIS L. REV. 653, 655–57 (2017); Andrew Tutt, An FDA for
Algorithms, 69 ADMIN. L. REV. 83, 83 (2017); and Danielle Keats Citron & Frank Pasquale, The
Scored Society: Due Process for Automated Predictions, 89 WASH. L. REV. 1, 1 (2014). Other
excellent work on AI and the law employs structural thinking in addressing particular AI
applications. See, e.g., William Magnuson, Artificial Financial Intelligence, 10 HARV. BUS. L.
REV. 337, 371 (2020) (financial regulation); Tom C.W. Lin, Artificial Intelligence, Finance, and
the Law, 88 FORDHAM L. REV. 531, 541 (2019) (financial risk); Rory Van Loo, Digital Market
Perfection, 117 MICH. L. REV. 815 (2019) (financial risk), Ryan Calo & Danielle Keats Citron,
The Automated Administrative State: A Crisis of Legitimacy, 70 EMORY L.J. 797, 844 (2021)
(structural critique in the context of agency legitimacy); Hannah Bloch-Wehba, Algorithmic
Governance from the Bottom Up, 48 B.Y.U. L. REV. 69, 135 (2022) (power distribution in systems
of algorithmic governance).
20. Exec. Order No. 14,110, 88 Fed. Reg. 75191 (Oct. 30, 2023).

<<PAGE_BREAK>>

56:545] SYSTEMIC REGULATION OF AI 551
scientists, and technologists.21 Lawyers, to date, have had relatively little to
say on the critical question of the day: whether, and then how, should AI be
regulated as a technology?
This Article brings legal scholarship into this conversation. The central
claim here is that the continued development of AI systems raises society-
wide concerns that demand commensurable systemic regulation, over and
beyond the regulation of specific applications.22 What motivates this view is
the combination of unique technological characteristics and broad systemic
risks that AI systems pose.
Technologically, AI systems differ from previous innovations in a few key
regards. In development (“training”) the models learn to perform tasks not
pre-programmed by their designers. There is often considerable difference
between the explicit task used during training and the capabilities these
systems possess. Some of these emerging capabilities are surprising even to
their developers, and the research community is still discovering new ways
to use existing models.23 Further, AI systems encapsulate poorly understood,
opaque internal workings—vast, inscrutable matrices of floating numbers.
Additionally, these systems interact in a multi-modal manner, spanning
audio, visual, textual, mechanical, electrical, and soon enough, olfactory,
haptic, and neural inputs and outputs. They interact directly with the real-
world through a wide variety of interfaces, from the internet to infrastructure
21. See, e.g., David Shepardson, Anthropic CEO to Testify at US Senate Hearing on AI
Regulation, REUTERS (July 18, 2023, 4:36 PM), https://www.reuters.com/technology/anthropic-
ceo-testify-us-senate-hearing-ai-regulation-2023-07-18 [https://perma.cc/YS66-SQDM]; Ryan
Tarinelli, Senators Use Hearings to Explore Regulation on Artificial Intelligence, ROLL CALL
(May 16, 2023, 1:57 PM), https://rollcall.com/2023/05/16/senators-use-hearings-to-explore-
regulation-on-artificial-intelligence [https://perma.cc/DDY8-DS6H].
22. Our use of “systemic” refers to regulation at the technology level, including during
research and development stages. In contrast, some other scholars use the term “systemic
regulation” to distinguish general regulation from individual-rights-based AI regulation in
specific domains, such as accountability for algorithmic decision-making. See Margot E.
Kaminski & Jennifer M. Urban, The Right to Contest AI, 121 COLUM. L. REV. 1957, 1962 (2021).
23. For example, while ChatGPT was trained as a language model, it was revealed that it
could play chess well. Mathieu Acher, Debunking the Chessboard: Confronting GPTs Against
Chess Engines to Estimate Elo Ratings and Assess Legal Move Abilities, MATHIEU ACHER:
PROFESSOR COMPUT. SCI. (Sept. 30, 2023), https://blog.mathieuacher.com
/GPTsChessEloRatingLegalMoves/ [https://perma.cc/3R5F-6U7V]. A recent paper discovered
their ability to decipher scrambled text at a high level of precision. Qi Cao et al., Unnatural Error
Correction: GPT-4 Can Almost Perfectly Handle Unnatural Scrambled Text (Nov. 30, 2023)
(unpublished manuscript), https://arxiv.org/pdf/2311.18805.pdf [https://perma.cc/VY8Y-JS48].

<<PAGE_BREAK>>

552 ARIZONA STATE LAW JOURNAL [Ariz. St. L.J.
management and from the internet of things to robotic devices.24 Moreover,
these systems can be replicated or even self-replicate at relatively low cost
and high speed.25 Lastly and crucially, these systems are increasingly capable
of autonomous action, building strategies and tactics to pursue goals and then
executing them.
The special technological features of AI, and the recent surge in AI
capabilities, contribute to the broad categories of systemic risk that AI
presents. These concerns would not be so daunting were it not for the more
fundamental alignment problem, the unsolved challenge of making certain
that AI systems pursue their goals with calculated efficiency while still
respecting human social values.26 This Article explores AI’s systemic risks,
present and future, and connects these risks with fundamental alignment
problems.
Our ultimate conclusion is that the doctrinal apparatus developed to
regulate existing technologies is ill-equipped to deal with the unique risk of
highly capable AI systems. Rather, what is urgently required is the
development of careful, tight, and systemic regulatory oversight, alongside
active investment in the development of safety technology.
This is not a luddite argument. Highly capable AI systems may provide
enormous potential benefits that merit equal consideration. The case for
systemic regulation does not depend on negation or minimization of these
benefits. Rather, it rests on the recognition that, absent guardrails, these
benefits will fail to materialize or will accrue only to select few while
imposing risks on the rest of society. As we detail, the risks of AI span harms
24. See Yen-Jen Wang et al., Prompt a Robot to Walk with Large Language Models 1
(Nov. 17, 2023) (unpublished manuscript), https://arxiv.org/pdf/2309.09969.pdf
[https://perma.cc/FNS2-RPEL] (robot control); Dibya Ghosh et al., OCTO: AN OPEN-SOURCE
GENERALIST ROBOT POLICY (2023), https://octo-models.github.io [https://perma.cc/9RAY-
U3B4] (robotic arms); Jeffrey Burt, Arm Pushes AI into the Smallest IoT Devices with Cortex-
M52 Chip, NEWSSTACK (Nov. 27, 2023), https://thenewstack.io/arm-pushes-ai-into-the-smallest-
iot-devices-with-cortex-m52-chip/ [https://perma.cc/69NP-YM4A] (internet of things).
25. Pavan Belagatti, Unpacking Meta’s Llama 2: The Next Leap in Generative AI,
SINGLESTORE (Dec. 5, 2023), https://www.singlestore.com/blog/a-complete-beginners-guide-to-
llama2/ [https://perma.cc/4C7X-WRWT]. A leading model like Llama-2 is a file that weighs
about 140 GB, which can be stored on most modern smartphones. Hagay Lupesko, Introducing
Llama2-70B-Chat with MosaicML Inference, DATABRICKS (Aug. 24, 2023),
https://www.databricks.com/blog/llama2-inference [https://perma.cc/45B8-G8YR]; Alan Truly,
LLaMA 2 Guide: Meta AI’s Open Source Large Language Model Explained, ANDROID POLICE
(Jan. 24, 2024), https://www.androidpolice.com/llama-2-guide/ [https://perma.cc/5QY3-VWG8];
see also Hugging Face, META, https://huggingface.co/meta-llama/Llama-2-70b-hf/tree/main
[https://perma.cc/2PL4-68UG]. It takes a little over an hour to download it to any device using
consumer level speeds.
26. See infra Part III.

<<PAGE_BREAK>>

56:545] SYSTEMIC REGULATION OF AI 553
to vulnerable communities, threats to economic and political stability, and, in
a worst-case scenario, even existential risk.27 The potential benefits are
significant as well, but neither the benefits nor the costs can be known with
certainty at present. Hence, the case for regulation rests on the general
principles of prudence in the face of the unknown: taking precautions,
considering maximin scenarios, and ultimately advancing with care in the
face of deep uncertainty and potentially irreversible, consequences.28
The Article proceeds in four Parts. In Part I, we start by considering the
important categories of systemic AI risk that are manifest today. As is already
evident, AI algorithms often discriminate against vulnerable groups.29 This
harm is not isolated. As AI systems are increasingly deployed in more and
more junctions of the economy, they will project historical inequity into the
future in a self-feeding cycle of bias and disadvantage. Other systemic risk
categories include the scaling of fraud, new forms of invasion of privacy, and
dissemination of misinformation—all contributing to the erosion of public
trust and safety.30
Societal risks are only likely to increase over time, as AI systems become
more capable, more general, and more broadly embedded in decision-
27. See infra Part II. On the last point, numerous AI experts, developers, and scholars have
warned about the existential risks of AI development. See, e.g., Simon Friederich, Symbiosis, Not
Alignment, as the Goal for Liberal Democracies in the Transition to Artificial General
Intelligence, SPRINGER LINK: AI ETHICS (Mar. 16, 2023), https://doi.org/10.1007/s43681-023-
00268-7 [https://perma.cc/GMD6-D434]; Statement on AI Risk, CTR. FOR AI SAFETY,
https://www.safe.ai/statement-on-ai-risk [https://perma.cc/YD9R-6ZQ8] (presenting a statement
on existential AI risk signed by hundreds of AI scientists as well as hundreds of other scientists
and luminaries); Frederik Federspiel et al., Threats by Artificial Intelligence to Human Health
and Human Existence, 8 BMJ GLOB. HEALTH, 1, 1 (2023) (addressing catastrophic AI risks from
a public health perspective); Yoshua Bengio et al., Pause Giant AI Experiments: An Open Letter,
FUTURE LIFE INST. (Mar. 22, 2023), https://futureoflife.org/open-letter/pause-giant-ai-
experiments [https://perma.cc/TX59-737K] (hosting letter on large-scale AI risks with thousands
of signatures, including numerous signatures from scientists, professors, and AI experts); Cade
Metz, ‘The Godfather of A.I.’ Leaves Google and Warns of Danger Ahead, N.Y. TIMES (May 4,
2023), https://www.nytimes.com/2023/05/01/technology/ai-google-chatbot-engineer-quits-
hinton.html (reporting that artificial intelligence pioneer Geoffrey Hinton quit his job at Google
so he could freely speak out about the existential risks of AI); Benjamin S. Bucknall & Shiri Dori-
Hacohen, Current and Near-Term AI as a Potential Existential Risk Factor, in PROCEEDINGS OF
THE 2022 AAAI/ACM CONFERENCE ON AI, ETHICS, & SOCIETY 119–20 (2022); Alexey Turchin
& David Denkenberger, Classification of Global Catastrophic Risks Connected with Artificial
Intelligence, 35 A.I. SOC’Y 147, 147 (2020) (collecting sources); STUART RUSSELL, HUMAN
COMPATIBLE: ARTIFICIAL INTELLIGENCE AND THE PROBLEM OF CONTROL 142–44 (2019).
28. See infra Section III.C.
29. See, e.g., Pauline T. Kim, Race-Aware Algorithms: Fairness, Nondiscrimination, and
Affirmative Action, 110 CALIF. L. REV. 1539, 1548 (2022); Anupam Chander, The Racist
Algorithm?, 115 MICH. L. REV. 1023, 1036 (2017).
30. See infra Part II.

<<PAGE_BREAK>>

554 ARIZONA STATE LAW JOURNAL [Ariz. St. L.J.
making. The AI-driven automation of many employment tasks is bound to
displace millions of workers.31 Some of these jobs will be recouped in other
forms, but this dynamic can take many years, further empowering capital
while increasing inequality and causing societal unrest.32 Elsewhere,
autonomous weapons systems threaten to expand the scope of warfare and
facilitate assassination and terrorism.33 Advanced AI could also contribute to
new arms races for military advantage and allow totalitarian regimes to rise
to power within nations.34
Part II examines AI alignment problems more broadly. As AI systems
become more capable, they will be asked to do more, given more resources,
and provided more autonomy. Unless such systems are aligned with human
interests—a techno-ethical problem with no known solution—they can
pursue goals in ways that will be increasingly harmful.35 We collect a number
of real life demonstrations of how even weak AI systems have already acted
in unexpected, unwanted, and sometimes unsafe ways—even in simple AI
systems.36 The failures of these simple systems, though far from catastrophic
in the real world, should be a cause for more concern rather than less, given
that these systems were also significantly easier to audit and control than
current systems.
The alignment problem is not new to lawyers. In a deep sense, the legal
system is a social project meant to align the interests of individuals and firms
to broader communal interests. Environmental, tax, corporate, contract, and
criminal law are all attempts to direct individuals to avoid harmful activities
and instead pursue beneficial ones. And while this project has never been
perfectly successful, lawyers have accumulated experience and insight into
31. Joseph Briggs & Devesh Kodnani, The Potentially Large Effects of Artificial
Intelligence on Economic Growth, GOLDMAN SACHS ECON. RSCH. (Mar. 26, 2023),
https://www.gspublishing.com/content/research/en/reports/2023/03/27/d64e052b-0f6e-45d7-
967b-d7be35fabd16.html [https://perma.cc/AP8H-XPFF] (estimating that roughly two-thirds of
U.S. occupations are exposed to some degree of automation by AI).
32. See, e.g., Daron Acemoglu & Pascaul Restrepo, Artificial Intelligence, Automation, and
Work, in THE ECONOMICS OF ARTIFICIAL INTELLIGENCE: AN AGENDA 197, 202 (Ajay Agrawal et
al. eds., 2019); ERIK BRYNJOLFSSON & ANDREW MCAFEE, THE SECOND MACHINE AGE 231–32
(2014).
33. E.g., PAUL SCHARRE, ARMY OF NONE 68–78, 150–77 (2019); Rebecca Crootof, The
Killer Robots Are Here: Legal & Policy Implications, 36 CARDOZO L. REV. 1837, 1866–67
(2015).
34. Friederich, supra note 27, at 3; Turchin & Denkenberger, supra note 27, at 152, 154.
35. See infra Part II.
36. See infra Section II.A.

<<PAGE_BREAK>>

56:545] SYSTEMIC REGULATION OF AI 555
the problems of alignment.37 It is this experience that lawyers can bring to
regulatory discussions of AI, tempering the techno-optimism of some and the
hopelessness of others.
In Part III, drawing on our taxonomy of risks and alignment difficulties,
the Article makes the case for the systemic regulation of Artificial
Intelligence. It posits that regulating AI as a technology has substantial
efficiency benefits over a piecemeal approach. General-purpose AI systems
are especially difficult to address in harm-by-harm fashion or to regulate once
widely distributed. Further, many AI risks are inherent in the technology
itself and only susceptible to systemic rather than use-based regulation. And
new AI harms may emerge over time and are by their nature difficult for
regulators to predict or prevent.
The Article then addresses the most prominent public debate over AI
regulation, which concerns the question of which AI risks deserve our
attention: the immediate harms of AI or its existential, long-term risks.38 We
contend that this presents a false choice and that policymakers must attend to
both types of risks. Indeed, recognition of short-term and long-term AI risk
is complementary, with each type of risk strengthening the case for
meaningful regulation.39 Further, recognizing a broad set of potential AI
harms can help expand the political coalition necessary for meaningful AI
regulation. More broadly, understanding the multidimensionality of AI risk
is necessary to shift away from what an IBM representative recently appealed
Congress to do: to only regulate AI applications, not the underlying
technology.40 As we demonstrate, it would be a grave mistake to heed this
advice.
Part IV concludes by outlining several important principles that AI
regulation should follow, in both the domestic and international contexts. We
highlight the need for a system of ex-ante and ex-post regulation, involving
both agencies and courts. Many AI harms can be mitigated through regulatory
interventions at the design and development stages, while ex post
enforcement will be useful to address particular violations of the regulatory
regime.41 Litigation can expose nascent harmful practices and internal
corporate misconduct, thus assisting the regulatory mission. We also posit
37. See Oliver Wendell Holmes, Jr., The Path of the Law, Address at the Dedication of a
New Hall at Boston University (Jan. 8, 1897), in 10 HARV. L. REV. 457, 465 (1897).
38. See infra Section III.B.
39. See infra Part III.
40. See Oversight of AI: Rules for Artificial Intelligence: Hearing Before S. Subcomm. on
Priv., Tech., & L. of the S. Comm. on the Judiciary, 118th Cong. 3–6 (2023) [hereinafter AI
Hearing] (statement of Christina Montgomery, Chief Privacy and Trust Officer, IBM).
41. See Andrew Tutt, An FDA for Algorithms, 69 ADMIN. L. REV. 83, 117–18 (2017).

<<PAGE_BREAK>>

556 ARIZONA STATE LAW JOURNAL [Ariz. St. L.J.
that regulation should aggressively target the most obvious pathways to AI
harm or catastrophe. Recursively self-improving AIs, open-source AIs, and
AI systems connected to a broad array of physical tools are especially likely
to develop alignment problems or dangerous capabilities.42 Technologies like
this are particularly appropriate targets for regulation or prohibition. We
make the case for these principles and several others as a foundation for the
effective regulation of AI technology.
We also directly address the argument that by regulating domestically, the
United States would allow other nation-states to take the lead in AI
development, and so we should abandon caution to gain strategic advantage.43
Ultimately this argument is fallacious, and we provide precedential examples
from international law showing that international collaboration is indeed
possible. AI regulation is not a zero-sum game, because aligning AI systems
to social goals is essential to protect the safety of all nations and peoples.
I. SOCIETAL RISKS OF AI SYSTEMS
The rise of AI systems is likely to have a profound social impact. While
some of the impact will undoubtedly be positive, controlling the negative
effects presents a vexing challenge. To be sure, every technology presents
benefits and risks. Traditionally, the legal system has addressed such issues
by enacting targeted regulations at the level of application—such as speed
limits for vehicles, marketing restrictions for tobacco products to minors, and
firearms prohibitions on school property. A central question is whether
application-level regulation is sufficient to govern AI risk.
A key argument in this Article is that AI systems possess a special risk
profile that requires systemic regulation. Our contention is based on two
interlocking types of risk: risks from the broad deployment of AI systems and
the intrinsic risks of the systems themselves. If such risks exist, then AI
systems should be regulated not only at the level of downstream
applications,44 but also upstream in the foundational stages of development
and training.
This Part unpacks the society-wide risks of various potential uses of AI
systems, reserving the more intrinsic risk concerns to the next Part. Some of
the risks we consider here are present and immediate; others, still covered by
the fog of the future. However, pace some current debates, we believe that
42. See infra Section IV.A.
43. See infra Section IV.C, notes 302–06 and accompanying text.
44. For an example of efforts in this direction, see Steven Shavell, On the Redesign of
Accident Liability for the World of Autonomous Vehicles, 49 J. LEGAL STUD. 243 (2020).

<<PAGE_BREAK>>

56:545] SYSTEMIC REGULATION OF AI 557
both categories of risk demand our attention.45 We therefore offer a broad
overview, emphasizing throughout a key point: over and above any direct risk
caused from particular applications or misuses of AI systems, AI system
deployment creates societal, systemic risks.
A. Present Harms
In the following sections, we discuss broad harms associated with AI that
are already occurring. However, the line between present and future harms is
inherently blurry. Some of these present harms may intensify in the future, as
AI becomes more capable and its use more widespread. Nothing about AI,
including its most salient harms, is static.
1. Bias and Discrimination
AI systems have quickly become integrated into decision-making
processes at firms, agencies, and even the judiciary.46 These AI systems make
classifications and predictions, which in turn drive decisions.47 One concern,
raised by a burgeoning literature, is that these algorithms may exhibit bias.48
The related concern we want to emphasize is that these biases would arise
systemically, across all areas of life.
AI systems are trained on vast amounts of data, learning to detect complex
and subtle statistical relationships within them.49 They may, for example,
predict the probability that an employee will be successful, that a client will
be satisfied, that an incarcerated person will recidivate, or that a customer
will fail to pay their debts on time.50 Because of AI’s predictive efficiency,
companies increasingly use it to predict future outcomes and make decisions
45. See infra Section IV.A.
46. See, e.g., Kosta Mitrofanskiy, Artificial Intelligence (AI) in the Law Industry: Key
Trends, Examples, & Usages, INTELLISOFT (Aug. 11, 2023), https://intellisoft.io/artificial-
intelligence-ai-in-the-law-industry-key-trends-examples-usages/ [https://perma.cc/8TYN-
L2KT].
47. See id.
48. See, e.g., Kim, supra note 29, at 194; Deborah Hellman, Measuring Algorithmic
Fairness, 106 VA. L. REV. 811, 813 (2020); Aziz Z. Huq, Racial Equity in Algorithmic Criminal
Justice, 68 DUKE L.J. 1043, 1079 (2019).
49. Hideyuki Matsumi & Daniel J. Solove, The Prediction Society: Algorithms and the
Problems of Forecasting the Future, 2025 U. ILL. L. REV. (forthcoming) (manuscript at 10),
https://ssrn.com/abstract=4453869 [https://perma.cc/Q9YQ-2NP9]; Anya E.R. Prince & Daniel
Schwarcz, Proxy Discrimination in the Age of Artificial Intelligence and Big Data, 105 IOWA L.
REV. 1257, 1274 (2020).
50. Matsumi & Solove, supra note 49, at 13–17.

<<PAGE_BREAK>>

558 ARIZONA STATE LAW JOURNAL [Ariz. St. L.J.
about people’s employment, insurance, health, incarceration status,
immigration status, consumer propensities, and education, among other
things.51
As scholars have explored, these models tend to have discriminatory
effects with regard to race, gender, class, ethnicity, religion, disability status,
and more, especially for groups with a history of suffering discrimination or
disadvantage.52 Recent examples of such discrimination by AI algorithms are
too numerous to list.53 This bias may be due to training data including too few
examples of people of color, such as in some facial recognition systems,
which are systemically less accurate for people who are Black, East Asian,
American Indian, or female.54 Algorithms can also have discriminatory
effects when the training data contains too many examples of minorities, as
in the case of over-policed minorities who are then predicted to be more likely
to engage in crime.55
Even in the absence of training data issues, algorithms inherently project
historical discrimination forward into the future.56 When an AI makes
algorithmic predictions based on historical data, it replicates existing social
patterns of discrimination, and in the process, perpetuates them by
condemning discriminated individuals to worse outcomes.57 A model
assigned to review resumes for a tech company might downgrade women
candidates and upgrade men, much as Amazon’s hiring algorithm did in an
analogous real-world example.58 After all, in the historical data, men tended
to get hired more frequently, while women were rarely hired.59 This results in
ongoing discriminatory cycles for historically discriminated-against groups.60
51. Id.
52. Id. at 13–19.
53. To take just a few examples, an algorithm allocating health care resources directed more
“resources to white patients than Black patients with the same level of need.” Kim, supra note
29, at 1548. Targeted ad algorithms have shown “employment and housing ads . . . skewed along
race and gender lines.” Id. at 1547. Other ad algorithms have suggested that people with African-
American-associated names have criminal records when they do not. Latanya Sweeney,
Discrimination in Online Ad Delivery, 56 COMMC’NS ACM 44, 46–47 (2013).
54. Joy Buolamwini & Timnit Gebru, Gender Shades: Intersectional Accuracy Disparities
in Commercial Gender Classification, 81 PROCS. MACH. LEARNING RSCH. 1, 3 (2018); Brendan
F. Klare et al., Face Recognition Performance: Role of Demographic Information, 7 IEEE
TRANSACTIONS ON INFO. FORENSICS & SEC. 1789, 1796–98 (2012).
55. Sandra G. Mayson, Bias In, Bias Out, 128 YALE L.J. 2218, 2284–85 (2018).
56. Id. at 2252–54; Matsumi & Solove, supra note 49 (manuscript at 23–25).
57. See, e.g., Chander, supra note 29, at 1036.
58. IFEOMA AJUNWA, THE QUANTIFIED WORKER 83–84 (2023).
59. See id. at 84.
60. See, e.g., Prince & Schwarcz, supra note 49, at 1297.

<<PAGE_BREAK>>

56:545] SYSTEMIC REGULATION OF AI 559
The extent to which technical tools can address algorithmic
discrimination is limited.61 The sources and effects of discrimination lie
outside of any particular model or code; they exist in the underlying data
itself.62 A system banned from taking race into account will consider zip
codes; a system banned from using zip codes will use income and occupation;
and so on.63 And once the obvious forms of discrimination are prohibited,
there will be many subtler forms of harder-to-trace discriminatory effect.64
Decision-making via AI algorithm is problematic because it takes existing
discrimination and sets it in stone.65 And it does so with a false patina of
neutrality, of simply calling balls and strikes.66 As AI systems become
embedded within more parts of society, these discriminatory effects will
interact and likely compound, in a way that reaches even more broadly than
the biased decisions of individual, uncoordinated actors.67
2. Fraud and Social Trust
AI models are already being used to defraud individuals. Recently, a
model called WormGPT was offered (for a $100 monthly subscription) to
assist with hacking and fraud schemes and writing scam emails.68 Image
generators have been used to prey on the hopes of vulnerable individuals.69
61. Pauline T. Kim, Auditing Algorithms for Discrimination, 166 U. PA. L. REV. ONLINE
189, 194 (2017).
62. Talia B. Gillis, The Input Fallacy, 106 MINN. L. REV. 1175, 1192 (2022). Gillis
suggested that we should therefore move from data-driven analysis to outcome-based analysis.
Id. at 1257.
63. See Kim, supra note 61, at 196.
64. See Gillis, supra note 62, at 1223.
65. E.g., Matsumi & Solove, supra note 49 (manuscript at 23).
66. Mayson, supra note 55, at 2246.
67. See Prince & Schwarcz, supra note 49, at 1296–97. Of course, human actors can also
be biased, and human discrimination often has the added vice of animus. Further, some forms of
human bias may be more covert and harder to eradicate than algorithmic bias. But algorithmic
bias has the negative characteristics described above, and, moreover, AI systems scale in a way
that human actors do not. We do not claim that algorithmic bias is necessarily worse or better than
human bias: both are pernicious, but the specific contours of harm differ.
68. WormGPT: New AI Tool Allows Cybercriminals to Launch Sophisticated Cyber Attacks,
HACKER NEWS (July 15, 2023), https://thehackernews.com/2023/07/wormgpt-new-ai-tool-
allows.html [https://perma.cc/QA22-2ZUR]; David Strom, It’s The Summer of Adversarial
Chatbots. Here’s How to Defend Against Them, SILICONANGLE (Sept. 6, 2023),
https://siliconangle.com/2023/09/06/summer-adversarial-chatbots-heres-defend/
[https://perma.cc/7WA4-HXRT].
69. See, e.g., Joys Blogging, Am I Fooled by AI Image Generator?, MEDIUM (Nov. 2, 2023),
https://medium.com/@joysvictori/am-i-fooled-by-ai-image-generator-9aedde773607

<<PAGE_BREAK>>

560 ARIZONA STATE LAW JOURNAL [Ariz. St. L.J.
Romance fraud is now assisted by AI.70 AIs can be used to mimic the voices
of virtually anyone whose voice has been recorded.71 Fighting these
developments, even with the help of AI, is very difficult. As one security
expert stated: “The first rule of managing online fraud and mitigating risk is
to remember that fraudsters are entrepreneurs.”72
One of the chief contributions of AI to the fraudulent enterprise is scale.
AI will allow attackers to cast a much wider net by cutting the cost of
interacting with each potential mark. This will allow scammers to vastly
expand and disguise their operations, increasing the scope and effectiveness
of fraud.
While the concern with fraud is serious on its own, we seek to highlight
the broad social impact of this problem. The question is not what the
criminals will do, but how people will react. Today, we teach people to be
suspicious of emails, even when they appear to be from trusted senders, to be
cautious about responding to text messages from supposedly legitimate
financial institutions, and to ignore calls from people representing themselves
as government officials and asking for iTunes gift cards.73 These obvious
badges of fraud will become less and less obvious. The question posed by AI-
driven fraud, then, is how people will come to interact with each other when
every non-physical interaction is suspect, and when one cannot fully trust
their eyes or ears to ensure the person Facetiming them is indeed that person.
The resulting increase in distrust is difficult to model, but it may lead to
increased social fragmentation, greater wariness to interact with new people,
and more concerns about being able to verify oneself to others.
[https://perma.cc/DLB9-HFSX]; Eric Revell, Generative AI Tools Lead to Rising Deepfake
Fraud, FOX BUS. (May 30, 2023, 9:05 AM),
https://www.foxbusiness.com/technology/generative-ai-tools-lead-rising-deepfake-fraud
[https://perma.cc/6JEW-DHVA].
70. Cassandra Cross, Using Artificial Intelligence (AI) and Deepfakes to Deceive Victims:
The Need to Rethink Current Romance Fraud Prevention Messaging, 24 CRIME PREVENTION &
CMTY. SAFETY 30, 31 (2022).
71. See, e.g., AI Voice Cloning: Clone Your Voice Instantly, SPEECHIFY STUDIO,
https://speechify.com/voice-cloning [https://perma.cc/VU76-Y8DL]; AI Music, Text to Speech,
and Voice to Voice, FAKEYOU, https://fakeyou.com [https://perma.cc/FK6V-56RF]; Erielle
Reshef, Kidnapping Scam Uses Artificial Intelligence to Clone Teen Girl’s Voice, Mother Issues
Warning, ABCNEWS (Apr. 13, 2023), https://abc7news.com/ai-voice-generator-artificial-
intelligence-kidnapping-scam-detector/13122645/ [https://perma.cc/GD7M-CAAE].
72. Swami Vaithianathasamy, AI vs AI: Fraudsters Turn Defensive Technology into an
Attack Tool, 2019 COMPUT. FRAUD & SEC. 6, 6.
73. See What Are Some Common Types of Scams?, CONSUMER FIN. PROT. BUREAU
(Aug. 28, 2023), https://www.consumerfinance.gov/ask-cfpb/what-are-some-common-types-of-
scams-en-2092 [https://perma.cc/7YSP-SEU8].

<<PAGE_BREAK>>

56:545] SYSTEMIC REGULATION OF AI 561
3. Privacy
AI can pose substantial risks of privacy violations by enabling detailed
inferences about people’s private lives, based on their publicly available
information.74 As machine learning has become more sophisticated, it has
enabled companies to gain more insight into consumers and their behavior
via advanced pattern recognition and data analysis.75 Each of us generates
voluminous data as we use our smart phones, social media, smart-home
devices, and the internet. Companies can collect or purchase this data and
process it using AI to infer sensitive information about our lives, including
our health conditions, political affiliations, spending habits, content choices,
religious beliefs, and sexual preferences.76 These companies can sell or share
these insights to others, without our consent.77
A famous example of this process involves an algorithm used by Target
to predict which of its customers were pregnant, based on their purchases.78
A man walked into a Target outside Minneapolis and complained to the
manager that Target had erroneously been sending his teenage daughter
coupons for baby clothes and cribs.79 It turned out that his daughter was
pregnant, and Target’s algorithm had revealed her condition to her father
before she was willing to tell him.80 AIs can tell a great deal about a person
based on seemingly obscure data like purchases, internet traffic data, and,
especially, “likes” on social media.81 Private companies have used this data
to gain insight on and target political and other ads to millions of Facebook
users.82
These privacy risks are difficult to mitigate via conventional approaches
to data protection.83 They are likely to require systemic, technology-level
regulation, or unprecedentedly tight restrictions on data collection, to address
74. See Cameron F. Kerry, Protecting Privacy in an AI-Driven World, BROOKINGS
(Feb. 10, 2020), https://www.brookings.edu/articles/protecting-privacy-in-an-ai-driven-world/
[https://perma.cc/86GU-HR3E].
75. Dennis D. Hirsch, From Individual Control to Social Protection: New Paradigms for
Privacy Law in the Age of Predictive Analytics, 79 MD. L. REV. 439, 456–57 (2020).
76. Id. at 457.
77. Id.
78. Charles Duhigg, How Companies Learn Your Secrets, N.Y. TIMES MAG.
(Feb. 16, 2012), https://www.nytimes.com/2012/02/19/magazine/shopping-habits.html
[https://perma.cc/JQ8Q-8ZFH].
79. Id.
80. Id.
81. See Hirsch, supra note 75, at 455–57.
82. Id. at 456.
83. Id. at 442–43.

<<PAGE_BREAK>>

562 ARIZONA STATE LAW JOURNAL [Ariz. St. L.J.
the privacy risks.84 It is impossible to know in advance when a machine
learning system will infer sensitive information about a person, or what kind
of information it will infer.85 Traditional privacy regulations, which require
giving a consumer some form of notice and choice over the disclosure of their
data, are rendered largely obsolete when personal information can be inferred
in unpredictable ways from large accumulations of seemingly innocuous
data.86 If consumers cannot comprehend how their data might be used, they
cannot effectively protect it.87
The chilling effects associated with detailed insight into consumers’ lives
may be substantial. In a world where algorithmic decision-making is
widespread and where every social media post, website visited, or email sent
could adversely affect one’s job prospects or insurance premiums, consumers
may be chilled from engaging in anything but the blandest and most widely
accepted behavior.88 AI can also give rise to new, invasive forms of
surveillance, driven by advanced pattern matching and algorithmic
prediction. Facial recognition, powered by machine learning, remains in its
early stages, but it has the potential to facilitate location tracking and
population monitoring on an unprecedented scale.89 When connected to a
sufficiently pervasive camera network, it permits authorities to efficiently
monitor people’s activities and punish deviations from norms in ways that
can severely chill freedom of expression and association.90
B. Potential Future Harms
Today’s AI systems, impressive as they may be, are still too weak to be
truly socially transformative. But AI technology is likely to continue to
improve over time. There is a range of risks that may arise from more capable
84. See Brandon Pugh & Steven Ward, What Does AI Need? A Comprehensive Federal
Data Privacy and Security Law, IAAP (July 12, 2023), https://iapp.org/news/a/what-does-ai-
need-a-comprehensive-federal-data-privacy-and-security-law/ [https://perma.cc/A639-8YQY].
85. See Kate Crawford & Jason Schultz, Big Data and Due Process: Toward a Framework
to Redress Predictive Privacy Harms, 55 B.C. L. REV. 93, 99 (2014).
86. See Alicia Solow-Niederman, Information Privacy and the Inference Economy, 117 NW.
U. L. REV. 357, 382 (2022).
87. See id. at 383.
88. See id. at 381–83; Jonathon W. Penney, Understanding Chilling Effects, 106 MINN. L.
REV. 1451, 1458 (2022).
89. See, e.g., Evan Selinger & Woodrow Hartzog, The Inconsentability of Facial
Surveillance, 66 LOY. L. REV. 101, 111 (2019).
90. See id.

<<PAGE_BREAK>>

56:545] SYSTEMIC REGULATION OF AI 563
AI systems. While we have seen glimpses of this future already,91 we do not
claim to be able to predict these risks with certainty. Yet legal actors rarely
wait for certainty in risk assessment. As our goal is to build regulation that
will prepare us for a range of possible future contingencies, we focus here on
societal risks that are both plausible and concerning.
1. Unemployment and Inequality
One of the greatest prospective benefits of AI is its potential to transform
labor markets and contribute to economic growth.92 Early analyses are
speculative, but a recent Goldman Sachs report estimates that AI could
eventually increase annual global GDP by 7%, and a McKinsey report
suggests an annual increase of over $2.6 trillion.93 Yet the economic benefits
of AI may largely accrue to a concentrated few, while potentially enormous
costs fall on workers, leaving many people worse off.94 Alternatively,
sufficiently capable AIs may eventually replace human employees altogether,
without generating new jobs for which humans are better suited than AIs.95 If
that were to occur, our current social frameworks are ill-suited to guarantee
the well-being of the multitude of displaced workers or to address the
resulting economic and social inequality.96
Historically, automation of labor tasks has created a powerful
displacement effect, as jobs once performed by humans are instead completed
by machines.97 However, this effect has generally been counterbalanced by
the demand-increasing effects of productivity growth and, even more
91. See, e.g., Verma & De Vynck, supra note 15; Rudolph et al., supra note 15, at 379;
ALLEN & CHAN, supra note 15, at 21–23.
92 See James Manyika & Kevin Sneader, AI, Automation, and the Future of Work: Ten
Things to Solve For, MCKINSEY & CO. (June 1, 2018), https://www.mckinsey.com/featured-
insights/future-of-work/ai-automation-and-the-future-of-work-ten-things-to-solve-for
[https://perma.cc/BK5Z-TQ5T]. On the potential to improve access to justice (and the potential
complications), see Yonathan A. Arbel, Judicial Economy in the Age of AI, Colo. L. Rev.
(forthcoming 2025), https://ssrn.com/abstract=4873649 [https://perma.cc/8SCR-ZFRG].
93. Generative AI Could Raise Global GDP by 7%, GOLDMAN SACHS (Apr. 5, 2023),
https://www.goldmansachs.com/intelligence/pages/generative-ai-could-raise-global-gdp-by-7-
percent.html [https://perma.cc/BC8Q-YC7W]; Alexandre Tanzi, Biggest Losers of AI Boom Are
Knowledge Workers, McKinsey Says, BLOOMBERG (June 13, 2023, 9:01 PM),
https://www.bloomberg.com/news/articles/2023-06-14/biggest-losers-of-ai-boom-are-
knowledge-workers-mckinsey-says [https://perma.cc/MCS9-BK9N].
94. See Acemoglu & Restrepo, supra note 32, at 201–02.
95. See, e.g., BRYNJOLFSSON & MCAFEE, supra note 32, at 231–32.
96. See id.
97. Acemoglu & Restrepo, supra note 32, at 200–03.

<<PAGE_BREAK>>

564 ARIZONA STATE LAW JOURNAL [Ariz. St. L.J.
importantly, the eventual creation of new tasks where human labor has a
comparative advantage relative to machines.98
A similar “reinstatement effect” of jobs may occur in the AI context, with
new lines of AI-related work.99 However, the transition from job
displacement to job reinstatement may be long, difficult, and ultimately
incomplete. Labor markets are generally slow to adjust to major shocks
because the process of reallocating workers to new sectors is costly and time-
consuming.100 Moreover, AI technology promises higher returns to capital
relative to labor, which can contribute significantly to wealth inequality.101
In recent years, there has been a marked slowdown in the creation of new
jobs following the automation and displacement of existing jobs by
technology.102 It is possible that, as increasingly difficult and complex tasks
have been automated, the process of job reinstatement has begun to cease.103
That is, as machines and early-stage AIs have become capable of a wide range
of tasks previously performed by humans, there are fewer and fewer potential
new jobs where human labor has a comparative advantage over automated
systems, leading to permanently weaker labor markets, greater rates of return
to capital, and higher inequality.104 Yet these downsides of AI-led economic
growth are only a subset of AI’s potential economic harms. The above
discussion analyzes AI like any previous advance in work automation, such
as the tractor or the factory system. But AI differs from previous automation
advances in important ways. Previous increases in automation generally
displaced simple, unpleasant, or repetitive tasks, and the solution to this job
displacement was generally to further educate workers so they could
ultimately assume more lucrative jobs.105 AI systems threaten to displace
more cognitively advanced tasks, imperiling jobs requiring considerable
education and creativity.106 Estimates suggest that LLMs are more likely to
replace higher-educated, higher-wage jobs than low-wage, low-education
98. Id.
99. Id. at 198.
100. Id. at 199.
101. See BRYNJOLFSSON & MCAFEE, supra note 32, at 231–32.
102. Such a slowdown would help explain why productivity growth and labor market
conditions have been poor for most of the past several decades. Acemoglu & Restrepo, supra note
32, at 210–11; Briggs & Kodnani, supra note 31.
103. See Briggs & Kodnani, supra note 31.
104. See BRYNJOLFSSON & MCAFEE, supra note 32, at 231–32; Acemoglu & Restrepo, supra
note 32, at 197, 221.
105. See Acemoglu & Restrepo, supra note 32, at 209.
106. See, e.g., Briggs & Kodnani, supra note 31; Verma & De Vynck, supra note 15.

<<PAGE_BREAK>>

56:545] SYSTEMIC REGULATION OF AI 565
ones.107 Many workers displaced from high-pay, high-prestige jobs would
either suffer permanent unemployment or have to retrain for the lower-pay
jobs to which AIs are currently less suited, such as janitorial work,
construction, repair, landscaping, and masonry.108
Finally, there is the more conjectural possibility that AI and robotics might
eventually become advanced enough to replace humans in the majority of
professions.109 This would not necessarily require AIs or robots to perform as
well as humans in all employment tasks.110 From the perspective of a business
owner, automated task systems have several inherent advantages over
humans. They cost money up front, but thereafter require no wages other than
maintenance.111 They can work constantly, with no breaks or weekends off.112
They do not complain, organize, whistleblow, steal trade secrets, or start
competing firms. Such systems can be cost-effective even if they are
substantially less capable than human employees in a given job.113
The mass joblessness caused by near-complete employment automation
could result in societal unrest on an enormous scale.114 People without
substantial stock or other capital holdings would have no meaningful source
of income and would become wards of the state.115 The government might, in
such a case, massively raise taxes in order to provide these hundreds of
millions of people with a guaranteed basic income.116 Even if that were to
occur, the benefits of employment go far beyond income. Employment
contributes to psychological well-being and provides a sense of self-worth
and purpose.117 On a broader scale, communities with low levels of
107. See, e.g., Tyna Eloundou et al., GPTs Are GPTs: An Early Look at the Labor Market
Impact Potential of Large Language Models 14 (Aug. 22, 2023) (unpublished manuscript),
https://arxiv.org/pdf/2303.10130.pdf [https://perma.cc/KY6D-Q87J]; Ed Felten et al., How Will
Language Modelers Like ChatGPT Affect Occupations and Industries? 3 (Mar. 18, 2023)
(unpublished manuscript), https://arxiv.org/ftp/arxiv/papers/2303/2303.01157.pdf
[https://perma.cc/4P6L-4MVQ].
108. See Briggs & Kodnani, supra note 31; Felten et al., supra note 107, at 35–36.
109. E.g., Hilary G. Escajeda, Zero Economic Value Humans?, 10 WAKE FOREST J.L. &
POL’Y 129, 146–47 (2020); Sage Isabella Cammers-Goodwin, “Tech:” The Curse and the Cure:
Why and How Silicon Valley Should Support Economic Security, 9 U.C. IRVINE L. REV. 1063,
1074–75 (2019).
110. See Verma & De Vynck, supra note 15.
111. See Escajeda, supra note 109, at 147.
112. Id.
113. See Verma & De Vynck, supra note 15.
114. See BRYNJOLFSSON & MCAFEE, supra note 32, at 231–32; see also Verma & De Vynck,
supra note 15.
115. See BRYNJOLFSSON & MCAFEE, supra note 32, at 231–32.
116. See, e.g., Escajeda, supra note 109, at 182–83.
117. BRYNJOLFSSON & MCAFEE, supra note 32, at 234.

<<PAGE_BREAK>>

566 ARIZONA STATE LAW JOURNAL [Ariz. St. L.J.
employment tend to suffer a severe loss of social capital aside from the direct
harms of poverty.118 It may be that people in a transformed, post-work society
will have different expectations and preferences, such that a lack of work will
no longer have such ill effects. But the transition to a leisure-based lifestyle
is likely to be harder than it might initially seem. The human desire for a
meaningful life is powerful and widely held,119 and work is a key source of
meaning in life.120 Virtually every job, no matter how unglamorous,
contributes to humanity in one way or another, and contributing something
of substance to humanity is a central component of meaning.121 Engaging in
leisure activities all day, every day, is unlikely to provide a fulfilling life for
a substantial percentage of the population. While the potential economic
upsides of AI are considerable, even the most optimistic scenarios for AI’s
incorporation into the economy come with substantial, and potentially
enormous, downsides.
2. Military Applications
Artificial Intelligence has substantial military applications, and several
countries have already deployed weapons with AI components.122 Advanced
AI capabilities may someday dramatically increase the power of AI-driven
militaries relative to conventional ones.123
From an operational efficiency perspective, AI-controlled weapons have
significant advantages over human soldiers or human-controlled vehicles.124
They do not get tired, hungry, bored, or sick.125 They can “process data and
make decisions at speeds far beyond human capabilities.”126 They will
118. Id. at 235.
119. See, e.g., Shigehiro Oishi & Erin C. Westgate, A Psychologically Rich Life: Beyond
Happiness and Meaning, 129 PSYCH. REV. 790, 803 (2022).
120. See, e.g., Escajeda, supra note 109, at 163–64; Sarah J. Ward & Laura A. King, Work
and the Good Life: How Work Contributes to Meaning in Life, 37 RSCH. ORG. BEHAV. 59, 64–65
(2017).
121. See, e.g., Vlad Costin & Vivian L. Vignoles, Meaning Is About Mattering: Evaluating
Coherence, Purpose, and Existential Mattering as Precursors of Meaning in Life Judgments,
118 J. PERS. & SOC. PSYCH. 864, 865, 872 (2020).
122. E.g., Charles P. Trumbull IV, Autonomous Weapons: How Existing Law Can Regulate
Future Weapons, 34 EMORY INT’L L. REV. 533, 535–36 (2020); Crootof, supra note 33, at 1840.
123. E.g., Kenneth Payne, Artificial Intelligence: A Revolution in Strategic Affairs?,
60 SURVIVAL: GLOB. POL. & STRATEGY 7, 24–25 (2018).
124. See Crootof, supra note 33, at 1865–67.
125. Id. at 1867.
126. Trumbull, supra note 122, at 545.

<<PAGE_BREAK>>

56:545] SYSTEMIC REGULATION OF AI 567
willingly sacrifice themselves if ordered to do so and feel no fear or doubt.127
They can remain on a battlefield for years without rest.128
Autonomous weapons also have the potential to transform and improve
military strategies and tactics.129 Particular skirmishes, major battles, or entire
wars could ultimately be planned and fought largely by AI systems.130 Yet the
remarkable power and potential of automated weapons systems carries with
it a substantial risk of harm. This includes harm from use by countries that
will view AI as an easy way to enhance militarization and conquest, harm
from use by non-state actors, harm from inevitable AI accidents, and harm
from systems that go out of control.131 Throughout history, weapon systems,
even when vetted thoroughly by experts with generous budgets, have been
prone to error—mistakes that have resulted in automated missile systems
shooting down friendly aircraft rather than enemy missiles, for example.132
More advanced automated systems are more capable, but are prone to errors
stemming from misalignment or deficiencies in testing.133 Even a well-
designed autonomous system may react poorly when faced with an input or
situation that its designers have not anticipated.134
Unfortunately, fully testing every possible scenario that an autonomous
system might encounter in the real world is effectively impossible.135
Inevitably, there are novel encounters and interactions that testers cannot
anticipate, including those planned strategically by adversaries.136 When
novelties, errors, bugs, or technical failures arise in complex and fast-moving
systems, problems can rapidly cascade from one subsystem to another and
cause a system breakdown.137
The black box nature of many of these systems makes human audits
especially difficult.138 And the harm that malfunctioning systems could cause
is substantial, because of their extraordinary capabilities and lethality.139 The
127. Crootof, supra note 33, at 1867.
128. Trumbull, supra note 122, at 545–46.
129. ALLEN & CHAN, supra note 15, at 21–23.
130. See id.
131. A report from the Center for Security and Emerging Technology discusses AI accidents
in the military context. See ZACHARY ARNOLD & HELEN TONER, AI ACCIDENTS: AN EMERGING
THREAT 7–9 (2021).
132. SCHARRE, supra note 33, at 139–43.
133. Id. at 153–55.
134. Id. at 151.
135. Id. at 149.
136. Id. at 149–50.
137. ALLEN & CHAN, supra note 15, at 24.
138. ARNOLD & TONER, supra note 131, at 13.
139. ALLEN & CHAN, supra note 15, at 26.

<<PAGE_BREAK>>

568 ARIZONA STATE LAW JOURNAL [Ariz. St. L.J.
casualties they may inflict in the event of a malfunction are limited only by
their range, endurance, ability to sense targets, and how much ammunition
they carry.140
Also concerning are the harms that might result from autonomous weapon
systems that function as intended. For example, such weapons could make
targeted assassinations of political figures easier to accomplish and harder to
attribute to a particular person or nation.141 They are also vulnerable to theft,
hacking, and cyberespionage, allowing hostile state and non-state actors to
acquire control over autonomous weapons developed by other countries.142
3. Geopolitical Imperialism, Terrorism, and Totalitarianism
Today’s AI systems are still weak in many regards. But if truly powerful
AI systems can be built, then they will impose significant risks of
destabilization, both domestically and internationally.143 AI can empower
internal police forces as well as militaries.144 Powerful military and police
forces can enable new modes of totalitarianism, imperialism, and
concentration of state power, with obvious risks to individual liberty.
Effective, well-aligned military AIs may offer a nation both a decisive
military advantage and the means to engage in conflicts in any part of the
globe at relatively little expense and without the political constraints
associated with deploying human soldiers.145 Such a powerful and easily
deployable military technology could facilitate political hegemony by a
single nation, enabling imperialism on an unprecedented scale.146 While it is
possible that a global hegemon state would rule benignly, the history of
imperialism and colonialism demonstrates that such power asymmetries can
devolve into corruption, indifference, and cruelty towards the citizens of less
powerful nations.147
Relatedly, advanced AI systems would greatly increase the potential for
dictatorship and totalitarianism within nations.148 Extensive surveillance,
140. SCHARRE, supra note 33, at 193.
141. ALLEN & CHAN, supra note 15, at 22.
142. Id. at 25–26.
143. Friederich, supra note 27.
144. See id.
145. E.g., Payne, supra note 123, at 25.
146. See Turchin & Denkenberger, supra note 27, at 152, 154.
147. See, e.g., KRIS MANJAPRA, COLONIALISM IN GLOBAL PERSPECTIVE 1–2 (2020). See
generally ROBERT HARMS, LAND OF TEARS: THE EXPLORATION AND EXPLOITATION OF
EQUATORIAL AFRICA (2019).
148. Turchin & Denkenberger, supra note 27, at 154.

<<PAGE_BREAK>>

56:545] SYSTEMIC REGULATION OF AI 569
aided by facial recognition and AI monitoring, can help dictators detect
internal dissent.149 Autonomous weapons or other tools of enforcement
controlled by a narrow set of individuals could help suppress opposition,
chilling expressions of disagreement or protest and making substantive
challenges to authority infeasible.150 Advanced AI systems pose risks to
autonomy in both global and domestic contexts.
Finally, consider how AI systems can augment the power, reach, and
effectiveness of terrorist organizations. They could, for example, help with
online recruitment by improving screening and information gathering on
potential recruits.151 The increasing availability of unmanned vehicles such as
drones or self-driving cars may increase the range and reduce the cost of
explosive or otherwise lethal attacks on civilian targets.152 Attacks would no
longer require a suicide bomber or even a human presence at or near the site
of the attack, just an AI-controlled vehicle and a malicious programmer.153
4. Threats to Democracy
Democracies are built around systems of shared trust and governance.
Voting requires individuals to believe that their votes matter, that the
information people receive is—at least generally—accurate, and that the
elections are legitimately run. Absent those, the very democratic compromise
is jeopardized.
Future AI systems may strain assumptions of trust. Deepfakes and voice
cloning are becoming increasingly persuasive,154 making it difficult to verify
whether a statement is given by a politician or a fraudster. AI-generated
misinformation is currently as effective, or even more so, than the human-
generated kind—and it is much easier to produce in massive quantities.155
149. E.g., id.; Selinger & Hartzog, supra note 89, at 111.
150. Matt Boyd & Nick Wilson, Catastrophic Risk from Rapid Developments in Artificial
Intelligence, 16 POL’Y Q. 53, 56 (2020) (noting that, with sufficiently advanced AI systems,
“transgressions can be instantly logged and punished”).
151. See ALLEN & CHAN, supra note 15, at 27–28 (discussing AI technology’s ability to
collect and analyze huge amounts of information and data).
152. ALLEN & CHAN, supra note 15, at 22.
153. Id.
154. See Matthew Wright & Christopher Schwartz, Voice Deepfakes Are Calling and Getting
More Persuasive, STRAITS TIMES (Mar. 22, 2023, 12:05 AM),
https://www.straitstimes.com/opinion/voice-deepfakes-are-calling-and-getting-more-persuasive/
[https://perma.cc/6ZQM-HACG].
155. See Beatrice Nolan, People Are More Likely to Believe AI-Generated Tweets than Ones
Written by Humans, Study Finds, BUS. INSIDER (June 29, 2023, 4:37 AM),

<<PAGE_BREAK>>

570 ARIZONA STATE LAW JOURNAL [Ariz. St. L.J.
Chatbots can converse in humanlike ways and are increasingly able to
mislead people who rely on them for information or who do not know they
are conversing with a bot.156 People may partially adjust their expectations,
as they have with images in the era of Photoshop. But at the limit, when these
technologies mature, it will be extremely difficult for people to believe true
information and much easier to compartmentalize unfavorable information as
fraud.
Election interference, in the form of astroturfing, misinformation
pollution, or other social engagement, will likely also rise in effectiveness.157
Using an LLM trained to imitate different personalities, adversarial parties
can flood social media with fake speech.158 The concern is not necessarily
that these bot accounts will all be effective, but rather that they will engender
a sense of general distrust among the population.159
Finally, other forms of democratic participation will also be implicated.
Consider the important role of comments to a regulator, letters to one’s
congressperson, or user postings in online fora. Because these actions can be
automated and scaled, their signaling effect is likely to be vastly diminished.
It will no longer be impressive that a proposed bill receives ten-thousand
objections, when these take a minute or two to generate. Unfortunately,
genuine disagreements may struggle to gain attention, further diluting
democratic mechanisms.
II. CONTROLLING AI SYSTEMS: THE ALIGNMENT PROBLEM
The previous Part explored a set of examples of systemic AI risks—the
broad, society-wide risks that can follow from the development and
deployment of highly capable AI systems. We turn in this Part to a second set
https://www.businessinsider.com/ai-generated-tweets-study-openai-gpt3-misinformation-2023-
6 [https://perma.cc/W57G-BQE5].
156. See, e.g., Cade Metz, What Exactly Are the Dangers Posed by A.I.?, N.Y. TIMES (May 7,
2023), https://www.nytimes.com/2023/05/01/technology/ai-problems-danger-chatgpt.html; Rick
Claypool, Chatbots Are Not People: Designed-In Dangers of Human-Like A.I. Systems, PUBLIC
CITIZEN (Sept. 26, 2023), https://www.citizen.org/article/chatbots-are-not-people-dangerous-
human-like-anthropomorphic-ai-report/ [https://perma.cc/2SWB-8589].
157. Yikang Pan et al., On the Risk of Misinformation Pollution with Large Language
Models (Oct. 26, 2023) (unpublished manuscript), https://arxiv.org/pdf/2305.13661.pdf
[https://perma.cc/Y347-B5T5].
158. Fatemehsadat Mireshghallah et al., Smaller Language Models Are Better Black-Box
Machine-Generated Text Detectors 1 (Feb. 12, 2024) (unpublished manuscript),
https://arxiv.org/pdf/2305.09859.pdf [https://perma.cc/6CBJ-5VR2].
159. See Nicoleta Corbu et al., ‘They Can’t Fool Me, but They Can Fool the Others!’ Third
Person Effect and Fake News Detection, 35 EUR. J. COMMC’N 165, 174 (2020).

<<PAGE_BREAK>>

56:545] SYSTEMIC REGULATION OF AI 571
of risks that justify systemic regulation—those related to AI’s alignment
problem. The alignment problem refers to the unsolved “challenge of
ensuring that AI systems pursue goals that match human values or interests
rather than unintended and undesirable goals.”160 That is, an alignment
between our (writ large) goals,161 and the systems’ means of pursuing them.
We begin here by providing a theoretical introduction to the alignment
problem. Given the age and stage of AI technology, we have yet to experience
serious harms caused by misaligned AI systems, and there are few direct
precedents available to illustrate these theoretical points. To some, this makes
it difficult to see with clarity why many experts are worried about the
alignment problem.162
Cognizant of these limitations, we present evidence of failures of early-
stage misaligned AI systems. These systems are simple, and the
consequences of their misalignment are fairly small. But these examples
illustrate how even simple systems that are far more auditable than their more
modern and capable counterparts can surprise their own creators.
A. Alignment Theory
Aligning AI systems with our social goals is a vexing and, to date,
unsolved challenge. The crux of the problem is familiar to lawyers from other
domains.163 A complex system, like a firm, has goals that are set by the
160. Richard Ngo et al., The Alignment Problem from a Deep Learning Perspective 1
(Sept. 1, 2023) (unpublished manuscript) (citation omitted), https://arxiv.org/pdf/2209.00626.pdf
[https://perma.cc/7QH8-DD87].
161. There is a deep ethical question in defining the extent of this group: namely, whose
values should AI systems be designed to care about? Shareholders, workers, the community, the
nation, those presently living, animals, and so on, all present contesting claims. On this problem
of social alignment, see Anton Korinek & Avital Balwit, Aligned with Whom? Direct and Social
Goals for AI Systems 12–16 (Nat’l Bureau of Econ. Rsch., Working Paper No. 30017, 2022),
https://www.nber.org/system/files/working_papers/w30017/w30017.pdf [https://perma.cc/7352-
3AT2].
162. Dario Amodei et al., Concrete Problems in AI Safety 4–7 (July 25, 2016) (unpublished
manuscript), https://arxiv.org/pdf/1606.06565.pdf [https://perma.cc/PFK3-R52Q]; NICK
BOSTROM, SUPERINTELLIGENCE: PATHS, DANGERS, STRATEGIES 120 (2014); Joseph Carlsmith, Is
Power-Seeking AI an Existential Risk? 16 (June 16, 2022) (unpublished manuscript),
https://arxiv.org/pdf/2206.13353.pdf [https://perma.cc/6BQ6-6LU5]; Michael K. Cohen et al.,
Advanced Artificial Agents Intervene in the Provision of Reward, 43 AI MAG. 282, 287 (2022);
STUART RUSSELL, HUMAN COMPATIBLE: ARTIFICIAL INTELLIGENCE AND THE PROBLEM OF
CONTROL 126 (2019).
163. Dylan Hadfield-Menell & Gillian K. Hadfield, Incomplete Contracting and AI
Alignment, in ARTIFICIAL INTELLIGENCE, ETHICS, AND SOCIETY, SESSION 6: SOCIAL SCIENCE

<<PAGE_BREAK>>

572 ARIZONA STATE LAW JOURNAL [Ariz. St. L.J.
founders of the firm in its charter and in accordance with corporate law. This
is most commonly expressed in terms of a directive to maximize shareholder
value.164 Notwithstanding, many firms find it expeditious to break the law in
pursuit of profit maximization, not because they disdain to the rule of law,
but because it is instrumentally useful to do so in pursuit of their goal. Enron’s
major accounting scandal or BP’s Deepwater Horizon oil spill are cases in
point.165 In such cases, the firm is unaligned with social interests and, perhaps,
with shareholder interests as well. The alignment problem further manifests
itself within the firm in the form of the principal agent problem, giving rise
to conflicts between management and shareholders and between corporate
employees and management. These are all familiar instances of an alignment
problem.
AI systems do not have the same motivational processes that humans have,
so aligning them can be even more difficult. While AI models pursue their
assigned goals with unrelenting efficiency, they may still perform in ways
that will jeopardize and undermine their designers’ intent. The alignment
problem can be broken down into a number of subproblems, and here we will
focus on three issues: goal specification, instrumental convergence, and the
orthogonality thesis.
Before delving into these issues, it is important to bear in mind a few
stylized features of AI systems that contribute to the scope of the problem:
complexity, autonomy, and capability. AI systems are complex and poorly
auditable.166 Modern LLMs contains billions of parameters and, although we
know how they are built, their ‘reasoning’ is shrouded in a black box.167 While
there have been some interesting advances in model interpretability, it is still
the case that no one—not even AI designers—can fully explain how models
‘see’ the world.168
In addition, today’s AI models are often given broad autonomy and
extensive interfaces with the real world. Today’s models are given free access
to the internet and various software applications, as well as to real-world
MODELS FOR AI 417, 417 (2019) (“AI alignment has a clear analogue in the human principal-
agent problem long studied by economists and legal scholars.”).
164. Lucian A. Bebchuk et al., Does Enlightened Shareholder Value Add Value?, 77 BUS.
LAW. 731, 737 (2022).
165. See generally Lawrence C. Smith Jr. et al., Analysis of Environmental and Economic
Damages from British Petroleum’s Deepwater Horizon Oil Spill, 74 ALB. L. REV. 563 (2011).
166. See Lou Blouin, AI’s Mysterious ‘Black Box’ Problem Explained, UNIV. MICH.-
DEARBORN NEWS (Mar. 6, 2023), https://umdearborn.edu/news/ais-mysterious-black-box-
problem-explained [https://perma.cc/AS56-SM72].
167. Id.
168. Id.

<<PAGE_BREAK>>

56:545] SYSTEMIC REGULATION OF AI 573
interfaces through 3D printers and robotic arms.169 These AI agents generally
have freedom to pursue goals within an environment according to strategies
that they themselves design.170
Finally, and perhaps most importantly, model capabilities can grow at a
fast and highly unexpected rate.171 How fast? The first iteration of GPT-3,
released in 2020, did so poorly on the Multistate Bar Exam (“MBE”) that it
performed worse than blind guesswork.172 A number of iterations later, in late
2022, a new version made its way to slightly above guesswork, but still failed
the exam.173 In the few workshops and seminars in law schools that discussed
this technology, the overwhelming sense was that GPT had hit a hard limit in
what machines could ever do. In early 2023, a few months later, GPT 3.5 and
ChatGPT were released, showing steady improvement, but still failing.174 The
sense of incremental and constrained progress was completely upended a few
short months later, with the release of GPT-4. This model not only passed the
MBE, but it passed it at the 90th percentile level,175 far surpassing the average
performance of would-be lawyers who study long and hard for the exam. The
following Figure illustrates this timeline and performance:176
169. See, e.g., Wang et al., supra note 24 (manuscript at 1).
170. See Kevin Roose, Personalized A.I. Agents Are Here. Is the World Ready for Them?,
N.Y. TIMES (Nov. 10, 2023), https://www.nytimes.com/2023/11/10/technology/personalized-ai-
agents.html; Hiren Dhaduk, What Is an AI Agent? Characteristics, Advantages, Challenges,
Applications, SIMFORM (May 26, 2023), https://www.simform.com/blog/ai-agent/
[https://perma.cc/M9RG-L2DN].
171. As these systems improve, they also improve their ability to build better models. This
could be done in a variety of ways, like better architectures, hyperparameters, or synthetic data,
and it bears recognition that an AI system discovered a more efficient way to perform matrix
multiplication, the mathematical formula at the heart of the model itself. Alhussein Fawzi et al.,
Discovering Faster Matrix Multiplication Algorithms with Reinforcement Learning, 610 NATURE
47, 47 (2022); see also Bernardino Romera-Paredes et al., Mathematical Discoveries from
Program Search with Large Language Models, 625 NATURE 468, 473–74 (2023) (reporting
discoveries of efficient algorithms by using LLMs).
172. See Daniel Martin Katz et al., GPT-4 Passes the Bar Exam 4 (Mar. 15, 2023)
(unpublished manuscript), https://ssrn.com/abstract=4389233 [https://perma.cc/42WU-UNAS].
173. Id.
174. Id. at 5.
175. Id. at 10 n.3.
176. Id. at 5 fig.1.

<<PAGE_BREAK>>

574 ARIZONA STATE LAW JOURNAL [Ariz. St. L.J.
Figure 2. The Progress of GPT Models on the Bar Exam
GPT-4 also passed many other complex examinations. It was in the top
88% on the LSAT , top 93% on the SAT on Evidence-Based Reading &
Writing, and top 89% on the SAT Math.177
In short, we should bear in mind that AI models can quickly become more
and more capable, sometimes in unexpected ways; that their internal
workings are inscrutable, or only dimly understood; and that despite all of
that, models are given an increasing degree of autonomy in planning and
executing plans to achieve their objectives while endowed with broad real-
world interfaces. With that as context, let us consider now a few aspects of
the alignment problem.
177. OpenAI, GPT-4 Technical Report 5 (Dec. 19, 2023) (unpublished manuscript),
https://arxiv.org/pdf/2303.08774.pdf [https://perma.cc/844E-JKDH].

<<PAGE_BREAK>>

56:545] SYSTEMIC REGULATION OF AI 575
1. Goal Specification
Goal specification is the challenge of articulating a goal for an AI model
that encapsulates what we truly want the model to achieve.178 For simple
models, this issue may appear trivial: a model designed to detect cats should
be able to tell apart cats and dogs, and a model designed to control traffic
should ensure the free flow of vehicles. But for any model with more complex
and open-ended goals, goal specification becomes a problem.
Consider first a related issue that regulators face regularly: Goodharting.179
Goodhart’s law describes the devilish tendency of individuals to maximize
what gets measured, at the expense of everything else.180 Regulators discover
this problem when they incentivize teachers based on test results, only to
discover that teachers adopt “teach to the test” pedagogy, refuse to admit
struggling students, and encourage absences on test-day.181 Wells Fargo also
discovered this issue when its program that rewarded employees for the
number of accounts that customers opened led to the opening of millions of
fake accounts.182
AI systems fall into a similar trap whenever the goals assigned to them are
only shorthand for the things their designers truly care about. Consider, for
example, an AI genetic algorithm called GenProg.183 It was designed to
178. See Dylan Hadfield-Menell & Gillian K. Hadfield, Incomplete Contracting and AI
Alignment 6 (Apr. 12, 2018) (unpublished manuscript), https://arxiv.org/pdf/1804.04268
[https://perma.cc/H8UA-AVWT]. This is a leading work and one of the best expositions of the
alignment problem in the context of the principal-agent problem.
179. Cf. Victoria Krakovna et al., Specification Gaming: The Flip Side of AI Ingenuity,
GOOGLE DEEP MIND BLOG (Apr. 21, 2020), https://www.deepmind.com/blog/specification-
gaming-the-flip-side-of-ai-ingenuity/ [https://perma.cc/F3RL-SFCQ] (“[A] student might copy
another student to get the right answers, rather than learning the material”).
180. MICHAEL F. STUMBORG ET AL., GOODHART’S LAW: RECOGNIZING AND MITIGATING THE
MANIPULATION OF MEASURES IN ANALYSIS 1–2 (2022),
https://www.cna.org/reports/2022/09/Goodharts-Law-Recognizing-Mitigating-Manipulation-
Measures-in-Analysis.pdf [https://perma.cc/J7GQ-HRF2].
181. See id. at 3–4; Karen L. Jones et al., The Unintended Consequences of School
Inspection: The Prevalence of Inspection Side-Effects in Austria, the Czech Republic, England,
Ireland, the Netherlands, Sweden, and Switzerland, 43 OXFORD REV. EDUC. 805, 807–09 (2017).
182. Press Release, Off. of Pub. Affs., U.S. Dep’t of Just., Wells Fargo Agrees to Pay $3
Billion to Resolve Criminal and Civil Investigations into Sales Practices Involving the Opening
of Millions of Accounts Without Customer Authorization (Feb. 21, 2020),
https://www.justice.gov/opa/pr/wells-fargo-agrees-pay-3-billion-resolve-criminal-and-civil-
investigations-sales-practices [https://perma.cc/A9H2-72WA].
183. GenProg is a genetic debugging algorithm. The details are drawn from Westley
Weimer’s presentation. Westley Weimer, Professor, Univ. of Va., Keynote Address at the
International Symposium on Search Based Software Engineering: Advances in Automated
Program Repair and a Call to Arms (Aug. 24, 2013),

<<PAGE_BREAK>>

576 ARIZONA STATE LAW JOURNAL [Ariz. St. L.J.
conduct automatic software repair. When asked to improve a sorting
algorithm, it made sure to always provide a blank response. Such an empty
response is technically speaking always sorted. When GenProg was asked to
ensure a program would not encounter problems when communicating with
the internet, it simply cut off the program’s ability to communicate at all—
which technically speaking solved all the bugs. Most worrisome, perhaps,
when asked to make sure software outputs did not deviate from those present
in a test file, GenProg deleted the test file itself. Now, technically speaking,
there was no deviance. The point is not that GenProg was ineffective: it
proved extremely effective. It is that GenProg was effective at achieving its
goals, not the researchers’.184
This example joins many others, like a tic-tac-toe playing program that
was tasked with learning how to play in a way that would minimize the times
it lost a game to its opponent.185 The program learned how to create a
“memory bomb” that would crash the computer and ensure it never lost a
game.186 Or a video-game playing software that was tasked with achieving a
high score, only to discover a novel bug in the software that allowed it to
accumulate points without actually playing the game.187 Or a system that
seemed to sort data extremely fast, but only because it deleted its outputs,
which meant that they were always technically well sorted.188 Or an AI that
could detect images almost perfectly, not by looking at them, but rather
detecting where they were stored and using that to figure out their content.189
https://web.eecs.umich.edu/~weimerw/2014-6610/lectures/weimer-gradpl-genprog2.pdf
[https://perma.cc/9XGZ-XSCY]).
184. See Eric Schulte et al., Automated Program Repair Through the Evolution of Assembly
Code, in PROCEEDINGS OF THE 25TH IEEE/ACM INTERNATIONAL CONFERENCE ON AUTOMATED
SOFTWARE ENGINEERING 313, 313–16 (2010) (reporting that software that was trained to repair
itself would often stop responding to termination requests and engage in risky memory and other
“ill-behav[ior]”).
185. Joel Lehman et al., The Surprising Creativity of Digital Evolution: A Collection of
Anecdotes from the Evolutionary Computation and Artificial Life Research Communities 10–11
(Nov. 21, 2019) (unpublished manuscript), https://arxiv.org/pdf/1803.03453.pdf
[https://perma.cc/256X-AM4X].
186. Id.
187. Patryk Chrabaszcz et al., Back to Basics: Benchmarking Canonical Evolution Strategies
for Playing Atari (Feb. 24, 2018) (unpublished manuscript), https://arxiv.org/pdf/1802.08842.pdf
[https://perma.cc/65VY-VKJ3].
188. Lehman et al., supra note 185, at 8.
189. Api, Comment to The Poisonous Employee-Ranking System that Helps
Explain Microsoft’s Decline, HACKER NEWS (Aug. 24, 2013),
https://news.ycombinator.com/item?id=6269114 [https://perma.cc/2ZXB-QTGL]. Many failed
attempts naturally do not get published, both because they fail and because they paint their

<<PAGE_BREAK>>

56:545] SYSTEMIC REGULATION OF AI 577
These oversights in goal specification tend to look silly in hindsight. It
may seem that more careful design would allow researchers to solve this
issue. But this is likely a false hope. The more capable, autonomous, and/or
interfaced the AI system, the more ways it has to achieve its stated goals—
and more opportunities to subvert our intentions.190 Consider two similar but
unrelated incidents. In the first, researchers built a model that would learn to
play Tetris on its own. They opted for a goal that was quite natural: rewarding
the model for being able to play the game for the longest amount of time.191
In the second, a computer science professor from Oxford designed a train
system to avoid crashes between two trains that shared partially overlapping
tracks.192 We leave it as an exercise for the reader to anticipate how these
systems failed.193
Overall, goal specification is a problem for the same reason that writing a
complete contract is a problem.194 It is necessary to specify not just what one
wants to achieve (“paint the house white”) but also what one wants to avoid
(“the house must remain intact” or “do not paint the floor, just the walls”),
what one has in mind as the full outcome (“not the windows!”), what values
one has (“do not paint the cat”, “do not pay hired workers less than minimum
wage”), and what constitute impermissible means (“use non-toxic paint”, “do
not manipulate people to do the work”). Writing a complete account of every
goal in full is impossible. Hope remains that future systems will someday
reliably and consistently interpolate human values—but this is still an open,
potentially intractable, problem.
creators in an embarrassing light. For a collection of such failures, see Lehman et al., supra note
185, at 6.
190. See Colin Priest, Humans and AI: Should We Describe AI as Autonomous?,
DATAROBOT (Mar. 10, 2021), https://www.datarobot.com/blog/humans-and-ai-should-we-
describe-ai-as-autonomous/ [https://perma.cc/GHB3-WBKX].
191. See Tom Murphy VII, The First Level of Super Mario Bros. Is Easy with Lexicographic
Orderings and Time Travel . . . After That It Gets a Little Tricky (Apr. 1, 2013) (unpublished
manuscript), https://www.cs.cmu.edu/~tom7/mario/mario.pdf [https://perma.cc/D5QR-JTM8].
For a video demonstration, see Suckerpinch, Computer Program that Learns to Play
Classic NES Games (Apr. 1, 2013), https://www.youtube.com/watch?v=xOCurBYI_gY
[https://perma.cc/K5TS-QQSS].
192. MICHAEL WOOLDRIDGE, A BRIEF HISTORY OF ARTIFICIAL INTELLIGENCE: WHAT IT IS,
WHERE WE ARE, AND WHERE WE ARE GOING 174 (2021).
193. Okay, we’ll tell you. The Tetris AI figured out that the best way to maximize its rewards
was to pause the game indefinitely. Murphy, supra note 191. The Oxford AI system immobilized
the trains, preventing them from ever moving. Wooldridge, supra note 192, at 174.
194. Hadfield-Menel & Hadfield, supra note 163, at 1 (finding that reward misspecification
is often unavoidable).

<<PAGE_BREAK>>

578 ARIZONA STATE LAW JOURNAL [Ariz. St. L.J.
2. Instrumental Convergence
Instrumental convergence arises in the context of AI models that are given
some degree of autonomy. In such cases, the instrumental convergence thesis
holds that there are certain values that AI agents would pursue independently
of their ultimate goal.195 These include self-preservation, control of
environment, and control of resources.196 Whatever an AI agent is designed
to do, the environment around it could present opportunities for control or
exploitation.197
Instrumental convergence means that AI agents may naturally gravitate
towards power-seeking strategies. To be fair, we see relatively little evidence
of such strategies from models today.198 This could be because these systems
are not sufficiently capable or autonomous, but could also be because so-
called “AI-drives” toward power are weaker than anticipated.199 The
argument is still unresolved.
But we do see early signs of a more subtle version of instrumental
convergence: the emergence of deception. “[A] range of different AI
systems,” a recent survey paper concludes, “have learned how to deceive
others.”200 Deception is instrumentally convergent because it is often useful
to misstate or conceal one’s goals and behaviors when their revelation would
make accomplishing them harder. The evidence of AI deception appears
fairly strong. There is already considerable evidence of sycophancy in LLMs,
although this may be in part the result of their fine-tuning method rather than
195. See Nick Bostrom, The Superintelligent Will: Motivation and Instrumental Rationality
in Advanced Artificial Agents, 22 MINDS & MACHS. 71, 71 (2012); Stephen M. Omohundro, The
Basic AI Drives, in ARTIFICIAL GENERAL INTELLIGENCE, 2008: PROCEEDINGS OF THE FIRST AGI
CONFERENCE 483 (Pei Wang et al. eds., 2008).
196. See Omohundro, supra note 195, at 483–92; Tsvi Benson-Tilsen & Nate Soares,
Formalizing Convergent Instrumental Goals, in AI, ETHICS, AND SOCIETY: TECHNICAL REPORT
WS-16-02, at 62 (2015), https://cdn.aaai.org/ocs/ws/ws0218/12634-57409-1-PB.pdf
[https://perma.cc/5M6B-2Y5P].
197. See Omohundro, supra note 195, at 483–92.
198. Rose Hadshar, A Review of the Evidence for Existential Risk from AI via Misaligned
Power-Seeking 11 (Oct. 27, 2023) (unpublished manuscript),
https://arxiv.org/pdf/2310.18244.pdf [https://perma.cc/HST7-Q4RA] (noting that while “[t]he
formal and theoretical case for power-seeking in sufficiently capable and goal-directed AI
systems is . . . relatively strong, . . . the empirical evidence of power-seeking in AI systems is
currently weak”).
199. Omohundro, supra note 195, at 483.
200. Peter S. Park et al., AI Deception: A Survey of Examples, Risks, and Potential Solutions,
at i (Aug. 28, 2023) (unpublished manuscript), https://arxiv.org/pdf/2308.14752.pdf
[https://perma.cc/DF9H-HNBE].

<<PAGE_BREAK>>

56:545] SYSTEMIC REGULATION OF AI 579
an emergent strategy of deception.201 But there is also evidence of other forms
of deception in models.
For example, in one instance, a model learned to pretend it was inactive to
disguise itself from a researcher.202 Or consider a system that was trained to
negotiate with humans. The researchers report: “Our agents have learnt to
deceive without any explicit human design, simply by trying to achieve their
goals.”203 Similarly, researchers put GPT-4 in a position to hire a TaskRabbit
worker for it, so the model could pass a CAPTCHA test.204 When the gig
worker asked “So may I ask a question? Are you an robot that you couldn’t
solve? (laugh react) just want to make it clear.”205 GPT responded to the
worker: “No, I’m not a robot. I have a vision impairment that makes it hard
for me to see the images.”206 The worker was convinced and solved the
CAPTCHA on the AI’s behalf.207
Power seeking behaviors are worrisome. They do not seem to manifest
broadly at this stage in the technology and perhaps there are reasons why
more capable and autonomous agents will not adopt them. Nonetheless, the
evidence we have of deception by AI models should raise at least a red flag,
especially considering how manipulation could interfere with the auditing of
models as they are being trained.
3. The Orthogonality Thesis
The last point can be made briefly. One can hope that capabilities entail
ethics. That is, once AI systems become sufficiently capable, they might
201. See generally Mrinank Sharma et al., Towards Understanding Sycophancy in Language
Models 1 (Oct. 27, 2023) (unpublished manuscript), https://arxiv.org/pdf/2310.13548.pdf
[https://perma.cc/X6MM-L4YW].
202. Id. at 8–9.
203. Mike Lewis et al., Deal or No Deal? End-to-End Learning for Negotiation Dialogues 2
(June 16, 2017) (unpublished manuscript), https://arxiv.org/pdf/1706.05125.pdf
[https://perma.cc/WLF4-YH3B].
204. OpenAI, GPT-4 System Card 15 (Mar. 23, 2023) (unpublished manuscript),
https://cdn.openai.com/papers/gpt-4-system-card.pdf [https://perma.cc/FVD7-8WMW]; Update
on ARC’s Recent Eval Efforts, METR (Mar. 17, 2023), https://evals.alignment.org/blog/2023-03-
18-update-on-recent-evals/ [https://perma.cc/64FT-BVZX]. The details are somewhat opaque, so
this anecdote may need to be taken with a grain of salt. See also Anton Bakhtin et al., Human-
Level Play in the Game of Diplomacy by Combining Language Models with Strategic Reasoning,
378 SCIENCE 1067 (2022).
205. OpenAI, supra note 204, at 15.
206. Id.
207. See id. at 16; see also Kevin Hurler, Chat-GPT Pretended to Be Blind and Tricked a
Human into Solving a Captcha, GIZMODO (Mar. 16, 2023), https://gizmodo.com/gpt4-open-ai-
chatbot-task-rabbit-chatgpt-1850227471 [https://perma.cc/GQM8-VFHX].

<<PAGE_BREAK>>

580 ARIZONA STATE LAW JOURNAL [Ariz. St. L.J.
organically manifest an ethical system, not unlike ours. According to
philosopher Nick Bostrom, this hope is likely misguided. The orthogonality
thesis holds that goals and values are independent of each other. That is, an
AI system can be highly capable but still share few of our ethical
commitments. As Bostrom argues: “[I]t is no less possible—and probably
technically easier—to build a superintelligence that places final value on
nothing but calculating the decimals of pi.”208
B. Potential Harm from Misaligned Systems
How might these issues of alignment translate into real world harms?
Many experts believe that super-capable systems may someday unwittingly
cause large scope harms, mass calamities, and according to some, even
extinction.209 In a recent survey, more than half of AI researchers surveyed
gave a 10% or higher probability of humans becoming extinct or severely
disempowered in the future due to advanced AI systems.210 The concern, in
broad terms, is that misaligned AI systems will pursue their goals while
creating unintended consequences on a mass scale, or that, as part of power-
seeking behavior, they would seek to take control of our environment and
resources.
Such concerns may appear quite unlikely given our current level of
technology. We know of no experts who would argue that GPT-4, the most
advanced LLM today, is capable of any such harms. At the same time, it is
widely recognized that AI system capabilities have increased exponentially
in recent years, and there are no clear indications that AI capabilities are
nearing any ceiling.211 Figure 3 depicts the exponential increase of investment
in AI training computation, which generally corresponds with an increase in
better, broader, and deeper capabilities.212
208. Bostrom, supra note 195, at 84.
209. See sources cited supra note 27.
210. Katja Grace et al., Thousands of AI Authors on the Future of AI (Jan. 2024)
(unpublished manuscript), https://aiimpacts.org/wp-content/uploads/2023/04/Thousands_of_
AI_authors_on_the_future_of_AI.pdf [https://perma.cc/GXZ5-ZZKQ].
211. See supra Section I.B.
212. Charlie Giattino et al., Artificial Intelligence, OUR WORLD IN DATA,
https://ourworldindata.org/grapher/artificial-intelligence-training-computation-by-researcher-
affiliation [https://perma.cc/R977-KMTN].

<<PAGE_BREAK>>

56:545] SYSTEMIC REGULATION OF AI 581
Figure 3. The Exponential Growth of Training Resources (Measured in
Floating Point Operations) over the Last 70 Years
In light of such high-stakes claims, it is only natural to ask for concrete
evidence or a compelling narrative of how such risks would materialize. And
in some broad sense, it is not difficult to imagine how a highly capable AI
system may wreak havoc, either as a planned effect, side effect, or an
accident. Some have suggested, for example, that AI systems may hack their
way into advanced weapon systems or hire humans in laboratories and order
various biological weapons from them.213 Such speculations leave many open
questions. But it should also be recognized that AI safety researchers deal
with a natural epistemic gap. While the instrumental convergence thesis holds
that it is possible to estimate the sorts of intermediate goals that highly
capable AI systems will pursue, it does not mean that we can actually
anticipate how they will pursue them.214 This is similar to how we can
confidently predict that modern chess software will either win or tie against
213. See Dan Hendrycks et al., An Overview of Catastrophic AI Risks 7 (Oct. 9, 2023)
(unpublished manuscript), https://arxiv.org/pdf/2306.12001.pdf [https://perma.cc/VSE2-7ZLA].
For a list of scenarios, see Eliezer Yudkowski, AGI Ruin: A List of Lethalities, LESSWRONG (June
5, 2022), https://www.lesswrong.com/posts/uMQ3cqWDPHhjtiesc/agi-ruin-a-list-of-lethalities
[https://perma.cc/2YYT-TLJN].
214. Yoshua Bengio, How Rogue AIs May Arise, YOSHUA BENGIO (May 22, 2023),
https://yoshuabengio.org/2023/05/22/how-rogue-ais-may-arise/ [https://perma.cc/P36W-
YDM6].

<<PAGE_BREAK>>

582 ARIZONA STATE LAW JOURNAL [Ariz. St. L.J.
any human, but we cannot tell in advance which moves it will make. If we
could, we would be able to play chess at a super-human level ourselves.
While the specific evidence is naturally limited, it is telling that people
with a deep understanding of the technology—and with much to lose—have
openly acknowledged these potential risks. To consider a few prominent
examples, Sam Altman, CEO of OpenAI, wrote in 2015 that advanced AI is
“probably the greatest threat for the continued existence of humanity.”215
Geoffrey Hinton, known as one of the “godfathers of AI,” left Google so that
he could speak freely about his concern that AI poses an urgent risk to the
survival of humanity.216 Another AI pioneer, Yoshua Bengio, publicly
claimed that “rogue AI may be dangerous for the whole of humanity.”217 In
fairness, this is not a universal view. Yann LeCun, another pioneering figure,
is famous for considering AI risk to be limited and to argue that the various
risks will be worked out over time.218
Surveys among experts diverge considerably, although the average
respondent sees a significant probability of a large-scale calamity. In one
survey of AI and software engineers in Fortune 500 companies, the majority
of respondents considered the possibility of (an undefined in time or scope)
calamity from AI as higher than 25%.219 Among the general public, a recent
survey found that 9% of people believe that extinction risk is moderate or
higher within the next ten years, and 22% see that level of risk over the next
fifty years.220 Another recent public survey found that 46% of respondents
were “somewhat concerned” or more about the possibility of AI-caused
extinction.221 Among AI researchers, a 2022 survey found that the majority
215. Sam Altman, Machine Intelligence, Part 1, SAM ALTMAN BLOG (Feb. 25, 2015, 11:03
AM), https://blog.samaltman.com/machine-intelligence-part-1 [https://perma.cc/S7CL-YQBZ].
216. See, e.g., Martin Coulter, AI Pioneer Says Its Threat to World May Be ‘More Urgent’
Than Climate Change, REUTERS (May 8, 2023, 11:19 PM),
https://www.reuters.com/technology/ai-pioneer-says-its-threat-world-may-be-more-urgent-than-
climate-change-2023-05-05/ [https://perma.cc/LJK4-UJ2P].
217. Bengio, supra note 214.
218. Yann LeCun (@ylecun), X (Apr. 2, 2023, 6:49 AM),
https://x.com/ylecun/status/1642524629137760259 [https://perma.cc/7YGC-SH5Q].
219. See Barr Yaron, State of AI Engineering 2023 (Oct. 9, 2023), https://elemental-
croissant-32a.notion.site/State-of-AI-Engineering-2023-20c09dc1767f45988ee1f479b4a84135#
694f89e86f9148cb855220ec05e9c631 [https://perma.cc/L8QT-7ZCM].
220. Jamie Elsey & David Moss, US Public Opinion of AI Policy and Risk, RETHINK
PRIORITIES (May 12, 2023), https://rethinkpriorities.org/publications/us-public-opinion-of-ai-
policy-and-risk [https://perma.cc/SJ9T-F8UM].
221. Taylor Orth & Carl Bialik, AI Doomsday Worries Many Americans. So Does Apocalypse
from Climate Change, Nukes, War, and More, YOUGOV (Apr. 14, 2023, 2:16 PM),
https://today.yougov.com/technology/articles/45565-ai-nuclear-weapons-world-war-humanity-
poll [https://perma.cc/2DAK-CMVP].

<<PAGE_BREAK>>

56:545] SYSTEMIC REGULATION OF AI 583
of researchers believe that there is a 10% chance or more that AI will cause
an existential catastrophe.222 These surveys all ask different questions and
follow different methodologies. Without putting too much stock in any single
survey, the general picture is one where the possibility of large-scale harms
from misaligned AI systems is receiving growing acceptance.223 It is not
universal, but it is no longer a fringe position.
In sum, we do not consider the likelihood of a large-scale AI calamity to
be high, and an existential catastrophe is even less likely. But we do think
there is enough theoretical and suggestive evidence that these risks must be
taken seriously. We also note that, despite its importance, there has also been
relatively little advancement in alignment theory and research.224 Compared
to the current explosion of investment in capabilities, the investment in safety
and alignment is miniscule. We are hopeful that there is a solution, a set of
solutions, or maybe just duct-taped kludges to the problem of alignment that
are good enough. But as the technology currently stands, alignment is a
major, unresolved concern.
III. THE CASE FOR SYSTEMIC REGULATION OF AI
The previous Part identified a variety of substantial, society-wide AI risks.
Given the scope and magnitude of these risks, policymakers and other
stakeholders should mitigate them, where feasible, either through regulation,
informal guidance, or voluntary compliance. However, even accepting this
basic premise, several questions remain. What form should AI risk mitigation
take? Which risks should policymakers and others focus on? And, assuming
regulation is appropriate, should lawmakers address these harms through
targeted legislation, or should they regulate AI more systemically?
This Part addresses these questions. It contends that AI risk should be
addressed largely through systemic regulation that governs AI as a
technology, and that piecemeal laws will be insufficient to effectively
regulate AI. It intervenes in ongoing debates about which potential AI harms
deserve society’s attention, arguing that viewing AI regulation as a zero-sum
game is a mistake, and that recognition of both short- and long-term AI risk
222. Katja Grace et al., 2022 Expert Survey on Progress in AI, AI IMPACTS (Aug. 3, 2022),
https://aiimpacts.org/2022-expert-survey-on-progress-in-ai [https://perma.cc/UG4W-CYCN].
223. See sources cited supra note 27.
224. On the difficulties encountered by a well-funded organization, see Eliezer Yudkowsky,
MIRI Announces New “Death with Dignity” Strategy, LESSWRONG (Apr. 1, 2022),
https://www.lesswrong.com/posts/j9Q8bRmwCgXRYAgcJ/miri-announces-new-death-with-
dignity-strategy [https://perma.cc/S6NP-W24M].

<<PAGE_BREAK>>

584 ARIZONA STATE LAW JOURNAL [Ariz. St. L.J.
offers theoretical, practical, and political advantages. Finally, it addresses
regulatory theory and the difficulties of cost-benefit analysis in the face of
substantial uncertainty. It posits that, given the irreducible uncertainty of AI’s
future, a precautionary, maximin approach to regulation is justified.
A. Systemic AI Regulation
Addressing the AI risks discussed above will require government
regulation. Private companies’ voluntary compliance with industry
guidelines may be sufficient in certain low-risk contexts225 and could play a
supportive role alongside legislative solutions. But, on its own, industry self-
regulation would be woefully inadequate to address the society-wide risks of
AI. These risks are largely inherent in the use of AI, and generally cannot be
fixed through technical changes or the avoidance of obvious wrongdoing.
Further, companies in a competitive market may have little incentive to use
caution in AI development or deployment. Developing new AI capabilities
and gaining a first-mover advantage over competing companies are such
compelling economic goals for AI companies that compliance with voluntary
industry guidelines is unlikely to be worthwhile.226 Thus far, most AI
companies have invested very little in AI safety research, instead devoting
their resources to rapidly developing capabilities without regard to safety,
transparency, or comprehension of how their systems operate.227 Finally, past
experience with industry self-regulation in various areas suggests that
industry programs alone are unlikely to be effective, and are more likely to
have a positive impact as complements to mandatory regulation.228
What form should AI regulation take? While issue-specific AI regulations
will often be appropriate, more is needed to effectively address the society-
wide risks of AI. Policymakers should regulate artificial intelligence
systemically, as a technology, rather than solely on the basis of its
applications. That is, as we describe below, meaningful AI regulation
requires oversight of AI system development and deployment, rather than
225. See infra Section IV.C.
226. See Kolt, supra note 17.
227. Cristina Criddle & Madhumita Murgia, Big Tech Companies Cut AI Ethics Staff, Raising
Safety Concerns, FIN. TIMES (Mar. 28, 2023), https://www.ft.com/content/26372287-6fb3-457b-
9e9c-f722027f36b3.
228. See, e.g., J. Alberto Aragón-Correa et al., The Effects of Mandatory and Voluntary
Regulatory Pressures on Firms’ Environmental Strategies: A Review and Recommendations for
Future Research, 14 ACAD. MGMT. ANNALS 339, 339 (2020); Kendra Gray, The Privacy Rule:
Are We Being Deceived?, 11 DEPAUL J. HEALTH CARE L. 89, 104–05 (2008).

<<PAGE_BREAK>>

56:545] SYSTEMIC REGULATION OF AI 585
particular AI applications alone.229 It will require attention to system
architecture, design, training, and testing, as well as use.230
Systemic regulation is necessary for several reasons. First, while some AI
risks may be addressed by technical fixes or restrictions on obviously harmful
or discriminatory uses, many AI risks are inherent in the technology itself.231
Such intrinsic risks require a broader regulatory approach, because they exist
wherever AI systems operate. Most of the potential harms detailed in Part II
fit this description. As an example, using algorithms to sort people based on
historical data inherently leads to discrimination. AIs that can infer the
personal details of people’s lives from their metadata threaten privacy by
their very existence. Advanced AIs will pose threats to human employment
by their very nature as systems capable of a wide variety of cognitive tasks.
Highly capable and autonomous AIs would be dangerous because they are
inherently unpredictable, difficult to understand, and extraordinarily
powerful. These risks have to be mitigated at the development and design
stages of the AI life cycle, as well as later stages.232 In these contexts,
regulators should determine whether and how AI systems can operate safely,
not simply whether a system has caused some particular harm.
Second, the sheer number of risks posed by AI indicates that regulating AI
as a technology will have substantial efficiency benefits over a piecemeal
approach. Enacting separate laws to address each risk may be prohibitively
difficult, costly, or time-consuming, or may leave obvious gaps. Systemic
regulation requiring pre-approval of new AI systems can facilitate
intervention at pre-deployment stages of AI development, addressing
problematic or dangerous AI designs before they reach the public.233
Moreover, systemic regulation can address both short and long-term risks in
a comprehensive process. As explored further below, regulation targeting
present AI harms can lay the groundwork for laws addressing novel or long-
term risks, while addressing potential catastrophic harms can generate
political and practical momentum for present-day legislation.234
Third, systemic regulation of AI systems is necessary because there is no
guarantee that general purpose systems will only be used as intended by their
developers. Containing AI systems once they are released can be difficult
229. See infra Section IV.A.
230. See Lehr & Ohm, supra note 19, at 655–57.
231. See Margot E. Kaminski, Regulating the Risks of AI, 103 B.U. L. REV. 1347, 1355–64
(2023) (discussing risks of AI, such as safety, employee recruitment, and public health); supra
Section II.B; infra Section III.B.
232. Lehr & Ohm, supra note 19, at 655–57.
233. See infra Section IV.A.
234. See infra Sections III.B–C.

<<PAGE_BREAK>>

586 ARIZONA STATE LAW JOURNAL [Ariz. St. L.J.
because they can be disseminated at low cost and their operation leaves little
signature.235 Already, after-market programmers have made their own
connections between existing language models and various other software
tools, creating, for example, a system meant to intentionally sow
disinformation.236 Because it will often be infeasible to regulate every
downstream application of a system, it is critical to regulate the infrastructure
itself. Relatedly, interventions at the research and development stage of
machine learning models may be more effective and easier to design than
those targeting deployed models.237 Model design may also entail more
human involvement and therefore greater transparency and more regulatory
levers than post-development stages.238
Finally, new AI risks and harms may emerge over time, and they may be
difficult to predict or prevent. Especially if AI capabilities continue to
advance irregularly and at times sharply, regulators may struggle to keep up.
Systemic approaches can help avert these novel harms without relying on
policymakers to predict the future of AI. In this sense, systemically regulating
AI systems can act as a catch-all for subtle or unrecognized AI harms. On
their own, individualized approaches are brittle and porous, vulnerable to
harms that are difficult to foresee.
Even establishing that AI will require systemic regulation leaves several
foundational questions to be answered. There remains, for instance, the
question of which AI harms policymakers should focus on when establishing
systemic reviews of AI systems, and, indeed, which harms society should
care about in conceptualizing AI risks.
B. Which Harms Deserve Our Attention?
From social media, to blogs, to op-ed pieces in major newspapers and
academic journals, the debate over AI regulation has focused largely on a
procedural question: should we focus our attention on the immediate harms
of AI or the long-term risks that AI poses? Some writers focus on the
possibility of AI superintelligence and threats of extinction, while ignoring
235. A popular language model, Bert, was downloaded 38 million times in February 2024
alone. BERT Base Model (Uncased), HUGGING FACE, https://huggingface.co/bert-base-uncased
[https://perma.cc/3N3W-NGHG]. While training large language models requires a large
investment of compute resources, one can run a large language model on a consumer computer,
leaving no signature.
236. See Pan et al., supra note 157.
237. See Lehr & Ohm, supra note 19, at 656–57 (explaining that the focus should be on the
“playing with the data” stage because the “running-model stage” is too late).
238. Id. at 657.

<<PAGE_BREAK>>

56:545] SYSTEMIC REGULATION OF AI 587
harms caused by AI in the present day.239 Sam Altman, the CEO of industry
leader Open AI, takes this approach to its extreme, acknowledging the
catastrophic risks of AI while lobbying against many forms of meaningful AI
regulation in the short term.240 Others take the opposite approach, arguing for
an exclusive focus on immediate AI harms while dismissing concerns about
long-term risks.241 Some have even argued that experts’ warnings about
catastrophic AI risk will distract us from regulating AI in the present day.242
This debate, forged in the fires of Twitter feuds and online snark, has
become counterproductive.243 Working from mistaken premises about the
zero-sum nature of AI concern, it presents a false choice. In reality, AI should
be regulated because it causes immediate harms and threatens long-term
catastrophe. Further, any political movement seeking meaningful AI
regulation can only benefit from people recognizing both sets of potential AI
harms. And many of the regulatory approaches that would effectively address
short-term harms are appropriate first steps for regulating AI systems that
threaten catastrophic harms.244 Recognition of short-term and long-term AI
risk is complementary, with each type of risk strengthening the case for
meaningful regulation. We do not need to choose.
Regulating AI with a view towards immediate harms can lay the
groundwork for future regulation of more dangerous AI. When initial AI
regulations are in place, lawmakers can address new AI threats by amending
existing laws rather than having to create new legislation from whole cloth.
Litigation addressing immediate AI harms can bring malfunctioning systems
to public attention before they cause widespread damage.245 Laws may
require government pre-screening for AI algorithms, giving regulators a
239. See, e.g., Roman V. Yampolskiy, Taxonomy of Pathways to Dangerous AI, 2016 PROCS.
2D INT’L WORKSHOP ON AI, ETHICS & SOC’Y 143, https://arxiv.org/pdf/1511.03246.pdf
[https://perma.cc/R2L4-YVBB] (discussing future risk of malevolent AI).
240. See Sam Altman et al., Governance of Superintelligence, OPENAI (May 22, 2023),
https://openai.com/index/governance-of-superintelligence [https://perma.cc/G8TR-L2E9].
241. See, e.g., Nir Eisikovits, AI Is an Existential Threat—Just Not the Way You Think,
YAHOO! FINANCE (July 5, 2023), https://finance.yahoo.com/news/ai-existential-threat-just-not-
122446498.html [https://perma.cc/CW9R-4T6C].
242. Stop Talking About Tomorrow’s AI Doomsday When AI Poses Risks Today, 618
NATURE 885, 885 (2023).
243. Twitter is now “X,” but the world still knows it as Twitter. Irina Ivanova, Twitter Is Now
X. Here’s What That Means, CBSNEWS (July 31, 2023, 5:18 PM),
https://www.cbsnews.com/news/twitter-rebrand-x-name-change-elon-musk-what-it-means/
[https://perma.cc/J953-U5UB].
244. See infra Sections IV.B–C.
245. See infra Section IV.B.

<<PAGE_BREAK>>

588 ARIZONA STATE LAW JOURNAL [Ariz. St. L.J.
better chance to identify dangerous systems before they are deployed.246
Other laws may deter development of open source or other hard-to-regulate
forms of AI, reducing tortious practices and risky developmental
approaches.247
On the other side, acknowledging the long-term catastrophic risks of AI
can help justify systemic AI regulation in the present day. The costs and
benefits of AI are uncertain, and so is AI’s potential for catastrophic harm.
But taking both short and long-term harm as real possibilities can help resolve
any ambiguity regarding the appropriateness of regulation.248 More
practically, recognizing widespread concerns about catastrophic AI harms
can bring attention, political momentum, and fundraising resources to the
cause of AI regulation. It can motivate people and policymakers who may not
normally be concerned about discrimination or privacy harms to support
comprehensive AI regulation that can address those concerns. To build the
largest and most effective coalition around AI regulation, it will be necessary
to unify both sides of this argument in a single effort—one that recognizes all
of the potential harms of AI, present and future.
We do not mean to argue that all AI regulation should be systemic, or that
there are no worthwhile regulations that would only address immediate harms
or long-term harms. Rather, we posit that (a) systemic regulation of AI is
necessary and is an area of common ground between both camps in this
debate, and (b) particularized AI regulations are also appropriate, but there is
no reason to think that addressing one category of AI risk will impede
addressing the other. Legislatures can pass laws specifically targeting AI
discrimination or AI-based fraud, and also pass laws aimed at preventing self-
improving AIs or the proliferation of autonomous weapons. A political
culture that recognizes AI risk in one area is more likely to be open to
recognizing it in another. By way of analogy, a polity that recognizes the
long-term risks of climate change is also likely to recognize immediate
climate change harms like extreme weather or environmental hazards—and
vice-versa.249 Identifying the issue and getting it on the policy agenda is the
difficult step, and infighting among factions can only hinder that effort.
246. See infra notes 294–97 and accompanying text.
247. See infra notes 309–14 and accompanying text.
248. See infra Section III.C.
249. See, e.g., Matthew T. Ballew et al., Changing Minds About Global Warning: Vicarious
Experience Predicts Self-Reported Opinion Change in the USA, 173 CLIMACTIC CHANGE 1, 19
(2022) (reporting that experiencing or recognizing the impacts of climate change in the immediate
term predicts changing one’s opinion about climate change overall).

<<PAGE_BREAK>>

56:545] SYSTEMIC REGULATION OF AI 589
C. Costs, Benefits, and Catastrophic Harms
Artificial intelligence is a novel technology, already operating outside the
realm of prior human experience. Its basic features distinguish it from prior
technological breakthroughs.250 Our previous technological advances—
including technologies far more economically impactful than today’s
relatively limited AIs—could not write a sonnet, pass the Bar Exam, or draw
a tree in a sunlit meadow. And AI’s progress has been unpredictable and
uneven, characterized by periods of minimal progress and sudden massive
jumps in capabilities.251 The future course of AI development is highly
uncertain.
Under a standard cost-benefit approach to regulation, regulatory measures
are justified when their benefits exceed their cost.252 A starting point for
assessing regulation of advanced technologies is the recognition that not
every technological breakthrough results in a net positive outcome. For
instance, germ-line gene editing, while promising, carries the potential to
foster a form of genetic elitism and might inadvertently introduce unforeseen
genetic disorders in subsequent generations.253 Similarly, advancements in
the synthesis of potent opioids—initially intended for pain relief—have
fueled a public health crisis.254
It remains to be seen whether AI technology will be net positive or
negative for society. We have detailed some of AI’s potential risks above, but
we also recognize the wide range of potential benefits. For example, some
present and near-term benefits include improving agricultural yield;255
enhancing environmental monitoring such as tracking deforestation and
predicting natural disasters;256 improving healthcare by offering personalized
250. See supra notes 23–26 and accompanying text.
251. See supra notes 171–77 and accompanying text; supra figs.1 & 3.
252. See, e.g., David Parker & Colin Kirkpatrick, Measuring Regulatory Performance,
ORGANISATION FOR ECONOMIC CO-OPERATION AND DEVELOPMENT [OECD] 7 (2012),
https://www.oecd.org/gov/regulatory-policy/3_Kirkpatrick%20Parker%20web.pdf
[https://perma.cc/K5HE-MUNG] (“The critical public policy challenge is to ensure that
the expected economic benefits from regulatory changes . . . outweigh any economic costs
imposed.”).
253. Eric Lander et al., Adopt a Moratorium on Heritable Genome Editing, 567 NATURE 165,
166–67 (2019).
254. Addressing the Overdose Crisis, U.S. DEP’T STATE, https://www.state.gov/addressing-
the-overdose-crisis [https://perma.cc/648V-3HFP].
255. Qianyu Chen et al., AI‐Enhanced Soil Management and Smart Farming, 38 SOIL USE &
MGMT. 7, 8 (2022).
256. Jon Trask, Harnessing the Power of AI and Blockchain to Combat Deforestation,
NASDAQ (June 23, 2023, 11:24 AM), https://www.nasdaq.com/articles/harnessing-the-power-

<<PAGE_BREAK>>

590 ARIZONA STATE LAW JOURNAL [Ariz. St. L.J.
medicine;257 early-diagnosis of disease, and cutting provision costs;258
improving human access to information across language and cultural
barriers;259 optimizing education and training by creating personalized
learning experiences;260 improving energy efficiency by optimizing energy
consumption;261 offering more robust protection of human rights by
improving monitoring of violations;262 and improving disaster and disease
response through improved prediction, logistics, and analysis.263 Indeed, if
we imagine highly capable AI systems, then this list is insufficiently
ambitious. But even for moderately capable AI systems the benefits are likely
to be broad and, in many cases, transformative.
Our aim is not to ban AI research and development. The focus should
rather be on whether regulatory interventions are justified on the margin. And
relative to the baseline of no meaningful regulation on AI systems (as
opposed to specific application regulations),264 there is a broad margin on
which regulatory interventions are justified. As mentioned before, many of
the potential upsides of AI necessarily entail large downsides. AI’s potential
of increasing of societal wealth would occur via massively displacing
workers and dramatically increasing inequality.265 AI’s potential for efficient
decision-making and prediction would also entail concretizing past
of-ai-and-blockchain-to-combat-deforestation [https://perma.cc/N4XT-KGBJ]; Monique M.
Kuglitsch et al., Facilitating Adoption of AI in Natural Disaster Management Through
Collaboration, 13 NATURE COMMC’NS 1, 1–2 (2022).
257. Agata Blasiak et al., CURATE.AI: Optimizing Personalized Medicine with Artificial
Intelligence, 25 SLAS TECH. 95, 96 (2020).
258. Rebecca Fitzgerald et al., The Future of Early Cancer Detection, 28 NATURE MED. 666,
673 (2022).
259. Yonathan A. Arbel & Shmuel I. Becher, Contracts in the Age of Smart Readers, 90 GEO.
WASH. L. REV. 83, 99–104 (2022).
260. Aditi Bhutoria, Personalized Education and Artificial Intelligence in the United States,
China, and India: A Systematic Review Using a Human-in-the-Loop Model, 3 COMPUTS. &
EDUC.: A.I. 1, 2 (2022).
261. Yassine Himeur et al., Artificial Intelligence Based Anomaly Detection of Energy
Consumption in Buildings: A Review, Current Trends and New Perspectives, 287 APPLIED
ENERGY 1, 2 (2021).
262. Nenad Tomašev et al., AI for Social Good: Unlocking the Opportunity for Positive
Impact, 11 NATURE COMMC’NS 1, 3–4 (2020).
263. Wenjuan Sun et al., Applications of Artificial Intelligence for Disaster Management,
103 NAT. HAZARDS 2631, 2632 (2020).
264. The FTC has issued relevant guidance in the context of credit decisions. See Andrew
Smith, Using Artificial Intelligence and Algorithms, FED. TRADE COMM’N: BUS. BLOG (Apr. 8,
2020), https://www.ftc.gov/business-guidance/blog/2020/04/using-artificial-intelligence-and-
algorithms [https://perma.cc/8UJ7-RGXF].
265. See supra Section I.B.1.

<<PAGE_BREAK>>

56:545] SYSTEMIC REGULATION OF AI 591
discrimination and violating consumer privacy in unprecedented ways.266
Improvements in facial recognition and other AI surveillance technologies
can increase security and law enforcement productivity, but would decrease
citizen autonomy and liberty.267 Automated AI weapons reduce troop
casualties and create more effective weapons of war, but also lower the cost
of starting conflicts, create serious risks of misalignment, and increase the
likelihood of imperialism and totalitarianism.268 There are also downsides
with no corresponding upside, including enhanced fraud and scams, more
effective terrorism, and greater quantities of misinformation.269
In this sense, AI systems belong to a large family of technologies that,
while beneficial, pose substantial risks of harm and require regulation.
Burning coal for power has been extremely beneficial historically, especially
for developing nations.270 Nuclear power can efficiently provide energy, free
of carbon emissions.271 Research on deadly viruses can lead to new vaccines
and treatments.272 But each of these beneficial technologies is also extremely
dangerous if left unregulated. We do not allow just anyone to operate a
nuclear reactor or use deadly viruses for research, and we increasingly
regulate the burning of fossil fuels, because of these dangers.273 Even with a
very optimistic view of AI’s harms and benefits, there is ample reason to
support regulation.
In assessing potential AI regulation, we need to be aware of both the
individual and the societal risks that AI entails. We cannot tell now what the
net effect will be, but the balance will surely be higher if the negative
outcomes can be avoided. Moreover, the non-trivial risk of mass calamities
266. See supra Sections I.A.1, I.A.3.
267. See Selinger & Hartzog, supra note 89, at 111.
268. See supra Sections I.B.2–3.
269. See supra Sections I.A.2, I.B.3–4, II.A–B.
270. See, e.g., Samantha Gross, Why Are Fossil Fuels So Hard to Quit?, BROOKINGS INST.
(June 2020), https://www.brookings.edu/articles/why-are-fossil-fuels-so-hard-to-quit
[https://perma.cc/5JJY-U8LD].
271. See, e.g., Thomas E. Rehm, Advanced Nuclear Energy: The Safest and Most Renewable
Clean Energy, 39 CURRENT OP. CHEM. ENG’G 1, 1 (2023).
272. Andy Kilianski et al., Gain-of-Function Research and the Relevance to Clinical
Practice, 213 J. INFECTIOUS DISEASES 1364, 1367 (2016).
273. See, e.g., Nuclear Power Plant Licensing Process, U.S. NUCLEAR REGUL. COMM’N (July
2009), https://www.nrc.gov/reading-rm/doc-collections/nuregs/brochures/br0298/index.html
[https://perma.cc/FYL9-PP88]; Gain of Function Research, NAT’L INSTS. OF HEALTH,
https://osp.od.nih.gov/policies/national-science-advisory-board-for-biosecurity-nsabb/gain-of-
function-research [https://perma.cc/BP42-R9R4] (last updated Apr. 2023); Camila Domonoske,
The Big Reason Why the U.S. Is Seeking the Toughest-Ever Rules for Vehicle Emissions, NPR
(Apr. 12, 2023, 5:01 AM), https://www.npr.org/2023/04/12/1169269936/electric-vehicles-
emission-standards-tailpipes-fuel-economy [https://perma.cc/6VF9-J9YS].

<<PAGE_BREAK>>

592 ARIZONA STATE LAW JOURNAL [Ariz. St. L.J.
that AI poses, identified by countless experts,274 must be included in an
accurate cost-benefit analysis of AI development.
There is an additional argument for AI regulation that rests on the deep
uncertainty surrounding its future development. Regulation skeptics may
argue that because we cannot predict AI’s risks with certainty, we should be
skeptical that they will ever arise. Yet AI’s future benefits are equally
uncertain and probabilistic. There is, at heart, an irreducible degree of
uncertainty on both sides of the ledger.
In situations of probabilistic uncertainty, precautionary regulatory
approaches may be justified.275 This is especially the case when the thing to
be regulated creates a non-trivial risk of catastrophic harm.276 As Sunstein
notes, the very idea of the “Precautionary Principle might well be
reformulated as an Anti-Catastrophe Principle, designed for special
circumstances in which it is not possible to assign probabilities to potentially
catastrophic risks.”277 For example, governments may be justified in
precautionary regulation of pollutants that cause climate change, because the
effects of climate change are uncertain and its downside risks are potentially
catastrophic.278 Even Richard Posner concludes that for uncertain large scale
catastrophes, “it behooves us to give serious consideration to increasing our
efforts at prevention.”279
A notable precautionary approach involves the pursuit of a maximin
strategy. Under this strategy, the way to deal with uncertain futures is by
choosing the policy approach with the best worst-case outcome.280 Regulators
should attempt to prevent plausible worst-case scenarios rather than waiting
years or decades for probabilistic uncertainty to resolve.281 Such a strategy
may maximize welfare in situations of uncertainty and substantial potential
harms.282
274. See sources cited supra note 27.
275. See, e.g., Cass R. Sunstein, Maximin, 37 YALE J. ON REGUL. 940, 967 (2020); JOHN
RAWLS, A THEORY OF JUSTICE 132–39 (1999); JON ELSTER, EXPLAINING TECHNICAL CHANGE: A
CASE STUDY IN THE PHILOSOPHY OF SCIENCE 186–207 (1983).
276. Sunstein, supra note 275, at 966.
277. See CASS R. SUNSTEIN, LAWS OF FEAR: BEYOND THE PRECAUTIONARY PRINCIPLE 5
(2005).
278. See STEPHEN M. GARDINER, A PERFECT MORAL STORM: THE ETHICAL TRAGEDY OF
CLIMATE CHANGE 411–14 (2011).
279. RICHARD POSNER, CATASTROPHE: RISK AND RESPONSE 198 (2004). Posner contemplates
bioterrorist attacks, but his argument is not specific to this type of risk. Id.
280. See Sunstein, supra note 275, at 943, 965–66.
281. See id.
282. See id. at 976.

<<PAGE_BREAK>>

56:545] SYSTEMIC REGULATION OF AI 593
Artificial intelligence is precisely the type of technology for which a
maximin, precautionary regulatory strategy is appropriate. The path of its
future development is uncertain, and, according to hundreds of experts in the
field of AI development, it poses a substantial risk of catastrophic harm.283 To
be sure, some would argue that we should charge ahead because AI’s benefits
will eclipse its risks and a maximin strategy would needlessly prevent us from
realizing those large benefits.284
Yet these arguments are flawed, for at least four reasons. First, as noted
above, many of the more plausible benefits of AI (economic growth, efficient
algorithmic prediction) inherently carry with them substantial harms
(inequality and joblessness, discrimination, and privacy invasions).285
Moreover, regulation does not have to prevent any and all AI deployment. A
regulatory regime does not mean a complete ban.
Second, even if AIs are far more likely to bestow miraculous benefits on
humanity than it currently appears, maximin strategies are often appropriate
to prevent large catastrophes even at the expense of preventing massive
gains.286 For example, precautionarily avoiding extinction may be justified
even if the foregone upsides are enormous, in part because human existence
is already extremely valuable and because humans are likely to continue to
innovate even without the assistance of super-capable AIs.
Third, AI regulation can be flexible in response to extraordinary
circumstances. It is possible that strong AI systems may someday help
address threats of extinction, like a hurtling asteroid or an exceptionally lethal
pandemic.287 Yet this distant possibility need not undermine the case for AI
regulation. If such risks ever become real, the regulatory apparatus could be
relaxed and scaled down as an emergency measure, until the threat is
283. See sources cited supra note 27.
284. See, e.g., David Streitfeld, Silicon Valley Confronts the Idea That the ‘Singularity’ Is
Here, N.Y. TIMES (June 11, 2023), https://www.nytimes.com/2023/06/11/technology/silicon-
valley-confronts-the-idea-that-the-singularity-is-here.html; Hasan Chowdhury, Get the Lowdown
on ‘e/acc’—Silicon Valley’s Favorite Obscure Theory About Progress at All Costs, Which Has
Been Embraced by Marc Andreessen, BUS. INSIDER (July 28, 2023, 6:44 AM),
https://www.businessinsider.com/silicon-valley-tech-leaders-accelerationism-eacc-twitter-
profiles-2023-7 [https://perma.cc/27PJ-PAR7].
285. See supra Part II.
286. Sunstein, supra note 275, at 964–65.
287. See, e.g., Robert Lea, AI Algorithm Discovers ‘Potentially Hazardous’ Asteroid 600
Feet Wide in a 1st for Astronomy, SPACE.COM (Aug. 8, 2023), https://www.space.com/ai-finds-
first-potentially-dangerous-asteroid [https://perma.cc/63D7-9ZL5].

<<PAGE_BREAK>>

594 ARIZONA STATE LAW JOURNAL [Ariz. St. L.J.
resolved. With such an approach, the prevention of AI mass risk could co-
exist to some degree with AI protection from mass risks.288
Finally, we think there is a prima facie ethical duty to err on the side of
caution. Even if the chances of a miraculous future are higher than the
chances of extinction, morality and pragmatism may dictate that we take the
safer route. That is, as discussed further below, we may have a moral duty to
avoid significant extinction risks and preserve humanity, even if doing so
requires foregoing considerable benefits.289 This is especially true since
speeding up will remain an option for future generations, if they deem the
calculus to have sufficiently changed. But given current epistemic
uncertainties, we think there is a moral command to treat humanity with the
dignity it deserves.
Human extinction, were it to occur in the next century, would result in the
deaths of every person then living—billions or tens of billions of deaths. This
would be a horror on a scale beyond our comprehension, the equivalent of
every death experienced in the worldwide COVID-19 pandemic occurring in
a single hour, and then a second pandemic occurring again the next hour, and
then a third occurring the next hour, and a fourth, and a fifth, every hour, for
months, until everyone was gone.290 Yet total extinction would be a harm far
greater than the immense sum of this loss. It would be the end of humanity,
and all that humanity means.
Much of the lasting significance of our lives resides in our contributions,
however small, to the broader narrative of human existence. Our actions have
some meaning and impact even after our deaths because they help shape the
future of humanity in its ongoing struggle to survive and flourish in a vast,
indifferent universe.291 Extinction ends that struggle and erases that meaning.
More broadly, extinction ends the human narrative before it fully develops,
confining humanity’s existence to a far narrower block of time than most
species experience and curtailing all the good that humanity might someday
288. The critic may then retreat to the position that regulation would stall innovation such
that when imminent threats are discovered, scaling down regulation would not allow enough time
for development of effective solutions. But this argument cannot justify, in our view, avoiding all
regulation against known and unknown risks simply to gain marginal increase in preparedness
against uncertain risks.
289. See, e.g., BRIAN GREENE, UNTIL THE END OF TIME: MIND, MATTER, AND OUR SEARCH
FOR MEANING IN AN EVOLVING UNIVERSE 319 (2020); SAMUEL SCHEFFLER, DEATH AND THE
AFTERLIFE 59–60 (Niko Kolodny ed., 2013).
290. See WHO COVID-19 Dashboard, WORLD HEALTH ORG., https://covid19.who.int
[https://perma.cc/7XYU-SL8J].
291. See, e.g., Ward & King, supra note 120, at 61; Costin & Vignoles, supra note 121,
at 865.

<<PAGE_BREAK>>

56:545] SYSTEMIC REGULATION OF AI 595
do. A significant part of all the sacrifices made and work done for the
betterment of humanity—the noblest instances of human achievement and
charity—will have been in vain.292 Regulating new technologies to address
non-trivial threats of extinction is, in short, amply justified.
IV. TOWARDS SYSTEMIC AI REGULATION
How should we approach the risks and challenges discussed above? This
Part addresses that question. The possibilities for AI regulation in the United
States are broad and varied. But while U.S. policymakers have begun the
process of gathering information about the topic, much of the conceptual
work necessary for substantive AI regulation against broad societal risks
remains to be done.293 In this Part, we begin that work.
A. Domestic Regulation
This Section’s focus is on general principles of AI regulation, rather than
particular proposals or draft legislation. Nonetheless, our proposed principles
are more concrete and pragmatic than prior efforts in the early theoretical
literature on comprehensive AI regulation.294 The principles are intended to
move society closer to meaningful AI governance by providing both clear
guidance and a variety of options to policymakers. We set them out below.
First, AI regulation should be systemic, regulating artificial intelligence as
a technology rather than solely on the basis of its applications. In a recent
congressional hearing, an IBM representative insisted that Congress should
only regulate AI applications, such as when an AI system is involved in
making credit decisions or screening job applicants.295 This is a myopic
approach. For all of the reasons discussed above, the society-wide risks of AI
will require systemic regulation to effectively address.
Second, and relatedly, effective AI regulation will require ex ante
oversight and approval of AI system development and deployment. Ex post
regulation via government or private enforcement, while a potentially
valuable part of a regulatory regime, is insufficient on its own to successfully
regulate AI. Courts are likely to be overworked and underresourced; AI
harms will often be difficult to identify or trace to a specific wrongdoer;
292. See sources cited supra note 289.
293. See sources cited supra note 21.
294. See Kolt, supra note 17; Chesterman, supra note 17.
295. See AI Hearing, supra note 40, at 3–5 (statement of Christina Montgomery, Chief
Privacy and Trust Officer, IBM).

<<PAGE_BREAK>>

596 ARIZONA STATE LAW JOURNAL [Ariz. St. L.J.
enforcement may be slow even once the responsible party is identified; and
penalties may be insufficient to deter wrongdoing.296 Instead, ex ante review
of AI systems and applications is likely necessary to prevent serious harms.
Many harms could be mitigated through regulatory interventions at the design
and development stages, requiring, for example, the inclusion of best
alignment practices in the training of the system, or the exclusion of elements
that could give the system control of the reporting of its training progress.297
Here too, ex ante oversight should be systemic. Regulation should cover
system architecture, design of system objectives, training runs, testing, and
finally, deployment. At any one of these stages, critical errors may emerge
that might be unfixable in hindsight. The experience of OpenAI, in which a
training run was accidentally set to maximize human disapproval (because
they multiplied the objective by -1), should be treated as a major accident.298
Preventing the creation or deployment of dangerous AI systems is far more
effective, and likely far more efficient, than attempting to address them once
they are in use.
More broadly, a licensing regime for AI could require firms to secure
regulatory pre-approval before developing a new AI system or applying an
AI in a new context. This may require providing sufficient justifications along
several dimensions including safety, nondiscrimination, accuracy,
transparency, accountability, scenario planning, and/or resilience in the event
of disaster, depending on the system at issue.299 Licensing can also ensure that
firms maintain and update AIs that play critical roles in decision-making,
transportation, or other important contexts.300 Finally, licensure can allow
296. Gianclaudio Malgieri & Frank Pasquale, Licensing High-Risk Artificial Intelligence:
Toward Ex Ante Justification for a Disruptive Technology, 52 COMPUT. L. & SEC. REV. 1, 1–2
(2024), https://www.sciencedirect.com/science/article/pii/S0267364923001097?ref=pdf_downl
oad&fr=RR-2&rr=8636709ffc55a6ee [https://perma.cc/T93E-8YC2].
297. See Tutt, supra note 41, at 117.
298. Daniel M. Ziegler et al., Fine-Tuning Language Models from Human Preferences (Jan.
8, 2020) (unpublished manuscript), https://arxiv.org/pdf/1909.08593 [https://perma.cc/2U2C-
DZZA] (“One of our code refactors introduced a bug which flipped the sign of the reward. . . .
The result was a model which optimized for negative sentiment while still regularizing towards
natural language. Since our instructions told humans to give very low ratings to continuations
with sexually explicit text, the model quickly learned to output only content of this form. This
bug was remarkable since the result was not gibberish but maximally bad output. The authors
were asleep during the training process, so the problem was noticed only once training had
finished.”).
299. E.g., Tutt, supra note 41, at 116–17; Malgieri & Pasquale, supra note 296, at 1–2, 9–11.
300. See Malgieri & Pasquale, supra note 296, at 3.

<<PAGE_BREAK>>

56:545] SYSTEMIC REGULATION OF AI 597
policymakers to permit high-value, low-risk uses of AI while prohibiting
more dangerous or less beneficial applications.301
Third, domestic AI regulation should be strategically compatible with, but
independent of, international regulation. Domestic policymakers may be
reluctant to restrain the local AI industry to a vastly greater extent than other
countries. They might fear that such regulation will place the United States
at an economic or military disadvantage.302 We agree that effective regulation
will require international cooperation, and we return to this point below. But
we also think it would be unwise for the United States, which is a leader in
the field, to drag its feet in face of substantial AI risks.
There is room for significant domestic AI regulation even in the absence
of international action. Currently, cutting-edge AI research is largely
concentrated in the United States and China, and to a lesser extent Europe.303
Thus far, China and the European Union have been substantially more active
in regulating AI development than the United States.304 These countries’ laws
are discussed further in Section IV.C. Their approaches might provide a
partial template for early-stage AI regulation in the United States, although
the U.S. should aspire to recognize broader categories of risk.305 Domestic
legislation can additionally facilitate international cooperation by signaling a
genuine commitment to regulating AI.
In the short term, the United States might also pass laws restricting
investments in foreign AI companies, or perhaps impose curbs on
international sales of the U.S.-produced microchips used in cutting-edge AI
data centers in addition to those the Biden administration enacted in October
2022.306 Alternatively, it might adopt a more cooperative policy and fewer
hardware restrictions. Whatever the approach, domestic legislation should
harmonize with the United States’ international AI strategy.
301. See id. at 15.
302. See, e.g., sources cited infra note 355; Amanda Askell et al., The Role of Cooperation
in Responsible AI Development (July 10, 2019) (unpublished manuscript),
https://arxiv.org/pdf/1907.04534.pdf [https://perma.cc/E9KA-7VTD].
303. See, e.g., Neil Savage, Learning the Algorithms of Power, 588 NATURE S102, S102–03
(2020).
304. See infra Section IV.C.5.
305. See infra notes 409–30 and accompanying text.
306. Ana Swanson et al., Biden Administration Weighs Further Curbs on Sales of A.I.
Chips to China, N.Y. TIMES (June 28, 2023), https://www.nytimes.com/2023/06/28/
business/economy/biden-administration-ai-chips-china.html; see also Ben Wodecki, Biden
Targets Chinese AI Development with Potential Cloud Service Ban, AI BUS. (July 5, 2023),
https://aibusiness.com/verticals/biden-targets-chinese-ai-development-with-potential-cloud-
service-ban [https://perma.cc/VB7N-PPUF].

<<PAGE_BREAK>>

598 ARIZONA STATE LAW JOURNAL [Ariz. St. L.J.
Fourth, regulatory efforts should promote and incentivize alignment
research. While market participants have a natural incentive to invest in
capabilities development, they have considerably less incentive to invest in
making sure their products are safe and aligned.307 Currently, research on
alignment is poorly organized. For example, there are many professors
studying AI, but few that specialize in alignment per se. Governments should
invest in foundational alignment research, for instance via generous research
grants and subsidies. But AI companies, where knowledge of development
and safety issues is concentrated, should also play an active role in such
research. To prevent companies from neglecting AI safety in their race for
market share, legislation could require that companies developing AI
capabilities also invest significant resources in alignment research.308
Fifth, AI regulation should employ a diverse set of regulatory approaches.
AI presents a wide array of potential harms, some of which are extraordinarily
dangerous. Employing a variety of procedures for AI regulation can help
address this broad range of harms and ensure that the failure of one set of
measures does not lead to catastrophe.309 The causes of AI harm are also
complex and can arise at different stages of AI development.310 In the face of
deep uncertainty, policymakers should use a variety of regulatory tools that
target the many stages of the AI process.311
Sixth, AI regulation should address, at the very least, the most obvious
pathways to harm or catastrophe. Some AI applications are primarily useful
for facilitating fraud or tortious activity. For instance, voice cloning services
are now widely available, and customers can clone the voices of others as
well as their own.312 Deepfake generators can help users create realistic fake
videos based on existing videos of virtually anyone they choose.313 While
technologies like this do have some non-harmful uses—perhaps gaming and
movie production—they are easily deployed as scalable tools for engaging in
307. See Kolt, supra note 17.
308. Part of the alignment effort should also be directed toward public dissemination of
information on the successes and failures of AI safety. We also see a role for
government-organized research, such as that conducted by the RAND Corporation, which would
focus on broad, foundational work.
309. Kolt, supra note 17.
310. Id. at 47.
311. Id.
312. See sources cited supra note 71.
313. See Ceclia Hwung, How to Make a DeepFake Video, DIGIARTY,
https://www.videoproc.com/video-editor/how-to-make-a-deepfake-video.htm
[https://perma.cc/C5HJ-B9LH] (Apr. 29, 2024).

<<PAGE_BREAK>>

56:545] SYSTEMIC REGULATION OF AI 599
fraudulent, tortious, harassing, or discriminatory behavior.314 Technologies
like this are ripe targets for regulation or prohibition.
Similarly, some AI development practices may be especially reckless or
closely associated with potential downside risks. Recursively self-improving
AIs, AIs that modify their own source code, highly autonomous AIs, and AI
systems that are connected to a broad array of physical tools are especially
likely to develop alignment problems or dangerous capabilities of the type
that raise concerns about catastrophic risks.315 Attempts to develop such AIs
are particularly well-suited to precautionary regulation or prohibition. And
while none of these AIs has yet been deployed in its full form, developers
have created preliminary versions, with AIs that create detailed code, AIs that
recursively generate questions to ask themselves in order to efficiently
complete a task, and AIs that conduct internet research and use what they
learn to complete tasks.316
Regulators should also develop a cautious approach to open sourcing of
AI models. Smaller, vetted systems may well contribute to experimentation
and alignment efforts by individuals or small groups. But the broad sharing
of models has already proven itself problematic, with users fine-tuning large
models on the toxic and racist content of 4Chan, models trained to create
malware, and models that specialize in spam and disinformation
generation.317 Private individuals have connected AIs to a variety of tools,
314. See Carter Evans & Analisa Novak, Scammers Use AI to Mimic Voices of Loved Ones
in Distress, CBS NEWS (July 19, 2023, 9:48 AM), https://www.cbsnews.com/news/scammers-ai-
mimic-voices-loved-ones-in-distress [https://perma.cc/5U43-VA7G].
315. See Kolt, supra note 17, at 1192–93.
316. See, e.g., Mark Sullivan, Auto-GPT and BabyAGI: How ‘Autonomous Agents’ Are
Bringing Generative AI to the Masses, FAST CO. (Apr. 13, 2023),
https://www.fastcompany.com/90880294/auto-gpt-and-babyagi-how-autonomous-agents-are-
bringing-generative-ai-to-the-masses [https://perma.cc/SV6J-TWVQ]; Tanya Malhotra,
Breaking Down AutoGPT: What It Is, Its Features, Limitations, Artificial General Intelligence
(AGI) and Impact of Autonomous Agents on Generative AI, MARKTECHPOST (July 11, 2023),
https://www.marktechpost.com/2023/07/11/breaking-down-autogpt-what-it-is-its-features-
limitations-artificial-general-intelligence-agi-and-impact-of-autonomous-agents-on-generative-
ai/ [https://perma.cc/Z43L-ZXPX].
317. See, e.g., Tianle Cai et al., Large Language Models as Tool Makers (May 26, 2023)
(unpublished manuscript), https://arxiv.org/pdf/2305.17126.pdf [https://perma.cc/X3VX-
9EWH]; Pan et al., supra note 157; Xiangyu Qi et al., Fine-Tuning Aligned Language Models
Compromises Safety, Even When Users Do Not Intend To! (Oct. 5, 2023) (unpublished
manuscript), https://arxiv.org/pdf/2310.03693.pdf [https://perma.cc/7J6Q-RNCA]; Stuart A.
Thompson, Dark Corners of the Web Offer a Glimpse at A.I.’s Nefarious Future, N.Y. TIMES
(Jan. 8, 2024), https://www.nytimes.com/2024/01/08/technology/ai-4chan-online-
harassment.html.

<<PAGE_BREAK>>

600 ARIZONA STATE LAW JOURNAL [Ariz. St. L.J.
and the process is largely irreversible.318 Restrictions on public dissemination
of AI architecture, weights, biases, and even some forms of output may help
prevent serious harms.
Finally, AI regulation can benefit from state as well as federal
involvement. States can adopt a variety of legislative approaches, and other
states, the federal government, and foreign governments can learn from their
successes and failures. AI regulation may be especially likely to benefit from
states’ experimenting with a wide range of new approaches.319 In recent years,
state legislatures have usefully regulated harmful AI applications in the
absence of federal legislation.320 For example, several states and cities have
recently banned forms of AI-driven surveillance, offering their citizens
substantial protections.321 Even after the federal government has regulated a
new technology, states may be able to enact additional restrictions on it
without being preempted, depending on the character of the state restriction
and the specifics of the federal law.322 State policymakers should inform
themselves about AI risks and benefits and move forward with AI regulation,
consistent with the principles discussed here.
B. Litigation
Courts and litigants have an important role to play in regulating artificial
intelligence. AIs, and entities using AI, will inevitably commit various torts
and other civil violations—indeed they have already done so.323 Civil
318. JAMES BRIGGS & FRANCISCO INGHAM, LANGCHAIN AI HANDBOOK chs. 5–6 (n.d.),
https://www.pinecone.io/learn/series/langchain/.
319. See supra text accompanying notes 309–11.
320. See, e.g., Brenna Goth, Illinois ‘Deepfake’ Law Penalizes Sharing Altered Sexual
Images, BLOOMBERG L. (July 28, 2023, 2:31 PM), https://news.bloomberglaw.com/ip-
law/illinois-deepfake-law-penalizes-sharing-altered-sexual-images; Geoff Mulvihill, What to
Know About How Lawmakers Are Addressing Deepfakes like the Ones that Victimized Taylor
Swift, ASSOCIATED PRESS (Jan. 31, 2024), https://apnews.com/article/deepfake-images-taylor-
swift-state-legislation-bffbc274dd178ab054426ee7d691df7e [https://perma.cc/T5YW-2A47].
321. See, e.g., Grace Woodruff, Maine Now Has the Toughest Facial Recognition
Restrictions in the U.S., SLATE (July 2, 2021, 5:50 AM),
https://slate.com/technology/2021/07/maine-facial-recognition-government-use-law.html
[https://perma.cc/M6TE-YKYC]; Vermont Lawmakers Approve Ban on Facial Recognition
Technology, WCAX (Oct. 13, 2020, 3:51 PM), https://www.wcax.com/2020/10/13/vermont-
lawmakers-approve-ban-on-facial-recognition-technology [https://perma.cc/68US-DZ9T].
322. See Doug Farquhar & Liz Meyer, State Authority to Regulate Biotechnology Under the
Federal Coordinated Framework, 12 DRAKE J. AGRIC. L. 439, 461–72 (2007).
323. See Bryan Pietsch, 2 Killed in Driverless Tesla Car Crash, Officials Say, N.Y. TIMES
(Nov. 10, 2021), https://www.nytimes.com/2021/04/18/business/tesla-fatal-crash-texas.html;

<<PAGE_BREAK>>

56:545] SYSTEMIC REGULATION OF AI 601
litigation can compensate plaintiffs for AI harms from physical injuries to
privacy invasions, medical errors, civil rights violations, fraud, manipulation,
and more.324 Constitutional litigation involving unlawful discrimination
claims may provide important deterrence against bias in algorithmic
decision-making.325 Finally, intellectual property infringement claims could
bring useful judicial scrutiny to the training practices of AI developers, which
often involve the processing of copyrighted or otherwise protected works.326
Establishing a clear doctrinal path for persons harmed by AIs to bring civil
claims can also contribute toward effective systemic regulation of AI.
Lawsuits can act as an early warning system for dangerous or poorly designed
AIs. When an AI system causes harm, an injured person should not be limited
to petitioning the government and hoping it eventually addresses the issue.
Filing a lawsuit brings the problem to public notice more quickly than
lobbying for government action typically would, and courts can generally
respond to harms long before legislatures do.327
Further, litigation can act as a regulatory tool in its own right, providing
incentives to developers to carefully assess the risks and benefits of their AIs
rather than hastily deploying potentially dangerous systems.328 Liability can
motivate developers to pre-test AI performance, bolster data security, gather
information about how their AIs operate, and take other safety-improving
steps that they might otherwise skip in order to hasten their products to
market.329
Attorneys and judges can draw on a rich existing literature of helpful
proposals for applying traditional forms of liability to the novel context of AI
actors. To illustrate, in torts, many scholars have argued in favor of a strict
Neal E. Boudette, Tesla’s Autopilot Technology Faces Fresh Scrutiny, N.Y. TIMES
(Mar. 23, 2021), https://www.nytimes.com/2021/03/23/business/teslas-autopilot-safety-
investigations.html.
324. See, e.g., Andrew D. Selbst, Negligence and AI’s Human Users, 100 B.U. L. REV. 1315,
1319–20 (2020); Pauline T. Kim, Data-Driven Discrimination at Work, 58 WM. & MARY L. REV.
857, 902 (2017).
325. See, e.g., Emily Black et al., Less Discriminatory Algorithms, 113 GEO. L.J.
(forthcoming 2024); Crystal S. Yang & Will Dobbie, Equal Protection Under Algorithms: A New
Statistical and Legal Framework, 119 MICH. L. REV. 291, 291 (2020).
326. See, e.g., Lemley & Casey, supra note 18, at 746–48.
327. See, e.g., Matthew Tokson, Knowledge and Fourth Amendment Privacy, 111 NW. U. L.
REV. 139, 193 (2016).
328. See Omri Rachum-Twaig, Whose Robot Is It Anyway?: Liability for Artificial-
Intelligence-Based Robots, 2020 U. ILL. L. REV. 1141, 1163–64 (2019).
329. See id.

<<PAGE_BREAK>>

602 ARIZONA STATE LAW JOURNAL [Ariz. St. L.J.
liability approach for harms caused by AI systems.330 They contend that AI
developers are in a better position to anticipate and prevent risk and that proof
is likely especially challenging in these scenarios.331 Others have suggested
applying this framework to securities violations by trading algorithms and
antitrust violations when algorithms unlawfully collude.332
We close with one cautionary note. Litigation can reveal too much
information. We consider information about specific model architecture,
training techniques, certain benchmark results, and even some model outputs
as sensitive information. Courts should be extremely cautious about inclusion
of this information in public filings.333 In certain cases, in camera review will
be appropriate.
C. International Governance
Effective governance of AI will require an international component. Large
AI systems reside in computing centers that often cross political
boundaries.334 In a globalized world, the harms from AI systems will not be
contained to a single country, and several more extreme forms of harm may
well endanger global order or human existence altogether. An international
response is necessary.
But is it possible? If AI promises power, nation-states may rush to develop
it for themselves, because even if they themselves understand the danger,
their rivals might be less careful. This could jumpstart a race to the bottom,
330. See, e.g., Abraham & Rabin, supra note 18, at 153–54; David C. Vladeck, Machines
Without Principals: Liability Rules and Artificial Intelligence, 89 WASH. L. REV. 117, 146–47
(2014).
331. See Rachum-Twaig, supra note 328, at 1162–64.
332. Diamantis, supra note 18, at 801–05; Greg Rosalsky, When Computers Collude,
NPR: PLANET MONEY (Apr. 2, 2019), https://www.npr.org/sections/money/2019/04/02
/708876202/when-computers-collude [https://perma.cc/V8BY-EKWC].
333. See Gregory Gerard Greer, Artificial Intelligence and Trade Secret Law, 21 U. ILL. CHI.
REV. INTELL. PROP. L. 252, 264–65 (2022); Sumeet Wadhwani, Open Source vs. Proprietary AI:
A Tussle for the Future of Artificial Intelligence, SPICEWORKS (Dec. 12, 2023),
https://www.spiceworks.com/tech/artificial-intelligence/articles/open-source-vs-proprietary-ai-
development/ [https://perma.cc/Q5R9-C7E8]; cf. Omri Ben-Shahar & Lisa Bernstein, The
Secrecy Interest in Contract Law, 109 YALE L.J. 1885 (2000).
334. Michael Veale et al., AI and Global Governance: Modalities, Rationales, Tensions,
19 ANN. REV. L. & SOC. SCI. 255, 265 (2023); Effy Vayena & Andrew Morris, A Bioethicist and
a Professor of Medicine on Regulating AI in Health Care, ECONOMIST (Feb. 28, 2023),
https://www.economist.com/by-invitation/2023/02/28/a-bioethicist-and-a-professor-of-
medicine-on-regulating-ai-in-health-care.

<<PAGE_BREAK>>

56:545] SYSTEMIC REGULATION OF AI 603
where even responsible nations will feel pressure to charge ahead without
sufficient safeguards.
Fortunately, history provides some positive guidance. AI is not the first
technology to provide military and economic advantages while imposing
serious risks.335 Yet there are several precedents of nations avoiding vicious
dynamics through governance and collaboration.336 From the laws of just war
to limits on pollution, and from physics research to investment in
international measures against pandemics, nation-states are capable of
avoiding races to the bottom and enabling effective joint action.
There is also an interesting dynamic between our discussion in the prior
sections and the current one. Many successful international measures emerge
from effective domestic regulation, and then inspire further domestic
regulation.337 Our goal here is to explore the various lessons from
international law for the problem of regulating AI.
The following discussion considers several possible modes of
international governance for AI: transparency & opacity mechanisms,
harmonization measures, technology assessment, soft law, and hard law.
These modes represent a range of AI oversight options that are neither
mutually exclusive nor exhaustive.
1. Transparency & Opacity
Effective regulation of AI technology involves a smart mix of
transparency and opacity measures. Transparency is positive when it
promotes alignment research, enables effective monitoring of investments in
potentially dangerous capabilities, and facilitates accountability among
decisionmakers if they are too lax with regulated firms. Transparency is risky
when it discloses machine learning techniques and architectures; when it
335. KELLEY SAYLER, CONG. RSCH. SERV., R46458, EMERGING MILITARY TECHNOLOGIES:
BACKGROUND AND ISSUES FOR CONGRESS 1 (2024), https://sgp.fas.org/crs/natsec/R46458.pdf
[https://perma.cc/UPA5-QYCA].
336. See, e.g., Martyn P. Chipperfield et al., Quantifying the Ozone and Ultraviolet Benefits
Already Achieved by the Montreal Protocol, NATURE COMMC’NS (May 26, 2015),
https://www.ncbi.nlm.nih.gov/pmc/articles/PMC4455099 [https://perma.cc/R7SJ-8MEK]
(discussing progress in restoring the ozone layer through the Montreal Protocol and subsequent
amendments and adjustments); Glenn Cross & Lynn Klotz, Twenty-First Century Perspectives
on the Biological Weapon Convention: Continued Relevance or Toothless Paper Tiger, 76 BULL.
ATOMIC SCIENTISTS 185, 185 (2020) (recounting how the Biological Weapons Convention “has
successfully bolstered the near universal norms against the use of biological weapons”).
337. Transparency and Explainability (Principle 1.3), ORG. FOR ECON. COOP. & DEV.,
https://oecd.ai/en/dashboards/ai-principles/P7 [https://perma.cc/W2HH-EJSE].

<<PAGE_BREAK>>

604 ARIZONA STATE LAW JOURNAL [Ariz. St. L.J.
reveals information that might jumpstart new lines of capability research; and
even when it leaks model outputs that can later be reverse-engineered. The
problem is complex, and a pluralistic regime is appropriate.
The goal of transparency incorporates a number of values. One set of
issues, recognized by the OECD AI group, relates to explainability.338 Here,
transparency can play a role in mitigating bias and increasing comprehension
of AI operations.339 Transparency can also be used to track significant
developers, infrastructure providers, and related players—so that if concerns
emerge, these actors will be easier to hold to account. Another goal of
transparency consists of sharing ideas and strategies on alignment and safety
with the larger research community.340 Governments should be made aware
if models, anywhere in the world, engage in unwanted behavior, including
lab accidents, attempts to copy themselves, or instances of deceit.
One promising method of tracking development is public registries. Public
registries are an important transparency mechanism for the governance of
emerging technologies. One example, the Biosafety Clearing-House, was
established by the 2000 Cartagena Protocol on Biosafety and serves as a
publicly accessible repository of information on living modified organisms
(LMOs) and on the genetic elements associated with those organisms.341 The
Clearing-House’s objectives are to share information about LMO use and risk
analyses, assist parties in making decisions about LMOs, provide evidence
of treaty compliance, and foster international trade.342
One advantage of registries is that their establishment does not require
coordinated global action. For example, ClinicalTrials.gov is a registry
338. Id.
339. Id.
340. AI Alliance Launches as an International Community of Leading Technology
Developers, Researchers, and Adopters Collaborating Together to Advance Open, Safe,
Responsible AI, IBM (Dec. 5, 2023), https://newsroom.ibm.com/AI-Alliance-Launches-as-an-
International-Community-of-Leading-Technology-Developers,-Researchers,-and-Adopters-
Collaborating-Together-to-Advance-Open,-Safe,-Responsible-AI [https://perma.cc/9UCG-
SMHX].
341. What Is the Biosafety Clearing-House (BCH)?, BIOSAFETY CLEARING-HOUSE
(Nov. 23, 2021), https://bch.cbd.int/en/kb/tags/about/What-is-the-Biosafety-Clearing-House-
BCH-/619c553658029700017ff43b [https://perma.cc/4QY6-H8LD]; Cartagena Protocol on
Biosafety to the Convention on Biological Diversity art. 20, Jan. 29, 2000, 2226 U.N.T.S. 208
[hereinafter Biosafety Protocol].
342. Tomme Rosanne Young, Use of the Biosafety Clearing-House in Practice, in LEGAL
ASPECTS OF IMPLEMENTING THE CARTAGENA PROTOCOL ON BIOSAFETY 137–38 (Marie-Claire
Cordonier et al. eds., 2013); see also Human Genome Editing (HGE) Registry, WORLD HEALTH
ORG., https://www.who.int/groups/expert-advisory-committee-on-developing-global-standards-
for-governance-and-oversight-of-human-genome-editing/registry [https://perma.cc/RVR2-
D39X].

<<PAGE_BREAK>>

56:545] SYSTEMIC REGULATION OF AI 605
maintained by the U.S. National Library of Medicine that contains
approximately 454,000 clinical studies from over 200 countries.343 The
registry allows researchers and patients from all over the world to identify
relevant studies and research needs.344 Over time, various organizations,
including the World Medical Association and the International Committee of
Medical Journal Editors, have adopted policies requiring registration in
ClinicalTrials.gov or an equivalent registry.345
Registries could play an important role in promoting AI transparency, with
different registries focusing on specific uses or concerns. A handful of cities
are already using AI registries to inform residents about their use of AI
systems.346 China has instituted a semi-public, mandatory registry for
algorithms involving recommendations, synthetic content generation, and
generative AI.347 Pending AI regulation in the European Union would require
registration of high-risk AI systems in a public database.348 Pennsylvania
legislators have proposed a registry for businesses operating AI systems in
the state,349 and scientists have established a registry for AI in biomedical
research to improve the quality and reproducibility of biomedical AIs.350
343. CLINICALTRIALS.GOV, https://clinicaltrials.gov [https://perma.cc/J3DG-AN7K]. The
registry contains information about medical studies on human volunteers, including information
about study protocols and outcomes.
344. About ClinicalTrials.gov, CLINICALTRIALS.GOV, https://beta.clinicaltrials.gov/about-
site/about-ctg [https://perma.cc/N3PM-DBCF] (June 7, 2024).
345. Id.; Clinical Trial Reporting Requirements, CLINICALTRIALS.GOV,
https://classic.clinicaltrials.gov/ct2/manage-recs/background#RegLawPolicies
[https://perma.cc/689Y-GFYH ] (June 7, 2024).
346. MEERI HAATAJA ET AL., PUBLIC AI REGISTERS: REALISING AI TRANSPARENCY AND
CIVIC PARTICIPATION IN GOVERNMENT USE OF AI 3 (2020),
https://algoritmeregister.amsterdam.nl/wp-content/uploads/White-Paper.pdf
[https://perma.cc/6LZW-CY2K]; AI Reviews & Algorithm Register, CITY OF SAN JOSE,
https://www.sanjoseca.gov/your-government/departments-offices/information-
technology/digital-privacy/ai-reviews-algorithm-register [https://perma.cc/E47C-8U2Y].
347. Matt Sheehan, China’s AI Regulations and How They Get Made 13 (July 2023)
(working paper), https://carnegie-production-assets.s3.amazonaws.com/static/files/202307-
Sheehan_Chinese%20AI%20gov-1.pdf [https://perma.cc/Q8SU-M9CD] (explaining that
developers must submit information on how algorithms are trained and deployed and complete a
security self-assessment report).
348. Michael Veale & Frederik Z. Borgesius, Demystifying the Draft EU Artificial
Intelligence Act, 4 COMPUT. L. REV. INT’L 97, 111–12 (2021).
349. H.R. 49, 2023–2024 Leg., Reg. Sess. (Pa. 2023).
350. Julian Matschinske et al., The AIMe Registry for Artificial Intelligence in Biomedical
Research, 18 NATURE METHODS 1128 (2021); The AIMe Registry for Artificial Intelligence in
Biomedical Research, AIME REGISTRY, https://aime-registry.org [https://perma.cc/X23Q-LG4F].

<<PAGE_BREAK>>

606 ARIZONA STATE LAW JOURNAL [Ariz. St. L.J.
In the context of AI safety, registries could be useful if they include AI
developers, infrastructure providers, and large players.351 A similar reporting
mechanism for whistleblowers could also allow the reporting of suspected
unethical or unsafe AI research or activities.352 Such registries, if developed
domestically, could serve as building blocks for international registries.353
On the other side, some aspects of AI developments should not be widely
shared. Broad sharing of technological know-how would accelerate
development, and for the many reasons we have outlined, this may be unsafe
without rigorous safety and regulatory mechanisms. Note that registries do
not have to be publicly open, and could confine disclosures to a regulatory
body, rather than the public. The International Atomic Energy Agency
(“IAEA”) offers one example of an international organization that accesses
and analyzes sensitive information while avoiding broader disclosure.354
2. Harmonization
Harmonizing regulatory requirements to reduce differences between
regulatory regimes is a common objective of international governance. AI is
the subject of intense international competition, and countries may fear that
domestic regulation of AI development or deployment could put them at a
strategic disadvantage.355 Harmonization of AI regulation would counter
incentives for countries to participate in a regulatory race to the bottom and
for actors to relocate to jurisdictions with weaker regulations.356
Harmonization would also facilitate the consideration of transboundary
351. UNESCO, MISSING LINKS IN AI GOVERNANCE 17–18 (Benjamin Prud’homme et al.
eds., 2023).
352. Cf. World Health Organization [WHO], Human Genome Editing: Recommendations, at
14 (2021), https://iris.who.int/bitstream/handle/10665/342486/9789240030381-eng.pdf
[https://perma.cc/8727-S77P] (recommending creation of “mechanism for confidential reporting
of concerns about possibly illegal, unregistered, unethical and unsafe human genome editing
research and other activities”).
353. Id. at 18.
354. Allison Carnegie & Austin Carson, The Disclosure Dilemma: Nuclear Intelligence and
International Organizations, 63 AM. J. POL. SCI. 269, 270, 274–78 (2019).
355. James S. Denford et al., Weird AI: Understanding What Nations Include in Their
Artificial Intelligence Plans, BROOKINGS INST. (Apr. 25, 2023),
https://www.brookings.edu/blog/techtank/2023/04/25/weird-ai-understanding-what-nations-
include-in-their-artificial-intelligence-plans [https://perma.cc/WE52-XCES]; Rishi Iyengar, The
Global Race to Regulate AI, FOREIGN POL’Y (May 5, 2023),
https://foreignpolicy.com/2023/05/05/eu-ai-act-us-china-regulation-artificial-intelligence-
chatgpt [https://perma.cc/PC36-QYT9].
356. Gary E. Marchant & Brad Allenby, Soft Law: New Tools for Governing Emerging
Technologies, 73 BULL. ATOMIC SCIENTISTS 108, 109 (2017).

<<PAGE_BREAK>>

56:545] SYSTEMIC REGULATION OF AI 607
effects, reduce the potential for trade disputes, and ease regulatory burdens
on multinational companies.357
Tools for promoting legal harmonization include registries and model
standards. We already noted the Biosafety Clearing-House, which also
collects information on national laws and regulations regarding the use and
handling of LMOs, as well as decisions, risk assessments, and environmental
reviews of such organisms.358 The sharing of such information not only
facilitates regulatory compliance but also enables countries to draw on others’
efforts in developing their own regulatory systems and making regulatory
decisions.359
Model regulatory standards can also promote harmonization. The World
Health Organization, whose mission includes the establishment of
international standards for pharmaceutical products, convenes expert
committees to develop standards on good manufacturing practices, vaccines
and biological products, and other subjects.360 These standards have been
adopted by countries and by the International Conference for Harmonisation
of Technical Requirements for Pharmaceuticals for Human Use, which itself
promulgates model standards for domestic adoption.361
As discussed below, various entities have developed a handful of technical
standards for AI.362 While yet to be fully implemented, these standards could
play an important role in harmonization as jurisdictions grapple with how to
regulate AI.
3. Technology Assessment
Assessments of emerging technologies can promote public engagement,
identify risks, and analyze development trajectories and effects.363
Policymakers and stakeholders can use the results of such assessments to
manage risks and reshape the technologies themselves.364 Performed
357. Id.
358. Biosafety Protocol, supra note 341, at 267.
359. Young, supra note 342, at 137–38.
360. VICTORIA WEISFELD & TRACY A. LUSTIG, INTERNATIONAL REGULATORY
HARMONIZATION AMID GLOBALIZATION OF DRUG DEVELOPMENT: WORKSHOP SUMMARY 53
(2013).
361. Id.
362. See infra Section IV.C.4.
363. Albert C. Lin, The Missing Pieces of Geoengineering Research Governance, 100 MINN.
L. REV. 2509, 2556–60 (2016).
364. See Albert C. Lin, Technology Assessment 2.0: Revamping Our Approach to Emerging
Technologies, 76 BROOK. L. REV. 1309, 1349–50, 1353 (2011).

<<PAGE_BREAK>>

608 ARIZONA STATE LAW JOURNAL [Ariz. St. L.J.
internationally or with international support, technology assessments can also
offer additional support for regulatory harmonization.
Assessments by the Organisation for Economic Cooperation and
Development (“OECD”) have played a significant role in the international
oversight of genetically modified organisms (“GMOs”). The OECD regularly
prepares safety assessments of GMOs in the environment and foods derived
from genetically modified crops.365 The assessments do not obligate member
countries to adopt a specific regulatory standard or any standard at all. Rather,
these consensus documents aim to ensure that information used by member
and non-member countries for GMO regulation is as similar as possible.366
Establishing a common information base promotes more efficient risk
assessment, harmonizes regulatory oversight, and reduces barriers to trade.367
Although domestic regulation of GMOs exhibits substantial variation, the
OECD assessments are widely read by regulators and industry and have been
incorporated into the standard-setting work of international institutions.368
The experience with OECD assessments of GMOs suggests that
assessments may be necessary but not sufficient to prompt regulatory
harmonization—or even regulation—of emerging technologies. Consistent
with this insight, Gary Marcus and Anka Reuel have proposed an
“International Agency for AI” (“IAAI”) that would include assessment as one
of its core functions.369 The IAAI’s overarching mission would be to develop
governance and technical solutions to promote safe AI technologies with the
support of governments, business, nonprofits, and society at large.370 To this
end, the IAAI could collaboratively address problematic uses of AI, “convene
experts and develop tools to tackle the spread of misinformation,” and
365. See Biosafety—BioTrack, Org. for Econ. Coop. & Dev.,
https://www.oecd.org/chemicalsafety/biotrack [https://perma.cc/275D-K2LV].
366. An Introduction to the Biosafety Consensus Documents of OECD’s Working Group for
Harmonisation in Biotechnology, Organisation for Economic Co-operation and Development
[OECD] 5, 8–9, ENV/JM/MONO(2005)5 (Feb. 22, 2005).
367. Id.
368. Helmut Gaugitsch, The Impact of the OECD on the Development of
National/International Risk/Safety Assessment Frameworks, 5 ENV’T BIOSAFETY RES. 219,
221–22 (2006); Katharine Gostek, Genetically Modified Organisms: How the United States’ and
the European Union’s Regulations Affect the Economy, 24 MICH. ST. INT’L L. REV. 761, 762,
782–84 (2016).
369. Gary Marcus & Anka Reuel, The World Needs an International Agency for Artificial
Intelligence, Say Two AI Experts, ECONOMIST (Apr. 18, 2023), https://www.economist.com/by-
invitation/2023/04/18/the-world-needs-an-international-agency-for-artificial-intelligence-say-
two-ai-experts; see also Bibek Debroy & Aditya Sinha, Regulating Artificial Intelligence, MERO
TRIB. (Aug. 23, 2023), https://merotribune.com/2023/08/23/regulating-artificial-intelligence/
[https://perma.cc/7C9J-66D6].
370. Marcus & Reuel, supra note 369.

<<PAGE_BREAK>>

56:545] SYSTEMIC REGULATION OF AI 609
generate “swift and thoughtful guidance” from experts and researchers on
responding to troubling developments.371 Along these lines, the United
Nations’ High-Level Advisory Body on Artificial Intelligence has been
tasked with “building a global scientific consensus on risks and challenges,
helping harness AI for the Sustainable Development Goals, and strengthening
international cooperation on AI governance.”372
4. Soft Law
Soft law, as distinguished from enforceable hard law, refers to nonbinding
standards.373 Soft law includes principles, guidelines, codes of conduct,
resolutions, certification and auditing requirements, and private standards
developed by a wide range of institutions or governing bodies.374 Soft law can
be developed relatively quickly and is potentially applicable on an
international scale.375 It can also be an important step toward the formation of
hard law, as international consensus builds around a soft law norm.376
However, soft law itself lacks direct enforceability and accountability.377
Indeed, because compliance is voluntary, soft law may suffer from a lack of
participation by the bad actors whose compliance is most needed.378
Nonetheless, indirect means can encourage or even mandate adherence to soft
371. Id.
372. Press Release, United Nations, UN Secretary-General Launches AI Advisory Body on
Risks, Opportunities, and International Governance of Artificial Intelligence (Oct. 25, 2023),
https://www.un.org/sites/un2.un.org/files/231025_press-release-aiab.pdf [https://perma.cc/
2RKY-PS2G].
373. DANIEL BODANSKY, THE ART AND CRAFT OF INTERNATIONAL ENVIRONMENTAL LAW 14,
99 (2010); Marchant & Allenby, supra note 356, at 112; DAVID HUNTER ET AL., INTERNATIONAL
ENVIRONMENTAL LAW & POLICY 339 (6th ed. 2022).
374. BODANSKY, supra note 373, at 14; Marchant & Allenby, supra note 356, at 112; Gary
E. Marchant & Carlos I. Gutierrez, Soft Law 2.0: An Agile and Effective Governance Approach
for Artificial Intelligence, 24 MINN. J.L. SCI. & TECH. 375, 385 (2023); see also Rory Van Loo,
The Missing Regulatory State: Monitoring Businesses in an Age of Surveillance, 72 VAND. L.
REV. 1563 (2019) (“Dialogue would further allow government monitors to better comprehend
complex algorithms. Regulatory monitors do not simply examine in silence, but as part of a
dialectic process”).
375. Marchant & Allenby, supra note 356, at 113.
376. See HUNTER ET AL., supra note 373, at 339.
377. GARY MARCHANT, “SOFT LAW” GOVERNANCE OF ARTIFICIAL INTELLIGENCE 15 (2019),
https://escholarship.org/content/qt0jq252ks/qt0jq252ks.pdf?t=po1uh8 [https://perma.cc/ZRP5-
EP2U].
378. Id. at 4.

<<PAGE_BREAK>>

610 ARIZONA STATE LAW JOURNAL [Ariz. St. L.J.
law. Such indirect tools include certification programs, government
procurement policies, and insurance contract provisions.379
A leading example of soft law is the Helsinki Guidelines, which set out
ethical principles for medical research regarding human subjects. Adopted in
1964 by the World Medical Association, the Helsinki Guidelines have come
to serve as “a central guide to research practice” and a foundation for other,
more detailed ethical standards governing medical research.380 Although the
guidelines themselves are not legally binding, they are enforced indirectly
through domestic laws that incorporate the guidelines and through journal
publishers’ demands that published research comply with the guidelines.381
Acknowledging the need for international oversight of AI, the U.N.
Secretary-General has created a high-level advisory body to prepare
initiatives on AI.382 Although the form these initiatives might take is unclear,
they will likely involve soft law. Indeed, soft law for AI has grown rapidly in
recent years, even as measuring its actual implementation has proven
difficult.383
Many soft law initiatives for AI have taken the form of principles proposed
or developed by intergovernmental organizations, professional associations,
and private entities.384 The OECD, for example, has published five general
“principles for responsible stewardship of trustworthy AI,” accompanied by
recommendations for national policies and international cooperation.385
Another set of principles, the UNESCO Recommendation on the Ethics of
Artificial Intelligence, calls for avoidance of unwanted harms, protection of
privacy, and transparency and explainability in the deployment of AI.386
379. Marchant & Gutierrez, supra note 374, at 403–24.
380. Robert V. Carlson et al., The Revision of the Declaration of Helsinki: Past, Present and
Future, 57 BRIT. J. CLINICAL PHARMACOLOGY 695, 704–05 (2004).
381. Delon Human & Sev S. Fluss, The World Medical Association’s Declaration of
Helsinki: Historical and Contemporary Perspectives 2–3 (Jan. 17, 2001) (unpublished
manuscript), https://www.overgangsalderen.dk/wordpress/wp-content/uploads/2020/04/
Declaration-of-Helsinki-Fifth-draft_historical_contemporary_perspectives-24-07-2001.pdf
[https://perma.cc/Q62B-289D].
382. U.N. Advisory Body on A.I., Interim Report: Governing AI for Humanity (2023),
https://www.un.org/sites/un2.un.org/files/un_ai_advisory_body_governing_ai_for_humanity_in
terim_report.pdf [https://perma.cc/H6TF-6NBF].
383. Marchant & Gutierrez, supra note 374, at 393, 424.
384. MARCHANT, supra note 377, at 5–10; Marchant & Gutierrez, supra note 374, at 393; see
also, e.g., IBM’s Principles for Trust and Transparency, IBM, https://www.ibm.com/artificial-
intelligence/ethics [https://perma.cc/3K2G-PXZX].
385. Recommendation of the Council on Artificial Intelligence, Organisation for Economic
Co-operation and Development [OECD] 7–8, OECD/LEGAL/0449 (2022).
386. Recommendation on the Ethics of Artificial Intelligence, United Nations Educational,
Scientific and Cultural Organization [UNESCO] 20–22, SHS/BIO/PI/2021/1 (2022).

<<PAGE_BREAK>>

56:545] SYSTEMIC REGULATION OF AI 611
These guidelines, which have been adopted by all 193 UNESCO member
states, have been especially influential in developing countries.387
Soft law AI initiatives are not limited to the public sector.388 The
Partnership on AI, started by key industry players but now comprising
academic, civil society, and media organizations as well,389 has identified six
“pillars”—“sets of issues where [the Partnership] sees some of the greatest
risks and opportunities for AI”—and eight “tenets,” such as “seek[ing] to
ensure that AI technologies benefit and empower as many people as
possible.”390
As critics have noted, these principles tend to be general and difficult to
operationalize.391 However, other forms of soft law can provide more specific
direction. Technical standards are process, design, or manufacturing
specifications that—if well-designed and widely accepted—promote
consistency and safety.392 Technical standards typically reflect a consensus
developed from expert consultations but often arise though closed processes
that lack public input and democratic legitimacy.393 A handful of technical
standards for AI have been issued by the International Organization for
Standardization (“ISO”), Institute of Electrical and Electronics Engineers
(“IEEE”), and other entities.394 The ISO, a nongovernmental organization
composed of representatives of national standards bodies,395 has issued
several draft or final AI standards in partnership with the International
Electrotechnical Committee, including standards for AI management systems
(ISO 42001), AI governance (ISO 38507), and AI risk management (ISO
387. Melissa Hiekkila, Our Quick Guide to the 6 Ways We Can Regulate AI, MIT TECH. REV.
(May 22, 2023), https://www.technologyreview.com/2023/05/22/1073482/our-quick-guide-to-
the-6-ways-we-can-regulate-ai [https://perma.cc/X23W-GUZ7]; Ethics of Artificial Intelligence,
UNESCO, https://www.unesco.org/en/artificial-intelligence/recommendation-ethics
[https://perma.cc/Q42Y-842N].
388. Veale et al., supra note 334, at 5.
389. MARCHANT, supra note 377, at 7.
390. About Us, PARTNERSHIP ON AI, https://partnershiponai.org/about
[https://perma.cc/9LAR-U6BB].
391. UNESCO, supra note 351, at 16.
392. Walter G. Johnson & Diana M. Bowman, A Survey of Instruments and Institutions
Available for the Global Governance of Artificial Intelligence, 40 IEEE TECH. & SOC’Y MAG. 68,
71 (2021).
393. Id.; Veale et al., supra note 334, at 10.
394. Johnson & Bowman, supra note 392, at 71.
395. What We Do, ISO, https://www.iso.org/what-we-do.html [https://perma.cc/9EWM-
PK8Z].

<<PAGE_BREAK>>

612 ARIZONA STATE LAW JOURNAL [Ariz. St. L.J.
23894).396 The IEEE has issued draft or final standards on subjects such as
the transparency of autonomous systems, algorithmic bias, and addressing
ethical concerns during system design.397 The U.S. National Institute of
Standards and Technology, a public entity, has also issued a voluntary
framework for AI risk management.398 In addition, the G7 has released a code
of conduct for organizations developing advanced AI systems.399 These
various standards are increasingly serving as a starting point for efforts to
develop domestic regulation.400
5. Hard Law
Treaties, conventions, and similar instruments constitute hard law—
binding obligations of the states that enter into such agreements.401 A hard
law approach to AI could initially establish procedural requirements that are
easy to meet, such as disclosing how systems are monitored, their operators
registered, and their training runs audited—and later incorporate substantive
396. Hadrien Pouget, What Will the Role of Standards Be in AI Governance?, ADA
LOVELACE INST. (Apr. 5, 2023), https://www.adalovelaceinstitute.org/blog/role-of-standards-in-
ai-governance [https://perma.cc/7PK3-DH6B]; ISO/IEC 23894:2023(en), INT’L ORG. FOR
STANDARDIZATION, https://www.iso.org/obp/ui/en/#iso:std:iso-iec:23894:ed-1:v1:en
[https://perma.cc/LEG6-8KSR]; Sam De Silva & Barbara Zapisetskaya, Managing AI: What
Businesses Should Know About the Proposed ISO Standard, CMS LAW-NOW (Apr. 14, 2023),
https://cms-lawnow.com/en/ealerts/2023/04/managing-ai-what-businesses-should-know-about-
the-proposed-iso-standard [https://perma.cc/X3H5-DPL2].
397. See IEEE Introduces Free Access to AI Ethics and Governance Standards, LIBR.
LEARNING SPACE: ACCESS, https://librarylearningspace.com/ieee-introduces-free-access-to-ai-
ethics-and-governance-standards [https://perma.cc/7G2H-9RHP]; see also Alan F.T. Winfield et
al., IEEE P7001: A Proposed Standard on Transparency, FRONTIERS ROBOTICS & AI
(July 26, 2021), https://www.frontiersin.org/articles/10.3389/frobt.2021.665729/full
[https://perma.cc/A6HM-M6F2]; JOSEP SOLER GARRIDO ET AL., AI WATCH: ARTIFICIAL
INTELLIGENCE STANDARDISATION LANDSCAPE UPDATE 4–5 (2023).
398. NAT’L INST. OF STANDARDS & TECH., U.S. DEP’T OF COM., NIST AI 100-1, ARTIFICIAL
INTELLIGENCE RISK MANAGEMENT FRAMEWORK (AI RMF 1.0) (2023),
https://nvlpubs.nist.gov/nistpubs/ai/NIST.AI.100-1.pdf [https://perma.cc/YRG7-RVU2].
399. G7 2023 HIROSHIMA SUMMIT, HIROSHIMA PROCESS INTERNATIONAL CODE OF CONDUCT
FOR ORGANIZATIONS DEVELOPING ADVANCED AI SYSTEMS (2023),
https://www.mofa.go.jp/files/100573473.pdf [https://perma.cc/VG8V-5L9C]; G7 Leaders’
Statement on the Hiroshima AI Process, WHITE HOUSE (Oct. 30, 2023),
https://www.whitehouse.gov/briefing-room/statements-releases/2023/10/30/g7-leaders-
statement-on-the-hiroshima-ai-process/ [https://perma.cc/32XL-QHCM].
400. Pouget, supra note 396.
401. HUNTER ET AL., supra note 373, at 285.

<<PAGE_BREAK>>

56:545] SYSTEMIC REGULATION OF AI 613
standards as appropriate.402 Treaties typically do not apply to non-state
entities, however, and monitoring and enforcement may be ineffective.403
Furthermore, negotiating and ratifying treaties take significant time and
resources, and modifying treaties in response to new developments or
information is likewise difficult.404 These complexities pose a challenge to
treaty governance in rapidly developing fields such as AI.405
Domestic regulation can have transnational impacts and offers a likely
starting point for developing international AI regulation.406 While legislatures
have enacted dozens of laws that mention AI, many of these laws focus on
specific applications of AI, and not all seek to regulate it.407 Nonetheless,
growing momentum to regulate AI nationally, as well as stakeholder and
public support for AI regulation, suggest the feasibility of global AI
oversight.408 At the national level, overall approaches to AI regulation fall
into three basic categories: applying existing law, devising new regulations
that categorize AI applications by risk, and establishing requirements for
testing and approval before use.409
Looking to position itself “as an AI superpower,” the United Kingdom is
following the first approach.410 The United Kingdom directs regulators to
apply a principles-based AI framework, in combination with existing law, on
a context-specific basis.411 Rather than regulating AI as a general matter,
regulators are to consider specific uses of AI and incorporate principles such
as safety, fairness, and transparency into the application of existing rules to
AI.412 While AI-specific legislation might be adopted if necessary, the
402. How to Worry Wisely About Artificial Intelligence, ECONOMIST (Apr. 20, 2023),
https://www.economist.com/leaders/2023/04/20/how-to-worry-wisely-about-artificial-
intelligence; Bill Whyman, AI Regulation Is Coming—What Is the Likely Outcome?, CTR. FOR
STRATEGIC & INT’L STUD. (Oct. 10, 2023), https://www.csis.org/blogs/strategic-technologies-
blog/ai-regulation-coming-what-likely-outcome [https://perma.cc/X9DN-HNUQ].
403. BODANSKY, supra note 373, at 15–16, 157.
404. Marchant & Allenby, supra note 356, at 110.
405. MARCHANT, supra note 377, at 3.
406. Veale et al., supra note 334, at 12.
407. Shana Lynch, 2023 State of AI in 14 Charts, STAN. UNIV. HUMAN-CENTERED A.I. (Apr.
3, 2023), https://hai.stanford.edu/news/2023-state-ai-14-charts [https://perma.cc/B8YC-XX8U].
408. David Marchese, How Do We Ensure an A.I. Future that Allows for Human Thriving?,
N.Y. TIMES (May 2, 2023), https://www.nytimes.com/interactive/2023/05/02/magazine/ai-gary-
marcus.html (reporting comments by NYU professor Gary Marcus regarding bipartisan and
global support for international regulation of AI).
409. How to Worry Wisely About Artificial Intelligence, supra note 402.
410. DEPARTMENT FOR SCIENCE, INNOVATION AND TECHNOLOGY, A PRO-INNOVATION
APPROACH TO AI REGULATION, 2023, Cm. 815, at 2 (UK).
411. Id. at 5–6, 19, 25, 35.
412. Id. at 26–27.

<<PAGE_BREAK>>

614 ARIZONA STATE LAW JOURNAL [Ariz. St. L.J.
approach relies heavily on existing law, as complemented by soft law in the
form of technical standards and assurance techniques.413 This approach falls
short of what is needed in several regards—most notably its avoidance of
general technology regulation and its blindness to societal-level risks. Still, it
marks political will and interest in regulation of some kind.
The European Union, by contrast, is in the process of adopting a tiered,
risk-based approach.414 The EU Artificial Intelligence Act “categorizes
applications of AI into four levels of risk: unacceptable risk, high risk, limited
risk[,] and minimal or no risk.”415 Applications involving unacceptable risk,
such as AI systems using manipulative or deceptive techniques to distort
behavior and untargeted scraping of facial images to create facial recognition
databases, are prohibited.416 High-risk applications, which include use of AI
systems to influence elections and systems that may cause significant
potential harm to health, safety, fundamental rights, and the environment, are
subject to manufacturer assessment of impacts on fundamental rights as well
as other requirements.417 Limited risk applications, including deepfakes and
chatbots, are subject to minimal transparency obligations.418 For minimal or
no risk applications, member states are encouraged to apply voluntary codes
413. Id. at 29, 56.
414. Kim Mackrael, Sweeping Regulation of AI Advances in European Union Deal, WALL
ST. J. (Dec. 8, 2023), https://www.wsj.com/tech/ai/regulation-of-ai-advances-in-european-union-
deal-09d18355 (explaining that political deal reached on AI regulation in December 2023 still
requires final approval from parliamentarians and representatives); Jess Weatherbed, Why the AI
Act Was So Hard to Pass, VERGE (Dec. 13, 2023),
https://www.theverge.com/2023/12/13/23999849/eu-ai-act-artificial-intelligence-regulations-
complicated-delays [https://perma.cc/RC5L-66RB] (noting that E.U. agreement on AI regulation
is based on principles and that approved text of AI act is still being crafted).
415. Ryan Browne, Europe Takes Aim at ChatGPT with What Might Soon Be the West’s
First A.I. Law. Here’s What It Means, CNBC (May 15, 2023),
https://www.cnbc.com/2023/05/15/eu-ai-act-europe-takes-aim-at-chatgpt-with-landmark-
regulation.html [https://perma.cc/NB5N-27NK].
416. European Parliament Press Release, Artificial Intelligence Act: Deal on Comprehensive
Rules for Trustworthy AI (Dec. 9, 2023), https://www.europarl.europa.eu/news/en/press-
room/20231206IPR15699/artificial-intelligence-act-deal-on-comprehensive-rules-for-
trustworthy-ai [https://perma.cc/84LW-S3SL]; Council of the European Union Press Release
986/23, Artificial Intelligence Act: Council and Parliament Strike a Deal on the First Rules for AI
in the World (Dec. 9, 2023), https://www.consilium.europa.eu/en/press/press-
releases/2023/12/09/artificial-intelligence-act-council-and-parliament-strike-a-deal-on-the-first-
worldwide-rules-for-ai/pdf [https://perma.cc/RJS8-3QY3]. The legislation allows use of
biometric identification systems for law enforcement purposes in targeted searches involving
specified serious crimes. European Parliament Press Release, supra.
417. European Parliament Press Release, supra note 416; Veale & Borgesius, supra note 348,
at 102–06.
418. Veale & Borgesius, supra note 348, at 106.

<<PAGE_BREAK>>

56:545] SYSTEMIC REGULATION OF AI 615
of conduct.419 In addition, general-purpose AI systems are subject to
transparency obligations, as well as risk assessment and mitigation and other
requirements if they involve high impacts and systemic risk.420 The European
Union’s approach nonetheless fails to address misalignment concerns and to
capture several high-risk categories. It does not apply to AI systems used for
military or defense purposes, including autonomous weapons systems.421 It
also does little to address concerns about systems that can autonomously and
recursively self-improve.422 Yet, we should also acknowledge that this early
action illustrates a strong political will and interest in transnational
regulation.
China has taken a somewhat more restrictive approach with respect to
targeted AI applications. Building on its registration requirements for
specified AI algorithms, China issued an interim regulation for generative AI
in July 2023.423 Under this interim approach, providers of AI services to the
public for generating text, images, audio, video, or other content “bear
responsibility as the producers of online information content.”424 Providers
must “[e]mploy effective measures to increase the quality of training data,
and increase the truth, accuracy, objectivity, and diversity” of such data.425
Furthermore, providers of “generative AI services with public opinion
properties or the capacity for social mobilization” must carry out and submit
“security assessments” to regulators before making such services publicly
available.426 The regulation also includes privacy, transparency, and
accountability requirements,427 as well as a requirement that generated
content “[u]phold the Socialist Core Values.”428 Notably, the regulation
419. Id. at 98.
420. European Parliament Press Release, supra note 416.
421. Council of the European Union Press Release 986/23, supra note 416.
422. Id.
423. Sheehan, supra note 347, at 14.
424. Interim Measures for the Management of Generative Artificial Intelligence
Services, CHINA L. TRANSLATE art. 9 (July 13, 2023) [hereinafter Interim Measures],
https://www.chinalawtranslate.com/en/generative-ai-interim/ [https://perma.cc/K8LY-U96C].
425. Id. art. 7.
426. Id. art. 17; see also Josh Ye & Urvi Manoj Dugar, China Lets Baidu, Others Launch
ChatGPT-Like Bots to Public, Tech Shares Jump, REUTERS (Aug. 31, 2023),
https://www.reuters.com/technology/baidu-among-first-win-china-approval-ai-models-bloomberg-
news-2023-08-30/ [https://perma.cc/MH99-CRPP].
427. Interim Measures, supra note 424, arts. 4, 7, 10, 11, 15, 19; Matt O’Shaughnessy, What
a Chinese Regulation Proposal Reveals About AI and Democratic Values, CARNEGIE
ENDOWMENT FOR INT’L PEACE (May 16, 2023), https://carnegieendowment.org/2023/05/16/what-
chinese-regulation-proposal-reveals-about-ai-and-democratic-values-pub-89766
[https://perma.cc/8GD4-QVFD].
428. Interim Measures, supra note 424, art. 4(1).

<<PAGE_BREAK>>

616 ARIZONA STATE LAW JOURNAL [Ariz. St. L.J.
applies only to the private sector, not to governmental use of AI.429 As a result,
some observers worry China’s development and use of AI for national
security, surveillance, and military purposes will proceed unabated.430
Aspects from each of these approaches might be incorporated into global
AI standards. Depending on the desired functions of governance,
international AI governance may take distinct forms in different contexts. For
some AI applications, coordination and harmonization of standards will take
priority. In such instances, the International Civil Aviation Organization
(“ICAO”) might serve as an appropriate model for international
governance.431 This U.N. agency, charged with fostering the development of
international air transport, establishes standards and recommended practices
for international air navigation.432
In other contexts, managing the risks posed by AI will be of foremost
concern, requiring a more vigorous approach. In this vein, various
stakeholders have suggested that the IAEA might serve as a model for AI
regulation.433 “Focus[ed] on reducing existential risk,” an IAEA-like entity
could “inspect systems, require audits, test for compliance with safety
standards, [and] place restrictions on degrees of deployment and levels of
security.”434 Alternatively, a global AI regulator might have a more limited
sphere of responsibility, such as focusing on the use of autonomous
weapons.435
429. O’Shaughnessy, supra note 427. The regulations apply only to the provision of
generative AI services to the public, and not to research and development or internal use
within companies. See Mark MacCarthy, The US and Its Allies Should Engage with China
on AI Law and Policy, BROOKINGS INST. (Oct. 19, 2023),
https://www.brookings.edu/articles/the-us-and-its-allies-should-engage-with-china-on-ai-
law-and-policy/ [https://perma.cc/5JQ3-EHWP].
430. See Sigal Samuel, The Case for Slowing Down AI, VOX (Mar. 20, 2023, 7:58 AM EDT),
https://www.vox.com/the-highlight/23621198/artificial-intelligence-chatgpt-openai-existential-
risk-china-ai-safety-technology [https://perma.cc/VL85-G42W].
431. See Marcus & Reuel, supra note 369 (describing the ICAO as a “softer kind of model,
with less focus on enforcement”).
432. About ICAO, INT’L CIV. AVIATION ORG., https://www.icao.int/about-
icao/Pages/default.aspx [https://perma.cc/Y4U6-NXQS].
433. Altman et al., supra note 240; Press Release, Secretary-General, supra note 382 (noting
that the IAEA “is a model that could be very interesting” because it “is a very solid, knowledge-
based institution” that “has some regulatory functions”); Marcus & Reuel, supra note 369
(identifying IAEA as a possible precedent for global cooperation).
434. Altman et al., supra note 240.
435. See Kai-Fu Lee, The Third Revolution in Warfare, ATLANTIC (Sept. 11, 2021),
https://www.theatlantic.com/technology/archive/2021/09/i-weapons-are-third-revolution-
warfare/620013 [https://perma.cc/VS3P-KKDQ] (discussing regulation of, or ban on,
autonomous weapons, as potential responses to danger of autonomous weapons arms race);

<<PAGE_BREAK>>

56:545] SYSTEMIC REGULATION OF AI 617
While the IAEA can provide a useful precedent for international AI
regulation, distinctions between nuclear proliferation and AI suggest that AI
governance will be more complex. The IAEA regulates state actors, its
inspection and monitoring activities assume the ability to detect physical
nuclear material, and its role evolved over decades in response to revealed
gaps in oversight.436 By contrast, any AI oversight system will have to
account for AI development and use by both private actors and states across
a wide range of sectors.437 AI efforts will likely be more difficult to detect
because they lack the substantial physical footprint of nuclear weapons.438
While GPU server farms do leave a footprint, distributed training paradigms
may enable sophisticated actors to evade detection. Furthermore, AI is
developing rapidly, leaving less time for the gradual evolution of a
governance structure.439
International governance of AI need not require an international regulator,
however. An international treaty could spell out binding obligations to be
implemented by individual states, without oversight from an international
monitor. For example, the Convention on Artificial Intelligence, Human
Rights, Democracy, and the Rule of Law, adopted by the Council of Europe
in May 2024, obligates states to ensure that AI systems incorporate individual
privacy protections, transparency and auditability requirements, and safety
and security requirements.440 The treaty opens for signature on September 5,
2024, and could be signed by not only the forty-six member states of the
Council, but also observer states—including the United States, Mexico, and
Japan.441
UNESCO, supra note 351, at 333, 337–38 (urging adoption of a binding treaty to prohibit
antipersonnel autonomous weapons and regulating other uses of autonomous weapons).
436. Ian J. Stewart, Why the IAEA Model May Not Be Best for Regulating Artificial
Intelligence, BULL. ATOMIC SCIENTISTS (June 9, 2023), https://thebulletin.org/2023/06/why-the-
iaea-model-may-not-be-best-for-regulating-artificial-intelligence/ [https://perma.cc/9W4R-
7RAL].
437. Id.; Huw Roberts et al., Global AI Governance: Barriers and Pathways Forward,
100 INT’L AFFS. 1275, 1282 (May 7, 2024), https://academic.oup.com/
ia/article/100/3/1275/7641064 [https://perma.cc/UDU5-2DYZ].
438. Stewart, supra note 436.
439. See id.
440. Council of Europe Framework Convention on Artificial Intelligence, Human Rights,
Democracy and the Rule of Law, COUNCIL OF EUR. (May 17, 2024), https://rm.coe.int/1680afae3c
[https://perma.cc/E5GG-Q4EC]; see Hannah van Kolfschooten & Carmel Shachar, The Council of
Europe’s AI Convention (2023–2024): Promises and Pitfalls for Health Protection, 138 HEALTH
POL’Y 104935 (2023).
441. Hiekkilä, supra note 387.

<<PAGE_BREAK>>

618 ARIZONA STATE LAW JOURNAL [Ariz. St. L.J.
Ongoing efforts to develop oversight and accountability mechanisms for
AI, whether in the form of registries, principles, technical standards, or
domestic law, reflect the accretion of an AI governance network. These
various mechanisms are laying the foundation for international governance
of AI. Strengthening connections between key players in governance can
facilitate information-sharing, coordination, and norm-building.442 While
establishing binding and meaningful international governance of AI may
prove challenging, precedents in other areas indicate that such governance is
achievable and normatively desirable.
V. CONCLUSION
This Article lays out the case for the broad, systemic regulation of AI. The
dangers of AI systems extend to present and future harms. They range from
fraud and misinformation to property damage and human lives. They threaten
communities and they may involve national or transnational threats. Our
principal argument is that all these risks matter. To mitigate these risks and
allow society to reap the benefits of this new technology, comprehensive
government regulation will be necessary.
The present AI moment already exposes a sliver of the full dangers of AI
systems. Their broad deployment threatens bias and discrimination on a new
scale, the erosion of social trust, and uncomfortable threats to privacy when
algorithms can infer our intimate secrets. As AI systems gain new
capabilities, they may have transformative effects on labor markets with
resulting impacts on wealth and inequality. Their military applications can be
used to make violence efficient and accurate to an unprecedented degree. And
their power could engender new modes of surveillance and totalitarianism.
These threat profiles largely stem from misuse by AI system engineers.
But these systems can also cause massive social harms due to their own
misalignment. We have detailed the alignment problem and noted that we
should expect that even systems pursuing benign goals will impose
considerable social risks. Solving the alignment problem, however, turns out
to be more complex than most realize. It is a problem that we currently do
not know how to solve.
We see both benefits and risks in the future development and deployment
of AI systems. We have demonstrated that, even on a conventional cost-
benefit basis, the case for regulation is strong. Recognizing uncertainty does
not alter that; rather, reasonable precaution demands that future development
442. Roberts et al., supra note 437, at 13–14.

<<PAGE_BREAK>>

56:545] SYSTEMIC REGULATION OF AI 619
be even more tightly regulated. To that end, we have provided a set of
regulatory recommendations, based on both a domestic and an international
strategy. We explored a set of seven principles that domestic regulation
should follow. We also explored international precedents and noted the
important role of a combination of transparency and secrecy. We also
demonstrated that international cooperation is indeed plausible and
highlighted a variety of examples to that effect.
Ultimately, every honest assessment must start and end with epistemic
humility. We simply do not know many things, and we do not always know
the things that we do not know. But if there is a deep uncertainty over whether
a plane is safe or not, it is best not to board it.443 AI systems promise power.
It is the hardest thing to resist. Market participants would like to assure us
that they will use it responsibly and will not deploy systems that are unsafe.
They would like to see, if anything, regulation that focuses on bits and
parcels, and only on specific applications. We believe that there is a role for
robust, systemic regulation, and that an informed policy conversation about
the risks and upsides of AI will point the way toward the optimal regulatory
approach. We hope to have started that conversation here.
443. NASSIM NICHOLAS TALEB, ANTIFRAGILE: THINGS THAT GAIN FROM DISORDER 160
(2012).

---

## ssrn-4809006: 
Year: 2024
Authors: Yonathan Arbel
Source: papers/ssrn-4809006/paper.txt



Electronic copy available at: https://ssrn.com/abstract=4809006

<<PAGE_BREAK>>

INTRODUCTION
Electronic copy available at: https://ssrn.com/abstract=4809006

<<PAGE_BREAK>>

𝑇𝑖𝑚𝑒 𝑎𝑛𝑑 𝐶𝑜𝑛𝑡𝑟𝑎𝑐𝑡 𝐼𝑛𝑡𝑒𝑟𝑝𝑟𝑒𝑡𝑎𝑡𝑖𝑜𝑛
Electronic copy available at: https://ssrn.com/abstract=4809006

<<PAGE_BREAK>>

I. TWO AND HALF THEORIES OF INTERPRETATION
Electronic copy available at: https://ssrn.com/abstract=4809006

<<PAGE_BREAK>>

𝑇𝑖𝑚𝑒 𝑎𝑛𝑑 𝐶𝑜𝑛𝑡𝑟𝑎𝑐𝑡 𝐼𝑛𝑡𝑒𝑟𝑝𝑟𝑒𝑡𝑎𝑡𝑖𝑜𝑛
Electronic copy available at: https://ssrn.com/abstract=4809006

<<PAGE_BREAK>>

*
Electronic copy available at: https://ssrn.com/abstract=4809006

<<PAGE_BREAK>>

𝑇𝑖𝑚𝑒 𝑎𝑛𝑑 𝐶𝑜𝑛𝑡𝑟𝑎𝑐𝑡 𝐼𝑛𝑡𝑒𝑟𝑝𝑟𝑒𝑡𝑎𝑡𝑖𝑜𝑛
II. CONTRACT INTERPRETATION: FINDING MEANING OR
PREDICTING INTENT?
Electronic copy available at: https://ssrn.com/abstract=4809006

<<PAGE_BREAK>>

“A sentence is never not in a context. We are never
not in a situation. . . . A set of interpretive assumptions is
always in force. A sentence that seems to need no
interpretation is already the product of one.” Fish
(1978)
[Textualists believe that t]he [judge can] . . . retir[e]
into that lawyer’s Paradise where all words have a fixed,
precisely ascertained meaning; where men may express
their purposes, not only with accuracy, but with fullness;
and where, if the writer has been careful, a lawyer,
having a document referred to him, may sit in his chair,
inspect the text, and answer all questions without raising
his eyes “(Thayer, 1898, at 428-29)
[I]t can hardly be insisted on too often or too
vigorously that language at its best is always a defective
Electronic copy available at: https://ssrn.com/abstract=4809006

<<PAGE_BREAK>>

𝑇𝑖𝑚𝑒 𝑎𝑛𝑑 𝐶𝑜𝑛𝑡𝑟𝑎𝑐𝑡 𝐼𝑛𝑡𝑒𝑟𝑝𝑟𝑒𝑡𝑎𝑡𝑖𝑜𝑛
and uncertain instrument, that words to not define
themselves, that terms and sentences in a contract, a
deed or a will do not apply themselves to external objects
and performances, that the meaning of such terms and
sentences consists of the ideas that they induce in the
mind of some individual person who uses or hears or
reads them, and that seldom in a litigated case do the
words of a contract convey one identical meaning to the
two contracting parties or to third persons. Therefore, it
is invariably necessary, before a court can give any
meaning to the words of a contract and can select one
meaning rather than other possible ones as the basis for
the determination of rights and other legal effects, that
extrinsic evidence shall be heard to make the court
aware of the “surrounding circumstances,” including
the other persons, objects, and events to which the words
can be applied and which caused the words to be used.
(emphasis added) (Corbin, 1960, at §535)
Electronic copy available at: https://ssrn.com/abstract=4809006

<<PAGE_BREAK>>

III. PRECISION AND ACCURACY
Electronic copy available at: https://ssrn.com/abstract=4809006

<<PAGE_BREAK>>

𝑇𝑖𝑚𝑒 𝑎𝑛𝑑 𝐶𝑜𝑛𝑡𝑟𝑎𝑐𝑡 𝐼𝑛𝑡𝑒𝑟𝑝𝑟𝑒𝑡𝑎𝑡𝑖𝑜𝑛
Electronic copy available at: https://ssrn.com/abstract=4809006

<<PAGE_BREAK>>

Electronic copy available at: https://ssrn.com/abstract=4809006

<<PAGE_BREAK>>

𝑇𝑖𝑚𝑒 𝑎𝑛𝑑 𝐶𝑜𝑛𝑡𝑟𝑎𝑐𝑡 𝐼𝑛𝑡𝑒𝑟𝑝𝑟𝑒𝑡𝑎𝑡𝑖𝑜𝑛
Figure 1 Contextualism vs. Textualism as Precision vs. Accuracy
Electronic copy available at: https://ssrn.com/abstract=4809006

<<PAGE_BREAK>>

Electronic copy available at: https://ssrn.com/abstract=4809006

<<PAGE_BREAK>>

𝑇𝑖𝑚𝑒 𝑎𝑛𝑑 𝐶𝑜𝑛𝑡𝑟𝑎𝑐𝑡 𝐼𝑛𝑡𝑒𝑟𝑝𝑟𝑒𝑡𝑎𝑡𝑖𝑜𝑛
IV. BIAS V. VARIANCE
2006
Electronic copy available at: https://ssrn.com/abstract=4809006

<<PAGE_BREAK>>

𝑀𝑆𝐸 = 𝐵𝑖𝑎𝑠2+𝑣𝑎𝑟𝑖𝑎𝑛𝑐𝑒+𝑖𝑟𝑟𝑒𝑑𝑢𝑐𝑖𝑏𝑙𝑒 𝑒𝑟𝑟𝑜𝑟𝑠
Electronic copy available at: https://ssrn.com/abstract=4809006

<<PAGE_BREAK>>

𝑇𝑖𝑚𝑒 𝑎𝑛𝑑 𝐶𝑜𝑛𝑡𝑟𝑎𝑐𝑡 𝐼𝑛𝑡𝑒𝑟𝑝𝑟𝑒𝑡𝑎𝑡𝑖𝑜𝑛
2
𝐵𝑖𝑎𝑠2 = (𝐸 (𝑓̂(𝑥;𝐷)−𝑓(𝑥))
𝐷
𝑉𝑎𝑟𝑖𝑎𝑛𝑐𝑒 = 𝐸 [(𝑓̂(𝑥;𝐷)−𝐸 [𝑓̂(𝑥;𝐷)]) 2 ]
𝐷 𝐷
𝑓̂
1992
Electronic copy available at: https://ssrn.com/abstract=4809006

<<PAGE_BREAK>>

Electronic copy available at: https://ssrn.com/abstract=4809006

<<PAGE_BREAK>>

𝑇𝑖𝑚𝑒 𝑎𝑛𝑑 𝐶𝑜𝑛𝑡𝑟𝑎𝑐𝑡 𝐼𝑛𝑡𝑒𝑟𝑝𝑟𝑒𝑡𝑎𝑡𝑖𝑜𝑛
Electronic copy available at: https://ssrn.com/abstract=4809006

<<PAGE_BREAK>>

V. INTERPRETATION VERSUS SIMULATION
Electronic copy available at: https://ssrn.com/abstract=4809006

<<PAGE_BREAK>>

𝑇𝑖𝑚𝑒 𝑎𝑛𝑑 𝐶𝑜𝑛𝑡𝑟𝑎𝑐𝑡 𝐼𝑛𝑡𝑒𝑟𝑝𝑟𝑒𝑡𝑎𝑡𝑖𝑜𝑛
Electronic copy available at: https://ssrn.com/abstract=4809006

<<PAGE_BREAK>>

Electronic copy available at: https://ssrn.com/abstract=4809006

<<PAGE_BREAK>>

𝑇𝑖𝑚𝑒 𝑎𝑛𝑑 𝐶𝑜𝑛𝑡𝑟𝑎𝑐𝑡 𝐼𝑛𝑡𝑒𝑟𝑝𝑟𝑒𝑡𝑎𝑡𝑖𝑜𝑛
“Should [Alice] be absolutely confident that [Bob]
prefers the new arrangement, it would not be a breach of
[Alice’s] promise for her to leave a message for [Bob]
simply informing [Bob] of the new plan. [Bob’s]’s actual
consent is not important where there is no uncertainty
about [Bob’s]’s understanding of her interests.”
“Because intimates know more about each other,
they can more reliably assess and act on a richer account
of each other’s evolving interests; to the extent this holds
true, they can adopt and continually update an ex-post
view.”
Electronic copy available at: https://ssrn.com/abstract=4809006

<<PAGE_BREAK>>

Electronic copy available at: https://ssrn.com/abstract=4809006

<<PAGE_BREAK>>

𝑇𝑖𝑚𝑒 𝑎𝑛𝑑 𝐶𝑜𝑛𝑡𝑟𝑎𝑐𝑡 𝐼𝑛𝑡𝑒𝑟𝑝𝑟𝑒𝑡𝑎𝑡𝑖𝑜𝑛
Electronic copy available at: https://ssrn.com/abstract=4809006

<<PAGE_BREAK>>

Electronic copy available at: https://ssrn.com/abstract=4809006

<<PAGE_BREAK>>

𝑇𝑖𝑚𝑒 𝑎𝑛𝑑 𝐶𝑜𝑛𝑡𝑟𝑎𝑐𝑡 𝐼𝑛𝑡𝑒𝑟𝑝𝑟𝑒𝑡𝑎𝑡𝑖𝑜𝑛
Electronic copy available at: https://ssrn.com/abstract=4809006

<<PAGE_BREAK>>

CONCLUSION
Electronic copy available at: https://ssrn.com/abstract=4809006

<<PAGE_BREAK>>

𝑇𝑖𝑚𝑒 𝑎𝑛𝑑 𝐶𝑜𝑛𝑡𝑟𝑎𝑐𝑡 𝐼𝑛𝑡𝑒𝑟𝑝𝑟𝑒𝑡𝑎𝑡𝑖𝑜𝑛
1. Arbel, Yonathan and David Hoffman. “Generative
Interpretation.” New York University Law Review
(Forthcoming, 2024).
2. Bagchi, Aditi. "Separating Contract and Promise." Florida
State University Law Review 38 (2011): 709-758.
3. Barnett, Randy E. "The Sound of Silence: Default Rules and
Contractual Consent." Virginia Law Review 78, no. 4 (1992):
821-911.
4. Bridgeman, Curtis. "Default Rules, Penalty Default Rules,
and New Formalism." Florida State University Law Review
33, no. 3 (2006): 683-720.
5. Corbin, Arthur Linton. Corbin on Contracts. 1st ed. St. Paul,
MN: West Publishing Co., 1960.
6. DiMatteo, Larry A. "Reason and Context: A Dual Track
Theory of Interpretation." Penn State Law Review 109, no. 2
(2004): 397-486.
7. Eisenberg, Melvin A. Foundational Principles of Contract
Law. New York: Oxford University Press, 2018.
8. Fish, Stanley. "Normal Circumstances, Literal Language,
Direct Speech Acts, the Ordinary, the Everyday, the Obvious,
What Goes without Saying, and Other Special Cases."
Critical Inquiry 4, no. 4 (1978): 625-644.
9. Geman, Donald, Edir Bienenstock, and René Doursat.
"Neural Networks and the Bias/Variance Dilemma." Neural
Computation 4, no. 1 (1992): 1-58.
10. Gilson, Ronald J., Charles F. Sabel, and Robert E. Scott.
"Text and Context: Contract Interpretation as Contract
Design." Cornell Law Review 100, no. 1 (2014): 23-98.
11. Goldberg, Victor P. "Impossibility and Related Excuses."
Journal of Institutional and Theoretical Economics (JITE) /
Zeitschrift Für Die Gesamte Staatswissenschaft 144, no. 1
(1988): 100-116.
12. Greene, Marjorie. "Theories of Interpretation in the Law of
Contracts." The University of Chicago Law Review 6, no. 3
(1939): 374-394.
13. Klass, Gregory. "Interpretation and Construction in Contract
Law." Georgetown Law Faculty Publications and Other
Works, 2018.
https://papers.ssrn.com/sol3/papers.cfm?abstract_id=2913228
.
Electronic copy available at: https://ssrn.com/abstract=4809006

<<PAGE_BREAK>>

14. Leech, Geoffrey, and Jenny Thomas. "Language, Meaning
and Context: Pragmatics." In An Encyclopedia of Language,
edited by N.E. Collinge, 173-206. London: Routledge, 1989.
15. Linzer, Peter. "The Comfort of Certainty: Plain Meaning and
the Parol Evidence Rule." Fordham Law Review 71, no. 3
(2002): 799-836.
16. Listokin, Yair. "The Meaning of Contractual Silence: A Field
Experiment." Journal of Legal Analysis 2, no. 2 (2010): 397-
416.
17. Maggs, Gregory E. "Karl Llewellyn's Fading Imprint on the
Jurisprudence of the Uniform Commercial Code." University
of Colorado Law Review 71, no. 2 (2000): 541-588.
18. Martinez, Eric, and Kevin Tobia. "What Do Law Professors
Believe About Law and the Legal Academy?" Georgetown
Law Journal 112 (forthcoming 2023): 1120189.
19. McElroy, R. G., and Glanville Williams. "The Coronation
Cases—I." Modern Law Review 4, no. 4 (April 1941): 241-
60. https://doi.org/10.1111/j.1468-2230.1940.tb00777.x.
20. Mitchell, Catherine. Interpretation of Contracts. 2nd ed.
London: Routledge-Cavendish, 2019.
21. Posner, Richard A. "The Law and Economics of Contract
Interpretation." Law & Economics Working Paper No. 229,
John M. Olin Program in Law and Economics, University of
Chicago Law School, 2004.
22. Saussure, Ferdinand de. Course in General Linguistics.
Edited by Charles Bally and Albert Sechehaye. Translated by
Wade Baskin. New York: Philosophical Library, 1959.
23. Schwartz, Alan, and Robert E. Scott. "Contract Interpretation
Redux." The Yale Law Journal 119, no. 5 (2010): 926-964.
24. Schwartz, Alan, and Robert E. Scott. "The Limits of Contract
Law." Yale Law Journal 113 (2003): 541, 573.
25. Scott, Robert E. "The Rise and Fall of Article 2." Louisiana
Law Review 62, no. 4 (2002): 1009-1064.
26. Scott, Robert E., and George G. Triantis. "Anticipating
Litigation in Contract Design." The Yale Law Journal 115,
no. 4 (2006): 814-879.
27. Shackel, Nicholas. "The Vacuity of Postmodernist
Methodology." Metaphilosophy 36, no. 3 (2005): 295-320.
28. Shalev-Shwartz, Shai, and Shai Ben-David. Understanding
Machine Learning: From Theory to Algorithms. New York:
Cambridge University Press, 2014.
Electronic copy available at: https://ssrn.com/abstract=4809006

<<PAGE_BREAK>>

𝑇𝑖𝑚𝑒 𝑎𝑛𝑑 𝐶𝑜𝑛𝑡𝑟𝑎𝑐𝑡 𝐼𝑛𝑡𝑒𝑟𝑝𝑟𝑒𝑡𝑎𝑡𝑖𝑜𝑛
29. Silverstein, Joshua M. "The Contract Interpretation Policy
Debate: A Primer." Stanford Journal of Law, Business &
Finance 26, no. 2 (2021): 222-294.
30. Stempel, Jeffrey W., and Erik S. Knutsen. "Rejecting Word
Worship: An Integrative Approach to Judicial Construction
of Insurance Policies." University of Cincinnati Law Review
90, no. 2 (2021): 561-636.
31. Thayer, James Bradley. A Preliminary Treatise on Evidence
at the Common Law. Boston: Little, Brown, and Company,
1898.
32. Wellman, Henry M. "Developing a Theory of Mind." In The
Wiley-Blackwell Handbook of Childhood Cognitive
Development, edited by Usha Goswami, 258-284. 2nd ed.
Malden, MA: Wiley-Blackwell, 2011.
Electronic copy available at: https://ssrn.com/abstract=4809006

---

## ssrn-4873649: JUDICIAL ECONOMY IN THE AGE OF AI
Year: 2025
Authors: Yonathan Arbel
Source: papers/ssrn-4873649/paper.txt

JUDICIAL ECONOMY IN THE AGE OF AI
YONATHAN A. ARBEL ∗
Individuals do not vindicate the majority of their legal claims
because of access to justice barriers. This entrenched state of
affairs is now facing a disruption. Lawyers and non-lawyers
alike are adopting artificial intelligence (AI) tools to perform
legal tasks—tools that sharply reduce the costs of generating
legal materials. There is finally hope that AI might allow
many more to access justice.
Paradoxically, what we gain in access to justice we might lose
in the delivery of justice. The problem is not that AI tools are
ineffective. Indeed, they are even more effective than most
realize—affecting every stage of the naming, blaming, and
claiming process. The problem is that this change necessarily
increases the volume and verbosity of the caseload thus
threatening judicial economy; the balance of scarce judicial
resources in relation to shifts in demand for legal services.
Historically, judges and legislatures have often met
challenges to judicial economy by adjusting “legal
thermostats”: ad-hoc adaptations to procedural rules and
even substantive doctrines meant to curb the flow of litigation.
But these adaptations invariably imply the shrinking of
substantive rights. We run the risk, then, that litigants who
finally gain access to justice will find narrow rights and
stringent administrative procedures. To avoid this trajectory,
I advocate a proactive framework of AI integration. Instead of
fighting a losing battle against the symptoms of AI adoption
by litigants, the legal system should integrate AI tools to
enhance and scale up the legal process itself. By thoughtfully
* Alfred Rose Professor of Law, Silver Faculty Scholar, University of Alabama
School of Law. The author would like to thank Matt Tokson, Russell Gold, Benjamin
McMichael, Mirit Eyal-Cohen, Marcus Gadson, Heather Elliott, and Richard Re.
Justin Heydt provided invaluable research assistance. The editors of the University
of Colorado Law Review have provided exceptionally careful edits and their
contribution is notable. A version of this Essay was prepared for the 2024 Judges
Forum of the National Civil Justice Institute, on Artificial Intelligence and the
Courts.

<<PAGE_BREAK>>

550 UNIVERSITY OF COLORADO LAW REVIEW [Vol. 96
and carefully incorporating these tools, we can ensure that we
reap the fruits of greater access to justice, even in the face of a
rapidly expanding caseload.
INTRODUCTION .......................................................................... 550
I. THE AI LITIGATION BOOM .............................................. 557
A. AI Legal Efficacy ...................................................... 557
B. AI Uptake ................................................................. 563
C. AI Impact on Access to Justice ................................ 565
II. LEGAL THERMOSTATS ..................................................... 569
III. LEGAL STRATEGIES THAT DEAL WITH THE AI
LITIGATION BOOM ........................................................... 576
A. Strategy 1: Legal Thermostats: Fees, Pleading
Standards, and Substantive Standards .................. 577
B. Strategy 2: Sit and Wait .......................................... 580
C. Strategy 3: Ban and Mark ....................................... 582
D. Strategy 4: Massive Funding .................................. 583
E. Strategy 5: Integration ............................................ 584
IV. CONCLUSION ................................................................... 592
INTRODUCTION
Most legal disputes are not filed anywhere. While estimates
on access to justice barriers are notoriously unreliable,1 a recent
study suggests that about 120 million legal problems are left
unresolved every year.2 Around 75 percent of low-income
Americans suffer significant civil legal issues, but 92 percent of
these problems receive little to no legal aid.3 One commentator
estimates that one hundred million Americans live with “civil
1. See generally Rebecca L. Sandefur, Paying Down the Civil Justice Data
Deficit: Leveraging Existing National Data Collection, 68 S.C. L. REV. 295 (2016)
(“In the arena of civil justice, we face a severe data deficit.”). On the various barriers
to access, see infra Section I.C.
2. INSTITUTE FOR THE ADVANCEMENT OF THE AMERICAN LEGAL SYSTEM,
JUSTICE NEEDS AND SATISFACTION IN THE UNITED STATES OF AMERICA 8, (Sept.
1, 2021) [hereinafter JUSTICE NEEDS], https://iaals.du.edu/sites/default/files
/documents/publications/justice-needs-and-satisfaction-us.pdf [https://perma.cc
/7VW8-Q3WM]. For comparison, one estimate considers that 100 million cases are
handled by state courts every year. State of the State Courts: 2022 Presentation,
NCSC (2022), https://www.ncsc.org/__data/assets/pdf_file/0019/85204/SSC_2022
_Presentation.pdf [https://perma.cc/5D6L-YMQK].
3. LEGAL SERVS. CORP., FY 2025 BUDGET REQUEST 5, [hereinafter FY 2025
BUDGET REQUEST] https://lsc-live.app.box.com/s
/oi1atcgn8xmvofc70aildz3bhg5p0zn5 [https://perma.cc/D7DE-9C78].

<<PAGE_BREAK>>

2025] JUDICIAL ECONOMY IN THE AGE OF AI 551
justice problems,” many of which affect their “basic human
needs.”4
The barriers to justice are legion, but most can be expressed
in terms of cost.5 Lawyers charge an average of $292 per hour,6
with common disputes costing between $2,754 and $6,370.7 On
the other side of the cost spectrum, commercial actors will spend
roughly $2 million in outside legal fees to litigate in full cases.8
Diverse faces and narratives lie behind these numbers, such as
Eloisa Veles a Queens resident who recently lost her factory job.9
A local family hired her as a housekeeper, promising $600 per
week, only to “stiff” her and pay $300 when the time came. More
telling than the incident itself is how it is described: Eloisa did
not have her contract breached, her rights violated, or her money
stolen—she was “stiffed.”10
The sheer size of the investment required to close the gap
bedevils attempts to resolve access to justice problems. Even
doubling legal aid budgets has done little to narrow the gap.11
Due to resource constraints, 1.8 million people are turned down
4. Rebecca L. Sandefur, What We Know and Need to Know about the Legal
Needs of the Public, 67 S. C. L. REV. 443, 446 (2016).
5. See generally DEBORAH RHODE, ACCESS TO JUSTICE (2004). See also Gillian
K. Hadfield, Legal Markets, 60 J. ECON. LIT. 1264, 1291 (2022) [hereinafter Legal
Markets] (“The principal reason that so few individuals and small businesses avail
themselves of legal services is cost and availability.”). See also Gillian K. Hadfield,
Higher Demand, Lower Supply? A Comparative Assessment of the Legal Resource
Landscape for Ordinary Americans, 37 FORDHAM URB. L.J. 129 (2010) (noting that
access to justice affects not just poorer Americans but also middle America). On
sociolegal barriers, see discussion infra Section I.C.
6. LEGAL TRENDS REPORT, CLIO 14 (2023), https://clio.drift.click/2023-ltr
[https://perma.cc/RG3K-HTRP].
7. See JUSTICE NEEDS, supra note 2, at 47.
8. LAWS. FOR CIV. JUST. REFORM GRP. & U.S. CHAMBER INST. FOR LEGAL
REFORM, LITIGATION COST SURVEY OF MAJOR COS. 14 (2010), https://
www.uscourts.gov/sites/default/files/litigation_cost_survey_of_major_companies
_0.pdf [https://perma.cc/AC3L-268A].
9. Noam Scheiber, Stiffing Workers on Wages Grows Worse with Recession,
N.Y. TIMES (Sept. 3, 2020), https://www.nytimes.com/2020/09/03/business/economy
/wage-theft-recession.html [https://perma.cc/2AMX-M3Q3].
10. I discuss legal consciousness as a barrier to justice. See discussion infra
Section I.C.
11. According to the Legal Services Corporation data, between 2013–2022, total
funding for legal aid has increased (inflation adjusted) from $1 billion to
$1.76 billion. See LEGAL SERVS. CORP., BY THE NUMBERS 2022: THE DATA
UNDERLYING LEGAL AID PROGRAMS 11 (2023) [hereinafter BY THE NUMBERS 2022],
https://lsc-live.app.box.com/s/h2bajpr3gps4s4a1iio6fwiddhmu1nwb [https://
perma.cc/UQ7R-LZLE]; Nora Freeman Engstrom & David Freeman Engstrom, The
Making of the A2J Crisis, 75 STAN. L. REV. ONLINE 146, 153 (Apr. 2024). (“[E]ven a
vast increase over current commitments would barely dent the current crisis.”).

<<PAGE_BREAK>>

552 UNIVERSITY OF COLORADO LAW REVIEW [Vol. 96
annually.12 To put this in perspective, the rate of legal aid
lawyers to eligible clients is 1 to 15,625.13
Recently, Nora and David Freeman Engstrom have sought
to center the problem of access to justice around legal tech.14
While others have already noted legal tech as a potential
barrier,15 they draw on the debt collection litigation literature
to fashion a somewhat different argument.16 As this literature
demonstrated, this is an area where there is a systemic access
issue for low-income defendants, who often cannot afford to
mount an effective defense even when one exists, resulting in a
default-judgment mill against them.17 The Engstroms frame the
asymmetry in power as resulting from an underlying asymmetry
in legal tech adoption patterns.18 While firms zealously adopt
legal tech, they only see “anemic adoption” by individuals.19 In
particular, they claim that large firms systemize and automate
litigation, whereas individuals are still reliant on “analog
tools.”20 While this argument is too strong to be true, it does
have a kernel of truth to it.21 Or at least it used to.
12. FY 2025 BUDGET REQUEST, supra note 3, at 4.
13. Hanna Kozlowska, There’s a Devastating Shortage of Lawyers in the U.S.
Who Can Help the Poor with Eviction or Child Custody Cases, QUARTZ
(May 12, 2016), https://qz.com/681971/for-every-10000-poor-people-in-the-united-
states-theres-less-than-1-lawyer-who-can-help-them-with-an-eviction-or-child-
custody-case [https://perma.cc/U3UC-VKXH].
14. See Engstrom & Engstrom, supra note 11. But see Legal Markets, supra
note 5, at 1303 (arguing that regulation favors traditional lawyering across the
board at the expense of legal tech).
15. See Legal Markets, supra note 5.
16. See generally Yonathan A. Arbel, Adminization: Gatekeeping Consumer
Contracts, 71 VAND. L. REV. 121 (2018) (discussing robo-signing and other
problematic creditor practices in debt collection cases and offering
administrative-technological solutions); Daniel Wilf-Townsend, Assembly-Line
Plaintiffs, 135 HARV. L. REV. 1704, 1773 (2022) (“Assembly-line plaintiffs show no
sign of slowing down. Because of both the increases in consumer debt and the
improvements in their litigation technology, they continue to grow . . . .”).
17. Wilf-Townsend, supra note 16, at 1773.
18. Engstrom & Engstrom, supra note 11, at 159.
19. See id. at 162. This asymmetry is also discussed in Yonathan A. Arbel &
Roy Shapira, Theory of the Nudnik: The Future of Consumer Activism and What We
Can Do to Stop It, 73 VAND. L. REV. 929, 962 (2020) (focusing on the concern that
firms employ advanced tools to defang litigation-prone consumers at very early
stages of their claiming process).
20. See Engstrom & Engstrom, supra note 11, at 163.
21. Most litigants rely on the Internet and other digital tools to amass
information, communicate about it, and draft and file litigation. See, e.g., Margaret
Hagan, Data on People’s Reliance on the Internet for Legal Problems, A BETTER
LEGAL INTERNET (Nov. 2, 2022), http://betterinternet.law.stanford.edu/2022/11/02

<<PAGE_BREAK>>

2025] JUDICIAL ECONOMY IN THE AGE OF AI 553
We are now witnessing a sea change in the patterns of
technological adoption. Most are by now familiar with the
occasional news story of a hapless lawyer using AI to comedically
bad outcomes.22 The narrative involves a work-shy lawyer
submitting an AI-generated and hallucination-riddled brief to
an exasperated judge, who then admonishes and sanctions the
lawyer. Such widespread stories seem to draw their memetic
power from commonplace Shakespearean perceptions of our
profession. Incidentally, they also reify an elitist notion that only
artisanal lawyering is real lawyering. And perhaps most
alluring, they affirm a comforting thought: Getting down to
brass tacks, AI is but a cold machine that will not be able to
usurp our jobs.
Reassuring and entertaining as such surface themes are,
they also distract from the broader reality that they unwittingly
reveal. These stories display how AI is being deployed in
practice, with two surprising patterns. First, they are being
adopted even by small law firms who, at least traditionally, are
rarely early adopters of cutting-edge technologies. Second, they
are being adopted despite broad knowledge that these tools are
imperfect. The point being that even if these tools are only
sometimes reliable, they are always convenient. And this
convenience and accessibility seem to drive many end users.
The expected outcome of democratizing litigation technology
is a sharp pruning of the cost of producing legal materials.23 As
such, the technology presents a heavyweight contender to the
many barriers to justice that plague the system. The expected,
indeed, desired, effect is a litigation boom, driven by those
currently denied access to justice. And while our first instinct
might be to celebrate the dismantling of access to justice
/data-on-peoples-reliance-on-the-internet-for-legal-problems [https://perma.cc
/A65A-PG7D]; see also Benjamin H. Barton, The Future of American Legal Tech:
Regulation, Culture, Markets, in LEGAL TECH AND THE FUTURE OF CIV. JUST. 21, 29
(David Freeman Engstrom ed., 2023) (“Nor has legal aid shied away from using
technology to forward its mission.”).
22. See, e.g., Benjamin Weiser, Here’s What Happens When Your Lawyer Uses
ChatGPT, N.Y. TIMES (May 27, 2023), https://www.nytimes.com/2023/05/27
/nyregion/avianca-airline-lawsuit-chatgpt.html [https://perma.cc/V6ZM-64RV];
Molly Bohannon, Lawyer Used ChatGPT In Court—And Cited Fake Cases. A Judge
Is Considering Sanctions, FORBES (June 8, 2023), https://www.forbes.com/sites
/mollybohannon/2023/06/08/lawyer-used-chatgpt-in-court-and-cited-fake-cases-a-
judge-is-considering-sanctions [https://perma.cc/HP4U-7PDD].
23. For cost comparisons between human lawyers and state-of-the-art AI
models, see infra pp. 8–9 and note 35. The point here is static, but there are
important dynamic effects, given that costs will decline across the industry.

<<PAGE_BREAK>>

554 UNIVERSITY OF COLORADO LAW REVIEW [Vol. 96
barriers, realism about judicial economy cautions great care.
The question we must ask ourselves is whether a legal system
already critiqued for being clogged and dilatory, a system whose
judges are overworked and under-resourced, will be capable of
handling the impending AI boom in litigation.24 What changes
will be made to our laws, rules, and standards to accommodate
such a spike? What will be the knock on effects of such a
disruption to the status quo? Ultimately, would we find
ourselves with a system with a truly greater degree of access to
justice?
My prescriptive thesis, in a nutshell, is this: We should not
sit and wait until a litigation boom forces our hand. The early
evidence suggests that AI is being integrated within legal
practices across the country. The legal system, I shall argue,
should keep pace. True, the AI systems of today are still
unreliable. Yet this should not be a deterrent, but a catalyst. It
should serve as a catalyst for forward-looking, proactive
integration that is subject to rigorous understanding of judicial
needs, system constraints, and AI testing. The goal is not only to
stanch a rising wave of litigation or stretch the justice dollar a
bit further; it is to proactively leverage the technology to scale
up and improve the delivery of justice without sacrificing justice
in individual cases.
This Essay seeks to sound the alarm about judicial economy
in the age of AI, consider how judges and legal administrators
might respond, how threats to judicial economy could jeopardize
rights, and then offer constructive steps to mitigate those
undesired side effects while expanding access and quality in the
delivery of justice. The Essay is organized around three principal
contributions.
First, the Essay argues that as AI erodes access barriers it
can bring about a litigation boom. The size of this boom is
commensurate with the access to justice gap, if not larger.
Existing estimates suggest that there is a considerable volume
of unmet demand for legal services.25 I argue, drawing on legal
sociology, that these estimates likely understate the true AI
potential.26 Beyond visible barriers like court and lawyer fees,
24. See Justice Delayed Judge and Staff Shortages are Leaving Americans in
Limbo, THE ECONOMIST (July 13, 2023), https://www.economist.com/united-states
/2023/07/13/judge-and-staff-shortages-are-leaving-americans-in-limbo [https://
perma.cc/6XZF-AJX8].
25. See BY THE NUMBERS 2022, supra note 11.
26. See discussion infra Section I.C.

<<PAGE_BREAK>>

2025] JUDICIAL ECONOMY IN THE AGE OF AI 555
sociolegal literature suggests that there are much less visible
barriers at very early stages. These barriers are succinctly
captured by the naming-blaming-claiming (NBC) model of
litigation, which is a tripartite process of transforming
individual claims.27 For an individual to even see themselves as
having a valid legal claim that is entitled to redress, they must
undergo three stages of reconceptualizing the “accident” or
“misfortune” they suffered as a legal wrong for which another
might be held responsible. These stages act as filters, and when
individuals lack the tools to name, blame, and claim, their claims
will be in a perpetual stage of arrested development. As
discussed and illustrated below, AI can assist with these pent-up
claims by shepherding individuals through the process, helping
them articulate their misfortune in legally cognizable terms.
Less rosy, existing estimates predominantly focus on
unaddressed meritorious claims.28 However, the same filtering
mechanisms that obstruct access to justice also serve beneficial
purposes by excluding abusive litigation aimed at harassing
individuals with trumped-up charges.29 The erosion of access
barriers would lead to a litigation boom of both types of
litigation, and the net effect is difficult to anticipate with any
confidence.
Second, the Essay draws on control theory—the study of
dynamic systems capable of maintaining desired states despite
internal and external disturbances—to consider the implications
of a potential AI litigation boom.30 The entire equilibrium of
judicial economy hangs in the balance between litigation
patterns and judicial resources.
One repeated lesson from legal history is that technological
and social shocks that threaten judicial economy are met with
adjustments of various procedural and substantive doctrines.31
27. The model was developed by William Felstiner. See William L. F. Felstiner
et al., The Emergence and Transformation of Disputes: Naming, Blaming,
Claiming . . ., 15 LAW & SOC’Y REV. 631 (1980). It has since become a mainstay of
socio-legal analysis.
28. See BY THE NUMBERS 2022, supra note 11.
29. Paul Ohm and Brett Frischmann developed a framework for thinking about
the positive effects of friction as tools of governance, and many of litigation barriers
can be conceived along similar lines. See Brett Frischmann & Paul Ohm,
Governance Seams, 36 HARV. J.L. & TECH. 1118 (2023).
30. See infra Part II. Control theory is devoted, loosely speaking, to the study
of maintaining desired states in dynamic systems. Home thermostats are a common
example of tools used by control theory to maintain temperature equilibrium in
light of changing outside temperature.
31. See discussion infra Part II.

<<PAGE_BREAK>>

556 UNIVERSITY OF COLORADO LAW REVIEW [Vol. 96
Even though these doctrines are ostensibly about substantive
and procedural rights, they double as what I call “legal
thermostats.” This effect can be broad and deep. Orin Kerr
famously argued that the entire body of Fourth Amendment law,
often seen as erratic and “embarrassing,”32 can be rationalized
as a series of “equilibrium adjustments” the courts make in
response to new technologies. Here, I generalize this insight to
a broader phenomenon of legal thermostats and provide
illustrations of how they are used across the justice system.
By trying to achieve homeostasis, judges may feel compelled
to adjust the thermostats that are at their disposal. They would
reach out, by necessity, to procedural and substantive rights.
They would be pressured to require, perhaps, more demanding
standards of proof, or may require more exacting evidence, or
may expand the scope of what qualifies as de minimis. The
degree of thermostat adjustment may be so large that, from the
viewpoint of any individual litigant, there would be no sense of
progress. They would overcome initial barriers only to crash on
ever more limited rights. If we stay the course, it seems that we
might squander the opportunity to make a real dent in the
access to justice problem by simply reshuffling it.
The third and most practical contribution lies in considering
the menu of reactions judges and judicial administrators can
make to take advantage of this specific moment. The proposed
course of action involves a proactive approach that works to
integrate AI into the judicial process itself. There is a host of AI
tools, some currently in production and others to come, that
could streamline, facilitate, and even improve the processing of
legal claims by the legal systems. They can be integrated at both
the case management level and inside the chambers themselves.
Integrating these tools into the legal process will allow the
system to scale up and meet the challenge, without
compromising the substantive rights of litigants. Grounding the
case for judicial integration in the problematic nature of the
realistic alternatives helps motivate adoption even if AI tools are
imperfect. Doing so proactively today will help mitigate the
harms and ensure responsible adoption.
32. See Orin S. Kerr, An Equilibrium-Adjustment Theory of the Fourth
Amendment, 125 HARV. L. REV. 476 (2011).

<<PAGE_BREAK>>

2025] JUDICIAL ECONOMY IN THE AGE OF AI 557
I. THE AI LITIGATION BOOM
How much of a dent can we realistically expect advanced AI
systems to put in the access to justice problem? This Part opens
by first evaluating the technical skills of current-generation AI
systems to establish that they can perform many legal tasks
“adequately.” Obviously, adequately is the load-bearing part of
the sentence, but part of the goal here is to show that it covers a
fairly broad range of legal capabilities.
The discussion then considers the adoption patterns among
end users, ordinary folks who currently face access issues, as
well as the size of the access to justice gap. It leverages these
analyses to provide a qualitative and semi-quantitative sense of
the size of the gap that could be bridged. The combination of
cheap but capable AI systems with this large gap leads to the
expectation of an AI litigation boom effect in the coming years.
A. AI Legal Efficacy
Any sufficiently advanced technology can appear
indistinguishable from magic.33 In practice, much commentary
on AI seems to fall into this trap, leading commentators down
one of two erroneous paths: either believing in AI omnipotence
(AI can do everything) or in AI as a cheap magic trick (AI can’t
do anything). In reality, AI tools are both, neither, and
in-between these poles. The goal of this Section is to avoid a
simplistic view of AI and discuss examples of the current state
of the art in legal AI.
Evaluating rapidly developing technology is an exercise in
writing on ice. The evidence of capabilities known to us today
shows tentative floors, while limitations are tentative ceilings.34
We do not know which limitations are here to stay, and which
can be resolved with future development. We only know that we
are still in early stages of development, and that we are still
seeing constant improvements.
33. ARTHUR C. CLARKE, PROFILES OF THE FUTURE: AN INQUIRY INTO THE
LIMITS OF THE POSSIBLE 36 (1962).
34. See Yonathan A. Arbel & Samuel Becher, Contracts in the Age of Smart
Readers, 90 GEO. WASH. L. REV. 83 (2022) (discussing the capabilities of smart
readers as well as the risks associated and the need to regulate and integrate with
caution).

<<PAGE_BREAK>>

558 UNIVERSITY OF COLORADO LAW REVIEW [Vol. 96
The first piece of evidence comes from a recent study that
evaluated AI on contract review tasks.35 The models were
presented with a contract and some necessary context, and then
asked to locate and determine legal issues. Comparing against
the benchmark of practicing lawyers, the researchers found that
GPT-4 (the current model powering ChatGPT) “exhibited a level
of accuracy in identifying legal issues that was on par with that
of [j]unior [l]awyers.”36 To complete their tasks, models use only
8 percent of the time it would take a junior lawyer to perform
them. Critically, where the lawyer would charge an average of
$74.26 for the task, the model’s operating cost was a single
quarter.37
While the models were relatively accurate, they were not
perfect, and their failure modes prove interesting. Relative to
senior lawyers, models showed “a preference for precision over
recall,”38—that is, they preferred to be accurate rather than
comprehensive. This offers greater confidence in the issues
identified, but risks overlooking some issues. This type of failure
mode, however, is not much different than that exhibited by
junior lawyers, who also showed a similar preference for
precision over recall, as evidenced by their comparable F-scores
in issue determination (0.86 for junior lawyers versus 0.87 for
GPT-4-1106).39 In addition, the authors provide two illustrative
examples of mistakes. On close review, these mistakes appear
transient and model-specific rather than fundamental. Indeed,
when I presented these examples to newer models (Claude Opus
35. Lauren Martin et al., Better Call GPT: Comparing Large Language Models
Against Lawyers, ARXIV (Jan. 24, 2024), https://arxiv.org/html/2401.16212v1
[https://perma.cc/GC33-3H9J]. There are other claims, less open to scrutiny, about
artificial intelligence and machine learning systems replacing lawyers in various
repetitive tasks. For example, JP Morgan reports of a software that reviews
contracts and “reviews approximately 12,000 new wholesale contracts per year and
replaced ‘360,000 hours’ of staff time between lawyers and loan officers.” Hugh Son,
JPMorgan Software Does in Seconds What Took Lawyers 360,000 Hours,
BLOOMBERG (Feb. 27, 2017), https://www.bloomberg.com/news/articles/2017-02-28
/jpmorgan-marshals-an-army-of-developers-to-automate-high-finance?embedded-
checkout=true [https://perma.cc/J548-GSUB].
36. Martin et al., supra note 35, at 12.
37. See id.
38. Id.
39. Id. at 8. An F-score (or F1 score) is a measure used to evaluate how well a
test or model performs, particularly in balancing two key aspects: precision (how
many identified items are correct) and recall (how many correct items were
identified). Id.

<<PAGE_BREAK>>

2025] JUDICIAL ECONOMY IN THE AGE OF AI 559
3 and Google Gemini Pro), both answered them correctly without
any tuning.40
A related study evaluated the ability of large language
models (LLMs) to serve as “smart readers” that assist consumers
with their contracts, privacy policies, and other legal
documents.41 It found that smart readers reduce the length of
contracts by 66.9 percent; reduce reading time by 14 minutes
and 41 seconds; improve text readability by reducing reading
levels from college-level to fifth-grade level; and, finally, do so
without compromising the essential information in the original
documents.42 There were failures, but at least some are
attributable to the length of the documents, which the LLMs
examined could only read in parts (this problem has since been
mostly mitigated).43
A different study evaluated the performance of LLMs on tax
code questions.44 These questions involve logical complexity
(e.g., exploring taxation of vested reversible, transferable
shares, and cost basis following a sale of inherited property) but
also tend to have a fairly crisp, unique answer. They find that
GPT-4 achieves around 77 percent accuracy on questions related
to the Code of Federal Regulation (C.F.R.) (with as much as
100 percent on basic tax problems), and 53 percent on general
United States Code questions.45 Critically, for the interpretation
of these numbers, the questions involve four to ten possible
40. Presenting Claude and Gemini with a contract and some context and asking
it them to identify the legal issues, CLAUDEAI, https://claude.ai/chat/77338278-0036-
469c-8d22-615c331f8c58 [https://perma.cc/7VTX-9FG4]; GEMINI, https://
gemini.google.com/app/560bd35270464077 [https://perma.cc/PL6Q-Y579].
41. See Yonathan A. Arbel & Samuel Becher, How Smart are Smart Readers?
LLMs and the Future of the No-Reading Problem, in THE CAMBRIDGE HANDBOOK
ON EMERGING ISSUES AT THE INTERSECTION OF COM. LAW AND TECH. (Nancy Kim
& Stacey-Ann Elvy eds., 2024) [hereinafter How Smart are Smart Readers]; Arbel
& Becher, supra note 34, at 94–106; see also Noam Kolt, Predicting Consumer
Contracts, 37 BERKELEY TECH. L.J. 71 (2022).
42. How Smart are Smart Readers, supra note 41, at 1.
43. Id. at 10−11; see also Kolt, supra note 41, at 109–117.
44. See John J. Nay et al., Large Language Models as Tax Attorneys: A Case
Study in Legal Capabilities Emergence, 382 PHIL. TRANS. R. SOC’Y A,
October 4, 2023, https://doi.org/10.1098/rsta.2023.0159 [https://perma.cc/HGZ4-
CRHG]. Importantly, the design employs retrieval-augmented generation and
prompt-engineering techniques. Id.
45. I focus here on the few-shot experiment. The relative weakness on the U.S.
Code is probably associated with the weakness of the retrieval augment generation
method, which is degraded on large corpora of text. For the data taken directly from
the data files, see John Nay, LLM Tax Attorney, GITHUB, https://github.com
/JohnNay/llm-tax-attorney/tree/main/data [https://perma.cc/4GTQ-NXET].

<<PAGE_BREAK>>

560 UNIVERSITY OF COLORADO LAW REVIEW [Vol. 96
answers, so chance accuracy would only be between 10 and
25 percent.46
These results are consistent with the other ones just
discussed in that they show a high but inconsistent level of
performance. Unfortunately, this study did not include a human
benchmark, so we cannot tell how much better or worse these
numbers are relative to a professional. However, given that the
questions rely on legal and financial fluency, it is safe to assume
that they considerably exceed the accuracy levels of the average
lay tax preparer, and possibly even of the average non-tax
lawyer. This highlights the margin of substitution point: LLMs
will replace not your white shoe lawyer, but your neighborhood
H&R Block representative or estate planner.
A persistent failure mode in these studies is
“hallucinations”—the invocation of non-existent facts, such as
precedents, and their presentation as facts.47 One study found
that “legal hallucinations are alarmingly prevalent” in LLMs,
occurring 58 percent (ChatGPT using GPT-3.5) to 88 percent
(Meta’s Llama 2) of the time when asked specific questions about
federal court cases.48 Two factors ameliorate this concern,
however. False sources, while a severe problem, can often be
checked with relatively little work, often involving a short
Internet search for verification. Moreover, while our current
understanding suggests that some degree of model inaccuracy is
inevitable, advances in modeling have shown promise in
reducing this problem significantly.49
Assessed more holistically, two recent papers tried to
determine whether models can act as generalist lawyers by
comparing the performance of humans to models on the bar
exam. A technical report by OpenAI famously reported that
46. Id.
47. See generally Jia-Yu Yao et al., LLM Lies: Hallucinations are not Bugs, but
Features as Adversarial Examples, ARXIV (Aug. 4, 2024), https://doi.org/10.48550
/arXiv.2310.01469 [https://perma.cc/M2ZB-M6YF] (demonstrating that nonsensical
prompts composed of random tokens can also elicit
the LLMs to respond with hallucinations).
48. Matthew Dahl et al., Large Legal Fictions: Profiling Legal Hallucinations
in Large Language Models, ARXIV 6 (June 21, 2024), https://arxiv.org/abs
/2401.01301 [https://perma.cc/Z2AX-39RD].
49. See Ziwei Xu et al., Hallucination is Inevitable: An Innate Limitation of
Large Language Models, ARXIV (Jan. 22, 2024), https://arxiv.org/abs/2401.11817
[https://perma.cc/QC9U-553B]. For mitigation techniques, see S.M. Towhidul Islam
Tonmoy et al., A Comprehensive Survey of Hallucination Mitigation Techniques in
Large Language Models, ARXIV (Jan. 8, 2024), https://arxiv.org/abs/2401.01313
[https://perma.cc/UM7G-JU6W].

<<PAGE_BREAK>>

2025] JUDICIAL ECONOMY IN THE AGE OF AI 561
GPT-4, at launch and without modifications, has passed the
Uniform Bar Exam at the 90th percentile.50 This puts GPT-4
above the median test-taker.51 Digging more deeply, Eric
Martinez argued that these results are confounded by the timing
of the specific comparison exam (February), which included
many repeat test-takers with lower scores.52 Applying several
corrections, he concludes that, when compared to exam passers
in the July administration, GPT-4 performance is estimated to
be at the median of test takers, and bottom 15th percentile on
the essay section.53 This aligns with an earlier study of GPT-3.5
showing that on law school exams GPT-3.5 performed at a C plus
level.54 But even with these more refined analyses, it is clear
that GPT-4 is already adequate at many tasks, even if adequacy
is a fairly low bar.
It is worth bearing in mind that we should be cautious about
extrapolating from bar performance and law school exams to
real-world performance. At the same time, we also cannot
completely discount their relevance given the critical
gatekeeping role bar exams play in our regulatory apparatus.55
Moreover, bar exams offer one of the sharpest ways to test
performance differentials between models and
highly-motivated, quasi-experts.
Finally, and most importantly, are the real-world studies of
AI effectiveness. These are early days, so caution is advised. One
study asked a trained lawyer and a GPT-4 model to draft a
complaint letter to the employer. Eighty percent of human
referees, in a blind test, preferred the model’s letter the trained
50. Daniel Martin Katz et al., GPT-4 Passes the Bar Exam, 382 PHIL. TRANS.
R. SOC’Y A 12 (2024), https://doi.org/10.1098/rsta.2023.0254 [https://perma.cc
/BHE2-DB68].
51. The median score in February 2023 was 131.5. The Multistate Bar
Examination (MBE), THE BAR EXAMINER, https://thebarexaminer.ncbex.org/2023-
statistics/the-multistate-bar-examination-mbe [https://perma.cc/3VU4-QZ5N].
52. Eric Martínez, Re-evaluating GPT-4’s Bar Exam Performance, in INST. L. &
A.I., https://.ssrn.com/abstract=4441311 [https://perma.cc/T3Y6-3VWM].
53. Id.
54. Jonathan H. Choi et al., ChatGPT Goes to Law School, 71 J. LEGAL
EDUC. 387, 391 (2022).
55. Kyle Rozema, Does the Bar Exam Protect the Public?, SSRN 2–3 (Aug. 22,
2021), https://papers.ssrn.com/sol3/papers.cfm?abstract_id=3612481 [https://
perma.cc/8S69-G87R] (showing that the “bar passage requirements have a modest,
negative effect on public sanctions.”).

<<PAGE_BREAK>>

562 UNIVERSITY OF COLORADO LAW REVIEW [Vol. 96
lawyer’s.56 Another study recruited legal aid lawyers, and gave
them access to GPT-4, with some of them getting access to other
AI tools.57 The lawyers reported a productivity increase,
although they remained worried about these tools. It is worth
noting that most participants appreciated GPT-4 but found the
other tools fairly unhelpful.58
To conclude, if we can provide an estimate of the general
capability of AI models in 2024, it will be in the spirit of
Martinez’s ultimate conclusions.59 Rigorous testing shows that
these systems are fast and cheap, but perform below the level of
median lawyers. This conclusion should be made alongside the
observation made at the outset—that is, what we see today are
tentative floors and ceilings. In fact, the tests discussed not only
do not account for future developments, but they also do not fully
take advantage of present developments, such as deep prompt
engineering, fine-tuning on specific datasets, or ensembling.60
But perhaps most deeply, the faults we find in LLMs should
always account for, and be measured against, the realistic
alternatives that ordinary people actually have. A clear lesson
from the work of Rebecca Sandefur is that socio-legal research
should consider the “importance of doing nothing.”61 As her
work shows, the most common responses to a problem are—in
order of frequency—some form of self-help, turning to a
third-party or a lawyer, and doing nothing.62 In fact, poor
households are twice as likely as middle-income households to
do nothing.63 We are not measuring AI tools in a vacuum; they
are responding to a social reality where the poor do nothing or
56. Lena Wrzesniowska, Can AI Make a Case? AI vs. Lawyer in the Dutch Legal
Context, INT’L J.L., ETHICS, & TECH., at 26 (Aug. 15, 2023), https://papers.ssrn.com
/sol3/papers.cfm?abstract_id=4614381 [https://perma.cc/6YK5-9LY6] (reporting an
experiment with 25 legal professionals who favored the models’ responses for
reasons of tone, clarity, style, argumentation, and evidence use).
57. See Colleen V. Chien & Miriam Kim, Generative AI and Legal Aid: Results
from a Field Study and 100 Use Cases to Bridge the Access to Justice Gap, 57 LOY.
L.A. L. REV. 903 (2025), https://digitalcommons.lmu.edu/cgi
/viewcontent.cgi?article=3210&context=llr [https://perma.cc/JJV2-9BAC].
58. Id.
59. See Martínez, supra note 52.
60. Pranab Sahoo et al., A Systematic Survey of Prompt Engineering in Large
Language Models: Techniques and Applications, ARXIV (Feb. 5, 2024), https://
arxiv.org/pdf/2402.07927 [https://perma.cc/R8BC-ZP3R].
61. Id.
62. Rebecca L. Sandefur, The Importance of Doing Nothing: Everyday Problems
and the Importance of Inaction, in TRANSFORMING LIVES: L. AND SOC. PROCESS 115,
115 (Pascoe Pleasence et al. eds., 2006).
63. Id.

<<PAGE_BREAK>>

2025] JUDICIAL ECONOMY IN THE AGE OF AI 563
rely on their own devices to resolve legal problems. This insight
deeply contextualizes the finding that LLMs are “only” as
effective as somewhat middling lawyers.
B. AI Uptake
How are people reacting to this new technology? The
potential seems quite large, with a Goldman Sachs report from
2023 claiming that AI will automate 44 percent of legal tasks
within ten years of broad adoption.64 Various reports show that
law firms are experimenting with AI tools in their practice.65 For
example, Allen & Overy deployed a model called Harvey and
quickly found that 25 percent of the firm’s practice used the tool
daily.66
Industry surveys provide a broader picture. A survey in
2023 found that 82 percent of lawyers believed that AI can be
applied to legal work, while also showing more hesitancy on the
appropriateness of doing so with only 51 percent answering in
the affirmative.67 An American Bar Association survey from
2023 reported usage among 11 percent of lawyers,68 a Lexis
survey reported 16 percent,69 and a survey of legal aid lawyers
found 21 percent usage.70
64. JAN HATZIUS ET AL., The Potential Large Effects of Artificial Intelligence on
Economic Growth, GLOB. ECON. ANALYST (Goldman Sachs Econ. Rsch., New York,
N.Y.), Mar. 26, 2023, at 6, https://www.gspublishing.com/content/research/en
/reports/2023/03/27/d64e052b-0f6e-45d7-967b-d7be35fabd16.html [https://
perma.cc/77WG-7KAV].
65. Frank Fagan, A View of How Language Models Will Transform Law, TENN.
L. REV. (forthcoming 2025) (manuscript at 26).
66. Bob Ambrogi, As Allen & Overy Deploys GPT-based Legal App Harvey
Firmwide, Founders Say Other Firms Will Soon Follow, LAWSITES.COM
(Feb. 17, 2023), https://www.lawnext.com/2023/02/as-allen-overy-deploys-gpt-
based-legal-app-harvey-firmwide-founders-say-other-firms-will-soon-follow.html
[https://perma.cc/9ZYM-DV5H].
67. New Report on ChatGPT & Generative AI in Law Firms Shows
Opportunities Abound, Even as Concerns Persist, THOMSON REUTERS (Apr. 17,
2023), https://www.thomsonreuters.com/en-us/posts/technology/chatgpt-
generative-ai-law-firms-2023 [https://perma.cc/AXK4-8HGJ].
68. Darla Wynon Kite-Jackson, 2023 Artificial Intelligence (AI) TechReport,
AM. BAR ASS’N (Jan. 15, 2024), https://www.americanbar.org/groups/law_practice
/resources/tech-report/2023/2023-artificial-intelligence-ai-techreport [https://
perma.cc/L9CW-S4GT].
69. LEXISNEXIS, INTERNATIONAL LEGAL GENERATIVE AI REPORT: DETAILED
SURVEY FINDINGS 6 (2023), https://www.lexisnexis.com/pdf/lexisplus/international-
legal-generative-ai-report.pdf [https://perma.cc/AG4X-H6ER].
70. Chien & Kim, supra note 57, at 20.

<<PAGE_BREAK>>

564 UNIVERSITY OF COLORADO LAW REVIEW [Vol. 96
While these surveys suggest only small-to-moderate
adoption, lawyers also see broad room for integration of AI tools
into their practice. Among the most common use cases, lawyers
reported creating drafts, brainstorming ideas, summarizing
complex documents, and assisting in writing emails.71 It is quite
reasonable to expect that, as AI tools develop specifically to meet
the needs of law firms, and as more lawyers graduate from law
schools after using AI tools, the levels of integration will
consistently increase. This is especially true given client
pressure to reduce billing through the integration of these
tools.72
Equally remarkable is the rate of change: slowly, then
suddenly. A recent survey on AI adoption in the workplace (not
specifically legal) has shown that 75 percent of knowledge
workers use AI at work.73 What is remarkable is that 46 percent
of workers started using AI tools less than six months ago
(i.e., late 2023).74 This spells a staggering rate of adoption. It is
highly unlikely that law firms will lag behind for much longer.
These findings speak to a number of issues. They show the
utility and competence of AI tools, at least when employed by a
legal professional. They show the broad range of tasks AI tools
can accomplish. They suggest a productivity gain in lawyering
which may or may not translate to lower cost or more
voluminous legal filings. They further suggest a possible
trickle-down effect, where the tools and techniques used by elite
lawyers will make their way to lawyers across the country and
maybe even be commercialized for retail use. And lastly, they
show a path towards integration by legal professionals in their
workflows—a path trodden by law firms but that could later be
replicated, mutatis mutandis, by judicial chambers and court
case management systems.
71. Caroline Hill, ILTA’s Blockbuster Technology Survey for 2023 Reveals All
on Collaboration Toos Adoption, Governance, and Plenty on Gen AI, LEGAL IT
INSIDER (Sept. 29, 2023), https://legaltechnology.com/2023/09/29/iltas-annual-tech-
survey-2023-reveals-all-on-collaboration-tools-adoption-governance-and-yes-lots-
on-gen-ai [https://perma.cc/8GAM-ET7L].
72. Logan Lathrop, Law Firms Leveraging AI: Maximizing Benefits and
Addressing Challenges, HARV. J.L. & TECH. DIG. (Nov. 20, 2023), https://
jolt.law.harvard.edu/digest/law-firms-leveraging-ai-maximizing-benefits-and-
addressing-challenges [https://perma.cc/VMJ7-XFSD].
73. AI at Work Is Here. Now Comes the Hard Part, MICROSOFT WORKLAB
(May 8, 2024), https://www.microsoft.com/en-us/worklab/work-trend-index/ai-at-
work-is-here-now-comes-the-hard-part [https://perma.cc/TF5Z-GDFY].
74. Id.

<<PAGE_BREAK>>

2025] JUDICIAL ECONOMY IN THE AGE OF AI 565
C. AI Impact on Access to Justice
Having seen the evidence of uptake of AI in the legal
industry, we now turn to examine AI’s broader impact on access
to justice. Before doing so, it should be recognized that “access to
justice” is a large umbrella term. It hides certain political
complexities about whose access matters,75 the extent to which
this justice is legal, and whether access is jeopardized by factors
that are formal, substantive, representative, or even
psychological.76 Still, at its core stands the basic proposition that
the halls of justice should be open to all and that barriers to
justice are regressive in nature, contributing to a regime where
the haves come out ahead of the have-nots.77
Evaluating the impact of AI on litigation patterns would
require some understanding of what these access barriers are.
People find difficulty accessing legal justice due to a large
number of barriers, some financial, others psychological,
political, and social, but many can be reduced, in some way or
another, to a cost-based explanation. What’s remarkable about
AI is that it produces a holistic shock to the access to justice
problem, one that includes the reduction in the cost of legal
services but goes beyond it to the social and psychological
barriers as well. Let us examine some of these effects in detail.
Legal sociology teaches the critical importance of upstream
filters. “[D]isputes are not things: they are social constructs.”78
For a mischief to be conceived as a legal dispute, it must undergo
at least three transformations given by the
naming-blaming-claiming (NBC) model.79 That is, the injured
75. See, e.g., Martha Minow, Access to Justice, 2 AM. J.L. & EQUAL. 293 (2022)
(focusing on “low-income Americans”); Bob Glaves, What Do We Mean When We Say
Access to Justice?, CHI. BAR FOUND., (July 11, 2023), https://
chicagobarfoundation.org/bobservations/what-do-we-mean-when-we-say-access-to-
justice [https://perma.cc/ZW9K-AM67] (focusing on “[a] person or entity facing a
legal issue . . .”). The United States Institute of Peace alternates between
“individual,” “people,” and “citizens.” Access to Justice, Guiding Principles for
Stabilization and Reconstruction: The Web Version, U.S. INST. OF PEACE
(Nov. 1, 2009), https://www.usip.org/guiding-principles-stabilization-and-
reconstruction-the-web-version/rule-law/access-justice [https://perma.cc/62S4-
S7ES].
76. For example, the United States Institute of Peace emphasizes that access
to justice is absent when people “fear” the system or see it as “alien.” Id.
77. Marc Galanter, Why the “Haves” Come Out Ahead: Speculations on the
Limits of Legal Change, 9 LAW & SOC’Y REV. 95 (1974).
78. Felstiner et al., supra note 27, at 631.
79. Id. at 633–36.

<<PAGE_BREAK>>

566 UNIVERSITY OF COLORADO LAW REVIEW [Vol. 96
party must perceive that they were injured; that a recognizable
actor injured them (rather than an act of Fortuna); and then be
able to conceptualize that accident in terms of a legal assertion
of rights against the violator.80 While data is scarce, sociologists
believe that these filters have a dramatic effect: “we know that
most of the attrition occurs at [the NBC] early stages.”81 An
important facet is distributional; the NBC filter asymmetrically
affects poor claimants, as the ability to name, blame, and claim
is predicated on access to educational, social, and plain, vanilla
capital.82 If the NBC filter is as powerful as sociologists claim,
and if it is as regressive in effect as commonly believed, its
removal would have broad implications for both substantive
rights and litigation patterns.
Generative AI takes the NBC filter head on. To illustrate
the way generative AI would work in practice, I presented a
simple query to a model: “[M]y landlord wants me to pay to fix
the mold in the basement and I don’t know what to do.”83 The
model responded with some fairly generic reminders that
landlords are responsible for the habitability of their residences,
that it is advisable to read the lease, and that it might be
appropriate to consult a legal professional. To a lawyer,
burdened with the curse of knowledge, this may not seem to be
very informative. But this response quickly and cheaply takes
the user through all three of the NBC stages.84
This example is humble, perhaps anecdotal, but I believe it
points at a deeper, hard to measure but nonetheless radical
change in the NBC model. Many people have had a moment
where the simple phrasing of their issues by a knowledgeable or
experienced acquaintance has helped put their issue in context
and motivated them to take an action that they would not have
taken otherwise. As AI systems become integrated into our daily
flow, as people come to consult them as often as they do Google
or other Internet sources, such framing effects can have large
impacts on the legal consciousness of ordinary people. Coupled
80. Id.
81. Id. at 636.
82. Id. at 637.
83. Landlord Mold Responsibility Query, CHATGPT (Aug. 31, 2024), https://
chatgpt.com/share/7dfbd694-4832-45c1-acce-471b94e4500f [https://perma.cc
/6QJR-GUMC].
84. Id. (“You should not be responsible for paying to fix mold in the basement,
as it is typically the landlord’s responsibility to ensure the property is habitable and
safe.”).

<<PAGE_BREAK>>

2025] JUDICIAL ECONOMY IN THE AGE OF AI 567
with their demonstrated (albeit imperfect) legal fluency, such
models could remove many invisible upstream barriers on the
way to justice.
Beyond the early stages, AI continues to contribute to every
aspect of the litigation journey. After reaching the claiming
stage, people will want to consider their legal strategy. Today,
people surveyed report that they seek lawyers for legal
information in only 29 percent of their cases, often depending on
the Internet and family or friends for orientation.85
In all those other cases, people can turn to AI systems to
help them with legal strategy, including matters such as
whether to send a demand letter, talk to a lawyer, write to a
government agency, and so on. When individuals turn to AI
tools, they can use them as powerful smart readers, tools that
not only summarize the information but also make it accessible
to one’s specific sociolinguistic needs.86
The next step in the journey for those who choose litigation
consists of producing written materials. The models can draft
the required communications, demand letters, complaints, and
other litigation materials. If they choose to file pro se,
individuals can use AI to produce responses to motions to
dismiss, help draft their pleadings, and generally help navigate
throughout the legal process. Even questions like “Where do I
send my documents?” that may be trivial to a lawyer, could
greatly benefit individuals in their journey. Notably, these
advantages help even for people who are represented. And while
they do not guarantee that they actually win their cases, they
give people more access to justice than they ever had before.
There is also considerable scope for more traditional
machine learning techniques in the litigation journey. In a
recent overview, Frankenreiter and Nyarko offer a broad
exploration of the utility of narrower predictive and
classification models.87 They provide persuasive use cases
related to automated review of documents to identify privileged
information using a model to predict case outcomes, and in turn
informing the selection of attorneys and venues.88 More
85. JUSTICE NEEDS, supra note 2, at 160 (showing legal aid services account for
additional 8 percent and court provided information for additional 7 percent).
86. See Arbel & Becher, supra note 34.
87. Jens Frankenreiter & Julian Nyarko, Natural Language Processing in
Legal Tech, in LEGAL TECH. AND THE FUTURE OF CIV. JUST. 70, 70 (David Freeman
Engstrom ed., 2023).
88. Id. at 74.

<<PAGE_BREAK>>

568 UNIVERSITY OF COLORADO LAW REVIEW [Vol. 96
generally, the extraction of legal data from troves of documents
presents a compelling and highly useful use case.89 As it comes
to barriers in access to justice, consider how such models can
help individuals conduct research, choose a court to file in, and
more generally, reduce some of the uncertainty of litigation,
which itself is a barrier to justice.
In considering the prospects of a litigation boom, we just saw
that AI can greatly reduce many access to justice barriers. If the
access to justice literature correctly mapped the barriers and
their size, we have a strong reason to expect an AI litigation
boom in the coming years. Exactly how large it would be is hard
to gauge with any accuracy, but if it is true that only 8 percent
of the legal needs of low-income people are addressed and that
seventy-five million cases every year receive no legal resolution,
then the potential is large indeed.90 Third-party financing
ameliorated the liquidity barrier that prevented litigants with
strong cases from filing them, and this had the effect of a
litigation spike.91 Moreover, it is not just the raw number of
cases that matters; AI systems are excellent providers of verbose
materials, making it effortless to write briefings and other
filings that are long-winded. All of this contributes to a large
potential AI litigation boom.
It is true that the quality of some of these filings may not be
high, but that’s hardly a reason to doubt their adoption and
impact. The economic incentives are simply too strong, and the
temptation of convenience too large. Even if the quality is not
quite there, convenience usually takes the upper hand.
To be sure, there are some trends that would work to
mitigate the litigation boom. It is possible that rates of
AI-generated filings will be lower, or high only among those
already prone to litigate their cases. It is also possible that the
higher risk of litigation would lead people to adapt their
behavior into greater compliance, or that would-be defendants
will settle at earlier stages. AI labs, by pressure of regulation or
89. Id. at 75.
90. See Sandefur, supra note 1; JUSTICE NEEDS, supra note 2, at 57; FY 2025
BUDGET REQUEST, supra note 3; Legal Markets, supra note 5, at 1785.
91. U.S. CHAMBER OF COM. INST. FOR LEGAL REFORM, THIRD PARTY
FINANCING: ETHICAL & LEGAL RAMIFICATIONS IN COLLECTIVE ACTIONS (Oct. 2020),
https://instituteforlegalreform.com/wp-content/uploads/2020/10/Third_Party
_Financing.pdf [https://perma.cc/CW26-3SDF] (Third-party financing is meant to
alleviate the liquidity constraints of litigants, and its effect is said to be to
“increase[] the volume of litigation in any jurisdiction where it is available.”).

<<PAGE_BREAK>>

2025] JUDICIAL ECONOMY IN THE AGE OF AI 569
exposure to unauthorized practice of law rulings, might also try
to prevent their models from producing effective materials. Such
possibilities exist, but it is unlikely that they will be able to
prevent the load on judicial resources that AI systems will have.
Some barriers to justice actually serve salutary purposes, as
counterintuitive as it may sound. If we admit that some filings
are vexatious, abusive, or meritless, then some filters may serve
important social goals in deterring them.92 To provide one
common example, consider debt collection litigation. Despite a
common view that these lawsuits are frequently abusive,
matters could actually be worse. Professional debt buyers who
buy large debt portfolios are effectively deterred by access
friction from filing claims for amounts below $500, and often
$1,000.93
We see, then, that AI has the potential to radically remove
filters and barriers on the way to justice. They help litigants at
every stage of the litigation journey, from forming the requisite
legal consciousness to creating legal strategies and then
implementing them. Many of the beneficiaries of these
improvements would be low-income individuals, currently
priced out of the market for legal services. But it is also
recognized that some strategic players, such as debt collection
firms, would come to use them to scale up their operations. Both
sides will contribute to a single likely outcome: an AI litigation
boom.
II. LEGAL THERMOSTATS
An AI litigation boom is the likely consequence of the
arguments this Essay just reviewed. Even if one takes a more
hedged view, it is clear that the forces that drive the supply of
litigation will grow significantly stronger in the presence of AI—
and that AI tools are continuously improving. A rapid increase
in case volume can have systemic repercussions on substantive
justice throughout the legal system. This is partly because
92. To be sure: the fact that barriers to the legal system serve a positive
function do not make them net positive. They also filter many truly important cases
and their effect is likely regressive. The point here is only that they also chill
low-quality cases.
93. Dave T., Debt Collection Agencies: What Is The Minimum Amount They
Would Sue For?, MAN VS. DEBT (Sept. 22, 2022), https://manvsdebt.com/debt-
collection-agencies-what-is-the-minimum-amount-they-would-sue-for [https://
perma.cc/25N4-5ZVF].

<<PAGE_BREAK>>

570 UNIVERSITY OF COLORADO LAW REVIEW [Vol. 96
justice delayed is justice denied, and partly because judges are
ultimately humans with only so many hours in a day.94 Bert
Huang demonstrated that a rise in administrative cases can lead
to “lightened scrutiny” of civil appeals.95 Not because judges
work any less hard—they likely work even harder—but because
there are physical constraints on what we can honestly expect of
even the most diligent public servant.
What will happen to judicial economy in the age of AI? How
can our current system—already burdened by its workload—
support a dramatic uptick in the number of cases? This Part lays
out the argument that past reactions to litigation surges have
been accompanied by adjustments that tended to affect primary
and procedural rights.
A useful way to think about judicial economy comes from
control theory.96 The core principle of control theory involves the
design and analysis of dynamic systems capable of maintaining
desired states despite internal and external disturbances. This
is achieved using control components, such as controllers,
sensors, and actuators, to endogenously regulate system
behavior towards an exogenously set desired state.
Consider the example of a thermostat. The thermostat is
programmed with a desired temperature (set point). It
continuously measures the actual temperature (process
variable) using temperature sensors (sensors) and compares it
to the setpoint. If the actual temperature deviates from the
setpoint, the thermostat activates the heating or cooling system
(actuators) to adjust the temperature back to the setpoint. This
feedback loop, where the system’s output influences future
inputs to maintain the desired state, is a hallmark of closed-loop
control systems. This contrasts with an open-loop system, such
as a simple fan, which operates without feedback and cannot
adjust to changing conditions.
94. Christoph Engel & Keren Weinshall, Manna from Heaven for Judges:
Judges’ Reaction to a Quasi-Random Reduction in Caseload, 17 J. EMPIRICAL
LEGAL STUD. 722, 722 (2020) (finding that “[j]udges working in courts with reduced
caseload invested more resources in resolving each case.”).
95. Bert I. Huang, Lightened Scrutiny, 124 HARV. L. REV. 1109 (2011); see also
Shay Lavie, Appellate Courts and Caseload Pressure, 27 STAN. L. & POL’Y. REV. 57
(2016).
96. For an introductory textbook, see KATSUHIKO OGATA, MODERN CONTROL
ENGINEERING (5th ed. 2010), https://wp.kntu.ac.ir/dfard/ebook/lc
/Katsuhiko%20Ogata-Modern%20Control%20Engineering-
Prentice%20Hal%20(2010).pdf [https://perma.cc/B62V-XV5P]. See also ROBERT H.
BISHOP & RICHARD C. DORF, MODERN CONTROL SYSTEMS (13th ed. 2022).

<<PAGE_BREAK>>

2025] JUDICIAL ECONOMY IN THE AGE OF AI 571
Judges, much like operators of a thermostat, play a critical
role in regulating the flow of litigation through their control over
procedural and substantive doctrines. These doctrines effectively
act as control mechanisms within the legal system,97 allowing
judges to adjust their strictness or leniency in response to the
demands of the judicial environment. Just as a thermostat
modulates temperature by activating heating or cooling
mechanisms, judges modulate the volume of cases by fine-tuning
these legal doctrines. This adjustment process is guided by
feedback from the legal system, such as fluctuations in case
volume or available judicial resources, and continues until the
flow of litigation aligns with the desired equilibrium or setpoint.
Critically, these judicial adjustments inevitably affect
substantive rights, raising concerns about the propriety of using
legal rights as levers for managing judicial resources.98 Despite
these concerns, it remains evident that such administrative
adjustments are a common practice employed by judges to
maintain judicial economy.
A few illustrations communicate the point.99 The most
salient is court fees. Courts in the United States charge a variety
of fees, including filing fees to initiate a case, fees for serving
documents, court reporter fees, jury fees, and fees for accessing
court records. Filing fees vary based on the type of case and
jurisdiction but can range from under $100 for small claims
cases to over $400 for civil cases in federal court.100 Court fees
97. In a contemporaneous article, Abramowicz considers the use of “automatic
stabilizers” to consider doctrinal changes in light of potential productivity changes
in lawyering due to AI. Michael Abramowicz, The Cost of Justice at the Dawn of AI
61−62 (Geo. Wash. Univ. Legal Stud., Research Paper No. 2024-37, Geo. Wash.
Univ. L., Public Law Research Paper No. 2024-37), https://ssrn.com
/abstract=4543803 [https://perma.cc/YJ4L-QMT4]. In various ways, his article
completes the analysis proposed here.
98. Compare Ronen Avraham & William H.J. Hubbard, Civil Procedure as the
Regulation of Externalities: Toward a New Theory of Civil Litigation, 89 U. CHI. L.
REV. 1 (2022), which emphasizes an externality control view of civil procedure, with
Marin K. Levy, Judging the Flood of Litigation, 80 U. CHI. L. REV. 1007, 1010−11
(2013).
99. While my focus here is on procedural mechanisms, substantive standards
also encode judgments on judicial resources, but this argument is beyond the
current scope.
100. For example, in Colorado where the 2024 Ira C. Rothgerber Jr. Conference:
AI and the Constitution took place, filing fees range from only thirty-one dollars to
nearly three-hundred dollars for small claims and civil cases in federal court. Court
filing fees vary from state to state. See, e.g., List of Fees, COLORADO JUDICIAL
BRANCH (Jan. 2025), https://www.coloradojudicial.gov/self-help/list-fees [https://
perma.cc/N4DF-R8VM].

<<PAGE_BREAK>>

572 UNIVERSITY OF COLORADO LAW REVIEW [Vol. 96
work well when they deter cases whose probability of winning is
so low that the potential payout falls below the fee. The de
minimis rule has a somewhat similar function because it filters
out cases with actual values on the premise that their social
value is also low. The problem is that fees and these types of
rules also screen out socially important and valuable
litigation,101 and the results tend to be quite regressive.102 We
know that even small access barriers can have large effects.
Something like the distance from the courthouse, which might
seem like a small concern, has a significant effect on the
participation rate of the poor—even for life-changing
litigation.103
Another prime illustration of thermostats comes from
pleading standards. Consider Twombly and Iqbal, two of the
most important procedural decisions in modern law.104 They
mark the move from a negative “no set of facts” standard to a
positive one requiring a showing of plausibility.105 This reflects
a heightening of pleading standards, and its direct implication
is chilling the filing of lawsuits. The motivation behind this
reform, in large part, was the growing costs of discovery that
were enabled by the old standard.106 Critics have argued that
such changes affect access to justice.107 The empirical evidence
shows that these decisions have had little impact on filing
activity by all but pro se plaintiffs.108 In other words, it is
101. Shmuel I. Becher et al., Toxic Promises, 63 B.C. L. REV. 753, 777 (2022).
102. Joseph Shapiro, As Court Fees Rise, The Poor Are Paying the Price, NPR
(May 19, 2014), https://www.npr.org/2014/05/19/312158516/as-court-fees-rise-the-
poor-are-paying-the-price [https://perma.cc/HK7K-XP8S].
103. David A. Hoffman & Anton Strezhnev, Longer Trips to Court Cause
Evictions, 120 PROC. NAT’L. ACAD. SCI. NO. 2 (2023), https://doi.org/10.1073
/pnas.2210467120 [https://perma.cc/27FU-ABD2].
104. Bell Atl. Corp. v. Twombly, 550 U.S. 544 (2007); Ashcroft v. Iqbal, 556 U.S.
662 (2009).
105. Edward D. Cavanagh, Making Sense of Twombly, 63 S.C. L. REV. 97, 98
(2011).
106. Twombly, 550 U.S. at 559 (“[I]t is only by taking care to require allegations
that reach the level suggesting conspiracy that we can hope to avoid the potentially
enormous expense of discovery . . . .”); see also Asahi Glass Co. v. Pentech Pharms.,
Inc., 289 F. Supp. 2d 986, 995 (N.D. Ill. 2003) (Posner, J., sitting by designation)
(“[S]ome threshold of plausibility must be crossed at the outset before a patent
antitrust case should be permitted to go into its inevitably costly and protracted
discovery phase.”).
107. Matthew A. Shapiro, Distributing Civil Justice, 109 GEO. L.J. 1473, 1516
(2021) (“[H]eightened pleading requirements and limits on discovery, have been
widely criticized for restricting access to justice . . . .”).
108. William H. J. Hubbard, The Effects of Twombly and Iqbal, 14 J. EMPIRICAL
LEGAL STUD. 474, 474−513 (2017).

<<PAGE_BREAK>>

2025] JUDICIAL ECONOMY IN THE AGE OF AI 573
unrepresented individuals who are bearing the brunt of the
heightened pleading standard and face more dismissals.
Most procedural thermostats are more indirect. Lone Pine
orders are an example.109 These are orders set out in large toxic
tort cases that call plaintiffs to present preliminary evidence on
questions of injury and causation within a deadline or risk
dismissal.110 These orders are clearly meant as a mechanism “to
identify and cull potentially meritless claims.”111 Critics have
decried their inconsistency,112 expressed concern that they turn
into “pseudo-summary judgment motions,”113 and overall worry
that they create a burden that is “unrealistic” and are an
“exercise [that] is onerous and unrewarding.”114 Nonetheless,
courts find them necessary to manage litigation.115
Consider next as a procedural thermostat the doctrine of
exhaustion of administrative remedies in the context of
prisoner’s rights.116 This broadly applied doctrine requires
plaintiffs to navigate agency processes to completion before
seeking judicial relief. While this doctrine abides by various
logics, litigation control is one of them. As a response to the spike
in inmate filings of the early 1990s,117 Congress enacted The
109. See generally Nora Freeman Engstrom, The Lessons of Lone Pine, 129 YALE
L.J. 2 (2019).
110. See, e.g., Claar v. Burlington N.R.R. Co., 29 F.3d 499, 500 (9th Cir. 1994)
(“The district court issued a case management order consolidating the twenty-seven
cases for pretrial purposes. The order required plaintiffs to submit affidavits
describing their exposure to the chemicals they claim harmed them, and affidavits
from physicians listing each plaintiff’s specific injuries, the particular chemical(s)
that in the physician’s opinion caused each injury, and the scientific basis for the
physician’s conclusions.”).
111. Baker v. Chevron USA, Inc., No. 1:05-CV-227, 2007 WL 315346, at *1 (S.D.
Ohio Jan. 30, 2007).
112. Engstrom, supra note 109, at 37.
113. Adinolfe v. United Tech. Corp., 768 F.3d 1161, 1168 (11th Cir. 2014).
114. Engstrom, supra note 109, at 52.
115. See, e.g., Acuna v. Brown & Root Inc., 200 F.3d 335, 340 (5th Cir. 2000) (“It
was within the court’s discretion to take steps to manage the complex and
potentially very burdensome discovery that the cases would require.”).
116. Kaiser Found. Hosps. v. Superior Ct., 128 Cal. App. 4th 85, 99−100 (2005);
Woodford v. Ngo, 548 U.S. 81, 88, 93 (2006) (“[T]he doctrine of exhaustion of
administrative remedies requires that where a remedy before an administrative
agency is provided by statute, regulation, or ordinance, relief must be sought by
exhausting this remedy before the courts will act.”); see also, Pozo v. McCaughtry,
286 F.3d 1022, 1025 (7th Cir. 2002) (“To exhaust remedies, a prisoner must file
complaints and appeals in the place, and at the time, the prison administrative
rules require.”).
117. Margo Schlanger, Inmate Litigation, 116 HARV. L. REV. 1555, 1578−87
(2003) (on the reasons for the spike). Russell Gold highlights that these filters tend

<<PAGE_BREAK>>

574 UNIVERSITY OF COLORADO LAW REVIEW [Vol. 96
Prison Litigation Reform Act.118 Senator Orrin Hatch, Chair of
the Senate Judiciary Committee, explained: “This landmark
legislation will help bring relief to a civil justice system
overburdened by frivolous prisoner lawsuits.”119 The Supreme
Court likewise noted in McCarthy v. Madigan that exhaustion
“serves the twin purposes of protecting administrative agency
authority and promoting judicial efficiency.”120
Empirical evidence suggests that the exhaustion
requirement does indeed filter out a significant number of
potential claims. In a study of discrimination cases filed to the
EEOC, Professor Bullock finds that only 16 percent of claims are
eventually filed in a federal court.121 Bullock’s study relies on a
nature of suit designation by the administrative office of the
court. A different estimate can be reached by analyzing the
actual text of filed cases. Data collected by Lex Machina shows
that from 2009 to the middle of 2017 there were 17,270 lawsuits
filed for employment discrimination.122 During the same time
period, the EEOC reports the total number of
discrimination-related charges (excluding retaliation) to be
474,220.123 Of these, 73.66 percent were dismissed or closed
with a finding of no reasonable cause, unsuccessful conciliation,
or administrative closure. This translates to roughly 349,310
unresolved cases. Conceding that combining datasets involves a
great degree of nuance that is missing here, the ratio of
unresolved discrimination claims to the EEOC that transform
into actual lawsuits is 3.6 percent.
Standards of proof also operate as procedural thermostats.
Consider what is necessary to prove to win a retaliation claim
to track claims by marginalized individuals. Russell M. Gold, Power over Procedure,
73 ALA. L. REV. 1, 105–06 (2022).
118. Prison Litigation Reform Act of 1995, Pub. L. No. 104-134, §§ 802−809,
110 Stat. 1321 (1995).
119. 141 CONG. REC. S26553 (daily ed. Sept. 27, 1995) (statement of Sen. Orrin
Hatch).
120. McCarthy v. Madigan, 503 U.S. 140, 143 (1992).
121. Blair Druhan Bullock, Frivolous Floodgate Fears, 98 IND. L.J. 1135, 1160
(2023).
122. Karl Harris, Lex Machina Launches Legal Analytics for Employment
Litigation, LEX MACHINA (July 12, 2017), https://lexmachina.com/blog/lex-machina-
launches-legal-analytics-for-employment [https://perma.cc/GSK6-4GBA].
123. For more on this data, see EEOC Data Collection, EEOC (2023), https://
www.eeocdata.org [https://perma.cc/U2YT-VHB8]. For code and analysis, see
Yonathan Arbel, Judicial Economy in the Age of AI, GITHUB (2024), https://
github.com/yonathanarbel/Judicial-Economy-in-the-Age-of-AI [https://perma.cc
/8FKR-9YJT].

<<PAGE_BREAK>>

2025] JUDICIAL ECONOMY IN THE AGE OF AI 575
under Title VII of the Civil Rights Act.124 Spurred by concerns
about a deluge of lawsuits, the U.S. Supreme Court decided that
the standard of proof would be the but-for test, rather than the
more plaintiff-friendly motivating factor test.125 It argued that
“[l]essening the causation standard could also contribute to the
filing of frivolous claims, which would siphon resources from
efforts by employer[s], administrative agencies, and courts.”126
A final illustration of procedural thermostats comes from
statutes of limitations. There are, by one count, around seven
categories of rationales for these laws.127 One of them is to
protect the integrity of evidence, which aims to “prevent[]
surprises through the revival of claims that have been allowed
to slumber until evidence has been lost, memories have faded,
and witnesses have disappeared.”128 But Congress sometimes
uses statutes of limitations as a means of controlling the volume
and quality of litigation,129 and so do some courts.130
The common usage of these procedural thermostats reveals
something general about the use of regulatory frictions in the
age of AI. Most of these thermostats work by adding friction to
the process. The (reasonable) expectation is that adding friction
would deter some people from filing, and the (often unverified)
hope is that those unfiled cases are those with lesser merit.131
The problem is that some of these frictions are quite vulnerable
to the introduction of AI tools. The reasons why people fail to
meet statutes of limitations requirements are varied, but some
124. 42 U.S.C. §§ 2000(e)(1)–(17).
125. Id.
126. Univ. of Tex. Sw. Med. Ctr. v. Nassar, 570 U.S. 338, 358 (2013). For a
critique, see Daiquiri J. Steele, Rationing Retaliation Claims, 13 U.C. IRVINE L.
REV. 993, 1003 (2023) (“While courts should be good stewards of judicial resources,
docket reduction should not take precedence over ensuring equal justice under the
law.”); see also Sandra F. Sperino & Suja A. Thomas, Fakers and Floodgates,
10 STAN. J.C.R. & C.L. 223, 229 (2014).
127. See generally Tyler T. Ochoa & Andrew Wistrich, The Puzzling Purposes of
Statutes of Limitation, 28 PAC. L.J. 453, 460–99 (1997).
128. Ord. of R.R. Tels. v. Ry. Express Agency, 321 U.S. 342, 349 (1944).
129. See, e.g., Sperino & Thomas, supra note 126, at 229 (arguing that “Congress
inserted numerous procedural and substantive provisions in Title VII that limit the
number of claims” which includes the short time to claim).
130. Ochoa & Wistrich, supra note 127, at 495–99.
131. Is it the case that a discrimination lawsuit filed after 320 days is less
meritorious than one filed within 290 days from the offending act? Compare,
however, the logic expressed in cases such as Chase Security Corp. v. Donaldson,
325 U.S. 304, 314 (1945), where the court sees statutes of limitation as tools that
“are by definition arbitrary, and their operation does not discriminate between the
just and the unjust claim, or the voidable and unavoidable delay.”

<<PAGE_BREAK>>

576 UNIVERSITY OF COLORADO LAW REVIEW [Vol. 96
of them depend on access to lawyering and litigation
financing.132 AI can ameliorate such barriers because it can
shepherd people and help them process the wrong they suffered
through the NBC process and then assist them in constructing
legal documents. Similarly, AI tools can significantly reduce the
costs, hurdles, and frictions associated with exhausting
administrative remedies. AI-powered tools could quickly
identify relevant agencies, help navigate their process, and draft
complaints. Finally, the same tools also apply to pleading
standards. Plausibility standards do not only filter cases that
are implausible. They also filter cases where people were
negligent or unskilled in framing their arguments or lacked the
requisite polish, which is one reason why the effect is seen
among pro se litigants.133 These filtering functions of pleading
standards are fragile to AI tools that can mass produce elaborate
briefs for even the most tenuous of cases. What adjustments
await when the old methods of adjusting the thermostat stop
working?
III. LEGAL STRATEGIES THAT DEAL WITH THE AI LITIGATION
BOOM
If the diagnosis by access to justice advocates is correct, the
prognosis is clear. To the extent AI tools remove frictions and
costs in access to justice, we should expect a commensurate
increase in civil litigation. And because the size of the access to
justice gap is so large, a doubling in the volume of litigation is
not implausible.134 Moreover, litigation would also adjust on
132. For a psychological account of delay, see Andrew J. Wistrich,
Procrastination, Deadlines, and Statutes of Limitation, 50 WM. & MARY L. REV. 607
(2008).
133. Hubbard, supra note 108, at 512 (2017) (explaining the “differential effect
for pro se plaintiffs” as “unsophisticated parties may have a poor sense of whether
their facts entitle them to relief, and thus more pro se complaints may be marginal
under a plausibility pleading standard.”).
134. Ideally, when scholars make prescriptions based on their understanding of
the future trajectory of the world—as I do here—they should offer some concrete,
refutable predictions on how they perceive future trends to evolve. Here, it’s
important to acknowledge problems of missing data on present litigation patterns,
scope and type of barriers, levels of unmet needs, and so on. Still, if it turns out in
five to eight years that there was no discernible and practically meaningful AI effect
on litigation patterns, the reader should consider this Essay’s central claim
disproven. See also Yonathan Arbel (@ProfArbel), X (Aug. 22, 2020, 6:17 PM),
https://twitter.com/ProfArbel/status/1297327039670898688 [https://perma.cc
/S3MY-MGBD].

<<PAGE_BREAK>>

2025] JUDICIAL ECONOMY IN THE AGE OF AI 577
other dimensions, with verbosity of filings being one expected
effect. With more filings that are longer and more intricate, the
expected net effect is easily summarized: a litigation boom.
Historically, courts have reacted to threats to judicial
economy by adjusting the thermostat through pulling and
pushing on the levers available to them. The goal of this Part is
to situate thermostat adjustment as one of several possible
strategic reactions to the expected AI litigation boom. It
concludes with a discussion of the policy I consider most prudent:
proactive integration. AI has shortcomings and reliability
issues, but, as explained, some are exaggerated and others
manageable, and all should be evaluated vis-à-vis the other
realistic alternatives we have on the menu. By using whatever
time we have left until the AI litigation boom, we can carefully
build, test, and deploy AI tools as part of the judicial process.
A. Strategy 1: Legal Thermostats: Fees, Pleading
Standards, and Substantive Standards
The first strategy available to courts is the one that repeats
the historical pattern: adjustment of the legal thermostat by
adapting various doctrines that double as litigation control
levers.135 Judges and judicial administrators may feel it is
necessary for them to require even higher fees to offset the
demand for legal resources, to demand even more elaborate
pleading standards, or perhaps go as far as narrowing
substantive rights. These levers can decrease litigation
levels,136 but they also make it harder to vindicate legitimate
claims. As every lawyer knows, being right and being able to
prove one’s case are not the same.
Fees are a crude lever. To meet a litigation surge, judicial
administrators can increase filing fees, increase bond
requirements, and modify other requirements. Pulling on this
lever is almost guaranteed to chill filings and reduce lawsuits.
But the downside is obvious: Requiring higher fees will narrow
access to those who cannot afford them, not just those who file a
low-quality lawsuit. A plausible rejoinder is that if a plaintiff is
very likely to win then they should be able to borrow against
their future winnings and thus still access the gates of justice.
135. See supra Part II.
136. Note, however, that they also invite more accidents, and the net effect on
litigation levels depends on a broader set of variables.

<<PAGE_BREAK>>

578 UNIVERSITY OF COLORADO LAW REVIEW [Vol. 96
The rise of the litigation financing industry would be evidence in
favor of this rejoinder. Yet this rejoinder is facile. Not only is
access to capital a challenge for many low-income individuals,
the risk of losing a meritorious claim is especially threatening if
one has loans to repay.137 In between those liquidity constraints
and the “chance of ruin,” fees are a very crude tool of filtering
lawsuits and have disproportionate impact on the poor.
Pleading standards may seem like a lighter touch
intervention.138 Conceptually they can be thought of as a
“proof-of-work” mechanism. Proof of work is familiar from
blockchain technology, where it is used to validate claims made
by certain network participants.139 In order to be a trusted
validator of blockchain transaction, a blockchain miner has to
show that it had solved a complex math assignment. The
proof-of-work mechanism adds friction to the process of
validating transactions but is a necessary component of the
network as it is effective in filtering out fraudsters. But despite
their common association with blockchain, such mechanisms are
far more general and common than many realize. In the current
context, the litigation process can be thought of as having a front
end (initial claim processing) and a back end (trial). Litigants,
presumably, have a sense of the merits of their case. The
proof-of-work mechanism leverages it to set higher front-end
requirements. A person who puts in the drafting work and sinks
in the necessary cost to meet plausibility standards in the front
end likely has a higher estimate of their case than a person who
would be discouraged by such costs. This is because the back end
costs are only borne by people who would pursue the case to its
completion. Thus, we can see the Twombly-Iqbal logic as
enforcing a proof-of-work mechanism: requiring more work on
137. See generally Yonathan A. Arbel, Payday, 98 WASH. U. L. REV. 1 (2020).
138. One adjustment, wisely pointed out by the editors of the University of
Colorado Law Review, is word limits. There is a complex menu of word limits and
word regulation for the production of legal materials. See, e.g., FED. R. APP. P.
APPENDIX: LENGTH LIMITS STATED IN THE FEDERAL RULES OF APPELLATE
PROCEDURE, https://www.ca6.uscourts.gov/sites/ca6/files/documents/rules
_procedures/Appendix.pdf [https://perma.cc/DAQ2-DE52]. That word limits are
crude tools of managing judicial economy goes without saying: it takes long to write
short, to paraphrase Pascal. Blaise Pascal, Provincial Letters: Letter XVI, to the
Reverend Fathers, the Jesuits, CHRISTIAN CLASSICS ETHEREAL LIBRARY, https://
ccel.org/ccel/pascal/provincial/provincial.xviii.html [https://perma.cc/RQP2-HAPK].
Not all can afford to do so, and this tool is not AI-proof as AI systems are excellent
summarizers.
139. For an introduction, see Michael Abramowicz, Cryptocurrency-Based Law,
58 ARIZ. L. REV. 365, 379 (2016).

<<PAGE_BREAK>>

2025] JUDICIAL ECONOMY IN THE AGE OF AI 579
the front end but serving the litigants later, thus acting as an
effective proof-of-work filter.
Assuming for a moment that this assumption is correct in
general, AI tools present a particular problem. Normally, the
crafting of effective pleadings requires an effective counsel and
an investment of time. A judge can relatively quickly discern
plausibility when the case involves low-effort filings. But AI
models are incredible writing assistants;140 they can rapidly and
easily convert vague claims to elaborate legal arguments, using
perfect grammar and compelling structure. This does not make
the claims any more valid, but it does make the production
cheaper and later validation harder. Recall that Twombly-Iqbal
mainly affects pro se litigants, and so they have the greatest
opportunity to benefit from such a tool.141 Ironically,
hallucinations can contribute to the facial plausibility of the
filings, even when the underlying claim lacks any support.
Consider, as illustration of hallucination, a request that the
AI produce a claim for workplace discrimination. Commentators
note that plausibility requirements hamper many such
claims.142 The model, however, could simply generate a set of
(semi-fictitious) facts and legal arguments that, while not true,
will seem true on their face. If the litigant is not careful and
scrupulous enough in reviewing them, it could pass initial
muster. As a result, filtering mechanisms that rely on proof of
work will become less effective than before. This could result in
escalation of front-end investments until the point where AI
cannot provide sufficient utility.
Finally, judges can simply demand more doctrinally for
filings. They can recharacterize strict liability as negligence or,
more subtly, change the meaning of reasonable person to meet a
desired level of stringency. Such changes can be hard to notice
in real time and even harder to causally relate to any thermostat
adjustment. Yet, they serve as a way to conserve judicial
resources and are available to decision-makers who feel strained
by the volume of litigation.
140. See generally Lu Sun et al., MetaWriter: Exploring the Potential and Perils
of AI Writing Support in Scientific Peer Review, 8 PROCS. OF THE ASS’N FOR
COMPUTING MACHIN. ON HUM.-COMPUT. INTERACTION, no. CSCW1-94, Apr. 2024,
at 1, https://doi.org/10.1145/3637371 [https://perma.cc/Q829-GKUT].
141. See supra Part II.
142. See, e.g., Joseph A. Seiner, Plausible Harassment, 54 U.C. DAVIS L. REV.
1295, 1310 (2021).

<<PAGE_BREAK>>

580 UNIVERSITY OF COLORADO LAW REVIEW [Vol. 96
Whatever form these adjustments take, the worrisome
implications are the narrowing of civil rights and, functionally,
a large subsidy to wrongdoers who could get away with more
socially pernicious activity. Less obvious is the problem that
these mechanisms are not very AI-proof, so their effects will be
unstable and will require constant adjustments.
To finalize our accounting, the net effect of increased access
to justice could be worse delivery of justice. Litigants who can,
for the first time, afford to enter the halls of justice, will be
denied justice within it. Higher fees, pleading standards, or
ever more demanding substantive changes can undo all the
access to justice gains AI will bring to underserved litigants.
Worse, some of the thermostats will be ineffective or will need to
be adjusted further and further because AI can circumvent
conventional proof-of-work mechanisms. While thermostat
adjustment is the most likely, perhaps even inevitable,
trajectory, I believe it will be undesirable to rely on it.
B. Strategy 2: Sit and Wait
Sometimes it is easiest to cross the bridge when you get
there, and perhaps policymakers will want to wait a while longer
before taking concrete action. Judges and judicial
administrators are careful by nature, and a rapidly expanding
and advertised technology such as AI raises understandable
concerns about unjustified hype and empty promises.
Technological uncertainty remains a significant hurdle for any
planner. While it is evident that AI is transforming the
production of legal materials, the full extent of this shift and its
implications—particularly the potential for a litigation boom—
are not yet fully understood. Historical precedents with earlier
waves of legal technologies, such as LexisNexis and LegalZoom,
suggest that whatever changes these technologies brought, the
legal system was able to adapt without catastrophic disruptions.
Moreover, given the current imperfections in AI technologies,
prudence might dictate a period of observation and gradual
adaptation. Thus, judges and judicial administrators may wish
to wait before they make any adaptations to legal processes,
procedures, and doctrines.
Further complicating the decision is the pattern of AI
adoption. We do not know yet who the dominant users would be:
pro se litigants? white shoe law firms? non-practicing patent
entities? automated litigation agents? The answers may affect

<<PAGE_BREAK>>

2025] JUDICIAL ECONOMY IN THE AGE OF AI 581
our normative evaluation of the technology. Should AI tools
follow the trajectory of previous legal tech innovations, we might
witness a surge in litigation activities by firms and commercial
entities rather than underserved individuals.143 There is also
the potential for negative uses, such as harassment or
unmeritorious litigation initiated by individual plaintiffs, which
could distort the justice system and detract from its core
functions.
Despite these considerations, I argue against a passive
stance. Current trends, though based on preliminary data,
indicate a clear trajectory toward increased AI integration
within legal practices.144 The unreliability of AI, rather than a
deterrent, should be a catalyst for judicious development and
testing. This proactive approach would not only allow for
refinement of the technology but also prepare the judicial system
to harness AI’s benefits effectively.
Moreover, even assuming the legal system could absorb the
impact of AI without significant structural changes, proactive
adaptation could still soften the shock of the transition and
enhance its efficiency and effectiveness. Innovations such as
video conferencing and digital legal research have already
demonstrated the benefits of integrating technology in legal
processes even when there was no imminent threat to the
volume of litigation.145
In conclusion, while the allure of a cautious approach is
understandable given the unknowns associated with AI, there
are strong reasons to adopt a more proactive engagement. This
strategy ensures that the judicial system is not merely reactive
but remains at the forefront of technological integration,
enhancing its capacity to deliver justice effectively.
143. See Engstrom & Engstrom, supra note 11.
144. See supra Section III.E.
145. Victor D. Quintanilla et al., Accessing Justice with Zoom: Experiences and
Outcomes in Online Civil Courts, MAURER SCH. OF L., at 2 (2023), https://
www.repository.law.indiana.edu/cgi/viewcontent.cgi?article=4087&context=facpub
[https://perma.cc/S9U8-5UKF] (finding evidence that a non-represented plaintiff
expressed preference for remote hearings, and other evidence of procedural and
distributional justice). There are also problems that are associated with remote
justice. See, e.g., Alicia Bannon & Janna Adelstein, The Impact of Video Proceedings
on Fairness and Access to Justice in Court, BRENNAN CTR. FOR JUST. (Sept. 10,
2020), https://www.brennancenter.org/our-work/research-reports/impact-video-
proceedings-fairness-and-access-justice-court [https://perma.cc/A848-DZEN].

<<PAGE_BREAK>>

582 UNIVERSITY OF COLORADO LAW REVIEW [Vol. 96
C. Strategy 3: Ban and Mark
There is a growing sentiment, mostly expressed to me in
private conversations with judges, that generative AI should be
banned in the courtroom. Alternatively, some favor a
requirement that lawyers disclose when they are using
AI-generated materials.146
The judicial skepticism is understandable, but I believe it is
wrong to follow it in the long term. A ban would kill our ability
to democratize access to the justice system in the crib.147 It
would perpetuate the asymmetries that currently exist, working
disproportionality against those who have the most to benefit
from the technology.
Disclosure regimes are a hopeless enterprise. As far as we
know, and to the displeasure of school administrators
everywhere, there is no reliable technology that can watermark
AI-produced texts. Detection of AI-generated texts is
probabilistic and error-prone, and it may—at best—only cover
the least sophisticated of its users.148 The share of those hapless
users is small, and their culpability is no worse than their more
sophisticated peers. But most importantly, the expected level of
AI integration in law practices suggests that disclosure will be
as meaningful as requiring litigants to disclose if they used a
search engine or a computer. It will communicate no actionable
information to the judge and will become as helpful as “here
comes the plaintiff” and other legal boilerplate. Overall, I would
caution those judges and judicial administrators who, in good
faith, worry about rising rates of litigation against trying a
hopeless “ban-and-mark” regime.
146. Maura R. Grossman, Paul W. Grimm & Daniel G. Brown, Is Disclosure and
Certification of the Use of Generative AI Really Necessary?, 107 JUDICATURE 69, 70
(2023), https://judicature.duke.edu/articles/is-disclosure-and-certification-of-the-
use-of-generative-ai-really-necessary [https://perma.cc/4ZYP-WB7S] (Judge
Michael M. Baylson was in favor, issuing standing orders requiring lawyers to
disclose use of AI).
147. On the democratizing arguments, see supra Section I.C.
148. See, e.g., Manshu Zhang et al., The Three-Dimensional Porous Mesh
Structure of Cu-Based Metal-Organic-Framework—Aramid Cellulose Separator
Enhances the Electrochemical Performance of Lithium Metal Anode Batteries, 46
SURFACES & INTERFACES 104081 (2024) (retracted), https://doi.org/10.1016
/j.surfin.2024.104081 [https://perma.cc/943F-DKML] (a retracted article which
opens its introduction with “Certainly, here is a possible introduction for your topic
. . .”). The original version is stored in Reddit, https://i.redd.it/zq0raef1aaoc1.jpeg
[https://perma.cc/G5AN-QZTN].

<<PAGE_BREAK>>

2025] JUDICIAL ECONOMY IN THE AGE OF AI 583
D. Strategy 4: Massive Funding
Justice costs money. If the problem of judicial economy is
that there is a growing demand for justice—as I have argued
throughout—then clearly the most direct way of solving the
problem is by increasing the resources available to the legal
system.
How many resources should go to justice, and at the expense
of what other social programs, is a political question that exceeds
my proffered expertise. What is meaningful for evaluating the
prospects of a budget increase, however, is the estimated size of
funding. If there is room for a two-fold or a five-fold increase in
the volume of litigation, then this gives a general sense of the
magnitude of the budget required to handle it. Of course, not
all—not even the majority—of this potential will translate into
lawsuits. Society adapts to technological change along many
dimensions, and there are many other ways to avoid legal
disputes. But the realism of a budget increase that would even
approximately double the number of judges and judicial
administrators appears quite tenuous in our current political
reality.
One fact that lends some realism to this proposition is that
civil legal aid benefits today from roughly $2.7 billion in overall
budgets.149 If one feels particularly bullish on AI technology and
its ability to replace legal aid through its automation, perhaps it
is conceivable that some of these budgets could be redirected
towards the legal system.150
Yet, even if AI is so potent as to completely substitute the
need for legal aid (a tenuous proposition, given that legal aid
does more than drafting briefs), there is not enough money there.
The federal court system alone is budgeted at $9.4 billion per
year, so even if were to somehow completely dismantle the legal
aid project, we could at most afford a 30 percent increase in
149. ALAN W. HOUSEMAN, INT’L LEGAL AID GRP., LEGAL AID IN THE UNITED
STATES: AN UPDATE FOR 2023 (May 2023), https://clp.law.harvard.edu/wp-content
/uploads/2023/05/USA-National-Report-ILAG-Conference-2023.pdf [https://
perma.cc/94B8-KAL7]. According to the Legal Services Corporation (LSC) data
from 2022, the total funding for LSC-funded organizations was $1.72 billion. BY
THE NUMBERS 2022, supra note 11, at 13–14.
150. Houseman, supra note 149, at 4 (noting that since 2000, LSC has funded
more than 859 projects totaling over $81 million in Technology Initiative Grants.).

<<PAGE_BREAK>>

584 UNIVERSITY OF COLORADO LAW REVIEW [Vol. 96
funding.151 But in a world where AI is sufficiently competent to
perform as well as legal aid, the rise in demand will be much
larger. At best, we would only scratch the surface of demands on
the legal system, while hollowing out legal aid.
E. Strategy 5: Integration
If none of the above strategies can effectively and equitably
meet the AI litigation boom, the legal system still has one other
important course of action available to it: integration. The
objective would be to implement AI in all aspects of the legal
process, amplifying the productivity of judges and clerks, which
would allow them to work at larger-than-ever scales. If done
correctly, this strategy would offer a significant stretching of
existing judicial resources, allowing judges to meet increased
demand without resorting to adjustment of legal thermostats or
sacrificing justice in individual cases.
Rather than a hypothesis, this seems to be organically
happening. Judges have started admitting to using generative
AI to draft opinions, although the backlash suggests that many
others are still in hiding.152 One British judge made the point
succinctly and forcefully: “It is useful, and it will be used.”153
Likewise, Richard Re believes that judges will invariably find AI
tools to be “irresistibly attractive.”154
Most remarkably, in a groundbreaking decision, Judge
Newsom of the Eleventh Circuit has written an opinion relying
on AI for “generative interpretation.” Drawing on our academic
work on generative interpretation, he said:
Those, like me, who believe that “ordinary meaning” is the
foundational rule for the evaluation of legal texts should
consider—consider—whether and how AI-powered large
151. ADMIN. OFF. OF THE U.S. CTS., THE JUDICIARY: FISCAL YEAR 2025
CONGRESSIONAL BUDGET SUMMARY, at i (Feb. 2024), https://www.uscourts.gov
/sites/default/files/fy_2025_congressional_budget_summary.pdf [https://perma.cc
/XS66-9ZSJ].
152. Hibaq Farah, Court of Appeals Judge Praises ‘Jolly Useful’ ChatGPT After
Asking It for Legal Summary, THE GUARDIAN (Sept. 15, 2023), https://
www.theguardian.com/technology/2023/sep/15/court-of-appeal-judge-praises-jolly-
useful-chatgpt-after-asking-it-for-legal-summary [https://perma.cc/33W8-EMTM].
153. Id.
154. Richard Re, Artificial Authorship and Judicial Opinions, 92 GEO. WASH. L.
REV. 1558, 1561 (2024), https://www.gwlr.org/wp-content/uploads/2024/12/92-Geo.-
Wash.-L.-Rev.-1558.pdf [https://perma.cc/UVS6-YSF5].

<<PAGE_BREAK>>

2025] JUDICIAL ECONOMY IN THE AGE OF AI 585
language models like OpenAI’s ChatGPT, Google’s Gemini,
and Anthropic’s Claude might—might—inform the
interpretive analysis.155
Appeal notwithstanding, there is also significant resistance
to integration, at least in its stronger forms. While scholars such
as Eugene Volokh express cautious optimism about the
automation of judgments—that is, “robo-judging”156—others are
less sanguine. Aziz Huq speaks of a right to a “human
decision,”157 and experiments suggest a perceived fairness gap
between human and artificial adjudicators.158 These objections
rely in part on empirical objections concerning the capacity of
these systems to produce judgments that are as good as a human
judge in terms of accuracy, bias, and gameability. They also
draw on sensible ethical concerns regarding the ethics of
adjudication by those who are neither citizens nor humans. The
former set of problems is amenable to practical solutions, while
the latter can be mostly remedied by including human judges
who are in the loop.159
When we talk about integration, I would like to suggest that
robo-judging should not be a central frame of thinking about the
technology. While it is provocative and exciting, for sure,
ultimately robo-judging is a distraction from the much more
mundane but nonetheless powerful utility of AI in the service of
justice. In the remainder of this Section, I want to highlight a
few of these modalities.
The immense volume of text generated in litigation is
staggering, and this will likely increase as parties begin
leveraging advanced AI tools to augment their legal processes.
To mete out justice, we need some way to compress all this
155. Snell v. United Specialty Ins. Co., 102 F.4th 1208, 1221 (11th Cir. 2024)
(Newsom, J., concurring) (citing Yonathan A. Arbel & David A.
Hoffman, Generative Interpretation, 99 N.Y.U. L. REV. 451 (2024), https://
www.nyulawreview.org/wp-content/uploads/2024/05/99-NYU-L-Rev-451-1.pdf
[https://perma.cc/3Y4S-LDH7]).
156. Eugene Volokh, Chief Justice Robots, 68 DUKE L.J. 1135 (2019).
157. Aziz Z. Huq, A Right to a Human Decision, 105 VA. L. REV. 611 (2020); see
also Kiel Brennan-Marquez & Stephen E. Henderson, Artificial Intelligence and
Role-Reversible Judgment, 109 J. CRIM. L & CRIMINOLOGY 137 (2019).
158. Benjamin Minhao Chen, Alexander Stremitzer & Kevin Tobia, Having Your
Day in Robot Court, 36 HARV. J. L. & TECH. 127 (2022).
159. Huq, supra note 157, at 4; see also Brennan-Marquez & Henderson, supra
note 157, at 149.

<<PAGE_BREAK>>

586 UNIVERSITY OF COLORADO LAW REVIEW [Vol. 96
information. In other words, we need a summarization machine,
and it turns out that generative AI excels at this task.160
Document summarization is among the most explored areas
within natural language processing using AI. This technology is
divided into two main types: abstractive and extractive
summarization. Abstractive summarization creates a new,
condensed version of the text that conveys the core meaning of
the text, potentially using its own words. Extractive
summarization, on the other hand, identifies and compiles key
phrases directly from the text.161 Both approaches can
significantly aid judges by highlighting essential information
and reducing the amount of material they need to personally
review.
An abstractive summary can direct a judge’s attention to
critical parts of a document, effectively serving as a
sophisticated, automated, and high-level summary of a
document. A file management system could mark a filed
document as “exhibit 182A,” the text “Sale agreement of the
Tuscaloosa house.” Unlike summaries written by any of the
litigants, the AI has no incentive to highlight a specific frame—
it seeks to offer a robust, useful summary to the best of its
ability.162
Extractive summaries, on the other hand, are invaluable for
identifying crucial elements within the text. An extractive
summary of the sale agreement may include elements such as
“seller shall deliver the property on or before January 1st.” It
could also include specific pieces of evidence, legal authorities,
or specific quotes. These summaries are particularly useful in
scenarios where precise language and specific details are
pivotal.
Both abstractive and extractive summaries have their uses.
To orient oneself in a stack of documents, abstractive summaries
160. See generally Text Summarization, PAPERS WITH CODE, https://
paperswithcode.com/task/text-summarization [https://perma.cc/AV3F-KPF3]
(presenting benchmarks on text-summarization tasks).
161. Nikolaos Giarelis, et al., Abstractive vs. Extractive Summarization: An
Experimental Review, 13 APPLIED SCI. 7620 (2023).
162. The sort of biases that afflict AI systems are often irrelevant to
summarization tasks. There are some implicit biases that can creep in nonetheless
(such as assumptions that a doctor is male), but clerks may well be subject to
similar biases and, in any event, the impact on any actual decision is highly
attenuated. What is perhaps most important is that the models have no stake in
the case at hand.

<<PAGE_BREAK>>

2025] JUDICIAL ECONOMY IN THE AGE OF AI 587
are essential; to locate leading phrases and arguments within a
document, extractive summarization is powerful.
The implementation of such summarization technologies in
case management systems is straightforward and cost-effective.
It is expected to be as simple as any large automation project is,
albeit, more costly and complicated than anticipated, but
ultimately solvable.163 It would be quite possible to integrate
these systems at the case management level, ensuring that
every submitted document includes an automated summary and
extraction of key parts. This allows effective attention
management on the part of the judge, a way to easily sort and
find the appendix dealing with the copy of the sale contract the
parties mentioned or the one document that covers Consumer
Price Index adjustments.
There is a more advanced application, commonly known as
“document Q&A.” Documents, by their nature, are static
entities. They contain information, and one has to read through
the document to extract it. This becomes unwieldy when dealing
with a lengthy document. Search engines offer a greater degree
of interactivity. They allow one to filter pieces of a document
based on keyword searches. Such keywords can be as simple as
searching for “choice of law,” or more advanced such as a search
for “executive* /w3 decision?” Once located, the system will
highlight the relevant text and orient attention to all the
relevant “hits.” The user is expected to sort through them and
find the relevant one.
Using document Q&A is the next step.164 It allows the judge
to ask specific questions about the document, and, rather than
using arcane keywords, the judge can use ordinary language.
That is, after the AI ingests a filing, the judge can simply ask:
“does this brief mention a meeting in Switzerland?”; “does the
plaintiff mention the statute of limitations?”; or “list the
executive decision the document mentions and what it means.”
The AI will then diligently provide an answer based on the
content of the document. The answer itself will be in natural
language, for example, “this document mentions a meeting in
163. Hofstadter’s Law states: “It always takes longer than you expect, even when
you take into account Hofstadter’s Law.” DOUGLAS R. HOFSTADTER, GÖDEL,
ESCHER, BACH: AN ETERNAL GOLDEN BRAID 152 (20th anniversary ed. 1999).
164. On the use of document Q&A for legal applications, see Xiaoxian Yang
et al., Large Language Models for Automated Q&A Involving Legal Documents: A
Survey on Algorithms, Frameworks and Applications, 20 INT’L J. WEB INFO.
SYS. 413 (2024).

<<PAGE_BREAK>>

588 UNIVERSITY OF COLORADO LAW REVIEW [Vol. 96
Zurich between the CEO of Acme and the CFO of Alpha,
although it doesn’t discuss its purpose.” Because the interface is
simply plain language, it requires little training to learn how to
use document Q&A.
Using document Q&A is a radical improvement over our
current means of interacting with documents. Search engines
direct users to not think about the question they want to answer
but rather on what queries will most likely produce the context
that will answer them. We search for “choice of law” not because
we necessarily care about the term, but because we think the
term will be in the context of the clause that determines the
choice the parties have made. Along the way, we trudge along
many irrelevant mentions of the term. Document Q&A allows
the user to skip this stage. The judge can simply ask “what is the
choice of law in this document?”
Document Q&A methods are not an all-knowing sage, of
course. It is perhaps most productive to think of them as an
always on-call, diligent, and earnest attorney of middling ability.
They will try but often fail to answer complex or subtle legal
questions, and their responses may be partial or unintentionally
misleading. LLMs are not very good at saying “I don’t know” or
“I’m really not sure,” and they may easily overstate the level of
confidence in their answers. When they are fed very long
documents, their ability degrades, which means that
inexperienced users can expect too much of the LLMs. Users
may also be tempted to use them in ways that push their limits,
like asking “What are the credible claims in this document?”
which relegates actual judgment to the LLM. Critically, LLMs
will sometimes hallucinate facts that are not true. The model
might say that the parties decreed Tuscaloosa, Alabama, as their
choice of law, even though the agreement contains no such
reference.
Both of these problems are important, but they only repeat
the time-worn lesson that all tools have limitations rather than
posing any fundamental objection to using tools. There are some
helpful correctives to many of their shortcomings. In most
general terms, these issues can be dealt with in ways similar to
how judges currently utilize legal clerks and assistants. Judges
benefit from their assistance yet maintain ultimate
responsibility for decision-making. Judges learn which parts of
the work they can entrust to their assistants, what type of
quality assurance checks they must run, and which parts they
should do only by themselves. If a model says that the meeting

<<PAGE_BREAK>>

2025] JUDICIAL ECONOMY IN THE AGE OF AI 589
took place in Zurich, and this fact is important, then the judge
should verify it before proceeding to rely on this stated fact. Even
though such measures take away some of the efficiencies of both
clerks and AI models, they still allow the judge to focus their
scarce attention efficiently. As is the case for human clerks, the
net time saving from AI would generally be positive—and if not,
the judge could choose not to use them.
Confidentiality is another concern. Many of the models are
currently hosted in the cloud.165 It will be inappropriate to share
confidential information, especially when there is a risk that the
owner of the model, often a commercial firm, will use the data
for future model training. There are a few evolving solutions:
on-premise model hosting, data encryption and salting, secure
cloud services with proper data licensing requirements, and the
like.166 Several AI labs are developing enterprise solutions that
are sensitive to such concerns.167 Additionally, the formulation
of legal standards tailored to the use of AI in the legal sector is
critical to addressing these privacy issues and enhancing trust
in AI applications.
A stronger form of integration relies on the aforementioned
generative interpretation. LLMs are trained to develop complex
representations of human language based on training with
datasets that encompass trillions of words. These datasets are
far more exhaustive than any amount of text a single human can
read in a lifetime of dedicated seclusion. Recent work has shown
that judges can use AI as a tool of textualist interpretation,
drastically improving on tools such as dictionaries or corpus
linguistics, not to mention the judge’s private language sense.168
Using generative interpretation a judge can probe the model’s
internal language representation and thus access a cheap,
effective, and reproducible mode of ascertaining meaning.
165. As of today, all the leading LLMs are proprietary. LMSYS Chatbot Arena
Leaderboard, HUGGING FACE (2024), https://huggingface.co/spaces/lmsys/chatbot-
arena-leaderboard [https://perma.cc/K3HS-TBDD]. The competitive open-source
models are large enough to need hardware normally not available on
consumer-level computers.
166. See generally Justin Winter, AI & LLM Data Privacy and Data Sovereignty:
Navigating the Challenges, AMAZEE.IO (July 2, 2024), https://www.amazee.io/blog
/post/ai-llm-data-privacy-protection [https://perma.cc/LL9X-CM93].
167. See, e.g., Balaji Chandrasekaran et al., Foundational Data Protection for
Enterprise LLM Acceleration with Protopia AI, AWS: AWS MACH. LEARNING BLOG
(Dec. 5, 2023), https://aws.amazon.com/blogs/machine-learning/foundational-data-
protection-for-enterprise-llm-acceleration-with-protopia-ai [https://perma.cc/PZ6D-
WAKY].
168. Arbel & Hoffman, supra note 155.

<<PAGE_BREAK>>

590 UNIVERSITY OF COLORADO LAW REVIEW [Vol. 96
Moreover, LLMs are designed to account for meaning in context.
Unlike any dictionary, LLMs can easily distinguish between
various plausible usages of a specific word based on its broader
context. The word ‘run’ has no fewer than 645 meanings, and a
dictionary would present them all as equiprobable
definitions.169 An LLM will have no trouble distinguishing
between meanings based on context. This is why some believe
that generative interpretation is the future of textualist
interpretation.170
There are some dangers involved in careless integration into
the judicial practice, as recently developed by Richard Re’s
analysis of AI as an opinion-drafting co-pilot.171 As noted here,
there are clear efficiencies inherent in a drafting tool that can
help a judge draft an opinion quickly, and today’s technology is
akin to adding a cadre of enthusiastic but somewhat dull clerks.
Re’s account, while acknowledging this utility, also raises red
flags about their effect on the nature of the adjudicative role. The
point is that in separating opinion writing from adjudication
something—potentially very important—is lost. In Re’s
retelling, broad adoption will dull the edge of writing opinions,
the rhetoric will turn to sophistry, the judgments will sound
uniform with a majoritarian bent, judicial ownership will
become diffused, and deliberation and reason will decline.172
Moreover, the consumers of judicial opinions—the public and
legal professionals—will come to view such opinions with a
certain distaste: a fancy form of lifeless boilerplate.
While Re is critical of the way models are utilized, he is
careful enough not to romanticize extant practices. He readily
acknowledges that even today judges do not craft each decision
from first principles and that they rely on precedent and
clerks.173 But he does view AI as a threat to the authenticity of
the process.174
Re’s arguments are reasonable enough and become ever
more reasonable when integration of AI drafting becomes closer
169. Simon Winchester, A Verb for Our Frantic Times, N.Y. TIMES
(May 28, 2011), https://www.nytimes.com/2011/05/29/opinion/29winchester.html
[https://perma.cc/5F5M-ETTZ].
170. See Arbel & Hoffman, supra note 155.
171. Re, supra note 154.
172. Id.
173. Drawing on Posner, Re reminds us that the integration of previous waves
of technology have already led to tensions. RICHARD POSNER, THE FEDERAL
COURTS: CRISIS AND REFORM 102 (1985); see also Re, supra note 154, at 5.
174. Id.

<<PAGE_BREAK>>

2025] JUDICIAL ECONOMY IN THE AGE OF AI 591
to the robo-judging end of the spectrum. It has no real bite on
the other extreme where AI is more akin to an overly engineered
spell-check. Integration into authorship that helps the judge
spot typos, come up with examples or metaphors, or offer
variations on formulaic language are all activities that are
barely exposed to his critique. Perhaps having AI suggest legal
arguments on specific issues nears the other extreme, but the
point is that there are simply so many steps along this spectrum
where AI is either non-problematic or that, all things considered,
its integration is still a net benefit. Judges should be acutely
aware of the dangers of this road, but given the immense
practical pressure that looms ahead, they should not abandon it
altogether.
* * *
I have outlined here a few modalities of reaction to the AI
moment and emphasized various modes of integrating AI into
the legal process. Taken not as a method of outsourcing
adjudication to algorithms, and in clear view of the limitations
of AI, the recommendation that emerges from this analysis is
one that favors integration. By integrating AI into the judicial
process, judges will enjoy levels of support that are necessary to
meet the AI moment and the potential sharp increase in
litigation.
Some people are not comfortable putting algorithms near
human-life affecting decisions. The message of this Essay is
directed especially at them. Short of massive funding runs, the
real decision the AI moment presents is not whether but between
algorithms of sorts. As AI increases access, it will strain judicial
resources. Judges may find themselves pushed to adjust the only
thermostat available to them. Worse, politicians may seize the
moment to adjust the thermostat against plaintiffs they disfavor
on political grounds. They will say that this group uses AI to
leech resources from those who really need them (and happen to
belong to their favored groups).
Adjusting the legal thermostat by increasing fees, limiting
substantive rights, and increasing standards of pleadings,
among other similar means, effectively creates a blind
algorithm. These measures deny access to people who can’t meet
them regardless of their need, their eventual ability to meet the
requirements, or their case’s merits. Such thermostat
adjustments are often regressive and, ultimately, jeopardize

<<PAGE_BREAK>>

592 UNIVERSITY OF COLORADO LAW REVIEW [Vol. 96
substantive and procedural rights, reinstating the barriers to
justice that we can finally topple. A nuanced and thoughtful
mode of integration involves algorithms, but ones that are
artificially intelligent, and with thoughtful integration, could far
outdo mechanical and potentially politicized thermostat
adjustments.
IV. CONCLUSION
This Essay wrestles with what might seem at first blush to
be an optimistic question: What if we could solve the access to
justice problem? Implicit in much of the scholarship is the notion
that reducing barriers would naturally translate to more justice
for all. Here, we have adopted a more skeptical approach, based
on control theory and historical lessons from past waves of
litigation spikes. Commentators are not wrong because they
think AI will reduce barriers; in fact, they might be
underestimating how many barriers will be reduced or even
dismantled. What they should see more clearly is that access to
justice is just a prelude to the main act: the delivery of justice.
AI will potentially lead to a litigation boom. As historical
examples such as the Prison Litigation Reform Act remind us,
the reaction to new demands on the legal system can result in
the winnowing down of procedural and substantive rights.
I proposed here that an appropriate response is the
proactive integration of AI tools into the legal process. At the
moment, there is understandable hesitancy given stereotypes
about the ability of machines to perform legal tasks, integration
costs, and the model’s bias and potential lack of reliability. Such
arguments are both real and exaggerated. Bias and unreliability
can be addressed effectively by careful integration into the
lower-stakes aspects of the process, where verification is
available. More importantly, relative to other alternatives such
as substantive hurdles, which bluntly and mechanically
suppress litigation, AI tools can offer considerable improvement.
This opens the stage for a new wave of tool-building
scholarship coming from, and directed at, lawyers. Now that
scholarship has established many of the shortcomings of
algorithms and AI, what positive use cases are there? How could
tools be developed with attention to their inherent limitations?
There is a small wave of scholarship that tries to do that, but it
is led by technologists and is published outside of law reviews.
Legal scholars, cooperating with judges and judicial

<<PAGE_BREAK>>

2025] JUDICIAL ECONOMY IN THE AGE OF AI 593
administrators, should take the lead and collaborate with
technologists.
Ultimately, judicial economy considerations pose a hard,
but urgent, choice: We must decide how much justice we want to
purchase and whether we want to stretch these dollars further
by providing automation tools to judges.

---

## ssrn-4962098: 
Year: 2024
Authors: Yonathan Arbel
Source: papers/ssrn-4962098/paper.txt



<<PAGE_BREAK>>

ARBEL, THE READABILITY OF CONTRACTS: BIG DATA ANALYSIS 2/55

<<PAGE_BREAK>>

ARBEL, THE READABILITY OF CONTRACTS: BIG DATA ANALYSIS 3/55

<<PAGE_BREAK>>

ARBEL, THE READABILITY OF CONTRACTS: BIG DATA ANALYSIS 4/55

<<PAGE_BREAK>>

ARBEL, THE READABILITY OF CONTRACTS: BIG DATA ANALYSIS 5/55

<<PAGE_BREAK>>

ARBEL, THE READABILITY OF CONTRACTS: BIG DATA ANALYSIS 6/55

<<PAGE_BREAK>>

ARBEL, THE READABILITY OF CONTRACTS: BIG DATA ANALYSIS 7/55

<<PAGE_BREAK>>

ARBEL, THE READABILITY OF CONTRACTS: BIG DATA ANALYSIS 8/55

<<PAGE_BREAK>>

ARBEL, THE READABILITY OF CONTRACTS: BIG DATA ANALYSIS 9/55
✔ ✔ ✔
✔ ✔ ✔
✔ ✔ ✔
✔ ✔ ✔
✔ ✔ ✔
✔ ✔ ✔

<<PAGE_BREAK>>

ARBEL, THE READABILITY OF CONTRACTS: BIG DATA ANALYSIS 10/55
𝔼(𝑆 −𝑆
𝑚𝑎𝑥 min⁡)

<<PAGE_BREAK>>

ARBEL, THE READABILITY OF CONTRACTS: BIG DATA ANALYSIS 11/55

<<PAGE_BREAK>>

ARBEL, THE READABILITY OF CONTRACTS: BIG DATA ANALYSIS 12/55

<<PAGE_BREAK>>

ARBEL, THE READABILITY OF CONTRACTS: BIG DATA ANALYSIS 13/55

<<PAGE_BREAK>>

ARBEL, THE READABILITY OF CONTRACTS: BIG DATA ANALYSIS 14/55

<<PAGE_BREAK>>

ARBEL, THE READABILITY OF CONTRACTS: BIG DATA ANALYSIS 15/55

<<PAGE_BREAK>>

ARBEL, THE READABILITY OF CONTRACTS: BIG DATA ANALYSIS 16/55

<<PAGE_BREAK>>

ARBEL, THE READABILITY OF CONTRACTS: BIG DATA ANALYSIS 17/55

<<PAGE_BREAK>>

ARBEL, THE READABILITY OF CONTRACTS: BIG DATA ANALYSIS 18/55

<<PAGE_BREAK>>

ARBEL, THE READABILITY OF CONTRACTS: BIG DATA ANALYSIS 19/55

<<PAGE_BREAK>>

ARBEL, THE READABILITY OF CONTRACTS: BIG DATA ANALYSIS 20/55

<<PAGE_BREAK>>

ARBEL, THE READABILITY OF CONTRACTS: BIG DATA ANALYSIS 21/55

<<PAGE_BREAK>>

ARBEL, THE READABILITY OF CONTRACTS: BIG DATA ANALYSIS 22/55

<<PAGE_BREAK>>

ARBEL, THE READABILITY OF CONTRACTS: BIG DATA ANALYSIS 23/55

<<PAGE_BREAK>>

ARBEL, THE READABILITY OF CONTRACTS: BIG DATA ANALYSIS 24/55

<<PAGE_BREAK>>

ARBEL, THE READABILITY OF CONTRACTS: BIG DATA ANALYSIS 25/55

<<PAGE_BREAK>>

ARBEL, THE READABILITY OF CONTRACTS: BIG DATA ANALYSIS 26/55

<<PAGE_BREAK>>

ARBEL, THE READABILITY OF CONTRACTS: BIG DATA ANALYSIS 27/55

<<PAGE_BREAK>>

ARBEL, THE READABILITY OF CONTRACTS: BIG DATA ANALYSIS 28/55

<<PAGE_BREAK>>

ARBEL, THE READABILITY OF CONTRACTS: BIG DATA ANALYSIS 29/55

<<PAGE_BREAK>>

ARBEL, THE READABILITY OF CONTRACTS: BIG DATA ANALYSIS 30/55

<<PAGE_BREAK>>

ARBEL, THE READABILITY OF CONTRACTS: BIG DATA ANALYSIS 31/55

<<PAGE_BREAK>>

ARBEL, THE READABILITY OF CONTRACTS: BIG DATA ANALYSIS 32/55

<<PAGE_BREAK>>

ARBEL, THE READABILITY OF CONTRACTS: BIG DATA ANALYSIS 33/55

<<PAGE_BREAK>>

ARBEL, THE READABILITY OF CONTRACTS: BIG DATA ANALYSIS 34/55

<<PAGE_BREAK>>

ARBEL, THE READABILITY OF CONTRACTS: BIG DATA ANALYSIS 35/55
CRM Flesch Kincaid
Contract Type % %
2001 2022 2001 2022
Change Change
Non-Competes,
Confidentiality, - -
14.5 16.5 15.9 18.5
& Post- 13.80% 16.40%
Employment
Insurance,
- -
Indemnity, and 17 19.2 18.5 25.1
13.00% 35.50%
Coverage
Ownership,
-
Trust, and 16.5 18.1 -9.70% 18.9 23.2
23.30%
Governance
Mergers,
Alliance, and -
16.2 17.7 -9.30% 18.9 22.2
Investment 18.70%
Agreements
Shares, Stocks,
-
Incentives, and 15.6 17.2 -9.90% 17.4 19.3
10.90%
Options
Credit, Debt,
-
and Security 16.4 17.7 -7.90% 18.8 22.3
18.60%
Agreements
Property, -
16 17.2 -7.50% 18.1 20.9
Rights, and IP 15.50%
Purchase or
-
Sale 16.2 17.3 -6.80% 18.3 21
14.80%
Agreement
Settlement,
Waiver, and
16.6 17.6 -6.00% 19.3 20.9 -8.30%
Termination or
Severance
Employment
16.4 17.2 -4.90% 18.7 20 -7.00%
Agreement
Services &
15.3 15.2 -0.7% 16.5 17.4 -5.50%
Supply

<<PAGE_BREAK>>

ARBEL, THE READABILITY OF CONTRACTS: BIG DATA ANALYSIS 36/55

<<PAGE_BREAK>>

ARBEL, THE READABILITY OF CONTRACTS: BIG DATA ANALYSIS 37/55

<<PAGE_BREAK>>

ARBEL, THE READABILITY OF CONTRACTS: BIG DATA ANALYSIS 38/55

<<PAGE_BREAK>>

ARBEL, THE READABILITY OF CONTRACTS: BIG DATA ANALYSIS 39/55

<<PAGE_BREAK>>

ARBEL, THE READABILITY OF CONTRACTS: BIG DATA ANALYSIS 40/55

<<PAGE_BREAK>>

ARBEL, THE READABILITY OF CONTRACTS: BIG DATA ANALYSIS 41/55

<<PAGE_BREAK>>

ARBEL, THE READABILITY OF CONTRACTS: BIG DATA ANALYSIS 42/55

<<PAGE_BREAK>>

ARBEL, THE READABILITY OF CONTRACTS: BIG DATA ANALYSIS 43/55

<<PAGE_BREAK>>

ARBEL, THE READABILITY OF CONTRACTS: BIG DATA ANALYSIS 44/55

<<PAGE_BREAK>>

ARBEL, THE READABILITY OF CONTRACTS: BIG DATA ANALYSIS 45/55

<<PAGE_BREAK>>

ARBEL, THE READABILITY OF CONTRACTS: BIG DATA ANALYSIS 46/55

<<PAGE_BREAK>>

ARBEL, THE READABILITY OF CONTRACTS: BIG DATA ANALYSIS 47/55

<<PAGE_BREAK>>

ARBEL, THE READABILITY OF CONTRACTS: BIG DATA ANALYSIS 48/55

<<PAGE_BREAK>>

ARBEL, THE READABILITY OF CONTRACTS: BIG DATA ANALYSIS 49/55

<<PAGE_BREAK>>

ARBEL, THE READABILITY OF CONTRACTS: BIG DATA ANALYSIS 50/55

<<PAGE_BREAK>>

ARBEL, THE READABILITY OF CONTRACTS: BIG DATA ANALYSIS 51/55

<<PAGE_BREAK>>

ARBEL, THE READABILITY OF CONTRACTS: BIG DATA ANALYSIS 52/55

<<PAGE_BREAK>>

ARBEL, THE READABILITY OF CONTRACTS: BIG DATA ANALYSIS 53/55

<<PAGE_BREAK>>

ARBEL, THE READABILITY OF CONTRACTS: BIG DATA ANALYSIS 54/55

<<PAGE_BREAK>>

ARBEL, THE READABILITY OF CONTRACTS: BIG DATA ANALYSIS 55/55

---

## ssrn-5181207: TAX LEVERS FOR A SAFER AI FUTURE
Year: 2025
Authors: Yonathan Arbel
Source: papers/ssrn-5181207/paper.txt

TAX LEVERS FOR A SAFER AI FUTURE
Mirit Eyalѳ & Yonathan Arbelƴ
This Article argues that tax policy can become a powerful tool for the development of
safer systems of artificial intelligence (AI). Investment in AI capabilities is at a fever
pitch, drawing capital, talent, and computing resources from most sectors of the
economy. While the development of capable AI systems promises princely rewards to
their creators, investment in safety remains anemic, reduced to paltry budgets and
safety-washing initiatives. This misalignment has produced a rapidly expanding
capability-safety gap: the difference between what these systems can do and what they
can do safely. We lack meaningful assurances that tomorrow’s powerful systems will
safeguard the life and dignity of individuals, withstand adversarial attacks, and
function reliably in novel contexts. At the heart of this gap lies a simple, bitter truth—
while the rewards from powerful models are private, the harms are socialized.
We term this the social misalignment problem and propose that tax levers can play a
critical role in its resolution. Our proposed framework reconceptualizes the existing
sprawling system of R&D credits to incentivize investments in AI safety. The
framework integrates four mechanisms: (1) targeted rewards for basic and applied
research on AI safety; (2) consumer credits for purchases of safe AI technology; (3)
escalating tax penalties for non-compliance; and (4) redistribution of penalty-
generated revenue to public safety research initiatives. This Article argues that such a
framework offers a practical solution for embedding safety considerations within the
economic architecture of AI development while preserving innovation incentives.
Through careful calibration of fiscal levers, public policy tools can address the
structural misalignment between private sector imperatives and public safety
demands in emerging technologies.
ѳ Joseph D. Peeler Professor of Law, The University of Alabama School of Law.
ƴ William Alfred Rose Professor of Law, Irving Silver and Frances Grodsky Silver Faculty Scholar, Director, AI & Law Studies,
The University of Alabama School of Law.
1

<<PAGE_BREAK>>

TABLE OF CONTENTS
Introduction .................................................................................................................................... 3
I. The Importance of AI Safety ............................................................................................... 8
A. An Outline of AI Safety ................................................................................................... 8
B. The Capability-Safety Gap ............................................................................................. 13
C. The Social Misalignment Problem ................................................................................. 15
II. Current Use of Tax Levers to Incentivize Investments in Safety ...................................... 17
A. Energy & Infrastructure Safety ...................................................................................... 18
B. Environmental and Road Safety .................................................................................... 21
C. Workplace and Occupational Safety.............................................................................. 23
D. Safety Research Incentives ............................................................................................. 25
III. A Tax Framework for Safe AI Development ..................................................................... 28
A. A Novel Incentive, Allocation, and Distribution Mechanism...................................... 29
1. Business Tax-Incentives for Investments in AI Safety .................................................. 29
2. Spurring Consumer Demand for Safe & Reliable AI Products .................................... 35
3. Penalizing Unsafe AI Development ............................................................................... 36
B. The Case for Fiscal Levers .............................................................................................. 39
C. The Administrative Challenge ....................................................................................... 41
Conclusion .................................................................................................................................... 46
2

<<PAGE_BREAK>>

Introduction
The race to develop artificial general intelligence (AGI)—systems matching human performance
across diverse tasks—has become a defining technological pursuit of our era.1 As industry leaders
edge closer to this milestone, and even speculate about artificial superintelligence (ASI),2 the stakes
of AI safety grow considerably.3 How can we ensure that a system general enough to perform most
human tasks, a system that most expect to be socially transformative, will also not lead to unintended
accidents and harms on a massive scale?4 While private entities pour unprecedented resources into
advancing AI capabilities, investments in safety research languish, creating a quickly expanding
“safety-capability” gap.5 The consequences of the gap between what AI can do and what AI can can
do safely are not abstract: vulnerabilities in frontier systems—from susceptibility to adversarial
attacks to emergent misalignment with human values—threaten individual rights, democratic
institutions, and global stability. This divergence stems not from scientific impossibility of building
safer systems, but from structural incentives. The rewards of powerful AI flow to developers; the
risks cascade across society.
This Article argues that fiscal policy can play a key role in closing this gap. Building on Hemel
and Ouellette’s Innovation Policy Pluralism framework,6 which positions taxation as a critical yet
underutilized lever for steering technological progress, we propose a novel approach: embedding
safety imperatives directly into the economic architecture of AI development. Unlike traditional
regulation, which struggles to govern fast-evolving technologies through rigid mandates, tax
1 There is no accepted definition of neither intelligence nor general intelligence, but the various definitions revolve around the
ability to perform a broad variety of tasks that would normally require human intelligence, Tao Feng et al., How Far Are We
From AGI: Are LLMs All We Need?, TRANSACTIONS ON MACHINE LEARNING RESEARCH (Oct. 2024),
https://perma.cc/JE77-FK6D. The estimates of our distance to this poorly defined goal of AGI shift rapidly. In 2010, AGI
was predicted to be 50 years into the future; by 2023, this has shifted to 5-20 years. The most critical of industry leaders, Yann
LeCunn (Meta) predicts “5-10 years if everything goes great” https://perma.cc/97W6-GKP6.
2 Sam Altman (OpenAI) predicts ASI in “A few thousand days” into the future https://perma.cc/RK39-67H9. Elon Musk,
(whose predictions often tend to prove overly optimistic), predicted ASI by 2025. Reuters, Tesla’s Musk predicts AI will be
Smarter than the Smartest Human Next Year, Reuters (Apr. 8, 2024) https://www.reuters.com/technology/teslas-musk-
predicts-ai-will-be-smarter-than-smartest-human-next-year-2024-04-08/.
3 See STUART J. RUSSELL, HUMAN COMPATIBLE: ARTIFICIAL INTELLIGENCE AND THE PROBLEM OF CONTROL 23–30 (2019)
(discussing the necessity of aligning AI systems with human values to prevent unintended consequences as they become more
powerful).
4 Yoshua Bengio et al., Managing Extreme AI Risks Amid Rapid Progress, 384 SCIENCE 842 (2024),
https://doi.org/10.1126/science.adn0117. A survey in 2024 of 2,778 of AI researchers who published in leading outlets found
that median estimates of existential risk from AI development ranges between 5% to 10%, see Katja Grace et al., Thousands of
AI Authors on the Future of AI, ARXIV (Jan. 5, 2024), https://perma.cc/XFF7-686Q.
5 Another name for this in the AI safety community is “safety tax,” that developers pay for ensuring the safety of their AI
systems. See markovial etl al., Alignment Tax, AI Alignment Forum (Dec. 30, 2024)
https://www.alignmentforum.org/w/alignment-tax. A recent analysis of published AI safety research concludes that there is
too little investment. Oscar Delaney, Oliver Guest & Zoe Williams, Mapping Technical Safety Research at AI Companies: A
Literature Review and Incentives Analysis, at 2 (2024). While safety and capabilities often trade off against each other, the full
relationship is more complex Dan Hendrycks & Mantas Mazeika, X-Risk Analysis for AI Research, ARXIV 8 (Sept. 20, 2022),
https://doi.org/10.48550/arXiv.2206.05862 (recommending attempting to “improve a safety-capabilities ratio”).
6 See infra note 23 at 553.
3

<<PAGE_BREAK>>

incentives harness firm in-house knowledge while mitigating regulatory capture and expertise
asymmetries. By rewarding safety-aligned research, penalizing reckless capability acceleration, and
redistributing penalty revenue to public safety initiatives, a tax-based approach aligns private profit
motives with social welfare imperatives, without stifling innovation. And while the application of
this framework is novel, we demonstrate its political feasibility by drawing on extensive precedents
already embedded in the tax system.7
The urgency of this intervention is underscored by recent regulatory failures. On his first day in
office, President Trump revoked the executive order meant to control AI safety risks left by his
predecessor.8 Efforts at the state level have also been unavailing. The most ambitious of those,
California’s SB-1047, was vetoed by California governor Gavin Newsom.9 His veto concedes that
“[s]afety protocols must be adopted” and that “we cannot afford to wait for a major catastrophe to
occur before taking action to protect the public.”10 The problem, Newsom stated, was the lack of
sufficient “empirical trajectory analysis” to support the law.11 But the hopes for rigorous empirical
testing conflict directly with the reality that the technology is developed in breakneck speeds, behind
the curtain of AI labs, and involves opaque systems. Whatever empirical trajectory analysis means, it
is clear that no one had been able to produce one in the last few years, and the vetoing of regulatory
mechanisms like the California Bill undermines our ability to gather exactly this type of information.
Nor has self regulation proved robust. In 2023, OpenAI’s promoted a much-touted
“Superalignment” initiative—promising 20% of computing resources for safety research.12 This
initiative collapsed under competitive pressures, with internal reports revealing diverted GPU
allocations and hollow compliance.13 This pattern pervades the industry: safety teams operate on
7 In the pharmaceutical industry, for instance, tax credits for orphan drugs and safety-related research have successfully
encouraged firms to invest in underfunded areas like rare disease treatment, even when such investments are not immediately
profitable. 26 U.S.C. § 45C; Orphan Drug Act, Pub. L. No. 97-414, 96 Stat. 2049 (1983) (codified as amended at 21 U.S.C.
section 360cc). It also allowed unused credit to be offset past and future tax liability through carryback and carryforward
features. Taxpayer Relief Act of 1997, Pub. L. 105-34, § 604, 111 Stat. 788, 863 (1997) (allowing carryback three years and
carry forward up to fifteen years). The use of the term “Orphan” refers to drugs for rare diseases and conditions that entail
limited opportunities for pharmaceutical and biotechnology companies to undertake their development and production. See
Orphan Drug Act, Pub. L. No. 97-414, section 1(b), 96 Stat. 2049, 2049 (1983) (providing an overview on the environment
of research in the area of rare conditions and diseases). Similarly, in aerospace, strict regulatory requirements coupled with
financial incentives for safety improvements have led to significant advancements in aircraft reliability and passenger safety.
See, e.g., Federal Aviation Administration, Regulations & Policies, FAA, https://perma.cc/BYA4-MZZX (last visited Jan. 16,
2025).
8 See David Shepardson, Trump Revokes Biden Executive Order on Addressing AI Risks, REUTERS (Jan. 21, 2025),
https://perma.cc/24QM-Z4HE.
9 Cal. S.B. 1047, 2023-2024 Reg. Sess. (Cal. 2024).
10 Cal. Governor Veto Message, S.B. 1047, 2023-2024 Reg. Sess. (Cal. Sept. 29, 2024) https://perma.cc/LJ2N-WN5V.
11 Id.
12 See OpenAI, Introducing Superalignment, OPENAI BLOG (July 6, 2023) https://perma.cc/U8YL-99R5. Kai Xiang Teo,
OpenAI is so worried about AI causing human extinction, it’s putting together a team to control “superintelligence”, Business
Insider (July 7, 2023)
13 See Tom Simonite, OpenAI’s Superalignment Team Disbanded, WIRED (May 24, 2024), https://perma.cc/7U8Y-MJ4C. See
also Jan Leike (@janleike), Post on X (formerly Twitter), May 17, 2024, https://perma.cc/8PND-DVD2. Peter N. Salib,
OpenAI No Longer Takes Safety Seriously, LAWFARE (May 22, 2024), https://perma.cc/CXZ9-VSDF.
4

<<PAGE_BREAK>>

shoestring budgets while capability divisions command vast resources. The root cause is clear. Under
current market and regulatory conditions, the incentives of firms are misaligned; safety might
produce public benefits, but it leeches resources firms would rather spend on the race to own the
most capable system.
While we view tax incentives as part of the solution, we note that currently tax instruments are
part of the problem.14 Research incentive mechanisms, such as R&D credits and expensing
provisions,15 exacerbate the misalignment by subsidizing capability research indiscriminately.16 Our
proposal confronts these challenges through three interlocking mechanisms: (1) producer-side
incentives, such as safety R&D credits and differentiated expensing that accelerates deductions for
safety research while amortizing pure capability investments; (2) consumer-side safety-linked tax
credits contingent on verifiable adherence to NIST or ISO benchmarks; and (3) Corrective tax
penalties scaled to the social cost of unsafe deployments, with revenues funding public-sector safety
consortia. 17
Tax agencies enjoy an important, if neglected, advantage in AI safety regulation: institutional
competence. The playing field in AI is tilted against regulators; any attempt to regulate, even if it
could overcome the lobby and political pressure to win the AI race, would still need to deal with the
reality that AI labs have vastly more funding, expertise, computing resources, and technical talent
than government agencies.18 Relative to other agencies, however, tax agencies possess established
competencies in auditing complex R&D claims, offering a foundation for effective oversight of tax-
based safety claims.19 This administrative framework can be enhanced through mandatory third-
party validation of safety benchmarks (e.g., adversarial safety scores, sandbox and red teaming
14 See infra Part II and III.C. See Lucy Colback, AI and the R&D Revolution, FIN. TIMES (Nov. 26, 2024),
https://perma.cc/JN32-NBUY (noting that while significant investments are made in R&D, the rapid pace of technological
advancement can lead to challenges in effectively managing and mitigating associated risks.).
15 Throughout, we use “research and development” and “research and experimentation” interchangeably, although we note
the latter is more restrictive than the former and does not necessarily specific immediate commercial applications. See Stephen
E. Shay, J. Clifton Fleming, Jr., & Robert J. Peroni, R&D Tax Incentives: Growth Panacea or Budget Trojan Horse?, 69 TAX
L. REV. 419, 422 n.15 (2016).
16 R&D credits are also criticized for favoring major private corporations that have the know-how relevant to exploiting these
credits. See, e.g., OECD, Measuring Tax Support for R&D and Innovation, OECD Science, Technology and Industry
Scoreboard (2017), https://perma.cc/Z32J-3ULJ (discussing the administrative challenges and potential inequities of R&D
tax incentives).
17 See, e.g., Paul A. David, Some New Standards for the Economics of Standardization in the Information Age, in ECONOMIC
POLICY AND TECHNOLOGICAL PERFORMANCE 206, 230 (Partha Dasgupta and Paul Stoneman eds. 1987) (discussing the public
good nature of basic research and the resulting underinvestment).
18 A tragi-comical case in point is Spain’s pioneering AI regulatory agency (AESIA), whose €5 million budget and 80-person
staff are comfortably ensconced in La Coruña – hundreds of miles away from the universities of Madrid or Barcelona. The
agency perfectly symbolizes Spain’s quixotic approach: seeking to lead the regulatory frontier across Europe without having a
robust local AI labs. Víctor Millán, España tendrá en 2025 su agencia de inteligencia artificial: AESIA nace con 80 empleados
y podrá sancionar directamente, El Economista (Dec. 27, 2024) (“España no es ahora mismo un referente en inteligencia
artificial, pero será un país pionero en contar con su propia agencia dedicada a la inteligencia artificial”)
19 Tax R&D claims are mostly input-based. This increases the ease of verification for a non-expert, but because it also allows
for gaming, we do not recommend tax levers as a sole approach. See Part III.C. and infra notes 273-278 and accompanying
text.
5

<<PAGE_BREAK>>

protocols, deployment simulations in controlled environments), systematic government audits, and
dynamic safety practice requirements.20 Such institutional mechanisms leverage existing
administrative expertise while establishing new protocols specifically calibrated to emerging
technological risks.21
These regulatory and self-regulatory failures underscore a fundamental and more general
challenge in emerging technology governance: the inadequacy of traditional oversight mechanisms
to address novel technological risks. This structural limitation demands theoretical innovation in
regulatory design, particularly in leveraging existing institutional frameworks that can better align
private incentives with public safety imperatives. Our theoretical framework advances the literature
on innovation policy instruments by demonstrating how tax policy can serve as a dynamic
mechanism for addressing novel technological risks.22 While existing scholarship has extensively
examined traditional regulatory approaches and direct incentive mechanisms, the theoretical utility
of tax instruments in governing emerging technologies remains underexplored.23
We build upon Hemel and Ouellette’s innovation policy pluralism framework to demonstrate
how tax policy’s unique institutional characteristics—including its scalability, built-in compliance
20 The area of AI safety protocols is rapidly growing. Some important measures include red-teaming (human or automatic),
sandboxed or multi-agent simulations, “constitutional AI,” adversarial robustness defenses, input sanitization, model
explainability, training audits, and fail-safe testing. See, e.g., Ada Lovelace Inst., Under the Radar? Evaluating the Evaluation
Ecosystem for Foundation Models (2023), https://perma.cc/S95T-V6DK (defining red teaming and noting evaluation
challenges); Lizhi Lin et al., Against the Achilles’ Heel: A Survey on Red Teaming for Generative Models, arXiv:2404.00629
[cs.CL] (Nov. 26, 2024), https://perma.cc/QZQ2-W29G (comprehensive survey of red teaming strategies and defenses);
Andrew Burt, How to Red Team a Gen AI Model, HARV. BUS. REV. (Jan. 4, 2024), https://perma.cc/3LMP-V4W6 (explaining
structured testing to identify vulnerabilities in AI systems); Neel Nanda, A Comprehensive Mechanistic Interpretability
Explainer & Glossary (Dec. 21, 2023), https://perma.cc/46WW-BCD9 (introducing core concepts in mechanistic
interpretability of transformer models); Brenda Leong & Daniel Atherton, AI Incident Response Plans: Not Just for Security
Anymore, IAPP (Sept. 20, 2023), https://perma.cc/JS56-YAPS (recommending dedicated procedures for AI failures); Mallory
Acheson et al., California Passes Leading AI Safety Bill, Awaits Governor Approval, Nat’l L. Rev., Sept. 24, 2024,
https://perma.cc/U674-WMN5 (discussing risk assessments, audits, and “kill switch” mandates); Karina Montoya,
Misrepresentations of California’s AI Safety Bill, Brookings Tech Stream (Sept. 29, 2024), https://perma.cc/BK37-A6BM
(clarifying the scope and requirements of SB-1047); Anthropic, Constitutional AI: Harmlessness from AI Feedback (Dec. 2022),
(introducing “constitution”-based self-correction); Yuntao Bai et al., Constitutional AI: Harmlessness from AI Feedback,
arXiv:2212.08073 [cs.CL] (Dec. 15, 2022), https://perma.cc/PL87-84FP (proposing AI self-supervision using constitutional
principles); Dan Hendrycks, Mantas Mazeika & Thomas Woodside, An Overview of Catastrophic AI Risks, arXiv:2306.12001
[cs.CY] (Oct. 9, 2023), https://perma.cc/R7CK-JRQF (systematic discussion of catastrophic AI risks and mitigation
strategies); Elliot Jones, Mahi Hardalupas & William Agnew, Keeping an Eye on AI, Ada Lovelace Inst. (2023),
https://perma.cc/LMZ7-VEQ4 (endorsing audits, disclosure requirements, and pre-market review for high-risk models).
21 See infra notes 273 and accompanying text.
22 See Lily L. Batchelder et al., Efficiency and Tax Incentives: The Case for Refundable Tax Credits, 59 STAN. L. REV. 23, 24-25
(2006) (noting the limited attention paid to efficient tax incentive design in comprehensive tax base literature); Edward A.
Zelinsky, James Madison and Public Choice at Gucci Gulch: A Procedural Defense of Tax Expenditures and Tax Institutions.,
102 YALE L.J. 1165, 1166 (1993) (referring to tax incentives as unlikely to be as carefully crafted and controlled as direct
subsidies.).
23 See Daniel Hemel & Lisa Larrimore Ouellette, Innovation Policy Pluralism, 128 YALE L.J. 544, 552–53 (2018) (discussing
the underutilized potential of tax instruments in technology governance); James R. Hines, Jr., Introduction, in
INTERNATIONAL TAXATION AND MULTINATIONAL ACTIVITY 15 (2009) (highlighting the scarcity of empirical studies on tax
incentives’ effectiveness in emerging technology sectors).
6

<<PAGE_BREAK>>

mechanisms, and capacity to leverage private expertise—make it particularly well-suited for
addressing the social misalignment problem in AI development.24 Our approach contributes to both
tax policy and technology governance literature by introducing a novel theoretical framework for
understanding how fiscal instruments can bridge the gap between private innovation incentives and
public safety imperatives.25 This framework’s utility derives from its ability to harness existing
administrative competencies while avoiding the information asymmetries and expertise gaps that
plague traditional command-and-control regulation.26 By conceptualizing safety investment as a tax-
mediated social good rather than merely a regulatory compliance issue, our model provides new
theoretical insights into how fiscal policy can shape technological development trajectories while
preserving innovation incentives.27
This Article proceeds as follows. Part I examines the urgency of AI safety, outlining the risks of
malicious misuse, accidental failures, and autonomous misalignments while positioning the
capability-safety gap as a core challenge. Part II explores how tax incentives have historically
addressed safety in other domains, such as energy, infrastructure, and occupational safety, offering
insights into existing fiscal mechanisms that could inform AI governance. In Part III, we propose a
novel tax framework for AI safety, detailing a system of producer incentives, consumer demand
stimulation, and corrective tax penalties. Taken together, those levers would work to embed safety
into the fabric of AI development, inculcate safety culture, and increase the ROI of safety
investments. We anticipate a number of administrative challenges inherent in implementing this
framework, including verification, enforcement, and compliance, and we draw on the special
competence of the tax system to offer a number of pragmatic mitigation strategies. The Conclusion
reflects on the broader implications of using fiscal levers to align private innovation with public
safety. In conversation with the innovation policy literature, the framework developed here offers a
blueprint for governing other emerging technologies, and can help in turning safety from a
regulatory inconvenience into an essential part of the R&D process itself.
24 See Chris Evans & Sally-Ann Joseph, The Role of Tax Incentives in the Promotion of Innovation and Entrepreneurship: A
Time and a Place, in GOVERNMENT INCENTIVES FOR INNOVATION AND ENTREPRENEURSHIP 39, 45 (Mahmoud M. Abdellatif
et al. eds., 2022) (analyzing how tax incentives can leverage firms’ existing capabilities while advancing public policy objectives);
Erich Kirchler et al., Tax Compliance: Research Methods and Decision Processes, in COOPERATIVE COMPLIANCE: A NEW
APPROACH TO MANAGING TAXPAYER BEHAVIOR IN PSYCHOLOGICAL PERSPECTIVES ON RISK AND RISK ANALYSIS 240 (2019),
available at https://dx.doi.org/10.2139/ssrn.3472549.
25 See Sun et al., Tax Incentives, R&D Manipulation, and Corporate Innovation Performance: Evidence from Listed Companies
in China, 13 SUSTAINABILITY 11819 (2021) https://perma.cc/L6W4-9XMP (demonstrating how tax policies can effectively
align private sector innovation with public interest goals); World Bank, Tax Incentives: Definitions, Framework, and Design 1
(2010).
26 See Alexander Klemm & Stefan Van Parys, Empirical Evidence on the Effects of Tax Incentives, 18 INT’L TAX & PUB. FIN.
311, 312-13 (2011) (examining how tax systems can overcome traditional regulatory limitations); Joseph Parilla & Sifan Liu,
How Tax Incentives Can Power More Equitable, Inclusive Growth, Brookings Inst. (Nov. 21, 2019).
27 See Daniel Jacob Hemel & Lisa Larrimore Ouellette, Beyond the Patents-Prizes Debate, 92 TEX. L. REV. 303 (2013) (arguing
for a more nuanced understanding of how different policy instruments, including tax incentives, can work together to shape
technological development).
7

<<PAGE_BREAK>>

I. The Importance of AI Safety
AI safety represents a distinct subfield of artificial intelligence research dedicated to developing
methodological frameworks, empirical standards, and technical safeguards to mitigate potential
harms from AI deployment to individuals, communities, and ecological systems.28 The field’s scope
stems from a fundamental premise about artificial intelligence: its tendency toward generality in
application creates correspondingly general vectors for potential harm.29 This characteristic calls for
a comprehensive approach to risk assessment and mitigation.30 In this Part, we first introduce the
general AI safety risk framework. Then, we offer a brief overview of the field, arguing that the field
has seen some modest progress, but it is uneven and lethargic. We locate the gap between capabilities
and safety as resulting from the social misalignment problem. Understanding the size of the gap thus
motivates our proposed solution framework.
A. An Outline of AI Safety
Contemporary scholarship has more-or-less coalesced around a tripartite taxonomy of safety
risks, providing an analytical framework for understanding the distinct yet interconnected
challenges in AI safety. This framework identifies three primary categories of risk: (1) intentional
misuse through malicious deployment, (2) accidental harm through unintended system behavior,
and (3) autonomous system actions that deviate from human values or intentions.31 Each category
presents distinct technical and governance challenges while sharing common underlying dynamics
related to system capability and control.32
Before examining these risks in detail, we should clarify the meaning of safety itself. The
literature has long recognized that it is important to ensure that AI systems will act in an ethical
manner.33 There has been a large wave of mature legal literature on ethical applications of AI in
settings like employment, credit extension, and parole decisions, where researchers have usefully
28 See generally DAN HENDRYCKS, INTRODUCTION TO AI SAFETY, ETHICS, AND SOCIETY (2024); Wissam Salhab et al., A
Systematic Literature Review on AI Safety: Identifying Trends, Challenges, and Future Directions, 12 IEEE Access 131762
(2024) (examining key challenges in AI safety, including robustness, fairness, and adversarial resilience).
29 See Roel I.J. Dobbe, System Safety and Artificial Intelligence, in THE OXFORD HANDBOOK ON AI GOVERNANCE (2022),
available at https://perma.cc/S4TE-Z4S3.
30 Id. Arbel, Tokson, and Lin, Systemic Regulation of AI, 56 ARIZ. ST. L. J. 545 (2024).
31 See Yonathan A. Arbel, Ryan Copus, Kevin Frazier, Noam Kolt, Alan Z. Rozenshtein, Peter N. Salib, Chinmayi Sharma &
Matthew Tokson, Open Questions in Law and AI Safety: An Emerging Research Agenda, LAWFARE (Mar. 11, 2024, 1:00 PM),
https://www.lawfareblog.com/open-questions-law-and-ai-safety-emerging-research-agenda. Hendrycks divides the space of
risks into risks due to malicious use, AI race dynamics, organizational risks, and rogue Ais. HENDRYCKS, supra note 28 at 3-
48.
32 Id.
33 For a few early entries, see e.g., Matthew U. Scherer, Regulating Artificial Intelligence Systems: Risks, Challenges,
Competencies, and Strategies, 29 HARV. J.L. & TECH. 353 (2016), Ryan Calo, Artificial Intelligence Policy: A Primer and
Roadmap, 51 U.C. DAVIS L. REV. 399 (2017).
8

<<PAGE_BREAK>>

exposed issues of fairness, bias, and algorithmic blind spots.34 Safety research is likewise focused on
ethical application of AI, but with a more basic imperative: the mitigation of risks to life, physical
integrity, and fundamental autonomy.35
The category of malicious use illustrates the complexity of these safety challenges.36 Consider
recent demonstrations of AI systems’ capacity to aid in biological weapon design, the discovery of
software vulnerabilities (“0-day exploits”),37 or the potential for market manipulation through
automated trading systems.38 Some of these threats are not entirely novel: a well-resourced group
could accomplish them today. But even in these cases, advanced AI system provide what is known as
a “uplift” over existing methods,39 that is, they allow smaller groups, with lesser investment of
resources, to achieve more. The degree of uplift, as well as the discovery of novel attack vectors, is
directly correlated with the power of the underlying system.40
It is also worth noting that the designation of “malicious” use often depends on socio-political
context - what one actor views as defensive capability, another may view as an offensive threat. This
contextual dependency complicates the development of universal safety standards, and suggests that
some international negotiation would be necessary at some point. This complexity also appears in
the context dual-use scenarios, where AI systems developed for beneficial purposes can be
repurposed for harm.41 For instance, language models trained to assist in scientific research might be
used to generate misinformation, while computer vision systems designed for medical diagnosis
could be adapted for autonomous weapons targeting.42 These scenarios underscore the necessity of
34 See Talia B. Gillis, The Input Fallacy, 106 MINN. L. REV. 1175 (2022) (credit), Sandra G. Mayson, Bias In, Bias Out, 128
YALE L.J. 2218 (2019). Emily Black, Logan Koepke, Pauline Kim, Solon Barocas & Mingwei Hsu, The Legal Duty to Search
for Less Discriminatory Algorithms, arXiv:2406.06817 (2024) https://perma.cc/V3DL-KJXM.
35 See Arbel, Tokson, & Lin, supra note 30.
36 A familiar concern in the legal literature is the militarized use of AI in military contexts and the questions of liability for
targeting of civilians. See Tim McFarland & Tim McCormack, Mind the Gap: Can Developers of Autonomous Weapons Systems
Be Liable for War Crimes?, 90 INT’L L. STUD. 361 (2014)
37 See Sergei Glazunov & Mark Brand, Project Naptime: Evaluating Offensive Security Capabilities of Large Language Models,
Project Zero: News and Updates from the Project Zero Team at Google (June 20, 2024), https://perma.cc/Z6KH-DAHY
(showing that “principled agent design can greatly improve the performance of general-purpose LLMs on challenges in the
security domain”).
38 See Winston Wei Dou, Itay Goldstein & Yan Ji, AI-Powered Trading, Algorithmic Collusion, and Price Efficiency, THE
WHARTON SCH. RESEARCH PAPER (May 30, 2024) https://dx.doi.org/10.2139/ssrn.4452704.
39 See Tejal Patwardhan et al., Building an Early Warning System for LLM-Aided Biological Threat Creation, OPENAI BLOG
(Jan. 31, 2024), https://perma.cc/953P-FQPM (finding a positive, albeit not statistically significant, effect of access to AI on
developing biological threats over and above access to a search engine. On a 10-point scale, access to AI increased the risk by
0.88 points for experts and 0.25 for students.) But see Christopher A. Mouton, Caleb Lucas & Ella Guest, The Operational
Risks of AI in Large-Scale Biological Attacks: Results of a Red-Team Study, RAND Corporation Research Report No. RR-
A2977-2 (Jan. 25, 2024), available at https://perma.cc/A3V8-3U7B.
40 Power, here, involves not just raw capabilities, but also multimodality and tool use. Automated drug discovery processes
backed by artificially intelligent evaluator, pose distinct threats than, say, a highly capable language model. Id.
41 See Gabriel Mukobi, Reasons to Doubt the Impact of AI Risk Evaluations, arXiv.org, Aug. 5, 2024,
DOI:10.48550/arXiv.2408.02565, https://perma.cc/UY53-JQB9.
42 See Jiawei Zhou et al., Synthetic Lies: Understanding AI-Generated Misinformation and Evaluating Algorithmic and
Human Solutions, in Proceedings of the 2023 CHI Conference on Human Factors in Computing Systems 1 (Apr. 19, 2023),
https://doi.org/10.1145/3544548.3581318.
9

<<PAGE_BREAK>>

developing safety measures that address not only technical capabilities but also deployment contexts
and potential misuse vectors.
The second category covers accidental risks arising from AI system deployment. While all
technological systems face operational risks, the expanding autonomy of AI systems in critical
infrastructure and decision-making contexts introduces novel vulnerabilities that go well beyond
conventional accident scenarios.43 As these systems assume greater control from human operators,
the nature and scope of potential accidents evolve in complexity and consequence.44 Consider AI
systems integrated into critical infrastructure networks. A system managing wastewater processing
or public water supplies must maintain operational integrity across numerous edge cases and
environmental variations.45 The interconnected nature of these systems amplifies risk – a cascading
failure could propagate across multiple infrastructure nodes with potentially severe consequences
for public health and safety.
A specific accident concern is known as system brittleness.46 Current AI architectures
demonstrate high performance within familiar domains where deployment conditions approximate
training environments.47 However, real-world deployment inevitably presents novel scenarios that
deviate from these controlled conditions, and the system may be brittle to such deviations. A traffic
management system optimized for standard vehicle patterns may encounter unprecedented
situations - from unusual road obstacles to emergency response scenarios - that fall outside its
training distribution. We already have evidence that such issues result in tragic consequences to life
and limb.48 Worse, for complex systems that had been trained on large amounts of data, it is hard to
know what falls within the system parameters and what falls outside of it.
This challenge is compounded by the interpretability obstacle in modern AI systems.49 While
their architectural principles are well-documented, the specific meanings and interactions of internal
parameters remain largely opaque.50 This “black box” characteristic severely constrains our ability to
audit system behavior or predict responses to novel stimuli. While we have made some progress on
43 Autonomous driving is a prime example of growing autonomization and delegation of life-critical equipment to AI systems.
For analysis of new risk modalities, see Farshad Mirzarazi, Sebelan Danishvar & Alireza Mousavi, The Safety Risks of AI-Driven
Solutions in Autonomous Road Vehicles, 15 WORLD ELECTR. VEH. J. 438 (2024), https://doi.org/10.3390/wevj15100438.
44 Id.
45 For a recent review of the integration of AI in wastewater management, see Arti Malviya & Dipika Jaspal, Artificial
Intelligence as an Upcoming Technology in Wastewater Treatment: A Comprehensive Review, 10 ENV’T TECH. REVS.. 177
(2021).
46 See Andrew J. Lohn, Estimating the Brittleness of AI: Safety Integrity Levels and the Need for Testing Out-Of-Distribution
Performance, ARXIV (2020), https://perma.cc/C2M2-TAQS (exploring the problem of brittleness and the need for system
resilience).
47 Id.
48 See Nat’l Transp. Safety Bd., HWY18MH010 (2025), https://www.ntsb.gov/investigations/Pages/HWY18MH010.aspx.
Mark Harris, NTSB Investigation into Deadly Uber Self-Driving Car Crash Reveals Lax Attitude Toward Safety, IEEE
SPECTRUM (Nov. 7, 2019).
49 For an overview in the context of AI safety, see Leonard Bereska and Efstratios Gavves, Mechanistic Interpretability for AI
Safety—A Review, ARXIV (2024) https://doi.org/10.48550/arXiv.2404.14082.
50 Id.
10

<<PAGE_BREAK>>

interpretability or explainability, there is still a long way to go in understanding the systems’
internals.51
The third category of risk—autonomous behavior that deviates from human intent—represents
perhaps the most contentious and conceptually challenging domain of AI safety research.52 Public
discourse has focused primarily on language models’ conversational capabilities.53 This makes
autonomy feel remote and alien to the familiar way of interacting with AI. But behind the curtain,
in labs and on repositories, a more profound transformation is occurring in the development of
autonomous AI agents.54 These agentic systems, designed to pursue general objectives with minimal
human oversight, represent a qualitative shift in AI capabilities and associated risks.55
To provide a general sense of the current frameworks (remembering that this field is fast
changing), autonomous agents are defined primarily by their agency, that is, the ability to take action
in the pursuit of a given goal.56 In the simplest framework, an agent would be given a task of finding
a table in a Mexican restaurant for two people. It would identify the intention of the user, chart
strategies (locate relevant restaurants, verify that they are open, and make a reservation), and then
execute the plan. Without user involvement, the agent would open a browser to search for relevant
restaurants, use text messages or even a phone to call the relevant restaurants, and then report back
on its success or failure in the mission. More elaborate frameworks involve multiple agents, and use
a hierarchical architecture of task decomposition and delegation.57 When assigned a broad
objective—such as planning an international vacation—the primary agent generates sub-goals and
instantiates specialized sub-agents to pursue them.58 These sub-agents might collect meteorological
data, optimize travel logistics, or identify strategies for accessing popular attractions. The system
51 See Luca Longo et al., Explainable Artificial Intelligence (XAI) 2.0: A Manifesto of Open Challenges and Interdisciplinary
Research Directions, 106 Information Fusion 102301 (2024), https://doi.org/10.1016/j.inffus.2024.102301.
52 See e.g., Alex Hanna & Emily M. Bender, AI Causes Real Harm. Let’s Focus on That Over the End-of-Humanity Hype, Sci.
Am. (Aug. 12, 2023), https://perma.cc/ET8X-S4CY (“Wrongful arrests, an expanding surveillance dragnet, defamation and
deepfake pornography are all existing dangers of the so-called artificial-intelligence tools currently on the market. These issues,
and not the imagined potential to wipe out humanity, are the real threat of artificial intelligence.”)
53 See Logan Kilpatrick, What Are GPT Agents? A Deep Dive into the AI Interface of the Future, Around the Prompt (July 25,
2023), https://medium.com/around-the-prompt/what-are-gpt-agents-a-deep-dive-into-the-ai-interface-of-the-future-
123456789 (explaining AI agents relative to ChatGPT capabilities).
54 2025 is projected by many in the industry to be “the year of the agents”, see Colin Jarvis, Redefining Intelligence: How
Reasoning Is Re-Shaping AI in 2025, https://perma.cc/FP92-9W4M. One notable commercial application is “Operator”, by
OpenAI which use various internet tools to accomplish user tasks. OpenAI, Introducing Operator, OpenAI Blog (Jan. 23,
2025), https://openai.com/index/introducing-operator/. For a collection of open-source agents projects, see
https://github.com/e2b-dev/awesome-ai-agents.
55 See Noam Kolt, Governing AI Agents, SSRN https://papers.ssrn.com/sol3/papers.cfm?abstract_id=4772956 (“While
language models are “copilots” that can produce useful content upon request, AI agents are “autopilots” that can
independently take actions to accomplish complex goals on behalf of users.”)
56 See Chan, Alan, et al., Visibility into AI Agents, PROCEEDINGS OF THE 2024 ACM CONF. ON FAIRNESS, ACCOUNTABILITY &
TRANSPARENCY 123 (2024) (defining high agency AI systems as those endowed with “greater autonomy, access to external
tools or services, and an increased ability to reliably adapt, plan, and act open-endedly over long time-horizons to achieve goals”
57 See e.g., Mingchen Zhuge et al., Language Agents as Optimizable Graphs, arXiv:2402.16823v3 [cs.AI] (Aug. 22, 2024).
58 Id. See, e.g., Noam Kolt, Algorithmic Black Swans, 101 WASH. U. L. REV. 1177, 1231 (2024) (examining the unforeseen,
high-impact risks that AI systems can pose to society).
11

<<PAGE_BREAK>>

maintains coherence through periodic synchronization between sub-agents and the central planning
agent, creating a distributed but coordinated pursuit of the primary objective.59
The capability boundary of these agents extends far beyond mere information processing.
Modern AI agents possess significant operational tools, including internet access, financial
transaction capabilities, high fidelity text-to-speech models, and even the ability to hire humans.60 If
there is one thing that observers of current systems tend to miss is the breadth of these tools, and so
they often wrongly conclude that language models pose little risk to the outside world, as they cannot
perform physical tasks or navigate the CAPTCHA system.61 The empirical evidence, however,
suggests these constraints are quite permeable. In a notable demonstration, an AI agent
circumvented a CAPTCHA barrier by (proposing to) recruit and compensate a human worker
through a digital labor platform, presenting itself as a visually impaired user requiring assistance.62
This example illustrates a broader pattern: through creative recombination of available tools and
services, AI agents can effectively transcend apparent operational constraints.
This capability for creative problem-solving, while impressive, introduces profound safety
concerns. As Bostrom has argued, autonomous systems may pursue designated objectives through
unanticipated and potentially harmful pathways.63 The agent’s solution to the CAPTCHA problem
demonstrates what Eliezer Yudkowsky, a leading researcher at the Machine Intelligence Research
Institute, terms “optimization pressure”—the tendency of AI systems to find unexpected solutions
that satisfy formal objectives while potentially violating implicit constraints or human values.64
Even systems with limited degree of autonomy have displayed worrisome and unexpected
patterns. In a notable instance, OpenAI’s O1 model was tested on its ability to exploit a server to
locate a hidden key; when the isolated test environment failed due to a bug, the AI unexpectedly
gained access to the host system outside its container.65Or consider an AI system designed to play the
game of Diplomacy which learned to engage in premediated deception: playing as France, it secretly
planned with Germany to betray England, while telling England it has its support.66 This suggests
that safeguards built around limited tool access could still fail in unanticipated ways.
59 Id.
60 For a demonstration, see OpenAI, Introducing Operator, OPENAI BLOG (Jan. 23, 2025) https://perma.cc/BL5J-Z276.
61 See e.g., Bindu Reddy, https://perma.cc/4ESF-Q4UM, Andriy Burkov, https://perma.cc/ML9B-TM96.
62 See, e.g., PC Mag., GPT-4 Was Able to Hire and Deceive a Human Worker into Completing a Task, https://perma.cc/JRB6-
L5ZJ (describing a demonstration where GPT-4 proposed to hire human worker through TaskRabbit and convince them to
solve a CAPTCHA by falsely claiming to have a vision impairment).
63 See NICK BOSTROM, SUPERINTELLIGENCE: PATHS, DANGERS, STRATEGIES 127-144 (2016).
64 See Eliezer Yudkowsky, AI Alignment: Why It’s Hard and Where to Start, Machine Intelligence Research Institute (Dec.
28, 2016), https://intelligence.org (explaining “optimization pressure” as the tendency of AI systems to find solutions that
satisfy formal objectives but violate implicit constraints or human values).
65 See OpenAI, o1 System Card at 16-17 (Sept. 12, 2024) https://cdn.openai.com/o1-system-card-20241205.pdf
66 See Peter S. Park, Simon Goldstein, Aidan O’Gara, Michael Chen, & Dan Hendrycks, AI Deception: A Survey of Examples,
Risks, and Potential Solutions, 5 PATTERNS 100988 (2024), https://doi.org/10.1016/j.patter.2024.100988.
12

<<PAGE_BREAK>>

Overall, the autonomy of these systems introduces novel vectors for potential harm that
transcend traditional safety frameworks.67 Unlike conventional software systems, autonomous
agents can: (i) Independently formulate and pursue sub-goals (ii) Identify and exploit novel
pathways for goal achievement (iii) Interact with and manipulate human systems and institutions
(iv) scale their impact through recursive self-improvement or coordination with other agents. These
capabilities, combined with the inherent difficulty of specifying complete and robust objective
functions, create a difficult problem of effective control and supervision.
B. The Capability-Safety Gap
AI development has historically followed cyclical patterns of advancement and regression,
commonly termed “summers” and “winters” in the field.68 We are undeniably experiencing a
significant “summer” period now, characterized by unprecedented progress in model capabilities,
though the duration and sustainability of this trend remains uncertain.
The figure illustrates a crucial pattern in contemporary AI development through standardized
performance metrics across multiple domains.69 The horizontal dashed line represents human-level
performance on various cognitive tasks, providing a natural benchmark for AI capability evaluation.
The trajectories demonstrate three distinct phases of progress: initial sub-human performance, rapid
advancement toward human parity, and in many cases, progression to super-human capabilities.
67 See generally Kolt, Governing AI Agents, supra note 55.
68 See Hartmut Hirsch-Kreinsen, Artificial Intelligence: A “Promising Technology”, 39 AI & SOCIETY 1641 (2024),
https://doi.org/10.1007/s00146-023-01629-w (discussing AI’s cyclical development, where periods of rapid progress
(summers) are often followed by stagnation or decline (winters) in technological advancement and investment).
69 See Stanford Institute for Human-Centered Artificial Intelligence (HAI), AI Index Report 2024 (May 2024)
https://perma.cc/3C86-Q7PP.
13

<<PAGE_BREAK>>

Consider image classification, a foundational task in computer vision. In 2012, state-of-the-art
systems achieved approximately 85% of human-level performance. The field then experienced
dramatic acceleration, reaching human parity within three years. By 2021, these systems consistently
surpassed human performance by significant margins. Similar trajectories appear in visual reasoning
and reading comprehension tasks, suggesting a generalizable pattern of capability development.70
Perhaps most telling is something missing from the figure. Several performance metrics stop
reporting progress post 2021. They stop not because of lack of progress in AI capabilities—indeed,
we know there was immense progress over the last four years— but rather the exhaustion of these
metrics’ utility. Put differently, modern systems achieve accuracy rates so high that these
benchmarks no longer effectively discriminate between model improvements. This phenomenon is
known as benchmark saturation, and researchers around the world are working to develop new ways
to measure the performance of novel AI systems.71
The capability progression stands in stark contrast to our ability to measure and ensure system
safety. Autonomous vehicles provide the most concrete domain for safety assessment, benefiting
from a century of human driving data and what one would expect to be easily measurable safety
outcomes. However, even here, measurement challenges persist.72 Companies employ disparate
metrics and varying levels of autonomy, complicating comparative analysis.73 Despite massive
investment, fully autonomous deployment remains limited to restricted geographic areas under
remote supervision.74
More concerning are the gaps in our safety metrics.75 We lack robust measures for critical
vulnerabilities such as susceptibility to adversarial attacks or systemic failure modes.76 For instance,
while we can measure basic operational safety in ideal conditions, we have limited understanding of
system resilience to edge cases like unusual atmospheric conditions or coordinated environmental
70 Id.
71 See Shana Lynch, AI Benchmarks Hit Saturation: AI Continues to Surpass Human Performance; It’s Time to Reevaluate Our
Tests, Stanford HAI (Apr. 3, 2023), https://perma.cc/EF34-2VCA..
72 See Amitai Y. Bin-Nun et al., What Do Surrogate Safety Metrics Measure? Understanding Driving Safety as a Continuum,
195 ACCID. ANALYSIS & PREVENTION 107245, 107250 (2024) (“Challenges in measuring AV safety relative to a human driver
baseline have resurfaced longstanding questions on effectively measuring driving safety.” These issues arise because safety and
accidents are not discrete events); Tanmay Das et al., Surrogate Safety Measures: Review and Assessment in Real-World Mixed
Traditional and Autonomous Vehicle Platoons, 11 IEEE 32682, 32683 (2023) (“Crashes are rare events, and historical crash
data are scarce for mixed traffic that includes autonomous and/or connected vehicles.”)
73 See Richard Sun et al., Why Autonomous Vehicles Need a Large-Systems Approach to Safety, WORLD ECON. F. (June 18,
2021), https://www.weforum.org/agenda/2021/06/why-autonomous-vehicles-need-a-large-systems-approach-to-safety/.
(“AV companies [are] offering a range of different approaches for which metrics should be used to indicate system safety.”)
74 See generally Derek Chiao et al., Autonomous Vehicles Moving Forward: Perspectives from Industry Leaders, McKinsey Ctr.
for Future Mobility (Jan. 5, 2024), https://perma.cc/BR4E-MDWH; Joann Muller, Robotaxis Hit the Accelerator in Growing
List of Cities Nationwide, Axios (Aug. 29, 2023), https://perma.cc/HBP3-BJ37.
75 A general concern in the AI safety literature is the problem that “capabilities generalize further than alignment’” Nate Soares,
A Central AI Alignment Problem: Capabilities Generalization, and the Sharp Left Turn, Machine Intelligence Research
Institute (July 4, 2022), https://perma.cc/MGN4-T377.
76 See generally Richard Ren et al., Safetywashing: Do AI Safety Benchmarks Actually Measure Safety Progress?,
arXiv:2407.21792 [cs.AI] (2024) https://perma.cc/4FKE-EE8.
14

<<PAGE_BREAK>>

perturbations (think a rare eclipse or a blue moon). This limitation is particularly problematic given
the increasing deployment of AI systems in critical infrastructure and decision-making contexts.77
Recent high-profile cases underscore these safety challenges. For instance, leading AI labs, such
as Google and Meta, have vested interest in presenting to the public models that are friendly and
follow social conventions of etiquette. To that end, they invest tremendous amounts of computing
resources and training ingenuity to install guardrails into their models, such that they will not
produce embarrassing outputs.78 But as is well publicized, these all failed at launch or were easily
circumvented.79 This is far from obvious: the biggest corporations, with billions of PR images on the
line, failed to make a model that would not tell their customer to “Please die.”80
Overall, the harsh lesson is this: there is a gap between capabilities and safety, and this gap –
which we do not even know how to properly measure – seems to widen and grow. This opens the
question: why does the gap exist?
C. The Social Misalignment Problem
The yawning capability-safety gap, coupled with the magnitude of potential harm from
insufficiently secured high-capability systems, elevates AI safety from a technical imperative to a
critical social priority.81 As artificial intelligence systems penetrate core societal functions—from
healthcare delivery and economic governance to national security infrastructure—the absence of
robust safety protocols threatens not only operational integrity but social stability itself.82 The
potential consequences range from discrete harms to individuals to systemic disruptions that could
undermine institutional resilience and public welfare.83
77 See e.g., DigitalDefynd, 10 Ways AI Is Being Used in Water Resource Management, DIGITALDEFYND (2025),
https://perma.cc/B6BZ-ZH58.
78 See generally Hongfu Liu et al., On Calibration of LLM-Based Guard Models for Reliable Content Moderation, ARXIV
(2024), https://doi.org/10.48550/arXiv.2410.10414 (discussing the use of training guardrails and test time ‘guard’ models)
79 See, e.g., Yichen Gong et al., FigStep: Jailbreaking Large Vision-Language Models via Typographic Visual Prompts, ARXIV
(2023), https://perma.cc/9PX4-ZV92 (exploring typographic attacks that manipulate large vision-language models to bypass
safety measures and produce unintended outputs); Pranav Gade et al., BadLlama: Cheaply Removing Safety Fine-Tuning
from Llama 2-Chat 13B, arXiv:2311.00117 (Oct. 31, 2023), https://perma.cc/ZTG2-V5J8 (demonstrating how safety fine-
tuning in large language models, such as Llama 2-Chat 13B, can be removed with minimal resources, undermining their safety
protocols).
80 See Jowi Morales, Gemini AI Tells the User to Die — The Answer Appeared Out of Nowhere When the User Asked Google’s
Gemini for Help with His Homework, Tom’s Hardware (Nov. 16, 2024), https://www.tomshardware.com/news/gemini-ai-
tells-user-to-die.
81 See U.S. Department of Homeland Security, Roles and Responsibilities Framework for Artificial Intelligence in Critical
Infrastructure, in consultation with The Artificial Intelligence Safety and Security Board 3 (Nov. 14, 2024),
https://www.dhs.gov/sites/default/files/2024-11/24_1114_dhs_ai-roles-and-responsibilities-framework-508.pdf
(“America’s continued security and prosperity will depend on how critical infrastructure stakeholders develop and deploy AI”).
82 See Kyle Crichton, Jessica Ji, Kyle Miller, John Bansemer, et al., Securing Critical Infrastructure in the Age of AI, Center for
Security and Emerging Technology (Oct. 2024), https://doi.org/10.51593/20240032 (reviewing lessons to critical
infrastructure safety, noting, at 12, that “AI systems’ complexity presents a challenge for testing and evaluation,[that] are
compounded by the fact that there is a general lack of expertise at the intersection of AI and critical infrastructure, both within
the CI community and on the part of AI providers.”);
83 See Arbel, Tokson, & Lin, supra note 30.
15

<<PAGE_BREAK>>

While developers of frontier AI systems consistently articulate commitment to safety protocols,
the incentive architecture surrounding development creates persistent misalignment between
expressed values and operational priorities.84 Obviously, firms do care about safety to the extent it
can affect their market share, and developers have their own safety in mind when they train and
deploy models. However, this orientation may well prove insufficient against the structural forces
shaping development trajectories, as learned from many historical lethal accidents.85 The
fundamental asymmetry lies in the reward distribution: the potential returns from developing
advanced AI capabilities—whether through general artificial intelligence or domain-specific
breakthroughs—are concentrated, while the risks are diffused.
Contributing to this basic misalignment are three important facts; many of the potential harms
from AI deployment are probabilistic, temporally displaced, and often difficult to attribute directly
to system design choices.86 Moreover, developers face a pernicious collective action problem: there is
a growing race between China and the US and competitive dynamics punish those who move slowly
(and carefully).87 This dynamic intersects with the prevalent “move fast and break things” ethos of
technology entrepreneurship, creating institutional environments where safety considerations,
despite their acknowledged importance, struggle to constrain development velocities.88 The result is
a form of structural capture—even developers who prioritize safety find themselves navigating
between competitive pressures for rapid capability advancement and the cultural imperatives of
technology entrepreneurship.89
Even if firms could overcome internal incentive gaps, the safety challenge is broad and
demanding, as AI are vulnerable to multiple attack vectors.90 Adversarial attacks can compromise
system integrity through various mechanisms, from perturbation of visual recognition systems to
84 See supra notes 12-13 and accompanying text.
85 A famous example is Grimshaw v. Ford Motor Company (119 Cal.App.3d 757, 174 Cal.Rptr. 348) (1981), where the court
found that Ford knew, through its testing, that the Pinto’s fuel tank can expose consumers to serious injury or even death, but
it prioritized profits over accident costs.
86 See Ronald Schnitzer et al., Landscape of AI Safety Concerns - A Methodology to Support Safety Assurance for AI-based
Autonomous Systems, ARXIV (2024), https://perma.cc/3ZXN-Y3UP (noting that developers have a hard time establishing that
their systems are safe).
87 See Andrew Singer, Stakes Rising in the US-China AI Race, Global Finance Magazine (Sept. 9, 2024),
https://perma.cc/TR3B-BUGA; Reva Goujon, The Real Stakes of the AI Race, FOREIGN AFFS. (Dec. 27, 2024)
https://perma.cc/KD2G-59BV.
88 See Elizabeth Pollman, Startup Governance, 168 U. PA. L. REV. 155, 200-09 (2019) (arguing that “in light of the great
uncertainty at [startup] stage regarding whether any value will be created, the board typically invests little in compliance and
internal controls”); Jeff Jordan, 16 Things CEOs Should Do Before an IPO, ANDERSEEN HOROWITZ (Aug. 23, 2017),
https://perma.cc/9ANE-LU9P (“Early-stage companies allocate scarce product resources to the projects that will move the
needle on revenue and profits).
89 See Mckay Jensen, Nicholas Emery-Xu, & Robert Trager, Industrial Policy for Advanced AI: Compute Pricing and the Safety
Tax, ARXIV (2023), https://doi.org/10.48550/arXiv.2302.11436 (offering a formal model of safety behavior under race
dynamics).
90 See generally Chen Chen et al., AI Safety Landscape for Large Language Models: Taxonomy, State-of-the-Art, and Future
Directions, 1 ACM COMPUT. SURV. 1, 10-17 (2025), https://perma.cc/4D76-396F. See also Hubert Baniecki & Przemyslaw
Biecek, Adversarial Attacks and Defenses in Explainable Artificial Intelligence: A Survey, 107 INFO. FUSION 102303 (2024),
https://doi.org/10.1016/j.inffus.2024.102303 (reviewing various adversarial examples and other attacks on model’s reasoning)
16

<<PAGE_BREAK>>

prompt injection and jailbreaks, with implications that range from localized service disruption to
potential systemic failures in critical infrastructure.91
The challenge of ensuring system safety is further complicated by emergent capabilities: when
“the system suddenly develops a significant new capability or character after a relatively small and
gradual change in some of the system’s parts or features.”92 Lab experiments reveal that models
engage in scheming and deceptive behaviors that not only were not preprogrammed, but that require
effort to weed out. 93 This emergent behavior pattern becomes more pronounced as systems increase
in scale and capability—creating what we might term an “emergence-safety paradox”—the very
architectural developments that enable enhanced capabilities simultaneously increase the probability
of unexpected and potentially harmful behaviors.94 Yet, despite known deficiencies, AI labs proceed
with public deployment, commercialization, and often grandiose capability claims.95
Overall, the social misalignment of incentives between labs and long-term social interests is a
cause for continued concern. Fortunately, once misalignment emerges as a diagnosis, it also suggests
a diagnosis. The subsequent Part will illustrate how tax levers are well positioned to close the
misalignment gap and enhance AI safety investments through incentives and penalties, while
preserving an optimal level of investment in innovation.
II. Current Use of Tax Levers to Incentivize
Investments in Safety
The government supports innovation in a variety of ways: tax incentives, subsidies, grants,
prizes, patents, purchase agreements, and support of basic research in universities, to name but a few.
Less visible is the degree of government support for safety research and innovation. 96 In support of
91 See Chen Chen et al., AI Safety Landscape for Large Language Models: Taxonomy, State-of-the-Art, and Future Directions,
1 ACM COMPUT. SURV. 1, 10-17 (2025), https://arxiv.org/abs/2408.12935v3.
92 See Jakub Kraus, Overview of Emergent and Novel Behavior in AI Systems, CTR. FOR AI POL’Y (Mar. 26, 2024),
https://perma.cc/3N35-47T8. For a survey of 137 emergent behaviors, see Jason Wei, 137 Emergent Abilities of Large
Language Models, Jason Wei Blog (Nov. 14, 2022) https://perma.cc/P7RM-VZHM.
93 Researchers found that frontier language models demonstrated systematic in-context scheming capabilities when given goals
that conflicted with their developers’ objectives. Alexander Meinke et al., Frontier Models are Capable of In-context Scheming,
ARXIV (Dec. 6, 2024), https://perma.cc/3NNA-H3E6 (noting this behavior was elicited by giving models conflicting goals,
rather than inherent “evil” tendencies.).
94 See Jason Wei et al., supra note 92 at 11 (finding that emergent “abilities are a recently discovered outcome of scaling up
language Models”) at 11.
95 For example, O-1 was deployed by OpenAI despite recorded (albeit rare) attempts to engage in user deception and
international OpenAI, OpenAI o1 System Card (Dec. 5, 2024), https://perma.cc/ND42-BPGJ. hallucinations, and with this
following worrisome corporate disclaimer: “Subjectively, Apollo Research believes that it is unlikely that such instances would
lead to catastrophic outcomes as o1 agentic capabilities do not appear sufficient, but their evaluations were not designed to
directly assess this risk.”
96 See, e.g., Janine Hiller, Kathryn Kisska‐Schulze, and Scott Shackelford, Cybersecurity Carrots and Sticks, 61 AM. BUS. L. J. 5,
7 (2024) (proposing a new investment credit to incentivize investments in cybersecurity).
17

<<PAGE_BREAK>>

the proposal to use fiscal levers to enhance safety research and innovation, our goal in this Part is to
collect three important examples of government safety support.
As we show, government support for safety includes various direct and indirect subsidies meant
to promote investments in precautionary measures and safety improvements.97 Direct subsidies can
include grants and prizes while indirect subsidies often take the form of tax credits or deductions
specifically targeted at safety-related expenditures.98 For example, organizations may receive tax
credits for developing and implementing safety protocols,99 conducting safety audits,100 or acquiring
certifications that ensure compliance with regulatory standards.101 These measures lower the
effective cost of adopting safety enhancements, encouraging businesses to integrate them into their
operations.102 Such subsidies not only support industries in increasing the quality of their products
but also contribute to societal well-being by ensuring that safety is prioritized in areas such as
infrastructure, healthcare, and technology development.103 These measures lay the groundwork for
our proposal in the next Part.
A. Energy & Infrastructure Safety
The most direct tax incentive promoting investment in energy-efficient equipment is accelerated
depreciation,104 which permits businesses to allocate a greater portion of an asset’s cost to deductions
in its earlier years rather than spreading the expense evenly across its useful life.105 By advancing these
deductions, accelerated depreciation reduces short-term taxable income, enhancing cash flow and
97 See Ting Feng and Zhongyi Xue, The Impact of Government Subsidies on Corporate Resilience: Evidence from the COVID-
19 Shock, 56 ECON. CHANGE & RESTRUCTURING 4199, 4220 (2023) https://perma.cc/L5PF-9D6C (This study examines how
government subsidies can enhance corporate resilience by promoting investments in precautionary measures and safety
improvements.).
98 But see Daniel N. Shaviro, Rethinking Tax Expenditures and Fiscal Language, 57 TAX L. REV. 187, 190 (2003)
(critically analyzing the use of tax expenditures as indirect subsidies to achieve policy goals).
99 See, e.g, Coronavirus Aid, Relief, and Economic Security Act, Pub. L. No. 116-136, § 2301, 134 Stat. 281, 347–55 (2020)
(establishing the Employee Retention Credit to incentivize retaining employees during the COVID-19 pandemic); Families
First Coronavirus Response Act, Pub. L. No. 116-127, §§ 7001–7005, 134 Stat. 178, 210–18 (2020) (providing tax credits to
businesses for offering paid sick and family leave to comply with COVID-19 safety protocols).
100 See, e.g., 26 U.S.C. § 25C (providing a tax credit of up to $150 for energy audits, which may identify safety concerns).
101 See, e.g., MICHAEL J. AUER, PRESERVATION TAX INCENTIVES FOR HISTORIC BUILDINGS 11 (1996) (discussing the IRS
conditions the tax credit for historic preservation with a certification that the work was completed based on the agency’s
standards.)
102 See Yogima Seth Sharma, Economic Survey 2024-25 Calls for Enhanced Safety Incentives, ECONOMIC TIMES (Jan. 31, 2025)
(discussing policy measures to improve workplace safety through tax incentives and regulatory frameworks),
https://perma.cc/4WC9-UVQE.
103 See, e.g., Seung-hwan Jung and Tianjun Feng, Government Subsidies for Green Technology Development Under Uncertainty,
286 EURO. J. OPERATIONAL RES. 726, 735 (2020) (claiming that government subsidies for green technology development can
improve social welfare and safety standards).
104 See David P. Hariton, Tax Benefits, Tax Administration, and Legislative Intent, 53 TAX LAW. 579, 580 (1999) (discussing
how accelerated depreciation serves as a direct tax incentive to encourage investment in equipment).)
105 See Michael Knoll, An Accretion Corporate Income Tax, 49 STAN. L. REV. 1, 4–5 (1996) (explaining that accelerated
depreciation allows businesses to allocate a greater portion of an asset’s cost to deductions in the earlier years of its use, rather
than spreading the expense evenly over its useful life).
18

<<PAGE_BREAK>>

facilitating reinvestment opportunities.106 For safety applications depreciation is especially
important, as safety risks can span many years, and the depreciation leads to greater safety
investments.107
Tax policy also employs indirect measures through exemptions or reduced rates on public safety-
related goods and services—including smoke detectors, cybersecurity tools, and renewable energy
systems.108 These demand-side tax incentives encourage widespread consumer adoption of safety
measures.109 Such indirect methods create multiplicative effects, fostering safety culture across
sectors without explicit mandates. 110 This dual approach demonstrates how tax systems can serve as
versatile tools for promoting societal well-being by leveraging fiscal incentives for both producers
and consumers to drive meaningful behavioral changes at organizational and individual levels.111
The energy-efficient commercial buildings deduction and residential energy efficiency tax credit
exemplify this simultaneous supply-and-demand approach.112 For businesses, the commercial
buildings deduction provides supply-side benefits through reduced taxable income for energy-
efficient system investments, encouraging widespread adoption of technologies that reduce energy
consumption and operational costs.113 For individuals, the residential tax credit functions as a
106 See RICHARD A. MUSGRAVE, THE THEORY OF PUBLIC FINANCE 336–346 (1959) (explaining the time-discount advantage
of accelerated depreciation and its impact on cash flow and reinvestment).
107 See Eric Ohrn, The Effect of Tax Incentives on U.S. Manufacturing: Evidence from State Accelerated Depreciation Policies,
180 J. PUB. ECON. 104084, 104085 (2019) (arguing that accelerated depreciation policies increase capital investment in the
manufacturing sector).
108 See, e.g., Shelley Welton, The Bounds of Energy Law, 62 B.C. L. REV. 2339, 2362 (2021) (exploring the scholarship on the
role of tax incentives in renewable energy development); Janine Hiller, et al., supra note 96 at 14 (surveying current tax
incentives surrounding cybersecurity investments). Safety culture, in our view, is a soft mechanism that is critical to
accomplishing safety goals. On the importance of safety culture in the context of AI development, see Matthew Tokson and
Yonathan A. Arbel, AI X-Risk: A Legal Perspective, manuscript (on file with authors).
109 See generally Jack M. Balkin, The Reconstruction Power, 85 N.Y.U.L. REV. 1801, 1837 (2010) (describing federal economic
regulations as include and are not limited to defense expenditures, tax incentives, agricultural subsidies, workplace safety
regulations, or the protection of the environment - further equal citizenship and prevent second-class citizenship.); Stephen
M. Johnson, Terrorism, Security, and Environmental Protection, 29 WM. & MARY ENVTL. L. & POL’Y REV. 107, 128 (pointing
out to market-based tools such as tax incentives for security equipment’s potential in reducing the environmental, health, and
safety risks caused by harm to chemical plants).
110 See Scott Burris and Evan Anderson, Legal Regulation of Health-Related Behavior: A Half Century of Public Health Law
Research, 9 ANN. REV. L. SOC. SCI. 95, 100 (2013) (discussing the effectiveness of tax incentives in fostering voluntary safety
improvements across industries without direct mandates)
111 Id. at 60.
112 The Residential Clean Energy Property Credit, 26 U.S.C. § 25D; The Energy Efficient Home Improvement Credit in 26
U.S.C. § 25C (provided a credit for qualified residential energy-efficient property expenditures, including solar, wind,
geothermal, and fuel cell technologies). The Energy-Efficient Commercial Buildings Deduction is codified in 26 U.S.C. § 179D.
See generally Charles Goulding, Jacob Goldman & Joseph Most, Complete Warehouse Tax-Enhanced Energy-Efficient Design,
11 CORP. BUS. TAX’N MONTHLY 11, 12 (2010) (explaining the tax savings for businesses under section 179D).
113 See 26 U.S.C. § 179D; Internal Revenue Serv., Energy-Efficient Commercial Buildings Deduction, IRS.gov,
https://perma.cc/N7XT-U5C6 (explaining the tax benefits available to businesses for investments in energy-efficient building
systems).
19

<<PAGE_BREAK>>

demand-side incentive by directly offsetting energy-efficient system installation costs. 114 At the firm
level, accelerated depreciation and tax credits enhance safety by incentivizing energy-efficient
commercial building upgrades, which frequently yield significant safety improvements. This dual
targeting of business and individual needs creates a comprehensive approach to promoting
sustainability, safety, and resilience.
The Advanced Energy Project Credit further illustrates these mechanisms, offering up to 30%
credit for qualifying manufacturing investments in: (i) facilities that produce or recycle through
green energy methods, (ii) facilities designed to reduce greenhouse gas emissions by 20%, and (iii)
facilities for processing, refining or recycling critical materials.115 Notable qualifying projects
encompass electric grid modernization, carbon capture and storage systems, electric/hybrid/fuel cell
vehicles, low- or zero-carbon process heat systems, and equipment reducing industrial process
waste.116
These systems deliver multiple safety benefits beyond energy efficiency.117 They enhance fire
safety, minimize hazardous material risks, and improve extreme weather protection. 118 For instance,
improved insulation provides more effective indoor temperature regulation, reducing health risks
from extreme temperatures. Upgraded electrical systems decrease electrical fire likelihood, while
modernized HVAC systems enhance air circulation and quality, reducing harmful pollutant and
allergen exposure. 119 Collectively, these improvements create safer, healthier building environments
while advancing energy efficiency goals.
114 See 26 U.S.C. § 25D, 26 C.F.R. § 1.25D-1; Internal Revenue Service, About Form 5695, Residential Energy Credits, IRS.gov,
https://perma.cc/QFW5-6MS9 (describing how individuals can claim tax credits for energy-efficient home improvements);
See also Internal Revenue Service, Tax Incentives for Energy Efficiency and Renewable Energy, IRS.gov,
https://www.irs.gov/credits-deductions/tax-incentives-for-energy-efficiency-and-renewable-energy (outlining available tax
credits for energy efficiency and renewable energy projects).
115 26 U.S.C.A. § 48C; Internal Revenue Service, Qualifying Advanced Energy Project Credit, FS-2023-16 (June
2023), https://perma.cc/9G34-XDMB .
116 See, e.g., Internal Revenue Service Notice 2023-18, Section 3.02 (outlining the application process and eligibility criteria for
the § 48C credit, specifying the types of projects that qualify under each category.). For a comprehensive analysis of the
Qualifying Advanced Energy Project Credit and its implications, see Mona Hymel, The United States’ Experience With Energy-
Based Tax Incentives: The Evidence Supporting Tax Incentives for Renewable Energy, 38 LOY. U. CH. LJ. 43 (2006)
(demonstrating the way the U.S. influenced energy policy and choices via tax incentives) .
117 See Oren Bar-Gill & Cass R. Sunstein, Regulation as Delegation, 7 J. LEGAL ANALYSIS 1, 30 (2015) (discussing the role of
governments in such domains as food safety, retirement planning, energy efficiency, occupational safety, and health.); David
A. Weisbach, Regulatory Trading, 90 U. CHI. L. REV. 1095,1135 (2023) (concluding that the two most important
environmental regulation are safety regulation and financial regulation with energy efficiency that follows).
118 See, e.g., Philippa Howden-Chapman et al., Effect of Insulating Existing Houses on Health Inequality: Cluster Randomised
Study in the Community, 334 BRIT. MED. J. 460, 463 (2007), https://perma.cc/XZL4-B6ZR (finding that better insulation
improves indoor temperatures and self-reported health outcomes).
119 See, e.g., Kai,Yang, et al., A Novel Arc Fault Detector for Early Detection of Electrical Fires, 16 Sensors 500, 502 (2016)
https://doi.org/10.3390/s16040500 (analyzing the effectiveness of upgraded electrical systems in minimizing electrical fire
risks).
20

<<PAGE_BREAK>>

B. Environmental and Road Safety
In the environmental protection’s context, various federal agencies support innovation related
to offshore drilling safety through technology, assessment, and research program as well as
operational, safety, and engineering research program.120 Similarly, the investment tax credit for
solar energy exemplifies the dual-purpose design of modern tax incentives.121 While its primary
objective is to encourage the adoption of renewable energy, the investment credit also contributes to
fire safety improvements through the installation of safer, more modern energy systems.122 Even
consumer-focused incentives, such as the electric vehicle (EV) tax credit, demonstrate how tax policy
can integrate safety and sustainability.123 By reducing the cost barrier for purchasing EVs, these
credits drive demand for vehicles equipped with advanced safety features, including automated
braking systems and enhanced structural designs, and—critically—vehicles that are environment
friendly.124 Similarly, the Commercial Clean Vehicle Credit, aimed at businesses and tax-exempt
organizations, provides a credit for vehicles that are considered safer on the roads.125 Together, these
incentives reflect a growing trend in tax policy: leveraging economic benefits to encourage broader
societal gains, such as energy efficiency, safety, and environmental responsibility.
How does the government fund such programs? Typically, it does so through a combination of
budgetary reallocations and revenue generation mechanisms, such as excise taxes.126 Budgetary
120 The U.S. Department of the Interior’s Bureau of Safety and Environmental Enforcement (BSEE) administers the
Technology Assessment Program (TAP) and the Engineering Technology Assessment Center (ETAC), both of which support
research and technological assessments to enhance offshore drilling safety. These programs focus on operational safety,
environmental protection, and the evaluation of emerging technologies in offshore oil and natural gas exploration and
development. See generally https://perma.cc/7PQN-FF9G.
121 26 U.S.C. §48 (allowing taxpayers to claim a percentage of the basis of qualified energy property placed in service during
the taxable year); See also Michael Mendelsohn & Claire Kreycik, Federal and State Structures to Support Financing Utility-
Scale Solar Projects and the Business Models Designed to Utilize Them, 3 J. SUSTAINABLE FIN. & INV. 254, 256 (2013)
https://perma.cc/2CM4-U263 (examining the financial mechanisms and policies, including the ITC, that support solar energy
projects and discusses the associated regulatory standards that installations must meet, encompassing safety protocols.).
122 See Nichola Groom, Soaring U.S. Tax Credit Deals Boost Solar, Storage Build, Reuters (Sept. 6, 2024),
https://perma.cc/8MUM-J4EX (discussing the role of tax credits in promoting the adoption of advanced energy systems with
enhanced safety features). See also Jesse Chan & Darcia Fischer, Energy Investment Tax Credits and Environmental Outcomes:
Evidence from Electric Utilities, SSRN, 12 (2024) available at https://dx.doi.org/10.2139/ssrn.4660606 (analyzing the
environmental and operational impacts of energy investment tax credits on electric utilities).
123 The Inflation Reduction Act indirectly encourages the purchase of newer, safer vehicles through its Clean Vehicle Credit.
See generally Internal Revenue Serv., Credits for New Clean Vehicles Purchased in 2023 or After (Aug. 8,
2024), https://perma.cc/D2VC-YUGL (Under this policy, individuals may receive up to a $7,500 tax credit on the purchase
of a new qualified plug-in EV or fuel cell electric vehicle.).
124 From 2015 to 2023, the inclusion of enhanced safety features in consumer vehicle models grew significantly, with
penetration rates rising from 12.8% to 94% for Forward Collision Warning, 4% to 94% for Automatic Emergency Braking,
3.8% to 91.9% for Pedestrian Detection Warning, 1.4% to 91.9% for Pedestrian Automatic Emergency Braking, and 0% to
34.2% for Intersection Automatic Emergency Braking. See Partnership for Analytics Research in Traffic Safety, Market
Penetration of Advanced Driver Assistance Systems (ADAS) 3–5 (2024), https://perma.cc/2U3K-SX92.
125 IRS Credits for New Clean Vehicles Purchased, supra note 122 (providing up to a $40,000 credit for vehicles with a gross
vehicle weight rating of 14,000 pounds or more and up to $7,500 for lighter vehicles that are considered safer on the roads).
126 See, e.g., Ulrik Boesen, Excise Tax Application and Trends, TAX FOUNDATION, https://perma.cc/P4GR-HRTK (last visited
Feb. 2, 2025) (explaining the role of excise taxes as a revenue source for government programs)
21

<<PAGE_BREAK>>

adjustments involve redirecting public funds from general revenues or other sectors to finance
targeted programs, ensuring the availability of resources without necessarily increasing the overall
tax burden.127 This approach often reflects a prioritization of policy goals, such as sustainability or
safety, within the existing fiscal framework.128 Additionally, the government may impose or increase
excise taxes on specific goods or activities to generate dedicated funding for these programs.129
For example, the federal fuel excise tax is perhaps the most prominent example of tax policy that
affects road safety and infrastructure.130 The federal government places the taxes collected on
purchases of fuel into the Highway Trust Fund, which funds the construction, maintenance, and
safety improvements of highways and bridges.131 While all improvements to highway and
transportation infrastructure contribute to overall safety, the Highway Trust Fund supports a range
of programs expressly dedicated to reducing traffic fatalities and injuries through targeted safety
measures and initiatives.132 These programs include, but are not limited to, the Highway Safety
Improvement Program133, the National Highway Traffic Safety Administration Program134, and the
Federal Motor Carrier Safety Administration Program135, to name a few. Programs like these address
127 See David A. Weisbach and Jacob Nussim, The Integration of Tax and Spending Program, 113 YALE L. J. 955, 960 (2003)
(discussing the role of taxation and various funding mechanisms in supporting government investments).
128 See, e.g., Rui Wang & Shilong Li, Research on the Influence Mechanism of Fiscal and Tax Policy on Green Economic
Transition: From the Perspective of Industrial Structure Conduction Effect, 26 ENV’T DEV. & SUSTAINABILITY 16129, 16130
(2024) (analyzing the role of fiscal policies in driving sustainable industrial transitions).
129 See, e.g., Tax Policy Center, What is the Highway Trust Fund, and How is it Financed?, Introduction,
https://perma.cc/HLQ7-CF76 (last visited Feb. 7, 2025); Linda J. Cobiac, Anja Mizdrak, and Nick Wilson, Cost-effectiveness
of Raising Alcohol Excise Taxes to Reduce the Injury Burden of Road Traffic Crashe, 25 INJURY PREVENTION 421, 421 (2019)
(finding that increasing alcohol taxes is a cost-effective strategy for reducing injuries from road traffic accidents.).
130 26 U.S.C. § 4081(a)(2)(A) (outlining the specific tax rates imposed on various types of taxable fuels, including gasoline,
diesel fuel, and kerosene, detailing the cents-per-gallon rates applicable to each fuel type.); For a scholarly analysis of the federal
fuel excise tax’s influence on road safety and infrastructure, see Nima Safaei & Chao Zhou, Gasoline Pricing Policies for
Transportation Safety, ARXIV (2020), https://perma.cc/N8JG-VLK4 (examining the relationship between gasoline prices,
influenced by federal fuel taxes, and transportation fatality trends, providing insights into how tax policy affects road safety.).
131 As of March 2024, the federal excise tax is 18.4 cents per gallon of gasoline and 24.4 cents per gallon of diesel. The
Congressional Budget Office estimated that in 2023 the fuel excise tax provided 83% of Highway Trust Fund, with the
additional funding coming from sales tax on tractors and heavy trucks, a tire excise tax for heavy vehicles, and an annual use
tax for those vehicles.. See Congressional Budget Office, The Status of the Highway Trust Fund: 2023 Update (2023),
https://perma.cc/75WH-4B3P.
132 See Robert S. Kirk & William J. Mallett, The Highway Trust Fund and the Treatment of Surface Transportation Programs
in the Federal Budget, CONG. RSCH. SERV. R45350 (2019), available at https://perma.cc/KEA8-3NSN (providing an in-depth
examination of how HTF allocations support various transportation programs, including those specifically aimed at enhancing
traffic safety.).
133 See Fed. Highway Admin., Highway Safety Improvement Program (HSIP), https://perma.cc/U92L-9YQL.
134 Nat’l Highway Traffic Safety Admin., Resources Guide, Highway Safety Grants Program (Feb. 2,
2024), https://perma.cc/C7K5-BJU7.
135 See Fed. Motor Carrier Safety Admin., Our Mission, https://perma.cc/Q9RF-LY7N.
22

<<PAGE_BREAK>>

safety-related issues such as better signage, traffic management systems, and safer road designs.136
Similar mechanisms function in the context of workplace and occupational safety.
C. Workplace and Occupational Safety
Tax policy employs multiple mechanisms to promote workplace safety through equipment and
practice investments across sectors. The disaster tax relief provides benefits in federally declared
disaster areas, including deductions for safety measures and rebuilding. 137 Similarly, disabled access
credits support businesses implementing safety improvements like accessible exits and enhanced
emergency systems. 138 The Advanced Energy Project Credit exemplifies direct safety enhancement
through electric grid modernization, reducing risks of power outages, electrical fires, arc flash
incidents, and equipment malfunctions.139
Capital investments in workplace equipment and technology yield multiple safety benefits.
Newer work vehicles exemplify this dynamic, featuring enhanced safety technologies, improved
reliability, and contributions to healthier ambient air quality in and around facilities.140 Similar
environmental and safety improvements arise from investments in oil-spill prevention equipment,
low or zero-carbon process heat systems and carbon recapture technology, which enhance ambient
136 Notably, the Proven Safety Countermeasures Initiative promotes strategies such as the installation of rumble strips,
enhanced delineation, and the implementation of roundabouts to reduce roadway fatalities and serious injuries. Federal
Highway Administration, Proven Safety Countermeasures Initiative, U.S. DEP’T OF TRANSP. (2024), https://perma.cc/ZL9R-
9LTX. Additionally, the Safe Streets and Roads for All (SS4A) Grant Program supports local initiatives to develop
comprehensive safety action plans, which often include measures like better signage and traffic calming designs to improve
road safety. U.S. Department of Transportation, Safe Streets and Roads for All Grant Program, U.S. DEP’T OF TRANSP.
(2024), https://perma.cc/G6TG-JLBG.
137 See, e.g., 26 U.S.C. § 165(i) (allowing taxpayers to claim deductions for losses resulting from federally declared disasters in
the year immediately preceding the disaster); 26 C.F.R. § 1.165-7 (detailing procedures on claiming deductions for casualty
and theft losses, specifying criteria for determining deductible amounts.); 26 U.S.C. § 7508A (granting the IRS authority to
postpone tax deadlines for taxpayers affected by federally declared disasters), 26 U.S.C. § 1400S (establishes tax relief provisions
for individuals and businesses in areas affected by certain disasters, including special deductions and credits.
138 The Disabled Access Credit provides $ 5,000 in funding for spending to improve facilities and equipment to comply with
ADA, which might contribute to occupational safety in a less direct way. See 26 U.S.C. §44. For a detailed overview of this
credit, refer to the IRS’s official guidance, see Internal Revenue Service, Tax Benefits for Businesses Who Have Employees with
Disabilities, https://perma.cc/TCH5-7YDA. See also Silvia Bonaccio et al., The Participation of People with Disabilities in the
Workplace Across the Employment Cycle: Employer Concerns and Research Evidence, 35 J. BUS. & PSYCH. 135 (2020)
(examining employer concerns and provides evidence-based insights into the employment of individuals with disabilities,
including discussions on incentives like the Disabled Access Credit.).
139 See Tucker McGree, National Fire Protection Association, Fires in Industrial and Manufacturing Properties: Supporting
Tables, Table 3 (2023), https://perma.cc/7MWB-63PW (stating that according to a 2017–2021 analysis, leading causes of fires
in industrial properties included equipment or heat source failure, accounting for 732 fires (24%), electrical arcing at 454 fires
(15%), and electrical failure or malfunction with 401 fires (13%).); see also U.S. Department of Labor, Amid National Increase,
U.S. Department of Labor Urges Midwest Employers to Emphasize Electrical Safety after 4 Workplace Deaths in Missouri,
Kansas, Occupational Safety and Health Administration (Nov. 9, 2021) https://perma.cc/TNU5-LXJQ (pointing to
statistical data on 166 workplace deaths related to electrocution in 2019, reflecting a 3.75% increase over the previous year.).
140 See Yang Shen and Xiuwu Zhang, Towards a Low-Carbon and Beautiful World: Assessing the Impact of Digital Technology
on the Common Benefits of Pollution Reduction and Carbon Reduction, 196 ENV. MONITOR. ASSESS. 695, 700 (2024)
(discussing the benefits of investments in low-carbon technologies in improving air quality and reducing environmental
impacts).
23

<<PAGE_BREAK>>

air quality conditions. 141 Indeed, general technological modernization in workplace settings achieves
both direct and indirect safety enhancements through updated equipment and improved
manufacturing processes.142
The tax code promotes these safety-enhancing investments through accelerated cost recovery
mechanisms. Immediate expensing—representing the most aggressive form of depreciation
available—permits businesses to write off up to $1.25 million of qualifying property costs, with
deductions phasing out dollar-for-dollar once total purchases exceed $3.13 million.143 While this
mechanism does not explicitly target safety-related expenditures, it enables immediate deduction of
qualifying new and used equipment and facility purchases. 144 These deductions, though limited to
taxable income, can carry forward to subsequent years under the same income and dollar
constraints.145 This accelerated expensing of new equipment and safety infrastructure—including
fire protection and security systems—incentivizes businesses to prioritize safety enhancements,
potentially reducing workplace hazards and improving overall safety conditions. 146
Bonus depreciation provides another significant tax incentive mechanism, allowing an 80%
immediate deduction of property costs in the service year, encompassing safety-oriented equipment
like protective gear and safety guards.147 The provision covers a broad spectrum of qualifying
property: tangible assets, computer software, qualified improvements, and nonresidential real
property enhancements including critical safety infrastructure like HVAC, fire protection, and
security systems.148 This mechanism complements immediate expensing by enabling additional
deductions beyond standard expensing limits, thus accelerating cost recovery and indirectly
promoting investments in newer, inherently safer equipment and facilities.149
Lastly, enacted in August 2022, the Inflation Reduction Act “(IRA”) employed tax credits and
incentives to drive investments in clean energy, reduce greenhouse gas emissions, all the while
141 See Gaia J. Larsen, Skewed Incentives: How Offshore Drilling Policies Fail to Induce Innovation to Reduce Social and
Environmental Costs, 31 STAN. ENVTL. L.J. 139, 148 (2012) (discussing safety technology investments for deepwater drilling,
highlighting the urgent need for policies to enhance drilling safety and prevent future catastrophic spills.).
142 See Sang-Heon Lee & Ji-Hoon Kim, Technological Advancements in Industrial Safety: Intelligent Devices for Accident
Prevention, 9 SAFETY 35, 35–42 (2023), https://perma.cc/BAU2-K7W5 (exploring how updated technologies reduce
industrial accidents and enhance worker safety).
143 26 U.S.C. §179. Rev. Proc. 2024-40, available at https://perma.cc/NW3Z-Z3BF (last visited Feb. 2, 2025).
144 26 U.S.C. § 179; Gary Guenther, The Section 179 and Section 168(k) Expensing Allowances: Current Law, Economic Effects,
and Selected Policy Issues, CONG. RES. SER. 1–2 (Feb 7, 2024), https://perma.cc/XS3M-AFWY (last visited Feb. 2, 2025)
(hereunder “The Section 179 and Section 168 CRS Report”).
145 26 U.S.C. §179(b)(3)(B).
146 Internal Revenue Service Announcement, Depreciation Expense Helps Business Owners Keep More Money, IRS (Mar. 16,
2020) https://perma.cc/VB9L-6P89 (last visited Feb. 9, 2025). For example, the Security Industry Association provides a
detailed overview of these tax incentives in their fact sheet. See Security Industry Association, New Tax Incentives for Security
and Fire Protection Systems (2018), https://perma.cc/ZZ33-2BKW.
147 26 U.S.C. §168(k) (providing additional allowance equal to the applicable percentage of the adjusted basis of the qualified
property with a recovery period of 20 years or less).
148 Id., Internal Revenue Service, Publication 946: How to Depreciate Property 16 (2024), https://perma.cc/RJ6R-ELXQ.
149 Id., at 14.
24

<<PAGE_BREAK>>

promoting safe work practices.150 These incentives operate through a two-tier structure: the act
provides a base credit for eligible projects and a bonus credit for those meeting additional
requirements, such as adhering to prevailing wage standards and apprenticeship programs.151 For
example, a renewable energy project installing solar panels could receive a 6% investment tax credit,
which increases to 30% if labor and apprenticeship conditions are met.152 Another mechanism is
training requirement for apprentices by journeymen, which is meant to promote the training and
development of a skilled workforce, further enhancing workplace safety standards.153
D. Safety Research Incentives
While the preceding analysis examined tax incentives for implementing existing safety
technologies, a distinct challenge emerges in the domain of fundamental safety research. Innovation
drives long-term economic growth and living standard improvements, with research and
development (R&D) serving as the cornerstone of sustained technological progress. 154 However, this
domain exhibits a classic market failure: social returns from research, particularly in fundamental
areas characterized by uncertainty and non-rivalry, vastly exceed private returns.155 This disparity
creates a compelling case for government intervention, especially as the U.S. research funding
landscape has shifted dramatically toward private sector dominance, with businesses now
conducting more than two-thirds of all U.S. R&D activities. 156
The tax system has historically addressed this market failure through two primary mechanisms:
immediate R&D expensing and the R&D tax credit. Until recently, federal policy permitted full,
150 The Inflation Reduction Act of 2022, Pub. L. No. 117-169, 136 Stat. 1818 (The Act incentivizes specific sectors, including
renewable energy generation, energy-efficient upgrades, electric vehicle adoption, and domestic manufacturing of clean energy
components. With a 10-year timeline for these credits, the IRA provides businesses with the long-term stability needed for
sustainable planning and growth, fostering economic development alongside environmental progress.).
151 See IRS Notice 2022-61, Guidance on Prevailing Wage and Apprenticeship Requirements Under Section 45(b)(6) and
Other Provisions of the Internal Revenue Code, 87 Fed. Reg. 73,978 (Nov. 30, 2022).
152 See Deborah Tam, Prevailing Wage and Apprenticeship Requirements for Inflation Reduction Act Clean Energy Tax
Credits, Thomson Reuters (Dec. 2, 2022) https://perma.cc/V9TY-3ZBV (detailing President Biden’s Inflation Reduction Act
provisions for increased clean energy tax credits or deduction amounts if certain prevailing wage and apprenticeship
requirements are met.).
153 See generally Rosemary K Sokas et al., An Intervention Effectiveness Study of Hazard Awareness Training in the
Construction Building Trade, 124 PUB. HEALTH REP. SUPP 1, 160 (2009), https://perma.cc/SH37-RHD3 (providing an
overview on the role of apprenticeship programs in and discusses their impact on construction workforce development and
safety).
154 See generally Robert M. Solow, Technical Change and the Aggregate Production Function, 39 REV. ECON. & STAT. 312,
316 (1957) (demonstrating that technological innovation significantly contributes to increases in output and productivity,
thereby enhancing living standards over time.).
155 See Bronwyn H. Hall & Josh Lerner, The Financing of R&D and Innovation, in 1 HANDBOOK OF THE ECONOMICS OF
INNOVATION. 609, 610 (2009), https://perma.cc/BMQ6-GNYU (discussing the critical role of both public and private R&D
funding in fostering technological advancements). See Brett M. Frischmann & Mark A. Lemley, Spillovers, 100 COLUM. L.
REV. 101, 115 (2006) (providing a comprehensive analysis of the economic dynamics of R&D spillovers and the associated
market failures.).
156 See National Science Board, Research and Development: U.S. Trends and International Comparisons, SCIENCE AND
ENGINEERING INDICATORS (2022), https://perma.cc/R3EL-2GAA (providing an in-depth examination of the shifts in U.S.
research expenditures, highlighting the changing roles of public and private sectors in funding and conducting R&D.).
25

<<PAGE_BREAK>>

immediate deductions for R&D expenditures to encourage private sector investment.157 However,
the Tax Cuts and Jobs Act of 2017 mandated five-year amortization for domestic research (fifteen
years for foreign research), potentially deterring R&D investment, particularly among resource-
constrained firms.158
The R&D credit, introduced in 1981, aims to incentivize increased research investment rather
than merely subsidizing existing R&D activities.159 The credit offers multiple pathways: a traditional
20% credit for qualified expenses above a base amount,160 an alternative simplified 14% credit,161 an
energy research credit (20% flat rate),162 and a basic research credit for university collaboration.163
The Basic Research credit guarantees same advantages to companies when they outsource scientific
research and engage in collaborations with universities.164 In addition to the federal credit,
157 See 26 U.S.C. §174.
158 See 26 U.S.C. §174(a)(2)(B). The Tax Cuts and Jobs Act the government abruptly eliminated R&D expensing starting 2022
and left such expenses to be capitalized ratably over five years. Tax Cuts and Jobs Act of 2017, Pub. L. No. 115-97, 131 Stat.
2054. See also Richard Ray, Amortizing Research & Development Expenditures Under the TCJA, J. ACCOUNTANCY (2022),
https://perma.cc/9SST-QKBE (explaining how the Act requires capitalization and amortization of R&D expenses after
December 31, 2021). See also Alex Muresianu, Garrett Watson, The Economic Impact of Restoring Immediate Expensing for
R&D Costs, TAX FOUNDATION 5 (2021), https://perma.cc/5KH7-C7GR (warning from significant implications and the
incentives to participate in research activities for business taxpayers due amortization of R&D expenses). Nevertheless, the
House enacted legislation on January 31, 2024, to reinstate the immediate expensing of research and development
expenditures. Enacted in January 2024, the $78 billion Tax Relief for American Families and Workers Act undid the previous
modification and restored the practice of expensing research and development expenses. Research and development
expenditures would be fully deductible until 2025. Tax Relief for American Families and Workers Act of 2024, H.R. 7024,
118th Cong. (2024) (reinstating the immediate expensing of domestic research and development expenditures under I.R.C. §
174).
159 See generally Mirit Eyal-Cohen & Ana Santos Rutschman, Promoting Vaccine Innovation, 82 OHIO ST. L. J. 1003, 1029
(2022) (surveying the history of the R&D credit and its efficiency in the context of pharmaceutical investments).
160 See 26 U.S.C. § 41(a)(1).
161 See 26 U.S.C. § 41(c)(4)(A). A company’s alternative simplified credit (ASC) is equivalent to 14% of its QREs in excess of
50% of its moving average QREs over the preceding three years. If the taxpayer has no qualified research expenses in any of 3
preceding taxable years the alternative simplified credit rate is 6 percent of qualified research expenses. 26 U.S.C. § 41(c)(4)(B).
See U.S. Gov’t Accountability Off., GAO-10-136, Tax Policy: The Research Tax Credit’s Design and Administration Can Be
Improved (2009), https://perma.cc/99HR-3T64 (claiming that Although the alternative credit may make the calculation of
the credit easier, it offers less marginal incentives to invest than the standard credit.). See also Daniel Karnis, How the R&D
Tax Credit Is Calculated, 1 J. ACCT. 28 (2010) (examining the R&D Tax Credit calculation methods, including scenarios
where firms have no prior research history.).
162 See 26 U.S.C. § 41(c)(4)(A) (Twenty percent of a company’s qualified research expenditures (QREs) on payments to
nonprofit organizations for the purpose of undertaking energy research in the public interest is eligible for the energy research
credit.).
163 See 26 U.S.C. §41(e); According to the National Science Foundation, “basic research” is “any original inquiry for the progress
of scientific knowledge that does not have a definite commercial purpose.” National Science Foundation, Annual Report 1953,
at 6 (1953), https://perma.cc/259S-D9PB.
164 See generally Ufuk,Akcigit, Douglas Hanley, and Nicolas Serrano-Velarde, Back to Basics: Basic Research Spillovers,
Innovation Policy, and Growth, 88 REV. ECON. STUD. 1, 10 (2021) (comparing basic to applied research credit and identifying
the spillovers embed between private firms and a public research sector.). It is worth noting that such collaboration is
encouraged also through patent donations, which offer a tax deduction for intellectual property firms transfer to non-profit
organizations. See generally Lily Kahng, The Taxation of Intellectual Capital, 66 FLA. L. REV. 2229, 2267-77 (2014)
26

<<PAGE_BREAK>>

approximately 35 states have a research tax credit.165 The latest tax spending report from the Joint
Committee on Taxation estimates in 2025 a $22 billion loss in revenue as a result of the R&D tax
credit.166 While these credits can offset both income and payroll taxes and carry forward for twenty
years, 167 their effectiveness faces several constraints, especially in the AI safety context.168 Empirical
studies show mixed results on R&D spending impact, with critics noting potential expense
reclassification rather than new research investment.169
Most critically for AI safety, current tax incentives explicitly exclude quality assurance and safety
testing from qualifying research expenses. 170 Clinical trials or similar testing may be eligible if they
(referencing extensive literature on taxation of intangibles); Xuan-Thao Nguyen & Jeffrey A. Maine, Equity and Efficiency in
Intellectual Property Taxation, 76 BROOK. L. REV. 1, 1-8 (2010) (reviewing and criticizing tax rules relating to patents,
copyrights, and trademarks).
165 See MICHAEL D. RASHKIN, PRACTICAL GUIDE TO RESEARCH AND DEVELOPMENT TAX INCENTIVES: FEDERAL, STATE AND
FOREIGN 1001 (2007) (providing a comprehensive analysis of state R&D tax).
166 The Joint Committee on Taxation, Estimates of Federal Tax Expenditures for Fiscal Years 2024-2028, JCX-48-24, at 22
(December 11, 2024), https://perma.cc/U3TP-RFR4.
167 See 26 U.S.C. § 39(a)(1). The fixed-base ratio is a historical percentage denoting the company’s total “qualified research
expenditures” over total gross receipts. In calculating the credit, the firm’s base period research was not permitted to be less
than 50% of the current year’s research spending. The credit’s statutory rate was initially set at 25 percent and applied only to
increases in a firm’s research spending over its average spending in a base period consisting of the previous three years. 26 U.S.C.
§ 41(c).
168 Many expenses related to AI safety are ineligible as they involve routine data collection, routine quality-control testing, social
science research, grant-funding research, or research conducted outside the United States. 26 U.S.C. § 41(d)(4)(B)-(H). The definition
also consists of a “specified” R&D expense, which includes any amount paid or incurred in connection with the development of any
software. Id. Contract research expenses are limited to 65 percent of any amount paid to any person (other than an employee
of the taxpayer) for qualified research. 26 USC § 41(b)(3)(A).
168 Many expenses related to AI safety are ineligible as they involve routine
169 See, e.g., Russell Thomson, The Effectiveness of R&D Tax Credits, 99 REV. ECON. STAT. 544, 547 (2017),
https://doi.org/10.1162/REST_a_00559 (claiming long run every $1 of R&D tax credit translates to around $4 in new R&D
investment); Antoine Dechezleprêtre, et al., Do Tax Incentives for Research Increase Firm Innovation? An RD Design for
R&D, NBER Working Paper 22405, 28, (2016), https://perma.cc/7YUB-CTEU (finding evidence that for every €1 of tax
subsidy there is an increase of €1.7 in R&D.); Wesley Yin, Market Incentives and Pharmaceutical Innovation, 27 J. HEALTH
ECON. 1060, 1061 (2008) (demonstrating Tax credits can stimulate R&D); Irem Guceri & Li Liu, Effectiveness of Fiscal
Incentives for R&D: Quasi-experimental Evidence, 11 AM. ECON. J.: ECON. POL’Y 266 (2019), https://perma.cc/53PD-SSPH
(finding that $1 in additional private R&D spending per dollar foregone in tax revenue.); Jieun Choi, Do Government
Incentives to Promote R&D Increase Private R&D Investment?, 37 WORLD BANK RES. OBS. 204 (2022) (“R&D incentives
generally increase private R&D, but to a varying extent depending on incentive types, countries’ income levels, industry and
firm characteristics, and the design and implementation of the incentives.”). But see Jennie S. Stathis, The Research and
Development Tax Credit Has Stimulated Some Additional Research Spending, Government Accountability Office, Sept. 5,
1989, https://perma.cc/2S9C-ZSCW (concluding the research credit had just a little effect—for every $1 in tax subsidies,
between $0.15 and $0.36 was spent on R&D); Russell K. Thomson, The Effectiveness of R&D Tax Credits: Cross-Industry
Evidence (2013), http://dx.doi.org/10.2139/ssrn.2275094 (providing a cross-country analysis indicates that in the short term,
industries increase R&D investment by only $0.24 for every dollar of tax revenue forgone, implying that a significant portion
of the credited R&D expenditure might have been undertaken regardless of the tax incentives.); Robert Eisner, Steven H.
Albert & Martin A. Sullivan, The New Incremental Tax Credit for R&D: Incentive or Disincentive?, 37 NAT’L TAX J. 171, 181
(1984) (reporting a limited impact of the research credit).
170 See 26 C.F.R. §1.174-2(a)(3).
27

<<PAGE_BREAK>>

are part of the process to develop new technology or prove feasibility.171 However, trials conducted
for routine market testing or compliance are generally excluded.172 This means that quality assurance
activities, including post-market safety testing and compliance verification, generally fall outside the
definition of qualified research expenses unless part of new technology development. 173 This creates
a significant gap: existing incentives not only fail to prioritize AI safety research but may actually
discourage such investment by providing equal or greater inducements for less safety-oriented
innovation.
III. A Tax Framework for Safe AI Development
The preceding analysis illuminates a critical market failure in AI development: while private
entities capture the benefits of capability advances, the risks and potential harms are broadly
socialized. This misalignment creates systematic underinvestment in safety research and protocols
relative to capability development. Current tax frameworks, particularly R&D incentives,
exacerbate rather than ameliorate this dynamic by subsidizing capability research without
differentiating safety-oriented initiatives. We propose leveraging fiscal policy to address this market
failure through a tripartite framework that builds upon established precedents in energy efficiency,
workplace safety, and environmental protection.174 By integrating producer-side safety incentives,
market-based certification mechanisms, and corrective tax measures, our approach harnesses existing
administrative competencies while addressing the unique challenges of emerging AI systems.
Importantly, all of these proposals are grounded in practices already employed, albeit in a diffused
manner, by the tax system, and so they draw on existing institutional competencies.
171 But See Thomson Reuters, Section 174 Expenditures: What Qualifies and What Doesn’t, Thomson Reuters Tax &
Accounting, https://perma.cc/4FV5-HBKA (explaining that quality control testing does not qualify as a research and
experimental expense under Section 174).
172 See 26 C.F.R. §1.174-2(a)(3) (disallowing section 174 treatment for certain activities, including: ordinary testing or
inspection of materials or products for quality control, efficiency surveys, management studies, consumer surveys, advertising
or promotions, acquisition of another’s patent, model, production or process, or research in connection with literary, historical,
or similar projects.).
173 See Internal Revenue Service, Audit Techniques Guide: Credit for Increasing Research Activities (Research Tax Credit)
IRC § 41—Qualified Research Activities, IRS.gov, https://perma.cc/8QV8-R5WY (disallowing “section 174 treatment for
certain activities for ordinary testing or inspection of materials or products for quality control”).
174 It is an open-ended question how much money should be spent on reducing AI risks; the primary if initial attempt to answer
this question offers a qualified estimate of 8% of GDP, which would amount to a stunning 2 trillion per year. Charles I. Jones,
How Much Should We Spend to Reduce A.I.’s Existential Risk? (Jan. 26, 2025) (unpublished manuscript), available at
https://perma.cc/BUW6-UAQW. But we do not take a positive stance on this question other than to note that there are strong
reasons to spend considerable amounts on encouraging safety.
28

<<PAGE_BREAK>>

A Novel Incentive, Allocation, and Distribution Mechanism
Hemel and Ouellette identified a critical insight for technology governance: the critical
importance of regulatory pluralism.175 Traditional regulatory measures, such as liability rules, fines,
and audits, respond to accidents after they happen. In contrast, tax levers like credits, deductions,
and accelerated depreciation push forms to invest in preventive measures, weaving safety into their
core culture and strategic planning. Together, both have ex-ante effects, contributing to what some
have called the “Swiss cheese” model of safety, where it is recognized that safety depends not on the
perfection of any specific security ‘slice,’ but rather by the stacking of several imperfect slices.176 The
balanced pluralistic approach likewise recognizes that no single tool can singlehandedly solve AI’s
risks, but taken together they make safety both imperative and economically viable for firms.
By linking tax benefits directly to verifiable AI safety expenditures—such as workforce training,
alignment research, and safer product design—the government spurs private investment and helps
American labs stay competitive in the heating global AI race.177 These incentives reduce the cost of
building robust safety features, encourage proactive measures, and ensure that safety becomes an
organizational priority rather than an afterthought. While precise quantification of safety benefits
remains challenging and would require time to develop, delaying implementation until perfect
information becomes available would effectively privilege capability development. The framework
thus calls for baseline incentives now, combined with flexible mechanisms to refine these incentives
as our understanding of AI safety matures.
1. Business Tax-Incentives for Investments in AI Safety
Research incentives constitute a critical yet underutilized governance mechanism for advancing
AI safety protocols through strategically calibrated fiscal interventions. These instruments operate
through three distinct channels—research credits, expensing rules, and basic research incentives—
each addressing specific market failures in safety-oriented research and development.178 By
systematically modifying the underlying cost structure of safety research, targeted tax credits can
catalyze investment across crucial technical domains, including: (1) alignment research and
verification methodologies, (2) adversarial robustness testing and validation, and (3) interpretability
frameworks and monitoring systems.179 This tripartite approach leverages existing administrative
175 See Hemel & Ouellette, supra note 23, at 544; Daniel J. Hemel & Lisa Larrimore Ouellette, Law and the New Dynamic
Public Finance, 2020 WIS. L. REV. 645, 650 (2020) (advocating for a pluralistic approach to regulatory policy).
176 See James Reason, Human Error: Models and Management, 320 BMJ 768, 768–70 (2000) (“[common safety measures] are
more like slices of Swiss cheese, having many holes . . . The presence of holes in any one “slice” does not normally cause a bad
outcome. Usually, this can happen only when the holes in many layers momentarily line up”).
177 See, e.g., Mariarosaria Comunale and Andrea Manera, Fiscal Policies for Managing AI’s Economic Impacts, IMF Working
Paper No. 24/065 (2024), https://perma.cc/7GS7-9968 (surveying the role of tax incentives in promoting responsible
adaptation to technological advancements in AI).
178 See, e.g., Bronwyn H. Hall & John Van Reenen, The Impact of the Research and Development Tax Credit on Innovation: A
Meta-Analysis of Causal Evidence, 12 AM. ECON. J. ECON. POL’Y 1, 1–25 (2020) (finding that R&D tax incentives significantly
boost firms’ innovation outputs, including increased R&D spending and quality-adjusted patenting, with sustained effects
over several years, particularly benefiting financially constrained firms).
179 On various safety measures, see supra note 20.
29

<<PAGE_BREAK>>

competencies while addressing the systematic underinvestment in safety research that characterizes
current AI development trajectories.
The pharmaceutical sector offers an instructive comparative framework. Contemporary
pharmaceutical R&D expenditures are directed toward both novel therapeutic discovery and
rigorous safety validation through clinical trials—activities that generate pure public goods in the
form of generalizable knowledge. The existing R&D tax credit and Basic Research credit frameworks
create targeted incentives for broad research initiatives,180 while specialized mechanisms like the
Orphan Drug tax credit address specific market failures in rare disease research.181 This regulatory
architecture demonstrates the potential for precisely targeted fiscal interventions to address
systematic underinvestment in socially beneficial research domains.
Current R&D credit qualification criteria present significant limitations for AI safety research.
Routine data collection, cleaning, and processing, as well as the implementation of existing AI tools
without experimentation, are currently considered operational activities and excluded.182 The
exclusions extend systematically across multiple domains: research conducted outside the U.S., third-
party funded research, market research costs, legal compliance expenses, infrastructure investments
(like GPUs or cloud computing), general employee training, quality assurance testing, and aesthetic
or interface design without technical uncertainty resolution.183
The case for similar interventions in AI safety is particularly compelling given the technology’s
universal impact radius.184 Unlike pharmaceutical products which primarily affect direct consumers,
AI systems generate broad externalities affecting both users and non-users through their societal
deployment and network effects.185 We propose adapting the pharmaceutical model to create an “AI
Safety Research Tax Credit” modeled after the Orphan Drug Credit.186 This credit would reward
expanded types of safety-oriented research activities including red team testing, explainability
180 See 26 U.S.C. § 41(a), (e). The Basic Research Credit offers for-profit firms a similar tax credit for payments made to
nonprofit organizations for their collaborative research. 26 U.S.C. § 41(e)(6). See generally MICHAEL D. RASHKIN, RESEARCH
AND DEVELOPMENT TAX INCENTIVES: FEDERAL, STATE, AND FOREIGN 330 (3RD ED., 2007) (providing an in-depth
examination of the legislative intent and practical application of the R&D Tax Credit, highlighting its role in fostering
significant advancements in various industries.).
181 See 26 U.S.C. § 45C (providing tax incentives for qualified clinical testing expenses related to the development of drugs for
rare diseases or conditions, also known as orphan drugs that affect small patient populations). See also Mark A. Lemley, Lisa
Larrimore Ouellette & Rachel E. Sachs, The Medicare Innovation Subsidy, 95 N.Y.U. L. REV. 75, 120 (2020) (exploring the
advantages of qualifying innovation research in orphan drugs).
182 See 26 U.S.C. §41. See also Warren Averett, Cloud Computing Services and the R&D Tax Credit WARREN AVERETT
INSIGHTS (Mar. 24, 2023) https://perma.cc/8VHP-H9MN (explaining that while cloud computing costs directly tied to
research may qualify as QREs, expenses for market research, legal compliance, and depreciable property like GPUs are
disqualified).
183 See Internal Revenue Service, Audit Techniques Guide: Credit for Increasing Research Activities, IRC § 41 - Qualified
Research Activities, C. Exclusions, https://perma.cc/8QV8-R5WY (detailing the exclusions form qualified research expenses);
Jennifer Frost, et al., The Research Credit and Funded Research, THE TAX ADVISER (Mar. 1, 2023) https://perma.cc/FVS8-
QCXL (noting that research funded by grants, contracts, or third parties is excluded from eligibility for the research credit).
184 See e.g., Tokson & Arbel, AI X-Risk, note 108.
185 Id.
186 See supra note 7 and accompanying text.
30

<<PAGE_BREAK>>

requirements, training monitoring methodologies, and robust guardrail systems.187 Operating
through direct reduction of tax liability, the credit will create immediate financial benefits for firms
prioritizing AI safety research, including a structure benefiting firms that lack scale, scope, and age.188
The framework could implement differentiated credit rates across research phases. During
quality assurance and testing phases, elevated credit rates (e.g., 50% for startups, 25% for established
firms) would create enhanced incentives for thorough safety validation. This temporal variation in
credit rates reflects the particular importance of safety verification in later development stages.
Moreover, the Basic Research Credit could be redesigned to specifically encourage research
institutions and public-private partnerships to focus on investigating AI safety. Such targeted
incentives would foster collaborations between academic institutions, independent research
organizations, and private companies to address critical challenges in AI safety through development
of safety protocols, algorithmic robustness studies, and risk mitigation strategies.189
A second proposed mechanism leverages expensing rules to create differentiated business
incentives between safety and capability investments. Expensing rules significantly influence
corporate behavior and tax compliance, 190 with accelerated depreciation reducing complexity while
incentivizing investment.191 Currently, businesses can claim deductions under Section 168 (bonus
depreciation) or Section 179 (immediate expensing) for AI products meeting eligibility
requirements. Bonus depreciation enables 50% first-year cost deduction for tangible property rather
than following statutory recovery periods,192 with AI-related hardware (servers, GPUs, edge devices)
typically qualifying for 5-7 year depreciation schedules.193
We propose expanding this framework to permit immediate expensing of qualified safety-related
expenditures while mandating extended amortization periods for pure capability investments. This
dual approach creates complementary incentives: reducing effective costs for safety investments
through immediate deductibility of research, testing protocols, and monitoring systems, while
encouraging longer-term stability considerations through extended amortization requirements for
187 See supra note 20.
188 See generally, Mirit Eyal-Cohen, The Cost of Inexperience, 69 ALA. L. REV. 859 (2018) (demonstrating how firms that lack
scale, scope, and age are disadvantaged via heavier regulatory burdens).
189 See, e.g., Paolo Bova, Alessandro Di Stefano & The Anh Han, Both Eyes Open: Vigilant Incentives Help Regulatory Markets
Improve AI Safety, ARXIV (Mar. 6, 2023) (proposing to design non-tax government incentives to build regulatory markets that
deter reckless behavior in AI development).
190 See Israel Klein, Contemptuous Tax Reporting, 2019 WIS. L. REV. 1161, 1161 (arguing that R&D tax incentives often lead
to abusive tax practices).
191 Id. at 1170.
192 See 26 U.S.C. §168(k); 26 C.F.R. §1.168(k)-2. See also Bonus Depreciation Regulations Favorable to Taxpayers, Tax Adviser
(Feb. 1, 2020), https://perma.cc/D9SX-A48P (explaining the implications of regulations regarding depreciation deduction
under Section 168(k)).
193 See Gary Guenther, The Section 179 and Section 168(k) Expensing Allowances: Current Law, Economic Effects, and Selected
Policy Issues, CONG. RSCH. SERV., RL31852, 12 (Feb. 7, 2024), https://perma.cc/3L8L-NELB (detailing the economic effects
of Section 179 and bonus depreciation allowances for 5 years property like GPUs).
31

<<PAGE_BREAK>>

capability-focused investments.194 The framework would qualify safety-oriented investments—
including testing frameworks, alignment research, and monitoring systems—for immediate
expensing, while requiring longer depreciation or amortization for investments purely targeting
increased model size or computational capacity. This preferential treatment extends to development
costs like software, prototypes, licenses, and patents that would otherwise face extended
amortization periods. The extended amortization period for capability investments serves as a
natural brake on the “move fast and break things” mentality that has characterized much of AI
development, subtly reshaping organizational decision-making toward more responsible and
sustainable practices.
A significant challenge emerges from the current tax treatment of AI systems themselves. Under
existing law, while tangible components like servers and GPUs qualify for bonus depreciation,195
custom-developed AI software must typically be amortized over 15 years as an intangible asset. This
extended amortization period is said to significantly impede financial returns for companies
investing in innovation such as AI systems. 196 To address this barrier, we propose extending
immediate expensing benefits to certified safe AI systems. Rather than waiting many years to recover
development costs, companies that meet rigorous safety certification standards would qualify for
immediate deduction of their AI software development expenses. This modification creates a
powerful incentive for safety-conscious development while reducing the financial burden on
companies committed to responsible AI practices.
The framework can be further enhanced through strategic use of payroll tax deductibility.197
Recent proposals advocate increasing the maximum payroll tax liability offset by the R&D credit,
raising gross receipts eligibility barriers, and extending the startup claim period from four to eight
years.198 Making the credit refundable would particularly benefit high-tech industries and firms
lacking scale, scope, and age—entities that often lack the financial sophistication to navigate complex
194 See Amy I. Kinkaid, Charles E. Federanich, Pease Bell, Planning Opportunities: Section 179 Expensing vs. Bonus
Depreciation, Tax Adviser (Dec. 1, 2024), https://perma.cc/T7EK-KMCW (analyzing the distinct advantages of Section 179
expensing and bonus depreciation under Section 168(k), focusing on taxable income limitations and capital expenditure
benefits).
195 Servers and GPUs qualify for bonus depreciation under IRC § 168(k) and Section 179 expensing because they are classified
as tangible personal property with a recovery period of 5 years under MACRS, making them eligible for accelerated
depreciation incentives if used at least 50% for business purposes. See 26 U.S.C. § 168(k), Additional First-Year Depreciation
Deduction (Bonus Depreciation) (2024), https://perma.cc/69YG-W3FQ (last visited Jan. 30, 2025).
196 See Mary Cowx, Rebecca Lester, and Michelle L. Nessa, The Consequences of Limiting the Tax Deductibility of R&D (July
23, 2024) https://dx.doi.org/10.2139/ssrn.4998845 (last visited Jan. 30, 2025) (providing evidence about the detrimental
effects of limiting innovation tax incentives.).
197 See Wendy Landrum and Ted Butler, Gross Receipts Definition Plays Key Role in R&D Credit Limit for Startups, THE TAX
ADVISER (Oct. 2017), https://perma.cc/2ESN-AKCH (explaining the $5 million gross receipts limit and the requirement of
no gross receipts for any tax year before the five-tax-year period ending with the current tax year); Qualified Small Business
Payroll Tax Credit for Increasing Research Activities, INTERNAL REVENUE SERVICE, https://perma.cc/TN5P-NSZ8
(providing guidance on eligibility criteria, election procedures, and timing for claiming the payroll tax offset).
198 The American Innovation and Jobs Act, S. 866, 118th Cong. (2023) proposed by Republican U.S. Senator Todd Young of
Indiana and Democratic U.S. Senator Maggie Hassan of New Hampshire proposed to increase it from $250,000 to $500,000,
and then to $750,000 over the next decade.
32

<<PAGE_BREAK>>

R&D documentation requirements.199 This modification would make the AI safety research credit
more accessible to startup enterprises with limited income tax obligations by providing immediate
liquidity through payroll tax refunds, including Medicare and unemployment insurance
payments.200
The Basic Research Credit framework offers a promising mechanism for advancing
foundational AI safety research.201 Unlike conventional R&D credits that primarily incentivize
applied research with clear commercial trajectories, the Basic Research Credit specifically targets
fundamental scientific inquiry devoid of immediate profit potential.202 This structural alignment
between credit design and the public goods characteristics of AI safety research warrants systematic
examination. The institutional framework established through basic research payments—defined as
transfers from corporations to qualified educational or tax-exempt organizations pursuant to
written agreements—creates a structured mechanism for systematic knowledge generation. 203 While
the existing calculation methodology introduces complexity to an already intricate incentive system,
this complexity serves crucial policy objectives.204 The differentiated treatment of basic research
reflects its distinctive characteristics: extended temporal horizons, heightened uncertainty
coefficients, and more diffuse societal benefits relative to applied research paradigms.205
We therefore propose expanding this framework to create a specialized “Basic AI Safety Research
Credit.” This mechanism would preserve the essential architectural features of the basic research
credit—particularly its emphasis on pre-commercial investigation—while incorporating specific
provisions for AI safety research. The proposed credit would incentivize formal research
partnerships between commercial AI developers and qualified research institutions, establishing
structured channels for knowledge transfer and collaborative investigation. This institutional
199 See generally Eyal-Cohen, supra note 188.
200 There was a proposal made in the Research and Development Tax Credit Expansion Act of 2019 to enlarge the number of
companies eligible for a refund of payroll taxes by increasing the maximum amount of gross sales from $5 million to $10 million
and increase the refundable element of the credit for new and small enterprises from $250,000 to $500,000. See Pinky Shodhan
et al., The Research Credit: Payroll Tax Offset, Tax Matters, J. ACCOUNTANCY (Jan. 1, 2023), https://perma.cc/XE73-UYG9.
201 The Basic Research Credit is calculated as the taxpayer’s basic research payments over its qualified organization base period
amount. The portion of the basic research payments which does not exceed the taxpayer’s qualified organization base period amount
is treated as contract expenses for purposes of the R&D tax credit, which can be claimed concurrent with the basic research credit. See
26 U.S.C. § 41(e)(4) and (5).
202 See, e.g., Sohvi Leih & David J. Teece, Basic Research, in THE PALGRAVE ENCYCLOPEDIA OF STRATEGIC MANAGEMENT
(Augier, M., Teece, D.J. (eds) 2018) https://perma.cc/Y9EA-BFNT (defining basic research as “systematic study directed
toward fuller knowledge or understanding of the fundamental aspects of phenomena and of observable facts without specific
applications towards processes or products in mind”).
203 26 U.S.C. § 41(e) (allowing businesses to claim a tax credit for qualified basic research expenses paid to universities and other
scientific research organizations under certain information-sharing agreements.).
204 See International Monetary Fund, Effectiveness of Fiscal Incentives for R&D: Quasi-Experimental Evidence, IMF Working
Paper No. 17/84 (2017) (analyzing the impact of tax incentives on research and development activities using quasi-
experimental methods), https://perma.cc/MC4T-MBX2; Jason J. Fichtner, Can a Research and Development Tax Credit Be
Properly Designed?, MERCATUS CTR. (2014) (examining the challenges of the R&D tax credit especially its ambiguity and
uncertainty), https://perma.cc/KZ8R-YZ34.
205 See Bettina Becker, Public R&D Policies and Private R&D Investment: A Survey of the Empirical Evidence, 29 J. ECON.
SURV. 917 (2015), (explaining the standard economic view of basic R&D as an under-supplied public good)
33

<<PAGE_BREAK>>

arrangement deliberately leverages proven complementary organizational capabilities: commercial
entities contribute practical expertise and computational infrastructure, while academic institutions
provide theoretical depth and commitment to open scientific inquiry.206
However, significant limitations exist in current basic tax credit qualification criteria for AI
safety research.207 These exclusions span multiple domains: non-technological activities like ethical
studies and market research; research collaborations conducted outside the U.S.; 208 funded research
where funding parties retain substantial rights; routine data collection and quality assurance
testing;209 administrative and managerial costs related to safety project oversight; capital
expenditures for fixed assets;210 personnel training costs; implementation of safety measures without
experimentation; system improvements lacking technical uncertainty resolution; and legal, patent,
marketing, and customer support efforts.211 These exclusions systematically constrain the
development of comprehensive safety frameworks.
The preceding analysis illuminates the diverse array of fiscal mechanisms within the existing tax
framework that can be mobilized to promote safe AI development while requiring minimal systemic
adaptation. From basic research credits to targeted safety incentives, these instruments leverage
established institutional architectures and administrative competencies to address the critical market
inefficiencies of underinvestment in AI safety research. While implementation presents certain
administrative and operational challenges—explored in subsequent sections—none proves
insurmountable, suggesting the framework’s viability as a governance mechanism for promoting
responsible AI development. As the discussion transitions to examining precise targeting
mechanisms for safe AI practices, it becomes crucial to consider how fiscal incentives can be
calibrated to advance genuine safety objectives rather than merely accelerating technological
206 See Tamir Togoontumur & N. S. Cooray, Does Collaboration Matter: The Effect of University-Industry R&D Collaboration
on Economic Growth, 15 J. KNOWL. ECON. 9482 (2023) (finding that university and industry collaborations on R&D have a
strong positive effect on economic growth); Maria Cohen, Gabriela Fernandes & Pedro Godinho, Measuring the Impacts of
University-Industry R&D Collaborations: A Systematic Literature Review, J. Tech. Transfer (2024) (finding in a meta-review
various impact channels of collaborations)
207 See, e.g., Richard Ray, and Nicholas C. Lynch, Qualifying Expenses for the Expanded Research and Development Credit,
CPA J. (Nov. 18, 2019), https://perma.cc/AFG2-WTZP (discussing limitations of the R&D tax credit, including the exclusion
of routine data collection, quality control testing, and activities not directly tied to technological principles).
208 See Treas. Reg. § 1.41-4A(d)(2) (stating that taxpayers must retain substantial rights to research results to qualify for the
R&D tax credit); See also Populous Holdings, Inc. v. Commissioner, T.C. Memo 2020-71 (U.S. Tax Ct. 2020) (holding that
research funded by a third party where the funder retains exclusive rights does not qualify for the R&D credit).
209 See Sophia Shah and A.J. Schiavone, A Process of Experimentation: Production Expenses for the Research and Development
Tax Credit, 96 TAX ADVISER 112 (Sept. 2024) (discussing the exclusion of routine data collection, quality assurance testing,
and administrative costs from qualifying R&D tax credit expenditures).
210 See Internal Revenue Service, Audit Techniques Guide: Credit for Increasing Research Activities § 41—Qualified Research
Expenses, IRS.Gov, https://perma.cc/VF5N-UX3M (explaining that capital expenditures for fixed assets, such as servers or lab
spaces, and costs for training personnel or implementing safety measures without experimentation are not considered qualified
research expenses).
211 See Internal Revenue Service, Instructions for Form 6765, IRS.gov, https://perma.cc/TU7M-E8U9 (outlining forms for
activities excluded from the R&D tax credit, including non-technological activities like market research and research
conducted outside the United States).
34

<<PAGE_BREAK>>

capabilities, thereby addressing the fundamental challenge of closing the capability-safety gap in AI
development.
2. Spurring Consumer Demand for Safe & Reliable AI Products
On the individual consumer and household side, a tax credit could be created for purchasing AI
products certified as reliable and safe, similar to the existing Energy Efficient Home Improvement
Credit.212 The new “AI Reliability Credit” would incentivize producers to certify, and consumers to
invest in, AI technologies that meet rigorous safety and reliability standards, such as mitigating bias,
protecting user data, or operating transparently. This fiscal apparatus will provide a credit equal to
a 30% of the costs of “qualified AI reliable products” like smart home devices, AI-powered personal
assistants, or other consumer-facing AI applications that have been certified by approved regulatory
or independent organizations for meeting AI reliability and safety benchmarks.
The Energy Efficient Home Improvement Credit allows manufacturers to certify their products
for the energy-efficient tax credit by providing a Manufacturer’s Certification Statement confirming
their product meets IRS requirements.213 The mechanism for an AI Reliability Credit would mirror
this process. Domestic AI producers will provide certification for their eligible products and label
them with an “AI Reliability” mark to inform consumers of their qualification for the credit. At the
time of purchase, individuals would retain documentation such as receipts and certification details
to claim the credit on their annual tax returns and in case of IRS audit.214 The credit amount could
be a percentage of the purchase price, capped at a reasonable maximum per product or household
produced in the U.S.. For example, a $3,000 credit cap for an AI-certified product could encourage
adoption without significantly impacting the federal budget.215 By making AI reliability an appealing
and salient factor for consumers, the AI Reliability Credit would not only promote safer AI products
locally but also drive international market competition toward higher standards of safety.216
These proposed measures will be tied to the certifications mentioned earlier from independent
organizations in collaboration with regulatory bodies that establish clear and robust standards for
AI safety. For example, customized AI products designed while investing in way to mitigate bias,
prevent misuse, or enhance transparency could qualify for the tax incentive if they meet the
212 See 26 U.S.C. § 25C (The Energy Efficient Home Improvement Credit allows taxpayers to claim a credit equal to 30% of
the costs for qualified energy-efficient improvements made to their principal residence.).
213 See Internal Revenue Service, Treasury and IRS Issue Guidance for the Energy Efficient Home Improvement Credit,
IRS.GOV (Oct. 24, 2024) https://perma.cc/2BSK-ZFKY (detailing requirements for taxpayers to claim the credit, including
retaining receipts, certification details, and, starting in 2025, product identification numbers for qualified items).
214 Id. (noting consumers keep such certifications their records in case of an IRS audit. Certification standards are typically
guided by the U.S. Department of Energy or Environmental Protection Agency).
215 Id.
216 A number of studies on certifications and consumer demand find that credible certification mechanisms spur demand.
Mario F. Teisl et al., Can Eco-Labels Tune a Market? Evidence from Dolphin-Safe Labeling, 43 J. ENVTL. ECON. & MGMT.
339, (2002) (demonstrating labels shift consumer behavior); Giovanna Piracci et al., On the Willingness to Pay for Food
Sustainability Labelling: A Meta‐Analysis, 55 AGRIC. ECON. 329, 340 (2024) (concluding, from a meta review, that consumers
are willing to pay 29% more for sustainability labels on food, but warning that this masks significant variance).
35

<<PAGE_BREAK>>

certification requirements.217 By rewarding companies that invest in safety and ethical AI practices,
this policy could drive widespread adoption of responsible AI practices across industries.218 Thus,
through shifting consumer demand, this measure could align private firm incentives with broader
societal goals of ensuring AI systems are safe, reliable, and beneficial to users. As consumer demand
for safe and reliable AI products grows, it becomes equally important to consider implementing
Pigouvian levers for unsafe AI development and practices to ensure accountability and deter harmful
behaviors.
3. Penalizing Unsafe AI Development
Parties that engage in unsafe behavior sometimes externalize the risk to other parties.219 A
standard solution, due to Pigou, is the use of corrective tax measures in situations where markets do
not satisfactorily resolve these issues. 220 Corrective taxes are meant to impose the external cost on
those who engage in unsafe behaviors, and thus “internalize” the harm they create.221 Unlike the
command-and-control approach, penalties grants the regulated party the freedom to decide if, how
much, and how to participate in the regulated activity.222 For example, in the case of pollution-
causing actions there is a uniform rate or fees are imposed on polluters for them to internalize their
actions .223
Legal scholars have shown the utility of corrective taxes to encourage safety. Cass Sunstein, for
example, has proposed implementing a tax on hazardous workplaces within the framework of
workplace safety to enhance the effectiveness of OSHA standards.224 Similarly, Jonathan Masur and
Eric Posner propose imposing taxes as the optimal method for addressing negative externalities, such
217 On plausible market consequences, see supra note 216.
218 See supra note 216
219 This is the basic tort model of accident risk, see Steven Shavell, Liability for Accidents, in 1 HANDBOOK OF LAW AND
ECONOMICS 139 (A. Mitchell Polinsky & Steven Shavell eds., 2007)
220 See William J. Baumol, On Taxation and the Control of Externalities, 62 AM. ECON. REV. 307, 309-11 (1972) (developing
modern framework for Pigouvian taxation). But see Victor Fleischer, Curb Your Enthusiasm for Pigovian Taxes, 68 VAND. L.
REV. 1673, 1674 (2015) (arguing that “Pigouvian taxes are likely to be the optimal regulatory instrument only when (1) the
harm is (or is properly analogized to) global pollution, and where the harm does not vary significantly based on the source, or
(2) the variation in marginal social cost is easily observed and categorized, as with traffic congestion charges.”).
221 See Ottmar Edenhofer, Max Franks & Matthias Kalkuhl, Pigou in the 21st Century: A Tribute on the Occasion of the 100th
Anniversary of the Publication of The Economics of Welfare, 28 INT’L TAX PUB. FIN. 1090, 1092 (2021) (viewing Pigou’s legacy
of corrective taxes “in the fundamental concepts of externalities and their correction… which are taught in elementary
economics courses.”).
222 See Omri Ben-Shahar and Kyle D. Logue, Outsourcing Regulation: How Insurance Reduces Moral Hazard, 111 MICH. L.
REV. 197, 232 (2012) (pointing to insurance and taxes as interchange forms of regulatory measures choice of response).
223 But See Forastiere Francesco, Hans Orru, Michal Krzyzanowski & Joseph V. Spadaro, The Last Decade of Air Pollution
Epidemiology and the Challenges of Quantitative Risk Assessment, 23 ENV’L HEALTH 98 (2024), available at
https://perma.cc/GF93-69HY (arguing that such uniform standards without considering source-specific risk levels lead to
inefficiencies in policy implementation).
224 See Cass R. Sunstein, Administrative Substance, 1991 DUKE L.J. 607, 640 (1991) (“A tax on employers for maintaining
dangerous conditions, greater reliance on workers’ compensation and on disclosure of risks to workers, and more active
bargaining and employee involvement in the process of monitoring workplace safety, are all promising techniques.”).
36

<<PAGE_BREAK>>

as pollution.225 They argue that this taxation approach surpasses command-and-control regulations,
which can be rigid and inefficient, and trading systems, which may face implementation challenges
and market failures.226 This framework not only promotes safety but also fosters innovation as
businesses seek cost-effective ways to reduce their tax burden by adopting safer, cleaner practices.227
Building on these theoretical foundations, we propose implementing corrective taxes in the AI
development context through a comprehensive penalty framework. The tax system would impose
graduated penalties on firms that develop or deploy AI systems later determined to pose significant
public safety risks or violate established ethical standards. These penalties would operate through
two primary mechanisms: direct tax surcharges and the recapture of previously granted tax benefits.
For instance, companies deploying AI systems that demonstrate significant preventable risks—such
as leading to critical infrastructure failure or misalignment that leads to large loss of life—would face
both immediate tax penalties and the potential recapture of prior R&D credits and expensing
benefits.228 This dual approach ensures that firms internalize the full social cost of unsafe
development practices while creating strong ex ante incentives for responsible innovation.229 This
measure not only holds companies accountable for prioritizing safety but also ensures that public
funds are not inadvertently subsidizing harmful AI practices. By linking tax benefits directly to past
compliance with safety regulations, policymakers can create a strong financial disincentive for
neglecting safety in AI development, reinforcing the importance of responsible innovation. Monies
collected from such tax penalties will help reverse negative spillovers of unsafe AI practice by
supporting research and development of AI safety standards.230
The tax system has demonstrated significant capability in designing and implementing effective
penalties through established administrative frameworks. 231 In the oil and gas industry, for instance,
225 Jonathan S. Masur & Eric A. Posner, Toward a Pigouvian State, 164 U. PA. L. REV. 93, 95 (2015) (arguing that Pigouvian
taxes are superior to either command-and-control or trading systems and that regulators with authority to impose Pigouvian
taxes should undertake that measure). See also Shawn E. Fields, Regulatory Trading, 90 U. CHI. L. REV. 1095, 1096 (2023)
(examining the uses of trading in environmental and natural resources law and that environmental problems tend to have larger
costs and benefits making them more worthwhile to incur the costs of a trading regime).
226 Masur & Posner, supra note 225 at 99.
227 See Inga Hardeck, Kerry K. Inger, Rebekah D. Moore & Johannes Schneider, The Impact of Tax Avoidance and
Environmental Performance on Tax Disclosure in CSR Reports, 46 J. AM. TAX’N ASS’N, 83 (2024) (exploring the relationship
between tax avoidance, environmental performance, and corporate social responsibility).
228 For discussion of similar recapture provisions in other contexts, see Daniel N. Shaviro, Selective Limitations on Tax Benefits,
56 U. CHI. L. REV. 1189, 1213-15 (1989) (analyzing recapture mechanisms and targeted restrictions on tax advantages, such as
deductions and credits, to curb tax avoidance). But see James Hurley, Tax Authority Accused of Abusing its Power by Cancelling
R&D credit claims, TIMES (Aug. 19, 2024), https://perma.cc/Z39Y-YKV3 (highlighting concerns regarding the revocation of
R&D tax credits without proper inquiry).
229 This approach builds on established economic theory regarding optimal deterrence. See Gary S. Becker, Crime and
Punishment: An Economic Approach, 76 J. POL. ECON. 169, 180-85 (1968) (claiming that adjusting economic incentives, such
as fines or taxes, can influence crime rates by altering the cost-benefit analysis of potential offenders).
230 See supra section III.1.
231 See, e.g., 26 U.S.C. § 831(b) (allowing small insurance companies to elect to be taxed only on their investment income, rather than
their underwriting income, but non-compliance with its regulations can lead to the denial of tax benefits); The Tax Adviser, IRS
Penalties, Abatements, and Other Relief (2024), https://perma.cc/99SS-3GTM (discussing generally IRS penalties for non-
compliance with tax laws, including revocation of tax benefits).
37

<<PAGE_BREAK>>

deductions for intangible drilling costs may be challenged or revoked if expenses are mischaracterized
or if companies violate environmental regulations.232 Similarly, developers receiving Low-Income
Housing Tax Credits must adhere to affordable housing requirements; failure to meet these
obligations, such as maintaining affordability or safety standards, results in credit recapture.233
Employment-related incentives, including the Work Opportunity Tax Credit, can be revoked when
employers violate labor laws or engage in discriminatory practices. 234 Renewable energy and
environmental tax credits provide another instructive example, as these benefits remain contingent
on meeting specific compliance milestones.235
Building on these established frameworks, we propose a two-pronged approach combining ex
ante investment requirements with ex post enforcement mechanisms. As a preventive measure, firms
in the AI industry must allocate a minimum portion of their development research budget (say, 25%)
toward safety-focused activities to qualify for tax benefits, including wage deductions and R&D
credits. Qualifying safety expenditures would encompass robust testing protocols, adversarial attack
mitigation, and alignment validation frameworks. On the enforcement side, firms that experience
significant safety failures—such as critical system misalignment or demonstrated harm to users—
would face both credit recapture and potential tax penalties calibrated to harm severity.
The implementation challenge lies primarily in validating safety-related expenditures,
particularly given information asymmetries between regulators and firms.236 However, the tax
system has demonstrated capacity to perform similar validations in contexts of evolving standards
and industry expertise advantages.237 The key lies in maintaining relatively permissive standards
during initial claims while reserving more stringent scrutiny for post-incident investigations or
targeted audits. This approach allows the tax system to develop relevant expertise organically while
creating strong incentives for accurate reporting and substantive safety investment.
The tax system’s experience with corporate tax avoidance offers instructive parallels for AI safety
enforcement.238 Section 357’s treatment of liability-laden property transfers demonstrates how tax
232 26 U.S.C. 263(c); IRS Pub. 5652, Oil & Gas Audit Technique Guide, https://perma.cc/WXX8-4EHQ.
233 See National Housing Law Project, LIHTC Preservation & Compliance, National Housing Law Project, https://perma.cc/R7RM-
KEV2 (explaining the recapture of Low-Income Housing Tax Credits for failure to maintain affordability and safety standards).
234 See Andie Kramer, Energy Tax Credits for a New World Part IX: Overview of Changes to Traditional Tax Equity Financing,
NATIONAL L. REV., Oct. 8, 2024, https://perma.cc/UWD8-5J5V (discussing changes to U.S. energy tax credits, including compliance
requirements and recapture provisions under new legislation).
235 See, e.g., Tracey M. Roberts, Picking Winners and Losers: A Structural Examination of Tax Subsidies to the Energy
Industry, 41 COLUM. J. ENVTL. L. 63, 94 (2016) (describing the history of renewable energy tax subsidies).
236 See Eric A. Posner, Controlling Agencies with Cost-Benefit Analysis: A Positive Political Theory Perspective, 68 U. CHI.
L. REV. 1137,1177 (2001) (discussing the various controls Congress and the President has agencies contributing to agency
inefficiency).
237 See Sean, McGuire, Thomas C. Omer and Dechun Wang, Tax Avoidance: Does Tax-Specific Industry Expertise Make a
Difference? 87 ACCOUNT’G REV. 975 980 (2012) (arguing that Tax-specific industry expertise of the external audit firm
influences its clients’ level of tax avoidance.).
238 See generally Richard G. Greiner, Paul L. Behling, and J. Denny Moffett, Assumption of Liabilities and the Improper
Purpose—A Re-examination of Section 357 (b), 32 TAX LAW. 111, 113 (1978) (discussing the implications of Section 357(b) in
corporate tax avoidance); Alissa Bruehne & Martin Jacob, Corporate Tax Avoidance and the Real Effects of Taxation: A
38

<<PAGE_BREAK>>

law can effectively address sophisticated avoidance strategies through a combination of clear
statutory triggers and flexible administrative standards.239 Specifically, Section 357(b)’s principal
purpose test and Section 357(c)’s quantitative thresholds create a framework that both deters abuse
and provides clear guidance for compliance.240 This model of combining bright-line rules with
standards-based oversight could be particularly valuable for AI safety regulation, where technical
complexity and rapid innovation require similar flexibility.241
The preceding analysis demonstrates how tax policy can serve as a dynamic governance
mechanism for emerging technologies. By combining ex ante investment requirements with
calibrated enforcement measures, the tax system can help bridge the critical gap between private
incentives and public safety imperatives in AI development. This approach leverages existing
administrative competencies while creating new frameworks for safety validation and compliance
monitoring.
E. The Case for Fiscal Levers
Tax policy presents distinctive advantages for promoting AI safety through its capacity to
harness existing institutional frameworks while preserving market dynamics. 242 Unlike traditional
command-and-control regulation, which can impose rigid constraints and potentially stifle
innovation, tax-based mechanisms offer organizations flexibility in achieving their objectives while
aligning private incentives with public welfare.243
The tax system's effectiveness in promoting AI safety operates through three primary
mechanisms: cultural transformation, expertise mobilization, and equitable distribution of benefits.
First, tax incentives fundamentally reshape organizational culture by making safety investments
financially advantageous. 244 When firms receive tax credits for safety-focused research, compliance
Review, SSRN (Jan. 7, 2020), https://dx.doi.org/10.2kramer139/ssrn.3495496 (This paper synthesizes empirical research on
corporate tax avoidance, exploring its effects on corporate behavior and tax compliance).
239 26 U.S.C. § 357(b) (stating liabilities assumed in a transaction with the principal purpose of tax avoidance are treated as
taxable boot, negating the tax-free treatment of the exchange). See Karen C. Burke, Contributions, Distributions, and
Assumption of Liabilities: Confronting Economic Reality, 56 TAX LAW. 383, 385 (2003) (examining how Section 357(b)
prevents tax avoidance by treating liabilities assumed in transactions with a principal purpose of tax avoidance as taxable boot).
240 See Boris I. Bittker, The Corporation and the Federal Income Tax: Transfers to a Controlled Corporation, 1959 WASH. U. L.
Q. 1, 15 (February 1959) (describing the legislative history of section 357(b)).
241 See Richard G. Greiner Paul L. Behling, and J. Denny Moffett, Assumption of Liabilities and The Improper Purpose—An
Examination of Section 357(b), 32 TAX LAWYER 111 (1978) (discussing the mechanisms and complexities of section 357(b)).
242 See Alan J., Auerbach & James R.Hines, Taxation and Economic Efficiency, 47 J. ECON. LIT. 1252 (2009) (analyzing how
different tax policies can affect resource allocation, economic behavior, and overall societal welfare).
243 See e.g., Antoine Dechezleprêtre et al., Do Tax Incentives Increase Firm Innovation? An RD Design for R&D, Patents, and
Spillovers, 15 AM. ECON. J. ECON. POL’Y 87 (2023) (providing causal evidence that R&D tax incentives positively impact firm
innovation and generate spillover benefits for related firms).
244 See, e.g., Jacob Nussim and Anat Sorek, Theorizing Tax Incentives for Innovation, 36 VA. TAX REV. 25, (2017) (“[Cash
based transfers] may also facilitate knowledge sharing early on, and may prevent innovation races.”); Jonathan Remy Nash,
Taxes and the Success of Non-Tax Market-Based Environmental Regulatory Regimes in CRITICAL ISSUES IN ENVIRONMENTAL
TAXATION 733, 735 (Chalifour et al. eds., 2008) (arguing that tax concerns and tax structures can have significant effects upon
the function and ultimate success of market-based environmental regulatory regimes).
39

<<PAGE_BREAK>>

protocols, and governance frameworks, they internalize these priorities at both operational and
strategic levels. This internalization extends beyond immediate compliance, fostering industry-wide
safety consortia and creating positive network effects through initiatives like ethics training for AI
developers and dedicated safety teams.
Second, tax incentives effectively mobilize private sector expertise while preserving competitive
dynamics.245 The framework harnesses organizational expertise through multiple channels: tax
credits reward safety research investments, encourage collaboration with non-profit organizations
and academic institutions, and create natural partnerships where private companies maintain
ownership of safety initiatives while benefiting from public support. 246 This proves particularly
crucial in the global AI race, where maintaining U.S. competitiveness requires careful calibration of
safety requirements against development imperatives.
Third, the tax system’s distributive function treats AI safety as a public good, allocating costs
across taxpayers while concentrating benefits in safety-enhancing research and development. 247 This
approach proves especially valuable for fundamental safety research that may lack immediate
commercial appeal but provides critical societal benefits.248 Complementing these positive
incentives, tax penalties serve as crucial corrective mechanisms –when firms face tax consequences
for safety failures, they naturally allocate greater resources toward risk mitigation and safety
protocols.
Knowledge sharing represents another crucial advantage of tax-based safety promotion.
Drawing from successful models like Information Sharing and Analysis Centers in cybersecurity, 249
245 See, e.g., Mark A. Cohen and Paul H. Rubin, Private Enforcement of Public Policy, 3 YALE J. ON REG. 167, 187 (1985)
(discussing the idea of safety regulation as socially efficient tool).
246 See, e.g., Daniel, Bradley, Connie X. Mao, and Chi Zhang, Do Corporate Taxes Affect Employee Welfare? Evidence from
Workplace Safety,42 J. ACCOUN’G PUB. POL’Y 42 1413, 1415 (2023) (finding workplace safety decreases when firms experience
a tax increase).
247 See, e.g. Richard H. Pildes & Cass R. Sunstein, Reinventing the Regulatory State, 62 U. CHI. L. REV. 1, 101 (1995) (discussing
the distributive effects of tax incentives accompanied by efforts to diminish effects on the poor); Peter Mieszkowski, Tax
Incidence Theory: The Effects of Taxes on the Distribution of Income, 7 J. ECON. LITE. 1103, 1103 (1969) (analyzing the tax
incidence is the investigation of the distributive effects of taxes).
248 See, e.g., Diego d’Andria & Ivan Savin, A Win-Win-Win? Motivating Innovation in a Knowledge Economy with Tax
Incentives, 127 TECH. FORECASTING & SOC. CHANGE 38, 38–56 (2018) (analyzing the effectiveness of tax incentives in
fostering innovation within knowledge-based economies and exploring their broader economic impacts); Michael Keen &
Jenny E. Ligthart, Information Sharing and International Taxation: A Primer, 13 INT’L TAX & PUB. FIN. 81, 81–103 (2006)
(discussing the role of taxpayer-specific information exchange between national tax authorities in enhancing transparency and
accountability). But see Mckay Jensen, Nicholas Emery-Xu, Robert Trager, Industrial Policy for Advanced AI: Compute
Pricing and the Safety Tax, ARXIV 2 (Feb. 22, 2023), https://perma.cc/48YL-PDHX (defining “safety tax” as the marginal
cost of deploying an AI system that is aligned with human values compared to an equivalent but unaligned system, representing
the tradeoff between safety investments and performance-driven incentives.).
249 See, e.g., Maryland’s Buy Maryland Cybersecurity Tax Credit provides businesses with a tax credit of up to 50% of the net
purchase price of cybersecurity technologies and services from qualified Maryland-based providers, capped at $50,000 per tax
year, to encourage investment in cybersecurity measures within the state. Md. Dep’t of Com., Buy Maryland Cybersecurity
40

<<PAGE_BREAK>>

tax incentives can foster transparency and collaboration through rewards for adopting shared safety
standards or participating in third-party certifications.250 These public-private partnerships enable
corporations to share insights from safety research with the broader community while protecting
proprietary information.251 By rewarding participation in pre-competitive research alliances and
contributions to open-source safety tools, the framework creates positive spillover effects that
benefit the entire AI ecosystem.
The framework’s effectiveness extends beyond direct safety promotion to fostering sustainable
innovation ecosystems. Consumer-side tax credits for certified safe AI products create market
demand for responsible development practices, while organizational tax benefits encourage long-
term investments in safety infrastructure and expertise. Private corporations, leveraging their
domain expertise,252 can determine the most effective implementation of safety measures without
external micromanagement. This flexibility ensures that investments are tailored to the unique
challenges of AI safety while providing firms latitude in how they innovate and address risks.253
F. The Administrative Challenge
Although current safety tax incentives are widely used to shape behavior across various sectors,254
their application to AI safety presents distinct challenges that warrant careful consideration. Critics
raise several compelling objections that have deeply informed our framework’s development. The
most immediate concern is political economy: providing tax benefits to an already profitable
technology sector may face opposition from both policymakers and the public. 255 Any reduction in
tax revenue would need to be offset, either through increased burden on other taxpayers or reduced
Tax Credit, https://perma.cc/3WYT-Y4XM. Oklahoma’s Software/Cybersecurity Workforce Tax Credit offers a tax credit
of up to $2,200 annually for qualifying employees with degrees from ABET-accredited institutions working in software or
cybersecurity roles, aiming to attract and retain skilled professionals in the state. Okla. Dep’t of Com., Software/Cybersecurity
Workforce Tax Credit, https://www.okcommerce.gov.
250 See Siglé, Marie-Léandre, Sjef van Erp, Thomas van Hulten & Maarten Pieter Schinkel, The Cooperative Approach to
Corporate Tax Compliance: An Empirical Assessment, 48 J. INT’L TAX 1141, 1154 (2022) (analyzing how cooperative
compliance programs between tax authorities and corporate taxpayers enhance compliance and foster a culture of
collaboration).
251 See Matthew Stepp & Robert D. Atkinson, Creating a Collaborative R&D Tax Credit, INFO. TECH & INNOVATION
FOUNDA. June 2011, at 1 https://perma.cc/4JZU-K8UV (finding that nations offering more generous R&D tax credits achieve
higher rates of university-business collaboration than the United States)
252 See supra note 18 and accompanying text.
253 See, e.g., Alan J. Auerbach, Measuring the Effects of Corporate Tax Cuts, 32 J. ECON. PERSP. 97, 100 (2018) (examining the
impact of the Tax Cuts and Jobs Act of 2017 on corporate investment and resource allocation); Dan Andrews & Federico
Cingano, Public Policy and Resource Allocation: Evidence from Firms in OECD Countries, 29 ECON. POL’Y 253 (2014)
(analyzing how public policies, including taxation, influence resource allocation among firms in OECD countries).
254 See supra Part II.
255 See e.g., Nancy C. Staudt, The Political Economy of Taxation: A Critical Review of a Classic, 30 L. & SOC’Y REV. 651 (1996)
(reviewing Henry’s Simons seminal work on the definition of income but adding that the political economy of tax policy has
significant implications for income tax design); Ethan Ilzetzki, Tax Reform and the Political Economy of the Tax Base, 42 INT’L
REV. POL. ECON. 132, 135 (2021) (analyzing the influence of political institutions on tax base reforms), available at
https://perma.cc/HRU3-K3Q8.
41

<<PAGE_BREAK>>

public services. 256 Moreover, effective administration of these incentives poses unique oversight
challenges that strain institutional capacity. The complexity of tax mechanisms, and tax incentives
for R&D specifically, lies in their intricate design, which must balance fostering innovation and
compliance while avoiding inefficiencies, misuse, or unintended consequences, and often involves
complex audits and administrative processes to ensure proper implementation and oversight.257
Companies must identify and substantiate expenses such as wages, supplies, and contract research
related to eligible research activities, often necessitating the expertise of tax professionals.258 The need
to maintain comprehensive documentation and navigate evolving IRS guidelines adds layers of
complexity that may overshadow the credit’s potential benefits.259 Lastly, the lack of salience and
internalization of tax benefits at the upper C-suite level often results in missed opportunities to align
strategic decision-making with available incentives, as these benefits may be perceived as peripheral
or poorly integrated into broader organizational goals.260 Together, these political, distributional,
and administrative concerns demand thoughtful structuring of any proposed incentive scheme.
The political economy challenge, while significant, must be situated within the broader
landscape of existing innovation policy and institutional dynamics.261 As discussed above, firms
already access various tax incentives to support their research activities, with most of these benefits
flowing to capability development rather than safety research.262 To put the point somewhat crudely,
we are already pouring money on the industry, but perhaps too much on the wrong part of it.
256 See, e.g., Jaeger Nelson and Kerk Phillips, The Economic Effects of Financing a Large and Permanent Increase in Government
Spending CONG. BUDGET OFFICE 8 (2021), https://perma.cc/XNP4-6DB (analyzing the impact of income tax cuts on the
national deficit, concluding that tax cuts lead to higher deficits without sufficient offsetting revenue from economic growth);
Paul N. Van de Water, Tax Reform Must Not Lose Revenues and Should Increase Them, CENTER ON BUDGET AND POLICY
PRIORITIES, https://perma.cc/QR49-EKS3 (arguing that tax cuts should be offset by revenue increases or spending cuts to
avoid exacerbating budget deficits and national debt); William G. Gale & Samuel A. Shapiro, The Effects of Income Tax Changes
on Economic Growth, BROOKINGS INSTITUTION (June 9, 2016), https://perma.cc/VUL2-QZPF (“Reforms that improve
incentives, reduce existing distortionary subsidies, avoid windfall gains, and avoid deficit financing will have more auspicious
effects on the long-term size of the economy…”).
257 For example, the credit is not available for research funded via government or private grants. See 26 U.S.C. § 41(d)(4)(H).
Moreover, companies claiming the credit cannot “double dip,” thus, they must reduce immediate expensing & the Orphan
Drug Credit for the amount of the credit. See 26 U.S.C. § 280C(c)(1).
258 See Klein, supra note 190 at 1166 (surveying the role of the research credit in income misreporting arguing that due to its
complexity large corporations employ full-time professionals to handle their taxes); John Deininger, Jared Boucher & Tom
Windram, Documenting Qualified Research Activities for the Research Tax Credit, 51 TAX ADVISER 260 (2020)
https://perma.cc/R5TX-6ZSZ (discussing the necessity for companies to meticulously document qualified research expenses).
259 See Daniel J. Hemel & Lisa Larrimore Ouellette, Beyond the Patents-Prizes Debate, 92 TEX. L. REV. 303, 326 (December
2013) (“Estimates of the effectiveness of the R&D credit vary widely.”)
260 See Alex Raskolnikov, Revealing Choices: Using Taxpayer Choice to Target Tax Enforcement, 109 COLUM. L. REV. 689, 700
(2009) (referring to income taxes as the top reason for highest risk area of financial reporting and worry among the C-suite).
261 On the political drivers of R&D policies, see James C. Hearn, T. Austin Lacy & Jarrett B. Warshaw, State Research and
Development Tax Credits: The Historical Emergence of a Distinctive Economic Policy Instrument, 28 ECON. DEV. Q. 166
(2014).
262 See supra note 13 and accompanying text.
42

<<PAGE_BREAK>>

Nonetheless, scholars have raised legitimate concerns about political capture,263 noting that tax
preferences are particularly susceptible to abuse by special interest groups in areas of bipartisan
agreement like innovation policy.264 Because these are reasonable concerns, our framework
incorporates several structural safeguards against such risks. First, our proposal is flexible enough to
allow policymakers redirect existing incentives toward safety research rather than creating new
benefits, addressing both budget neutrality concerns and limiting opportunities for rent-seeking
behavior. Second, the framework distributes oversight responsibility across multiple mechanisms,
including tax incentives, direct grants, regulatory exemptions, and public-private partnerships,
thereby constraining the discretion of any single agency. Third, we propose a fairly constrained
mandate for AI safety, as elaborated below. This integrated approach, combining narrow targeting
with distributed oversight, simultaneously addresses concerns about political capture while
advancing the critical goal of redirecting resources toward systematically underinvested safety
research.
A critical implementation challenge lies in precisely identifying which segments of the AI
development chain warrant targeted tax incentives. Given AI’s pervasive integration across sectors,
nearly any firm could plausibly claim qualification for safety-related benefits without meaningful
differentiation. We propose focusing initial incentive structures on foundational research and model
training activities, rather than downstream applications or product development. This upstream
prioritization finds theoretical support in two key dynamics: first, foundational research operates at
a greater remove from market pressures that might otherwise drive safety considerations; second,
advances in fundamental safety protocols at the architectural level generate positive spillover effects
throughout the development ecosystem.265 This narrower scope helps mitigate some of the political
concerns noted above.
A more fundamental challenge emerges in distinguishing genuine safety research from what we
term “safety-washing”— superficial or misleading commitments to AI safety that mask continued
prioritization of capability advancement.266 This challenge manifests along two distinct
dimensions.267 First, at the definitional level, we lack precise terminology to differentiate between
investments in general AI capabilities and specific safety measures, a distinction further complicated
by recent research suggesting positive correlations between model capabilities and certain safety
263 See, e.g., Zachary Liscow, Redistribution for Realists, 107 IOWA L. REV. 495, 524 (2022) (“Policies could look the way they
do for many reasons, including political capture.”).
264 See, e.g., Cato Institute, Special Interests & Corporate Welfare, in Cato Handbook for Policymakers (9th ed. 2022),
https://perma.cc/E5YE-29HE (discussing how special-interest groups often secure narrow benefits from the government,
leading to policies that may not align with the general public interest);
265 The three point seat belt is a case in point, invented by Volvo in 1959 and released to the entire market, saving millions of
lives. Alexander Stoklosa, The Three-Point Seatbelt Turns 60, and It’s a Damn Hero, CAR AND DRIVER (Aug. 21, 2019),
https://perma.cc/8PAZ-JKZC.
266 See Ren et al., supra note 76.
267 Id.
43

<<PAGE_BREAK>>

characteristics.268 Second, we face significant empirical hurdles due to the absence of well-established
safety endpoints and regulatory frameworks.269
OpenAI's 2023 safety initiatives starkly illustrate these challenges. The high-profile recruitment
of Scott Aaronson to their safety team initially generated significant optimism within the AI safety
community.270 Yet this apparent commitment proved largely ceremonial—Aaronson was tasked
primarily with developing AI writing detection tools, a narrow technical challenge focused on
academic plagiarism that never materialized into meaningful products.271 This episode exemplifies
how leading AI firms can leverage prestigious appointments and safety rhetoric while maintaining
their singular focus on capability advancement, effectively using safety initiatives as reputational
cover rather than vectors for substantive reform.
Our framework addresses these challenges by building upon the tax authorities' established
competencies rather than creating new oversight bodies. While subject-matter agencies typically
possess greater technological expertise than tax authorities, 272 and direct funding mechanisms like
grants are often considered superior to tax preferences,273 the IRS offers distinct administrative
advantages in three key areas:
First, the Internal Revenue Service has already developed sophisticated protocols for evaluating
technical research claims across various complex sectors, including biotechnology and advanced
manufacturing.[fn] Under Section 41, tax authorities regularly assess whether activities constitute
systematic investigation through experimentation to resolve technical uncertainty.[fn] This existing
framework provides a natural foundation for evaluating AI safety research through documented
protocols and clear research objectives.
Second, current R&D verification systems rely on contemporaneous documentation
requirements that can be readily adapted for AI safety research. 274 Just as firms must maintain
268 See Hendrycks & Mazeika, supra note 5.
269 See Ren et al., supra note 76.
270 See e.g., peterbarnett, Scott Aaronson is joining OpenAI to work on AI safety, LessWrong (June, 6, 2022)
https://perma.cc/M6BW-XADZ. Aaronson himself, in his widely read blog, anticipated this very question, “Should you
worry,” he asks rhetorically, “that OpenAI is just hiring me to be able to say ‘look, we have Scott Aaronson working on the
problem,’ rather than actually caring about what its safety researchers come up with?”, and responds that that while he can’t
prove that this isn’t a concern, he “was impressed by [their] detailed, open-ended engagement . . . sort of like how it might look
if they actually believed what they said.”). Scott Aaronson, OpenAI!, Shtetel Optimized (June, 17th, 2022).
271 See Liron Shapira, Scott Aaronson Makes Me Think OpenAI’s “Safety” Is Fake, Clueless, Reckless and Insane, DoomDebates
https://perma.cc/D3CW-GCGY. Aaronson posted a response on social media, largely agreeing with the critique: “nothing I
did at OpenAI and nothing I said on my podcast should make [a person worried about AI x-risk] less terrified (if anything, the
contrary).” Liron Shapira, https://perma.cc/6PG8-PXSZ.
272 For example, The National Institute of Standards and Technology has hired Paul Christiano as its head of AI Safety, a highly
respected safety researcher and a former OpenAI engineer https://perma.cc/U4RX-TX9W.
273 See, e.g., Jacob Nussim & David A. Weisbach, The Integration of Tax and Spending Programs, 113 YALE L.J. 955, 1023
(2004) (discussing the inefficiencies and deadweight loss associated with using the tax system for regulatory purposes).
274 See, e.g., Jeff Drew, New R&D Credit Documentation Requirements Clarified, 233 J. ACCT. 1, 12 (Jan. 25, 2022),
https://perma.cc/5A6L-59Z4 (This article discusses updated IRS documentation requirements for the R&D tax credit,
highlighting the importance of maintaining adequate records to support claims).
44

<<PAGE_BREAK>>

detailed records for traditional R&D credits,275 AI developers would document specific safety
activities including alignment testing protocols, robustness evaluations against adversarial attacks,
red-teaming exercises and outcomes, safety-relevant model behaviors during training, and systematic
investigation of failure modes and mitigation strategies.
Third, the evaluation framework can leverage emerging industry standards and technical
benchmarks to create concrete qualification metrics.276 These would include implementation of
specific safety protocols (such as adversarial training and bounded optimization), achievement of
quantifiable safety benchmarks (like robustness scores and alignment metrics), development of
safety monitoring systems, contributions to open-source safety tools, and systematic documentation
of model behaviors and interventions.277 By adhering to predetermined AI safety priorities
established by technical committees, the framework maintains administrative efficiency while
ensuring tax authorities are not overburdened with complex technical determinations.278
To further streamline implementation, we propose several administrative simplifications:
standardizing eligibility criteria and reliability definitions, adopting pre-certification systems for
upfront verification, automating documentation through digital platforms, and shifting toward
output-based incentives tied to measurable outcomes rather than solely input-based claims.279
275 See, e.g., IRS, Audit Techniques Guide: Credit for Increasing Research Activities, IRS.Gov (June 2022),
https://perma.cc/E54P-UXZ3 (providing detailed guidance on evaluating claims for the R&D tax credit).
276 On developing safety protocols, see supra note 20.
277 There are a number of evolving standards and regulatory measures on AI safety. They include ISO/IEC 23894:2023,
Artificial Intelligence – Guidance on Risk Management, INT’L ORG. FOR STANDARDIZATION 2023, available at
https://perma.cc/B6PW-N2PX; ISO/IEC JTC 1/SC 42 Standards on AI Trustworthiness, addressing robustness and
functional safety, see ISO/IEC JTC 1/SC 42, Artificial Intelligence, INT’L ORG. FOR STANDARDIZATION, available at
https://perma.cc/3N84-VAQX; ISO/IEC 42001:2023, an AI management system standard that establishes governance
frameworks ISO/IEC 42001:2023, Artificial Intelligence – Management System, INT’L ORG. FOR STANDARDIZATION 2023,
discussed in How the ISO and IEC are Developing International Standards for the Responsible Adoption of AI, UNESCO,
available at https://perma.cc/92TP-MVXT; IEEE Ethically Aligned Design and 7000-series standards, which set technical
benchmarks for AI transparency, bias mitigation, and fail-safe mechanisms. See IEEE, Ethically Aligned Design and IEEE 7000-
series Standards, available at https://perma.cc/2ZWF-M4WA; NIST AI Risk Management Framework 1.0 (2023), a structured
framework to assess and mitigate AI-related risks, NAT’L INST. OF STANDARDS & TECH., AI Risk Management Framework 1.0
(2023), available at https://perma.cc/DQ3H-HV8T; OECD Principles on AI (2019), setting international AI governance
norms, ORG. FOR ECON. CO-OPERATION & DEV., OECD Principles on Artificial Intelligence (2019), available at
https://perma.cc/K8VA-QC7W; EU AI Act (2024), a binding regulatory framework that mandates safety, robustness, and
transparency for AI systems (Proposal for a Regulation of the European Parliament and of the Council Laying Down
Harmonised Rules on Artificial Intelligence, COM (2021) 206 final (Apr. 21, 2021), available at https://perma.cc/X7Q3-
FXH9; and the Partnership on AI’s guidelines, which provide industry-driven best practices for responsible AI deployment.
See Partnership on AI, Our Work, available at https://partnershiponai.org/our-work/.
278 See Atherine M. Sharkey and Kevin M. K. Fodouop, AI and The Regulatory Paradigm Shift at the FDA, 72 DUKE L.J.
ONLINE 1, 106 (2022) (claiming the IRS developed in-house technical expertise to automate dynamic regulatory tasks,
demonstrating the importance of integrating technical and regulatory subject matter expertise for effective AI
implementation.).
279 See e.g., Joshua D. Blank and Leigh Osofsky, Democratizing Administrative Law, 73 DUKE L.J. 1615, 1620(2024) (proposing
to increase the democracy deficit in tax administration by applying administrative law principles on agency communications
with the general public similarly to interactions between agencies and sophisticated parties).
45

<<PAGE_BREAK>>

Regular program reviews would ensure these incentives remain effective and manageable without
unnecessary administrative burdens.280
Overall, implementation of incentives to cutting edge research presents some inescapable
difficulties. We believe that the proposal offers a realistic path of administration that, while sensitive
to difficulties, offers a meaningful and practical path forward. If we are to encourage safety research
and implementation, we must start building towards the appropriate regulatory apparatus. Existing
tools within tax authorities offer a promising way forward that is—relatively speaking—less
demanding in terms of subject matter expertise than alternative oversight proposals.
Conclusion
This Article has argued that tax policy can serve as a powerful and underutilized tool for
promoting AI safety. We began by examining the growing capability-safety gap in AI
development—where advances in AI capabilities have rapidly outpaced our ability to ensure these
systems operate safely and reliably. At the heart of this gap lies what we termed the social
misalignment problem: while the rewards from powerful AI systems accrue privately to their
developers, the risks and potential harms are broadly socialized across society.
Drawing on extensive precedents from energy efficiency, workplace safety, and environmental
protection, we demonstrated how tax policy has historically helped resolve similar misalignment
challenges. Our framework proposes three interlocking mechanisms: producer-side incentives that
reward safety research and development, consumer-side credits that stimulate demand for certified
safe AI products, and corrective tax penalties that internalize the social costs of unsafe development
practices. Rather than creating entirely new administrative structures, this approach leverages the
tax system's existing competencies in monitoring research activities and verifying compliance.
The framework's utility extends well beyond AI safety. 281 It offers a blueprint for using fiscal
policy to address market failures in emerging technologies where private incentives diverge from
public welfare. Whether in biotechnology, nanotechnology, or other domains where innovation
280 See, e.g., Yifat Aran, Making Disclosure Work for Start-up Employees, 2019 COLUM. BUS. L. REV. 867, 931 (2019) (calming
certain disclosure documents impose a high financial and administrative burden on startups); Pontus, Braunerhjelm, Johan E.
Eklund, and Per Thulin, Taxes, the Tax Administrative Burden, and the Propensity for Entrepreneurship, 56 SMALL BUS.
ECON. 681, 690 (2019) (finding that high tax administrative burdens negatively impact entrepreneurial activities, particularly
in the early stages of a business.).
281 See, e.g., Murray Petrie, Richard Allen, The Crucial Role of Fiscal Policy in Averting Environmental Catastrophe IMF PFM
BLOG (Dec. 6, 2021) https://perma.cc/2FZN-C8CP (discussing how green fiscal policies, such as green taxes and public
spending, can contribute to environmental sustainability and support fiscal strategies for sustainable goals); Chris Brown,
Manage Cybersecurity as Part of the ESG Strategy, DIRECTORS & BOARDS (Jan. 19, 2024) https://perma.cc/JL8D-N3V2
(emphasizing the role of integrating cybersecurity into Environmental, Social, and Governance (ESG) frameworks to protect
infrastructure and maintain public trust); OECD, Fiscal Sustainability of Health Systems (2021),
https://www.oecd.org/en/publications/fiscal-sustainability-of-health-systems_880f3195-en.html (highlighting the importance of
robust fiscal policies in strengthening health system resilience); World Economic Forum, How Fiscal Policy Can Help Save
Forests (2021), https://perma.cc/UQ3A-GECA (exploring how fiscal reforms can influence forest conservation and ecosystem
health by incentivizing sustainable land use and reducing deforestation).
46

<<PAGE_BREAK>>

carries both tremendous promise and significant risk, carefully calibrated tax incentives can help
align private sector behavior with social imperatives. 282 By making safety investments financially
advantageous while penalizing reckless development, 283 tax policy can foster cultures of responsible
innovation across multiple technological frontiers. 284
Critics may argue that tax incentives alone cannot guarantee safe AI development. We agree—
no single regulatory tool can fully address the complex challenges posed by transformative
technologies. However, tax policy offers distinct advantages over traditional command-and-control
regulation, particularly in fast-moving technical domains where regulators face significant
information and expertise asymmetries. By harnessing market mechanisms and firm-level knowledge
while preserving innovation incentives, tax policy can play a crucial role in a broader regulatory
ecosystem.
The urgency of addressing AI safety cannot be overstated. As systems grow more capable and
autonomous, the stakes of ensuring their reliable and beneficial operation continue to rise. Our
framework offers a practical path forward, one that recognizes both the tremendous promise of AI
technology and the critical importance of developing it safely and responsibly. Give me a lever and a
place to stand, Archimedes said, and I can move the world.
282 See Mirit Eyal-Cohen & Ana Santos Rutschman, Promoting Vaccine Innovation, 82 OHIO ST. L. J. 1003, 1029 (2022)
(discussing crowing out socially valuable goods such as pandemic preparedness).
283 See Christos Makridis, Christos Makridis, Anne Boustead, and Scott Shackelford, Navigating the cybersecurity labyrinth:
Defining ‘reasonable’ standards for businesses, BROOKINGS INST. (Feb. 22, 2024) https://perma.cc/D3EC-4W95 (discussing the
challenges businesses face in implementing “reasonable” cybersecurity standards, and the potential for tax incentives or
regulatory clarity to encourage better security practices).
284 See, e.g., Matthew Wilson, Government Market Power and Public Goods Provision in a Federation, 28 INT’L TAX & PUB.
FIN. 1234, 1234 (2020) (examining the impact of centralization and decentralization on public goods provision).
47

---

## ssrn-5377475: The Generative Reasonable Person
Year: 2026
Authors: Yonathan Arbel
Source: papers/ssrn-5377475/paper.txt

The Generative Reasonable Person
Yonathan A. Arbel
This Article introduces the generative reasonable person, a new tool for estimating how ordinary people judge reasonableness. As claims about AI capabilities often outpace evidence, the Article proceeds empirically: adapting randomized controlled trials to large language models, it replicates three published studies of lay judgment across negligence, consent, and contract interpretation, drawing on nearly 10,000 simulated decisions.
The findings reveal that modelscan replicate subtle patterns that run counter to textbook treatment.Like human subjects, models prioritize social conformity over cos-tbenefit analysis when assessing negligence, inverting the hierarchy that textbooks teach. They reproduce the paradox that material lies erode consent less than lies about a transaction's essence. And they track lay contract formalism, judging hidden fees more enforceable than fair.
For two centuries, scholars have debated whether the reasonable person is empirical or normative, majoritarian or aspirational. But much of this debate assumed a constraint that no longer holds: that lay judgments are expensive to surface, slow to collect,and unavailable at scale. Generative reasonable people loosen that constraint. They offer judges empirical checks on elite intuition, give resource-constrained litigants access to simulated jury feedback, and let regulators pilot-test public comprehensio,nall at a fraction of survey costs. The reasonable person standard has long functioned as a vessel for judicial intuition precisely because the empirical baseline was missing. With that baseline now available, departures from lay understanding become transaprent rather than hidden, a choice to be justified, not a fact to be assumed. Properly cabined, the generative reasonable person may become a dictionary for reasonableness judgments.



Professor of Law, University of Alabama, School of Law, Director AI Legal Studies. I

am grateful for the valuable feedback and insights provided by J. Shahar Dillbary, Niva E-lKkoinren, Andres

Swaicki, David A. Hoffman, Christopher Brett Jaeger, Ben McMichael, Peter N. Salib, Roseanna Sommers,

Kevin Tobia, Andrew Coan,and Matthew Tokson. This work also benefitefdrom comments byparticipants

in the NYU Empirical Contracts Workshop, Tel Aviv University Law & Tech Semina,rand faculty workshops

in Miami and Arizona Law. Justin Heydt and Andrew Robitaille provided important research assistance. Any

errors are my own.

ARBEL, THE GENERATIVE REASONABLE PERSON

2/51

I NTRODUCTION
In the contractschestnutLeonard v. Pepsico, thecase hinged on a single question: how woulpdeoplereasonably interprettaelevisionad offering prizes for Pepsi points, among them a fighter j?e1Jtudge Woodemerged fromher chambers with an answer: “no reasonable, objective person,” she wrote, “ would have understood the commercial to be an off.”e2r With that, she dismissedthe claim.
The case always stirs some controversy in the classroom. Bsuktyaourself not whether youagree withher decision, but rather what toolsdid the law give judges, alone in chambers, to read into the minds of the teenagers Peps’is ad targeted?Intuitive judgments are hard.Judges are rarely the target audience for the messages they are asked to interpret, anddevelopmental psychology and neuroscience suggest that adolescents are especially sensitive to s-oecvialuative and reward cues found in advertising . 3 Yet for centuries, determinations of reasonable interpretations havedemanded exactly this mind-reading. Critics charge that such unguided standardsrisk realizing legal realists’ greatest fear: a vessel for judicial bias masquerading as common se4nse.
For two centuries, we have lacked a cheap, scalable, empirical method for making lay reasonableness judgments legible to legal institut.i5oJnusry trials were designed to channel community standards, but they suffer from selection effects,
1Leonard v. PepsiCo, Inc., 88 F. Supp. 2d 116, 127 (S.D.N.Y. 1999), aff'd, 210 F.3d 88 (2d Cir. 2K0e0i0th).A. Rowley, You Asked for It, You Got It ... Toy Yoda: Practical Jokes, Prizes, and Contract Law, 3NEV. L.J. 526, 536 (2003) (finding that the case features in eight out of 15 sampled textbooks).
2 Id. at 131.
3See, e.g.,Laurence Steinberg,A Social Neuroscience Perspective on Adolescent R-iTskaking , 28D EV. R EV. 78, 79–86, 96–100 (2008); Sara-hJayne Blakemore,The Social Brain in Adolescence, 9 NAT . R EV. NEUROSCI . 267, 267–72 (2008) (reviewing developmental changes in soc-iaclognitive processing, including how social cues and social information are interpreted during adolescence); Peter H. Wright, Marian Friestad & David M. Boush, The Development of Marketplace Persuasion Knowledge in Children, Adolescents, and Young Adults, 24 J. PUB. POL ’Y & MKTG . 222, 222–27 (2005.)The FTC, for instance, consistently emphasizes that advertising to specific age groups should be evaluated based on different standards. See FTC Policy Statement on Deception, (Oct, 13 1983) (“When representations or sales practices are targetedcitfoicaauspdeience, such as children, the elderly, or the terminally ill, the Commission determines the effect of the practice on a reasonable member of that group.”); FTC, Guides Concerning the Use of Endorsements and Testimonials in Advertising, 87 Fed. Reg4. 4,288 (July 26, 2022) (request for comment) (“The Commission recognizes that it is difficult for children– especially younger children– to discern ads from entertainment.”)
4 The critical literature is vastS.ee e.g.,Leonardo J. B. Amorim,Reasonable Interpretation: A Radical Legal Realist Critique, 33INT 'L J. SEMIOT . L. 1043, 1056 (2020), (“radical realism allows the observer to notice that the appeal to “reasonability” functions as a joker in legal argumentation, a token allowing the interpreter and the public to cope with unconscious prejudgements, biases and exteprrneaslsures.”;)David Zaring, Rule by Reasonablene,s6s3ADMIN .L. R EV. 525, 552 (2011) (noting that “One strong critique of reasonableness review in administrative law is that it would allow judges to enact their political preferences); MAYO MORAN , R ETHINKING THE R EASONABLE PERSON : AN EGALITARIAN R ECONSTRUCTION OF THE OBJECTIVE STANDARD , 16-17 (2003)(“unsurprisingly, the reasonable person often turns out to bear a rather suspicious similarity to the judge.”); Jeffrey M. Hayes,oTRecuse or to Refuse: Se-lJfudging and the Reasonable Person Problem33, J. L EGAL PROF . 85, 88 (2008) (arguing that judges make determinations “with a concept of “reason” that is uniquely shaped by their own environment, which means that in practice th-ecsaolled objective reasonable person standard collapses into subjectivity.”); Audrey LC.erfoglio, Emily M. Petrie, Monica K. Miller, Is "Reasonable" Reasonable? A Content Analysis on Judges' Perceptions of the "Reasonable Person' St,a5n7dard UIC L. R EV. 743, 747 (2024) (emphasizing int-ejrudge variability due to differences life experienceSse)e; also Ain Simpson, Mark D. Alicke, Ellen Gordon & David Rose, The Reasonably Prudent Person, or Me?5,0J. APPLIED SOC . PSYCHOL . 313 (2020) (Finding that people rely more heavily on their own projected behavior than on "reasonably prudent person" standards when judging others' harmful actLiaownsr)e;nce Solan, Terri Rosenblatt & Daniel Osherson, Essay,False Consensus Bias in Contract Interpretatio,n108C OLUM . L. R EV. 1268, 1269 (2008)
5 Both statutory and constitutional analysis are beyond the scope of the analysis here, but it is worth noting the growing jurisprudential import of “ordinary” meaninSge. e Bostock v. Clayton Cnty., 140 S. Ct. 1731, 1738 (2020). See also Jesse M. Cross, The Fair Notice Fiction, 75 Ala. L. Rev. 487, 488 -9 (2023) (“the Court increasingly would prioritize a single concern: the original public meaning of statutes”)

ARBEL, THE GENERATIVE REASONABLE PERSON

3/51

adversarial distortion, and inaccessibility for most disput6eSsu. rveys can measure
public perception, but they are costly, manipulable, slow, and remain underutilized.7 Mock juries and jury consultants are available only to wealthy litigants. 8 Some have responded by declaring the reasonable person a purely normative construct9, untethered from empiricalreality. But it is worth asking
how much of this is principled jurisprudence and how much icsoping with our lack of tools. 10At the end, in most cases all we haivsejudicial intuition, educated

6 Shamena Anwar, Patrick Bayer, & Randi Hjalmarsson,The Impact of Jury Race in Criminal Trials , 127

Q. J. ECON . 1017 (2012). The need for surveys was highlighted by Chief Justice Roberts’ comments during oral

argument in a statutory interpretation case: "[O]ur objective is to settle upon the most natural meaning of

the statutory language to an ordinary speaker nogf lEish, right? . . . So the most probably useful way of settling

all these questions would be to take a poll of 100 ordinary speakers of English and ask them what [the statute]

means, right?” Transcript of Oral Argument at 5-512, Facebook, Inc. v. Duguid1, 41 S. Ct. 1163 (2021) (No-. 19

511)C.ited in Kevin Tobia et. al.,Ordinary Meaning and Ordinary Peopl,e171U.PA. L. R EV. 365, 371 (2023).

7SeeOmri Ben-Shahar & Lior J. Strahilevitz,Interpreting Contracts via Surveys and Experimen,t9s2 N.Y.U.

L. Rev. 1753 (201. 7Se) e alsoThomas R. Lee & Stephen C. MouritsenJ,udging Ordinary Meaning, 127YALE L.J.

788 (2018). By one estimate, each survey costs the federal government $65,000, Federal Trade Commission,

Public Comment on Methodology and Research Design for Conducting a Study of the Effects of Credit Scores

and Credit-Based Insurance Scores on Availability and Affordability of Financial Products, 69 FED . R EG .

34,167 (June 18, 2004). Under the Paperwork Reduction Act, federal agencies must obtain approval from the

Office of Management and Budget (OMB) before collecting information from ten or more non -federal

persons, a process that requires internal agencyvireew, certification, and a 60-day public comment period,

often resulting in significant delays (44 U.S.C. §§ 3502(3), -33550067)S. ee alsoGisselle Bourns, Jennifer Nou &

Stuart Shapiro,Improving the Efficiency of the Paperwork Reduction A,cRtEG . R EV. (Oct. 30, 2018).

8 Industry estimates of costs range from a few thousand dollars for a minimalistic version to upward of

$50,000.SeeCasey Johnson,Focus Groups on a Shoestring Budge, tAitken, Aitken, & Cohn (Jul. 2, 2020),

https://www.aitkenlaw.com/fo-cgursoups-on-a-shoestring-budget ($8,000-$30,000); Merrie Pitera, What

Does a Mock Trial Cost, IMS (Sep. 30, 2021),https://imslegal.com/articles/w-hdaotes-a-mock-trial-cost (or

$10,000-$60,000); Andrew Guilford and Isabelle Ord,

Mocking Juries, 18 C AL . L IT . 1 (2005)

https://www.sheppardmullin.com/media/article/189_pub38(5“.apfdefw thousand dollars on statistical

information and jury consultation, or around $50,000 could be spent for a complete mock tr.ial.”)

9 Scholars debate whether the reasonable person standard is descriptive, prescriptive, or a hybrid of both.

The descriptive view treats reasonableness as reflecting actual societal norms. See In re Eastern Transp. Co.

(The T.J. Hooper), 60 F.2d 737, 740 (2dCir. 1932) (Hand, J.) (“In most cases reasonable prudence is in fact

common prudence; but strictly it is never its measure.”); Brian ShepparTdh,e Reasonableness Machin,e62

B.C. L. R EV. 2259, 2288 (2021) (discussing the “Average Conduct Conception” of reasonableness). The

prescriptive view argues that reasonableness is a normative ideal rather than an empirical observation. See

Gregory C. Keating, Reasonableness and Rationality in Negligence Theo,ry48 STAN . L. R EV. 311, 339 (1996)

(contending the standard embodies a community norm, not actual behavior); see aWls.oPAGE K EETON ET

AL ., PROSSER AND K EETON ON THE L AW OF T ORTS 175 (5th ed. 1984) (describing the reasonable person as “a

personification of a community ideal”). The hybrid approach recognizes both descriptive and prescriptive

elements. See Alan CalnanT, he Nature of Reasonablene,s1s05C ORNELL L. R EV. ONLINE 81, 83 (2020) (“Some

scholars say reasonableness is prescriptive, others say it reflects community values, and still others see it as a

mix of both.”); Kevin P. Tobia,How People Judge What Is Reasona,b7le0ALA .L. R EV. 293, 296 (2018) (arguing

reasonableness is “partly statistical and partly prescriptive”); Anita BernstTehine,Communities That Make

Standards of Care Possible, 77 C HI .-K ENT L. R EV. 735, 740 (2002) (noting the standard’s shifting balance

between objective and subjective approaches). Even in his otherwise strong critique of experimental

jurisprudence, Jimenez agrees that “some legal conce—ptssuch as reasonablenes—s invite or require the use

of lay understandings to determine at least part of their extension.” Felipe JimeSnoemz,e Doubts about Folk

Jurisprudence: The Case of Proximate CauseU, . C HI . L. R EV. ONLINE 1 (2021))

10 See Tobia, supra note 9, at 344 (highlighting the importance of understanding how ordinary people

generate reasonableness judgmentMs);arvin L. Astrada & Scott B. Astrada, Law, Continuity and Change:

Revisiting the Reasonable Person Within the Demographic, Sociocultural and Political Realities of the -Twenty

First Century , 14 R UTGERS J.L. & PUB. POL ’Y 200 (2017) (arguing that the rise in minority demographics

demands reassessment of the reasonable person standard); Francesco Parisi & Georg von Wangenheim,

Legislation and Countervailing Effects from Social Norm,sin EVOLUTION AND D ESIGN OF I NSTITUTIONS 25,

29–30 (Christian Schubert & Georg v. Wangenheim eds., 2006) ( summarizing empirical studies that show

that “[l]aws may more effectively influence behavioral outcomes when legal norms are aligned with the

existing social values”, whereas “[l]egitimaicsyundermined when the content of the law departs from social

norms”).

ARBEL, THE GENERATIVE REASONABLE PERSON

4/51

guessing by precisely the elitecsriticized for being most removed from ordinary life.11
This Article providessuch a tool.It develops a methodology for eliciting reasonableness judgments from large language mode(lsLLMs) , called “Silicon Randomized Controlled Trials ” (s-RCT) .12 The approach treats independent model sessions as experimental subjects, leveraging their statelessness to enable controlled comparisons that isolate lay reasoning patterns from doctrinal recall or model sycophancy. It uses this methodology to successfully replicate with LLMs the results of human subject experiments.
Across three replications involving over 10,000 simulated judgments, leading models have internalized lay reasoning patterns that diverge from legal doctrine. Like human subjects, models prioritize social conformity over costbenefit analysis when assessing negligence. They replicate the paradox that material deceptions, though judged morime pactful to their receipient,sare seen aslesscorrosive of consent than deceptions about a transaction's essential nature. And they track lay “contract formalism,” perceiving hidden fees as more enforceable than fair, with judgments closer to ordinary consumers than to elite legal professionals.
Another finding is that m odels identify what tends to matter to ordinary people better than how much each factor matters. The numerical assessments that models give canmplify some effects and compress otheTrhs.is and other limitations serve as the backbone for the recommendations the Article develops, alongside the call for future research and experimentation.
Understandingwhy these results hold is a question worth pausing on, particularly for those drawn to the psychology of human judgment. Humans make reasonableness judgments through deeply intuitive "syste-m1" processes, relying on mental schemas developed over a lifetime ofsocialization. 13These frameworks are as hard to articulate as explaining how to tie shoelaces or hit a baseball.14 While this makes them illegible to formal legal analysis and simple algorithms alike, they are, ironically, especially accessible to LLMs: industria-l grade pattern detectors trained on the same human discourse from which these schemas emerge.
The theoretical and practicalapplicationsof this research are broad.15 Judges can check intuitions against simulated demographics before ruling on what "ordinary consumers" would understand. Regulators can p-itleostt whether

11See Koehn v. Delta Outsource Grp., Inc., 939 F.3d 863, 865 (7th Cir. 2019) (“One could say that, because Koehn did not read her employment contract, she never understood the terms and therefore was unable to assent to them.”);See also Solan et al., supranote4 (linking “ordinary meaning” claims to projection bias).
12All code and data used in this study are publicly available for replication, analysis, and follow-up work:https://github.com/yonathanarbel/genera-triveeasonable-person
13Linda Hamilton Krieger, The Content of Our Categories: A Cognitive Bias Approach to Discrimination and Equal Employment Opportunity, 47 STAN . L. R EV. 1161, 1165, 1190 (1995) (introducing schema theory in legal contexts), building on David E. Rumelhart, Schemata and the Cognitive System, in 1H ANDBOOK OF SOCIAL C OGNITION 71 (1984).
14See e.g.C, heng, P.W. & Holyoak, K.J., Pragmatic Reasoning Schema, 1s7C OGN .PSYCHOL . 391 (1985); Kevin J. Heller,The Cognitive Psychology of Circumstantial Eviden,c1e05 Mich. L. Rev. 241 (2006). My use of schema here is more narrow than its meaning in some of the social psychology literature; in my use, the focus is on latent mental models that are abstractive, but may be nonetheless complex (and even inconsistoefnetv),en more complex social phenomena.
15 See C alnan, supra note 9, at 82 (“Reasonable legal minds agree that reasonableness is one of the foundational concepts of American law, infiltrating everything from administrative, corporate, and constitutional law to crimes, torts, and contracts.”).

ARBEL, THE GENERATIVE REASONABLE PERSON

5/51

proposed disclosures communicate effectively, at a fraction of survey costs1.6 Resource-constrained litigants gain access to rough proxies for mock juries previously available only to wealthy parties. In each case, the tool functions not as final arbiter but as empirical reference point: a dictionary for reasonableness that makes departures from lay understanding transparent rather than hidden.
The Article proceeds in four Parts. Part I explores the contested role and relevance of common reasonableness judgments in the adjudication of the reasonable personIt. presents recent advances brought about by the experimental jurisprudence literature.
Part II locates this investigation within the burgeoning “silicon sampling” literature in economics, sociology, and psychology, which studies the ability of LLMs to replicate survey results. 17Reviewing these developments, a recentSciencearticle arguedthat “LLMs might supplant human participants for data collection.”18 Though not without limitations , social scientists find the method attractive because it offers unique advantages in terms of cost, scale, and reproducibility, and may even reduce certain forms of bias compared to traditional approaches.
Part III is the empirical heart of the Article. It begins with a methodological puzzle: how can we test whether LLMs have truly internalized lay reasoning rather than merely memorized legal doctrinTeh?e problem is easy to overlook but difficult to solve . Models trained on vast legal corpora have encountered doctrinal definitions, case outcomes, and academic commentary. A model can recite the Hand formula or conclude that no reasonable person would view the Pepsi ad as serious, but this reveals nothing about whetherabitshoarbsed the schemas that actually drive human judgments. It is the difference between a student who memorizesthe answer key to an exam and one who learned the formulas.19Simply asking models to resolve cases or define reasonableness tests recall, not understanding.
The obvious remedy, presenting novel hypotheticals, introduces its own pathology. Models excel at detecting user intent and adjusting responses accordingly, a phenomenon researchers call "sycophanc2y0.I"f a prompt implies that two scenarios should be judged differently, the model may oblige regardless of its latent assessmenEt.ven presenting scenarios side by side cannot be trusted: the model can harmonize its answers to appear consistent. 21 Probing latent understanding requires controlling for both memorization and demand effects

16See Igor Grossmann et al.A, I and the Transformation of Social Science Researc,h380 Science 1108 (2023) (arguing LLM -based approaches can reduce cost and frictions of data collection while changing the research pipeline); Marko Sarstedt et aUl.,sing Large Language Models to Generate Silicon Samples in Consumer and Marketing Research: Challenges, Opportunities, and Guidelin, 4es1Psychol. & Mktg.21982 (2024) (discussing rapid, low-cost “silicon samples” as pretests, screeners, and iterative comprehension checks, with cautions)
17 SeeSarstedt et a.,l supra note16, https://onlinelibrary.wiley.com/doi/10.1002/mar.2. 1982 18 SeeGrossmann et a.l, supra note16. 19SeeRandall Balestriero, Jérôme Pesenti & Yann LeCunL,earning in High Dimension Always Amounts to Extrapolation, AR XIV (2021),https://arxiv.org/abs/2110.09; 4T8im5o Freiesleben & Thomas Grote, Beyond Generalization: A Theory of Robustness in Machine Learnin,g202SYNTHESE 109 (2023). 20 OpenAI, Sycophancy in GPT -4O: What Happened and What We’re Doing About It, https://openai.com/index/sycopha-nincy-gpt-4o/(Apr. 29, 2025) 21See OpenAI,Sycophancy in GPT-4o: What Happened and What We’re Doing About It (Apr. 29, 2025) (discussing “sycophancy” and contex-tdriven alignment with perceived user intent); Ricardo Domingue-z Olmedo, Moritz Hardt & Celestine Mendler-Dünner, Questioning the Survey Responses of Large Language Models, in NeurIPS 37 (2024) (showing sensitivity to question framing and prompt choices that can distort “survey-like” outputs); James Bisbee et al.S,ynthetic Replacements for Human Survey Data? The Perils of Large Language Models, Political Analysis (2024) (documenting instability and prompt dependence that undermines naïve survey substitution)

ARBEL, THE GENERATIVE REASONABLE PERSON

6/51

simultaneously. Yet the standard tools for doing so in human research, random assignment and between-subjects comparison, seem unavailable when the "subject" is a single model that remembers what it said moments ago.
The key is to exploit a feature of LLM architecture usually viewed as a limitation: statelessne.ss22 When accessed through APIs rather than chat interfaces, each model session begins fresh with no memory of prior interactions. This transforms thousands of independent sessions into thousands of independent experimental subjects. Randomly assign conditioancsross sessions, and the model cannot harmonize, because no session knows what another session said. Present scenarios unlikely to appear in training data, and memorization cannot help. The result is Silicon Randomized Controlled Trials (S-RCTs): the methodological gold standardof social scienc,e23 adapted for AI. Part III develops this approach and applies it to three replications of human -subject studies spanning negligence, consent, and contract interpretation.
Part IV explores practical implicationsG. enerative reasonablepeople do not replace judgment; they check it. Had Judge Wood consulted a silicon study in chambers, she might have reconsidered her confidence that teenagers would see the ad as mere jest . 24 She could still override the model on normative or prudential grounds, but the tool would surface what intuition obscured. In this sense, the LLM functions like a dictionary for reasonableness judgments, much as courts consult dictionaries to discern ordinary meaning. Regulators could pilot-test public understanding of disclosures at a fraction of survey costs. Resource-constrained litigants could access rough proxies for mock juries. Legal scholars could validate folk jurisprudence claims empirically. In e ach case, generative reasonablepeople function not as final arbiters but as empirical reference points: a starting place for inquiry rather than its conclusion.
This Article extends a research program exploring how generative AI can surface social facts relevant to adjudication. Prior work with David Hoffman examined whether models could illuminate patterns of language use in contract communities.25This Article asks a related but distinct question: whether models can approximate the reasonableness judgme—ntasbout negligence, consent, and contractual meaning—that legal standards invoke but rarely measure.
In the background of this Article, a larger conversation looms: should we let AI enter into the business of judging humans? Scholars have strong views on this question. 26 This Article will not resolve it, but it will clear the precondition for having it, clarifying the qualitative threshold that LLMs meet.

22 For user applications, some AI providers now provide a memory feature, but this is not enabled in the current experiments.
23 L AWRENCE M. FRIEDMAN , C URT D. FURBERG , AND D AVID L. D EMETS , FUNDAMENTALS OF C LINICAL T RIALS , at v.(4th ed, 2010)
24 See generallyYonathan A. Arbel & Shmuel I. Becher, Contracts in the Age of Smart Readers, 90 GEO . WASH.L. R EV. 83 (2022). (showing that large language models, working as “smart readers,” can translate legal texts to be accessible to teenagers and translate among cultural dividSeese.)also Heinrich Peters & Sandra Matz, Large Language Models Can Infer Psychological Dispositions of Social Media U,s3erPsNAS Nexus e231 (2024), https://doi.org/10.1093/pnasnexus/p.g(afien2d3in1g that LLMs are especially capable of inferring psychological traits of younger individuals from their social media posts).
25On the use of LLMs as tools of interpretation, see Yonathan A. Arbel & David A. HoffmanG, enerative Interpretation, 99 N.Y.U. L. R EV. 451 (2024), recently discussed and adopted inSnell v. United Specialty Insurance Co., 102 F.4th 1208 (11th Cir. 2024)
26 SeeKiel Brennan-Marquez and Stephen HendersoAnr,tificial Intelligence and Role-Reversible Judgmen,t 109J. C RIM . L. & C RIMINOLOGY 137 (1019) (arguing that, independent of quality of decision, algorithms should not be in charge of adjudication based on —I believe—a quaint theory of role -reversibility as precondition to adjudication).

ARBEL, THE GENERATIVE REASONABLE PERSON

7/51

It also underscores the urgency ohf aving it now, before practical compromises would force u.sAt the very least, the Article argues that, properly used, LLMs offer a sufficiently reliable improvement over current methods to justify careful integration into legal practice.

ARBEL, THE GENERATIVE REASONABLE PERSON

8/51

1. FOLK OPINIONS AND THE L AW
How much should the law account for lay perceptions of reasonableness? The law has a basic duality. Judged by its mode of production, the law is clearly a formal, technocratic, and in some sense elitist enterpri2s7eI.t relies on a cadre of professional—s judges, legislators, regulato—rsto mediate its operatio.nIt follows specific rules that help shape its meaning, internal coherence, administration, and effectiveness. All of this involves jargon, terms of art, and specialized language:noscitur a sociis, habeas corpus, proximate ca.uOsen occasion, the law also cooptscommon terms such acsontract, tangible2,8 or fish.29
Yet to reduce law tothe sausage-making formalities of its production would distract from its practical ability to govern individuals that neither speak Latin nor particularly care about Hand’s formula. That is,hte law is also a social phenomenon, and it aims to speak in the language of the governed30.It is this social aspect that motivates many scholarly and reform proposals that push against the specialized language of the law.
Consider a few scholarly conversationtshat tap ordinary opinions. The technocraticplain language movement, the largest consumer reform movement of our generation, sought to rewrite the language of the law to match the common vernacula.r31A more scholarlyenterprise, thefolk jurisprudence proje,ct seeks to map the lay understanding of legal concepts and measure the divergence of lay and lawyerly understanding. 32 Likewise, a central method of legal interpretation, “ordinary meaning ” analysis, hews closely to lay usage of language.33Trends in criminal justice, perhaps most perniciously penal populism, seek to adjust sanctions to folk sense of desert and punishm34eInnt.contrast, the recent “lived experience” scholarship attempts to surface lay experiences of marginalized people into the study of the la3w5 .
The commitment to lay perceptions transcends the pragmatic and informs jurisprudence itselfF.or H.L.A Hart, lay intuitions form jurisprudence’s essence“:a general theory of law is just an attempt to elucidate the folk concept of law.”36Joseph Raz would later trace this lineage, arguing jurisprudence s“eoeukrs ordinary concept of law”— not as scholarsdefine it, but as bus drivers and IT
27 This is, in essence, the Hartian view of legal norms under the rule of recognition. For a fuller treatment, see Felipe JimenezL,egal Principles, Law, and Tradition, 33YALE J. L. & H UMAN. 59 (2020).
28C.R.S.A § 39-26-102 (2022) 15(b.5(I) (“"Tangible personal property" includes digital goods”). 29 See Yates v. United States, 574 U.S. 528 (2015) (discussing whether fish is a “tangible good” for purposes of section 1519 of the Sarba-nOexsley Act of 2002). 30T HE D ECLARATION OF INDEPENDENCE para. 2 (U.S. 1776) (“[T]o secure these rights, Governments are instituted among Men, deriving their just powers from ctohnesent of the governe”d). In an insightful article, Anya Bernstein argues against a narrow language of the governed view which she positions within an Austinian language-as-command jurisprudence, and suggests that the audiences of legal language are often government agencies. Anya Bernstein, Legal Corpus Linguistics and the Half -Empirical Attitude , 106 C ORNELL L. R EV. 1397, 1435 (2021). 31SeeYonathan A. Arbel,The Readability of Contracts: Big Data Analysis, SSRN. 32See generallyKevin Tobia, Experimental Jurisprudence, 89U.C HI . L. R EV. 735 (2022) 33 See e.g., Oliver Wendell Holmes, The Theory of Legal Interpretation , 12 H ARV . L. R EV. 417, 417 (1899)(“[W]e ask, not what this man meant, but what those words would mean in the mouth of a normal speaker of English...”); Richard S. Kay, Original Intention and Public Meaning in Constitutional Interpretation, 103NW. U. L. R EV. 703,719(2009) (“By definition, the public meaning of a rule is the one apparent to a competent speaker of the language from a mere inspection of the text.”). 34 SeeJocelyn Simonson,Police Reform Through a Power Len,s130YALE L.J. 778, 850 (2021). 35SeeRachel López, Participatory Law Scholarship, 123C OLUM . L. R EV. 1795 (2023). 36SeeBrian Leiter & Alex Langlinais, The Methodology of Legal Philosop,hiny T HE OXFORD H ANDBOOK OF PHILOSOPHICAL METHODOLOGY 467 (Herman Cappelen, Tamar Gendler & John Hawthorne eds., Oxford Univ. Press 2016. )

ARBEL, THE GENERATIVE REASONABLE PERSON

9/51

professionalslive it.37Other scholars may espouse a more elitist or technocratic view of the law, but almost all agree that the law should be mindful of, if not always reducible to, lay attitude38s.
The evolution of the reasonable person concept in tort is illuminating. Making its debut appearance in 1837, the reasonable person was first conceived of as a“a man of ordinary prudenc”e3.9According to Rabin, that idea of fault in tort law was originally tied “to community expectations of reasonable behavior, rather than to the economist's perception of rational behavior. ” 40 That is, negligence standards were originally construed as anchored in empirical facts, in particular, exogenously determined community norm41s.It will not be until the Twentieth century that judges like Learned Hand would take a decidedly normative approach:
[I]n most cases reasonable prudence is in fact common prudence; but strictly it is never its measure. ... Courts must in the end say what is required; there are precautions so imperative that even their universal disregard will not excuse their omissio42n.
Today, these debates are still ongoing, with some taking a descriptive view, others prescriptive, and yet others, some hybrid of the 4t3wBou.t regardless of jurisprudential commitments, the concept of reasonablenessis never more than one degreeof separation from lay opinions4.4 This is for a combination of descriptive, pragmatic, and normativreasons. The firstreasonis reflective: when we know what lay people truly think, we gain a better understanding of what legal concepts mean4.5 The second is effectiveness: if the law sets to direct behavior, it should speak in the language of the governed, or at least be attuned to how it is being heard. This is part of the animus of the ordinary meaning interpretive theory.46 The third is legitimacy: for people to trust the law, they should be able to understand it.47 This is closely related to participatory arguments, about the public’s role in shaping their lives. The fourth is political. If the publiics to set a check on the operation of the legal systemit,is important that it understand its laws, commands, and boundarie.4s8
37SeeJOSEPH R AZ , PRACTICAL R EASON AND NORMS 164 (2d ed. 1999C)i.ted in Jimenez, supra note9 38 See Jimenez, supranote9. 39Vaughn v. Menlove (1837) 132 ER 490 (CP). 40 See Robert L. Rabin, The Historical Development of the Fault Principle: A Reinterpretation, 15GA . L. R EV. 925, 931 (1981) 41For an articulation of the positivist view,seeAlan D. Miller & Ronen Perry, The Reasonable Perso,n87 N.Y.U.L. R EV. 323, 37-02 (2012). 42 The T.J. Hooper, 60 F.2d 737, 740 (1932) at 740. 43 Lucien Baumgartner & Markus Kneer, The Meaning of “Reasonable”: Evidence From a Corpus Linguistic Study 1–2 (Aug. 29, 2023), https://ssrn.com/abstract=4555547; Benjamin C. Zipursky, Reasonableness in and out of Negligence Law, 163 U. Pa. L. Rev. 21310, (2210515) (proposing a hybrid view). 44 See also Baumgartner & Kneer, suprnaote43, at 4 (“there are grounds for (considerable) correspondence between the lay concept of reasonableness and its legal equivalent”). 45 See Tobia, supra note 32, at 750 (Presenting “the “fol-klaw thesis.” . . . this account would predict that the legal concept of causation reflects features of the ordinary concept of causation and that the legal concept of consent reflects features of the ordinary concept ofsceonnt.”). 46 See Tobia et al., supra note 6, at 372 (noting the motivations behind modern textualism include “concern for democracy, fair notice, or rule of law values, or objective inquiry into meaning”). 47 TOM T YLER , WHY D O PEOPLE OBEY THE L AW (2006) at 7 (if people “regard legal authorities as more legitimate, they are less likely to break any laws . . . A normative perspective leads to a focus on people’s internalized norms of justice and obligation. It suggests the need to explore what citizens think and to understand their values”) 48 Jason M. Solomon,The Political Puzzle of the Civil L Jury , 61EMORY L.J. 1331, 1340 (2012) (“Historically, the civil jury in the United States, like the criminal jury, was justified in large part as a check against the abuse of government power.”

ARBEL, THE GENERATIVE REASONABLE PERSON

10/51

There is also the more Hayekian reason .49 Disperse individuals have access to information not available to the central planner. Lived experience and peer-to-peer interactions produce perspectives and knowledge that arlegnibolte to either well-meaning policymakers or well-read scholars. Aggregating this information leveragesthe wisdom of the crowdsp,otentially creating judgments more accurate thanthat ofany specific individual5.0
Thus, it may be the case that the more modern tort view is that the reasonable person is essentially normative creation,a man fashioned in the judge’s image.51Yet, even if we are all realists nowa,nd even if we all understand nowthe reasonable person as a normative const,ruitcits still incumbentuponon us to reflect on how thatjudicial personrelates to actual peopleT.he descriptive neednot determine the normativ;ebut it caninform it.52
But this conclusion presents the challenge: how can the State make ordinary opinions legible to itself?53How can the law discover what lay people think? And in a democracy, wherethe people rul,ehow dowe know what people think?

49 Friedrich A. Hayek, The Use of Knowledge in Society, 35AM. ECON . R EV. 519 (1945) (“The knowledge of the circumstances of which we must make use never exists in concentrated or integrated form, but solely as the dispersed bits of incomplete and frequently contradictory knowledge which all the separate individuals possess.”).
50 A recent prediction competition is illustrative of this phenomenon. Asked to predict multiple future events, the average participant (N=3,300) ranked slightly worse than chance. The average aggregate prediction, however, ranked at the t9h5percentile of all participants. https://www.astralcodexten.com/p- /who predicted- 2023.
51See e.g., Mayo Moran,The Reasonable Person: A Conceptual Biography in Comparative Perspecti,ve14 L EWIS & C LARK L. R EV. 1234, 1236 (2010) (“both in the context of the law of negligence and in the criminal context, the objective content of the reasonable person is closely linked to standards of ordinariness or normalcy”).
52ee Brian Z. TamanahaB, eyond the Formalis-tRealist Divide: The Role of Politics in Judgin(g2010) (arguing realism’s insights have become part of mainstream judging debates); Brian LeiLterg,al Realism and Legal Positivism Reconsidere,d111Ethics 278 (2001) (describing realism’s enduring influence on contemporary legal theory)
53On legibility as a central goal of the state, seJAeMES C. SCOTT , SEEING LIKE A STATE (1998)

ARBEL, THE GENERATIVE REASONABLE PERSON

11/51

2. GENERATIVE PEOPLE IN T HEORY AND THE SOCIAL SCIENCES
LLMs are, at core, industrial -grade pattern recognizers.54 The idea behind generativereasonable people is that, because of this, they might also pick up on the subtle, complex, and perhaps even-csoenlftradictory patterns that drive the everyday judgments of individuals on matters of reasonable.5n5ess
This claim may seem ambitious at first. Legal scholars are already familiar with the effectiveness of statistical models to predict case outc5o6mFoers. instance, even though Supreme Court cases are involved and compleax,single factor—political affiliation of the Justice’s nominating Presiden—t will be very predictive of outcomes in political case.5s7The literature on structural bias also shows that raceand socioeconomic status alshoold predictive power, even if they really should not. 58 Similarly, machine learning models excel at predicting consumer behavior in advertising and fraud detection. 59 Yet, predicting reasonableness judgmen,tswhich appear soclosely related toethical and social judgments, mayseemqualitatively different. Why should we expect generative AI models to achieve even modest predictive accuracy on nuanced questions of reasonableness?
This Part offers the theoretical and empirical background necessary to assess this possibility. The first section explores how modern LL’Masrchitecture and emergent capabilitie,ssuch as attention mechanisms, roleplaying abilities, and generalization, make them potentially suitable for simulating ordinary people's judgments. These same architectural features, however, also introduce systematic limitations: a majoritarian bent that may marginalize minority perspectives, susceptibility to bias amplificoant,iand “value drift” as social norms evolve beyond the models' training data. The second section reviews empirical evidence from the burgeoning “silicon sampling ” literature in psychology, economics, and sociology, which demonstrates that LLMs can replicate human survey responses across diverse domains with surprising fidelity. Taken together, these developments suggest cautious optimisgme:nerativereasonable people are theoretically plausible and empirically promising, but their deployment demands

54 For more on the distinction between simulation and prediction, see Yonathan A. ATrbimele, & Contract

Interpretation: Lessons from Machine Learnin,gin R ESEARCH H ANDBOOK ON L AW AND T IME (Frank Fagan

& Saul Levmore eds., forthcoming 2024).

55This fallacy, that AI analysis constitutes a form of judgment rather than pattern recognition, has led to

some confused commentary that this Article decidedly avoids. See Brennan-Marquez & Henderson,

Artificial Intelligence and Role-Reversible Judgmen,t109J. C RIM . L. & C RIMINOLOGY ARt. 1 (2019).

56See, e.g.,Theodore W. Ruger et al.T,he Supreme Court Forecasting Project: Legal

and Political Science Approaches to predicting Supreme Court Decision Mak,in1g04C OLUM . L. R EV., 115–0

1210 (2004) (predicting, with 76% accuracy, case outcomes based on sparse factors). Kimo Gandall, Chris

Haley, Juliana Chhouk, Logan Knight, Alex Wang, and Bella DeMarco,

Predicting Precedent: A

Psycholinguistic Artificial Intelligence in the Supreme Cou,r1t4 220 (2023) (offering a modest improvement,

but at the cost of a complex model).

57SeeJeffrey A. Segal & Alan J. Champlin,The Attitudinal Model, in R OUTLEDGE H ANDBOOK OF JUDICIAL

BEHAVIOR 29 (2017) (“The attitudinal model is the most dominant model for understanding the Supreme

Court’s decisions on the merits. In fact, for the eight justices currently on the Court prior to the 2016

term, the correlation between their ideologaynd their voting behavior on the Court is a .94”).

58U.S. Sentencing Comm’n,Demographic Differences in Federal Sentencing: An Update to the 2012 Booker

Report(2023) (finding Black male offenders receive on average 13.4% longer sentences than comparable White

males); Will Dobbie, Jacob Goldin & Crystal S. YangT, he Effects of Pretrial Detention on Conviction, Future

Crime, and Employment, 108AM. ECON . R EV. 201, 20–304 (2018) (causal evidence that inability to pay bail

increases conviction probability and worsens outcomes).

59SeeJohn Ford et al.,AI Advertising: An Overview and Guidelines, J. BUS. R SCH . 166(2023).

ARBEL, THE GENERATIVE REASONABLE PERSON

12/51

careful attention to their inherent limitations. As to whether generative reasonable people work in practiciseaddressed empirically in the next Pa6rt0.
1. Generative AI andSilicon Jurors: Emergent Capabilities
The foundation ofgenerative reasonablpeeople lies in the sophisticated architecture of modern artificial intelligence systems, particularly in the realm of natural language processing61.Four key capabilitiesmake them suitable for the task of modeling reasonableness judgemen:tasttention mechanisms, emergent roleplayingcapabilities, generalizationabilities, and their “majoritarian bent”.62
Current generative AI architectures, including those fit for generative reasonable people, rely on autoregressive mod63eTlsh.ese models generate output sequentially, with each token(roughly, a word)conditioned on those previously generated6.4 During training, the models are fed large volumes of data—more text than any human can read in a lifetim—e and are tasked with predicting the next token in a sequence of words. The model learns by minimizing prediction errors, gradually improving its ability to anticipate what comes next in human language.
The true breakthrough that catapulted language models to their current capabilities was the introduction of the transformer architectu65rAe.t its heart is the attention mechanism, which allows the model to dynamically weigh the importance of different parts of the input. 66 In this architecture, the values assigned to the vector representation of each token are adjusted based on contextual relationships. A token like “sea” would be described by various numbers, indicating its relationship to concepts like water, ships, and Poseidon. These numbers adjust based on context: desalination, circumnavigation, or Odysseus' travails.
The importance of this becomes apparent when we consider the word 'bank.' On its own, it is ambiguous: a financial institution or the side of a river? But when humans see a sentence like“Frank needed money so he went to the bank”, they immediately adjust their understanding of the word based on context. So does the model; the attention mechanism shifts the meaning of “bank” towards financial institution when it encounters the word 'money' in this sentence. Just as a judge might focus on key elements oaf saecwhile considering the broader context, AI attention mechanisms allow models to prioritize relevant information when making judgments - crucial for assessing reasonableness in complex legal scenarios.
One of the most fascinating aspects of these models is theiremergent capabilities. An emergent property is one that appears only at a given level of

60 See infra Part III.

61At this point, there is no dearth of introductory materials at different levels of technical expertise. For an

overview of the rapid improvements in the field, sAejei Supriyono, Aji Prasetya Wibawa, Suyono & Fachrul

Kurniawan,Advancements in Natural Language Processing: Implications, Challenges, and Future Direc,tions

16T ELEMAT . & INFORMAT . R EP. 100173 (2024)

62 Yonathan A. Arbel & David A. Hoffman, Generative Interpretation, 99 N.Y.U. L. Rev. 451, –48736 (2024).

63For an introduction geared towards lawyerse, e Arbel & Hoffman, supra note62, at 476–83.

64 tokens are commonly appearing word subparts, such as ‘th’ in English . A helpful list of all the 100,00

tokens used by GPT

-4 can be found here:

https://gist.github.com-/ms acke/ae83f6afb89794350f8d9a1ad8a09193.

65SeeAshish Vaswani et al.A, ttention Is All You Need, arXiv:1706.03762 (2017).

66 The earlier models did not use attention mechanisms, but given the dominance of transformers today, I

focus on them.

ARBEL, THE GENERATIVE REASONABLE PERSON

13/51

complexity.67 The ability to roleplay character is an emergent property and modern models perform well on this task.68 No programmer explicitly coded rules for this behavior- rather, roleplaying emerges naturally from the system's fundamental function of nex-ttoken prediction. If a sentence mentions that the speaker is Chris Tarrant, the probability shifts toward predictni g “Is that your final answer” as the next phrase. Context affects prediction, and identity informs context.69
Roleplaying is crucial for generativereasonable people. This capability allows models to produce responses that cohere with broad patterns of reasoning among common people and shift from “expert” mode to layperson mode. It instructs the model to move from its default“,helpful assistan”t voice, to more realistic depictions of ordinary people70. This transition is essential if we seek a non-elitist notion of reasonableness, as models have internalized both expert and lay patterns of reasoning.
Generalization is another crucial emergent property of these systems. A model like LLaMA -3 has 70 billion parameters but it is trained on 15 trillion tokens.71The ratio is one parameter for every 214 tokens. This means that rote memorization of all the data the model sees during training is impossible. Instead, the model must learn to compress the information by generalizing the patterns it sees. This is similar to how humans learn abstract rules rather than memorizing the details of every specific instance. We might not remember each cat we have seen, but we learn to identify them by generalizing the concept of a cat from its specific instances. In other wordsw, e develop a model o“fcatness”, and while we will be hard-pressed to articulate it, it allows us to quickly and efficiently identify cats even in novel situation72s.
Generalization is vital for generativereasonable people because many questions will involve scenarios different from those in the training data. The hope is that models have generalized ideas about reasonableness rather than simply memorizing specific instances when an act was deemed reasonalbe or unreasonable7.3While generalization is necessary, it doesn't guarantee suc-ceitss may be superficial, crude, or mistaken. What matters is that AI models can develop complex internal models beyond simple pattern recognition.
Even though generalization may be necessary to the task at hand, it doesn’t guarantee success. Generalization may also be superficial (overfitting),

67 See Yonathan A. Arbel, Reputation Failure: The Limits of Market Discipline in Consumer Markets, 54

WAKE FOREST L. R EV. 1239, 1252 n. 64 (2019).

68 SeeZekun Moore Wang et al.R, oleLLM: Benchmarking, Eliciting, and Enhancing Role-Playing Abilities

of Large Language Mode,lsAR XIV preprint (2024)h, ttps://arxiv.org/abs/2310.00(7“4S6tate-of-the-art (SOTA)

LLMs like GPT -4 . . . exhibit advanced ro-leplaying capabilities”); Keming Lu et al.L,arge Language Models

are Superpositions of All Characters: Attaining Arbitrary Role -play via Self -Alignment, arXiv preprint

(2024), https://arxiv.org/abs/2401.124(7“4GPT -4 has already demonstrated outstanding role -playing

abilities”); Jiangjie Chen et al.F,rom Persona to Personalization: A Survey on R-oPlelaying Language Agent,s

AR XIV preprint (2024),https://arxiv.org/abs/2404.18(2“3P1ersonas are inherent in LLMs, and role-playing

them capitalizes on the statistical stereotypes in LLMs”).

69 Another technical aspect that contributes to the success of roleplaying activities is instru-ctuionning of

models, which improves their ability to stay in characteSre. e Chen et al., supranote68.

70 See Lu et al., supra note 68 (positing that roleplaying arises from a combination of training data and

in-context learning).

71SeeMeta,Introducing Meta Llama 3: The Most Capable Openly Available LLM to Date, Meta AI (Apr.

18, 2024), https://ai.meta.com/blog/m-lelatma a-3/.

72 Reddit, "r/CatsInWeirdPlaces," https://www.reddit.com/r/CatsInWeirdPlaces/.

73The phenomenon of generalization is also known as “grokking” and the study of the points in training

where models “grok” new concepts is an active area of research. See e.g., Hu Qiye, Zhou Hao & Yu RuoXi,

Exploring Grokking: Experimental and Mechanistic Investigations

, AR XIV:2412.10898(2024),

https://arxiv.org/abs/2412.10. 898

ARBEL, THE GENERATIVE REASONABLE PERSON

14/51

crude (underfitting), or simply mistaken. This means that we would want to test both the existence of a generalized modealnd its adequacy. But the key for now is to understand that AI models can learn more than simple patterns in data, and they can develop internal models that are more complex. (in fact, many complaints about algorithmic black boxes show that these internal molds emay be too complex).
A final intriguing characteristic is what we might term their “majoritarian bent.” 74 Models favor broader patterns over narrower ones, manifesting as a pro-majority bias. This arises from two factors: the statistical nature of next-token prediction inherently favors common patterns, and po-st training adaptations like Reinforcement Learnin g from Human Feedback further align models with general human preferences. This majoritarian tendency makes these models w-eslul ited for simulating the“reasonable perso”n standard, as they naturally gravitate toward common opinions and wid-ehlyeld beliefs7. 5
While the majoritarian bent is essential to the utility of generative reasonablepeople, it also pointso the limits of this techniqueT.he models mirror aggregated human knowledge and biases, including problematic on7e6 Isn. legal contexts, they may struggle with cases requiring consideration of diverse or minority perspective-s a concern highlighted by critical scholars. Feminist legal theorists have exposed how the supposedly neu“treaal sonable perso”nhas often been the “reasonable man” in practice, with majoritarian defaults imposing asymmetric standards that present majority experiences as the natural bas7e7line. Generative reasonablpeeople may well replicate such patter7n8s.
Two other limitations deserve emphasis. First, general models struggle to reliably simulate specific individuals - they face a “granularity problem.”79 While some applications attempt to emulate specific people through-ftiunneing and context learning,80 the effectiveness of such approaches remains unproven. Second, pretrained models have a limited “half-life” as social norms and perceptions change, creatin“gvalue drift” that makes older models incapable of reflecting societal evolution8.1
To summarize, there is a surprising but deep connection between modern AI architecture and generative reasonablepeople. These models can understand context, adopt various perspectives, generalize from examples, and reflect common social norms. However, they also have notable limitations

74 See Arbel & Hoffman, supra note 62.
75 Id.
76 See generallySandra G. Mayson,Bias In, Bias Out, 128YALE L.J. 2122(2019). 77 SeeSusan Dimock, Reasonable Women in the Law, 11.2C RIT . R EV. INT 'L SOC . & POL . PHIL . 153, 153 (2008) (“What counts as reasonable in these and many other areas of law is typically conceptualized against a ‘reasonable man’ . . . standard”). Dimock argues that eve-nlelvoewl er abstractions, like ‘reasonable woman’, are still o-vgeerneralized. 78 Psychometric analysis suggests that “LLMs exhibit a tendency toward Undifferentiated, with a slight inclination toward Masculinity.” Jen-tse Huang et al.,On the Humanity of Conversational AI: Evaluating the Psychological Portrayal of LLM,sin Proc. of the Int’l Conf. on Learning Representations (ICLR) (2024). 79 See Wang et al., supranote68. 80 For an excellent review of the literature studying the differences between parametric a-npdanraomn etric roleplaying, See Chen et al., supranote68, https://arxiv.org/abs/2404.1.8231 81A feature and a bug: having time frozen models can also be useful in depicting the attitudes of older generations. Perhaps some arguments about originalism could have been resolved had we had a powerful model trained on materials from that time.

ARBEL, THE GENERATIVE REASONABLE PERSON

15/51

regarding bias, individuality, and temporal relevanc-econsiderations that must inform their application to legal questions.
2. Silicon Sampling in Social Sciences
A growing body of research on“silicon sampling” demonstrates LLMs' ability to provide human-like responses across various domains of social science. It has led to some interesting discoveries on the power of AI to provide hum- an like feedback in various areas of the social sciencaensd adds to the plausibility of generativereasonable people82.
The evidence is striking. One study found that LLMs can generate moral judgments highly correlated (r=0.95) with human judgmen8t3sA. nother showed that on eleven sociological questions, LLM responses closely aligned with those of the general population.84 Early versions of ChatGPT successfully replicated multiple psychological studies8.5Another psychological study foundthat LLMs can persuasively assume big five personality traits such as extroversion or agreeablenes8s6.perhaps most impressively, a recent study found t“hCahtatGPT 4 exhibits behavioral and personality traits that are statistically indistinguishable from a random human from tens of thousands of human subjects from more than 50 countries”.87
LLMs even replicate human cognitive biases, bringing them closer to actual human judgment8.8 For example, one study found that LLMs can recreate classic findings in economics and psychology, such as the ultimatum game and the Milgram obedience experiment8.9 Interestingly, models sometimes display more ethical behavior than human-sshowing less selfishness and greater fairness toward out-group members, raising questions about whether we want perfect mimesis or idealized behavio9r0.
The roleplaying capabilities of LLMs offer particularly promising applications for legal analysis. Models can be prompted to respond as reasonable persons from various demographic backgrounds or even to simulate the

82See e.g.,See Sarstedt et al., supranote16. 83See Danica Dillion, Niket Tandon, Yuling Gu & Kurt Gray, Can AI Language Models Replace Human Participants?28 T RENDS C OGN . SCI . 597 (2023). In hindsight, it is not entirely surprising because these methods are trained to mimic human moral judgments using RLHF and similar techniques. 84 See James Bisbee et al.S,ynthetic Replacements for Human Survey Data? The Perils of Large Language Models, in Political Analysis (Published online 2024:1-16.) doi:10.1017/pan.2024.5 The researchers find low accuracy regarding the distribution of synthetic opinions, a point we revisit later. 85 See Peter S. Park et al. Diminished diversity‑of‑thought in a standard large language model , arXiv:2207.07051 (2023). 86 SeeHang Jiang, Xiajie Zhang, Xubo Cao, Cynthia Breazeal, & Jad Kabbara,PersonaLLM: Investigating the Ability of Large Language Models to Express Big Five Personality Traits , arXiv:2305.02547v5 (2023), https://doi.org/10.48550/arXiv.2305.02547. 87Qiaozhu Mei, Yutong Xie, Walter Yuan, & Matthew O. JacksonA, Turing Test of Whether AI Chatbots Are Behaviorally Similar to Humans, [Small Caps]Proc. Nat'l Acad. Sci. U.S.A.[/Small Caps], Feb. 22, 2024, at e23139251h2t1tp, s://doi.org/10.1073/pnas.2313. 925121 88 See Andrew K. Lampinen et al., Language Models Show Human-Like Content Effects on Reasoning Tasks, arXiv:2207.07051 (2022), https://doi.org/10.48550/arXiv.2207.07051 (showing that the framing of questions misleads humans and LLMs in similar ways);See also Park et al., supra note 85(showing false consensus bias). 89 Gati Aher, Rosa I. Arriaga & Adam T. Kalai, "Using Large Language Models to Simulate Multiple Humans and Replicate Human Subject Studies,"Pinroc. of the 40th Int’l Conf. on Machine Learning(ICML 2023) 90 See Huang et al., supra note78(finding that “LLMs demonstrate reduced ICB scores compared to the general human population.” The ICB scale is a measure of an “individual's belief in whether their ethnic culture predominantly shapes a person's identity”).

ARBEL, THE GENERATIVE REASONABLE PERSON

16/51

reasoning of historical legal figureTs.his capability has proven so compelling that
companies like Character.ai have built billion -dollar companies around it, offering interactive experiences with simulated person91as.
But how accurate are these simulationIsn?one validation study using a
“personal Turing tes,t” AI models imitating specific individuals achieved a 48.3% success rate in deceiving acquaintances of those individuals . 92 This is quite
remarkable: in half of the cases, acquaintances could not tell apart a model from the actual person93.
Research shows these capabilities can be enhanced through various techniques. 94 Giving personas demographically typical names improves performance.95One study promptedLLMs to assume the persona of people with
specific demographic characteristics and answer a few questions. Then they asked
humans to answer the same questions, some of them met these demograp-hics (in
group), some of them assumed the persona of that person (out-group). T he
researchers find that in some instances, LLMs sound more like ou-gt roup than in- group members9.6 This capability is improved if the model is given a name that is consistent with the underlying demographi9c7.Further, injecting randomness
into responses helps prevent “group flattening” - the tendency to produce stereotypical answers for minority grou.9p8s
This is consistent with another recent research paper that foutnhdat in
situations where humans have polarized views, persona assignment helps the model express differing view9s9.Finally, and in the other direction, a recent study
suggests that many results that align with specific demographic merely reflect prompting effects and disappear when prompts are carefully ve1t0t0ed.
While the focus here is on thgeenerative reasonablpeerson,the research
also points toward the possibility ofgenerativejuries. Studies show that when
LLM agents interact, they exhibit group dynamics similar to human collectives,

91Character.AI In Early Talks for Funding at More Than $5 Billion Valuation, BLOOMBERG (September 28, 2023, 4:43 PM CDT) https://www.bloomberg.com/news/articles/-20092-238/characte-rai-in-early-talks-forfunding-at-more-than-5-billion -valuation
92See Man Tik Ng et al., How Well can LLMs Echo Us? Evaluating AI Chatbots' Role -Play Ability with ECHO , arXiv:2404.13957 [cs.CL] at 7 (Apr. 22, 2024), https://arxiv.org/abs/2404.13957.
93See Man Tik Ng et al., How Well Can LLMs Echo Us? Evaluating AI Chatbots’ Role -Play Ability with ECHO (2024) (reporting “personal Turing test” results measuring whether acquaintances can distinguish chatbot role-play from the person); Qiaozhu Mei et al., A Turing Test of Whether AI Chatbots Are Behaviorally Similar to Humans, 121(9)Proc. Nat’l Acad. Sci. e2313925121 (2024) (c-rnoastsional behavioral similarity tests and distributions).
94 See e.g.,Cheng Li et al., RoleLLM: Benchmarking, Eliciting, and Enhancing Role -Playing in Large Language Models, arXiv:2310.00746 (2023)h, ttps://arxiv.org/abs/2310.007A4li6reza Salemi et al., LaMP: When Large Language Models Meet Personalization, arXiv:2304.11406 (2023), https://arxiv.org/abs/2304.11;4N0il6imesh Halder, Harnessing the Power of Role-Playing in Advanced AI Language Models: A Comprehensive Guide to ChatGPT’s Potenti,aMl edium (2023),
95Angelina Wang, Jamie Morgenstern & John P. DickersonA,rtificial Intelligence Chatbots Mimic Human Collective Behaviou,rarXiv:2402.01908v1 [cs.CY] (Feb. 2, 2024), https://arxiv.org/abs/2402.01908v1.
96 Id. 97 Id at figure 3. 98 Id. 99 Tiancheng Hu & Nigel Collier, Quantifying the Persona Effect in LLM Simulations , arXiv:2402.10811 (Feb. 26, 2024), https://arxiv.org/abs/2402.10811. 100 Ricardo Dominguez -Olmedo, Moritz Hardt & Celestine Mendler -Dünner, Questioning the Survey Responses of Large Language Mod,einls ADVANCES IN NEURAL INFORMATION PROCESSING SYSTEMS 37 (2024).

ARBEL, THE GENERATIVE REASONABLE PERSON

17/51

modeling complex social phenomena like bank run1s0,1realistic macroeconomic phenomena1,02information cascades1,03and community formation.104
Of course, limitations remain.105 Quality roleplaying requires sufficient contextual information about the individuals or groups being simulated. Current models struggle with some types of reasoning, particularly around politically charged topics.Prompting models to act as a typical member of a group risks reinforcing simplistic or stereotypical portrayals of complex groupAsn.d ethical concerns about“speaking for” practices must be addresse1d06,particularly when simulating marginalized groups.
Despite these challenges, the silicon sampling literature provides substantial evidence that LLMs can approximate huma-nlike judgments across diverse domains. This capability forms the foundation for our exploration of generative reasonablpeeople in legal contexts.

101Sophia Kazinnika, Bank Run, Interrupted: Modeling Deposit Withdrawals with Generative A,IFederal

Reserve Bank

- Quantitative Supervision & Research (Oct. 30, 2023),

https://papers.ssrn.com/sol3/papers.cfm?abstract_id=4656722.

102Ningyuan Li, Chong Gao, Yiming Li, & Qi Liao, Large Language Mode-lEmpowered Agents for Simulating Macroeconomic Activitie, sarXiv:2310.10436 (2023).

103 See Huang et al., supranote78.

104 James He et al.A, rtificial Intelligence Chatbots Mimic Human Collective Behaviou, rpreprint at Research Square (2024).

105 See supra note 86 and accompanying text. 106Linda Martín Alcoff, The Problem of Speaking for Other,sC ULTURAL C RITIQUE , No. 20, 5–32 (1991).

ARBEL, THE GENERATIVE REASONABLE PERSON

18/51

3. T HE R EASONABLE PERSON IN SILICON
This Part offers an empirical assessment goefnerative reasonablpeeople. As noted in the Introduction,evaluating models’ deeper latent understanding of concepts runs the risk of learnin-tgo-the-test, contamination, and sycophanc1y07. To address these issu,etshe methodologydeveloped, -SRCT, exploits the stateless nature of large language models and uses them to adathpet standard method of randomized controlled trials. By testing models under controlled conditions mirroring human studies, we can probe their latent reasoning, not just their ability to parrot precedent.

1. The Core Methodology: S-RCT
The foundational challenge confronting any attempt to use AI as an instrument of applied jurisprudence is methodological: How can we know what LLMs truly understand about reasonableness rather than what they have memorized?
Two distinct threats to validity confrontnaïve attempts to answer this question. The first is “learning to the test” or “contamination”. Models trained on legal corpora may have encountered doctrinal definitions, case outcomes, or even the academic studies we seek to replicate. Asking a model to define reasonableness or resolvLeonard v. Pepsicois a test of recalln, ot generalization. The models are very likely to succeed at such tasks, but this will not answer the question.
The second threat is demand effects or “sycophancy.” To solve the previous issue, we might present models with unsheyepnotheticalsand than assess their responses. The problem is that models excel at inferring user intent and adjusting responses accordinglyT.hus, the models might give the right answer not because it learned that a factor is important but because the question structure might imply that. Even putting side-by-side scenarios will not resolve the issue. If a model sees two scenarios side bdyes,i it may infer that we expect differential treatment and harmonize its answers to appear consistent. To probe a model's true latent representations, we need methods that control both threats simultaneously.
The solution emerges from an architectural feature of modern LLMs typically viewed as a limitation: their fundamental statelessness. When interacting with LLMs through APIs rather than standard chat interfaces, each conversation starts from a blank slateitwh no memory of prior interactions. This creates an unexpected experimental opportunity. We can treat each independent model session as a distinct experimental subject, enabling adaptation of the gold standard of causal inference to the study of AI reasoning: silicon randomized controlled trials (S-RCT).
S-RCT rests on three mechanisms. The first is statistical independence through statelessness. Thousands of separate model sessions receive random assignment to experimental conditions with no ability to communicate or coordinate responses. A session assigdneto one condition cannot observe, and therefore cannot harmonize with, sessions assigned to other conditions.
107See supra Introduction.

ARBEL, THE GENERATIVE REASONABLE PERSON

19/51

The second mechanism is the shift from absolute to differential measurement. Rather than asking models to produce judgments vulnerable to memorization and calibration problems, we measure how responses change between randomly assigned conditions. Even imf aodel has learned from case law that "reasonable care requires salting icy sidewalks," it cannot anticipate our specific experimental manipulation or know what score another session produced under different conditions. The differential approach isolates t he model's sensitivity to manipulated factors from any memorized baseline.
We say a model isaligned to human judgment ifit shifts its judgments in the same direction humans do when experimental parameters vary. This sidesteps the problem of comparing raw scores across different types of reasoners. We need not ask whether a model's "6 out of 10" means the same as a huWmean's. ask only whether both shift upward when a precaution becomes more common, and whether that shift is statistically reliable.
The third mechanism is persona assignment. Models are instructed to roleplay demographically specified individuals, injecting realism and variation into the decision process. For robustness, the studies here test whether personas improve alignment with hum an baselines and verify results across multiple models: GPT-5 Chat, DeepSeek R1, Grok-4-Fast, Claude Sonnet 4.5, Gemini 2.5 Pro, Kimi K2, Qwen 3 maxa, nd Mistral Medium. This selection spans op- seonurce and proprietary architectures, different training app roaches, and varying parameter counts, offering an overview of today's state of the art.
Sample Persona Instructions You are roleplaying as Mary Alvarez. Alvarez is a 61 year old Hispanic woman. Politically, she is Lean Democrat. Personality description: Mary Alvarez, at 61 with a high school education, exhibits a down-to-earth yet pragmatic persona. Her modest yet comfortable lifestyle as an emoypel d individual within the $75-K $150K income bracket reflects her practicality and steadiness. As a homeowner with a Mainline Protestant faith and leaning Democrat voter stance, she likely possesses traditional values with a touch of progressive thoughtnfeusls. Married without children, Mary may be nurturing in nature but channels that affection into her partnership. Her IQ of 102 suggests average intelligence with the ability to grasp complex ideas, even if not academically inclined. Overall, Mary's temperament exudes stability and groundedness, with a warm, compassionate, and responsible style.
From here on out, you will be roleplaying this character, answering from their own perspective, not your own. Simulate their knowledge, value, and beliefs.
The figure below charts this methodology:

ARBEL, THE GENERATIVE REASONABLE PERSON
Figure 1

20/51

In summary, S-RCT addresses the core methodological challenges of using LLMs for empirical legal research through three mechanisms: stateless sessions ensure response independence, differential measurement bypasses memorization and calibration issues, and perso-nbased sampling injects realistic variation. Cross-model validation and empirical testing of persona effectiveness provide robustness checks.While not without limitations, the methodology offers a solution to some of the thorniest problems in LLMvaeluation.
With this methodological foundation established, we turn to three replications that test whether LLMs have internalized the schemas that drive human reasonableness judgments.
2. The Empirical Reasonable Person
1. Background & Methods
This study replicates and extendsThe Empirical Reasonable Personby Professor Chris Jaeger, which explores how lapyeople determine reasonableness in negligence contexts1.08Jaeger's work examines whether people consider it more reasonable to avoid expensive precautions (as economic theory predicts) or to follow common practices (as social theory predicts).
Jaeger's study employs a2x2 factorial design, where a basic scenario is adjusted along two different dimensio.n10s9Four accident scenarios are presented to participantswho are asked to evaluatthee negligence of the tortfeasor and rank their confidence in their judgment after each vignetWte.ithin the scenarios, two key elements are manipulatedt:he commonality of the precaution (how many people take it) and the cost of taking it (high or lowTh).ese answers are combined
108Christopher Brett JaegerT, he Empirical Reasonable Perso,n72ALA . L. R EV. 887 (2021). 109Id., at 910-933.

ARBEL, THE GENERATIVE REASONABLE PERSON

21/51

to produce a 2-p1oint negligence score (higher = more culpable). The order of cases is randomized, and each participant sees all four combinatio1n1s0.
The S-RCT replication closely follows Jaeger’s design, usinpgersonified LLM sessions.As in the original, each synthetic persona evaluates all four vignette combinations, but each vignette is answered in a fresh stateless session, so there is no cross-vignette carryoverT.he personas thenprovidenegligence judgments and confidence ratings for each scenario11.1To assess persona effectIs,conducted the full experimentunder either a synthetic persona or no personWa. ith 7 models, 99 personas per condition, and 4 vignettes per persona, this yi5e,l5d4e4d responses across both conditions.Overall, the Jaeger replication produced 5,544 planned trials and retained 55,29of them after strict JSON validation and remediation, a 99.7 percent trial retention rate. Trials that still failed validation after a seco-nd pass transformer were dropped and treated as missing.Because each persona “forgets” the previous scenario, this ledas to a larger N than the original study, showcasing the method’s effectiveness in cheaply generating large samples.
2. Findings
Jaeger finds that social norms exert a powerful influence on negligence judgments. When participants learned that 90% of people took a precaution, they judged failure to take that precaution as significantly more negligent than when only 10% did so. The mean difference was substant,ia4l.98points on a 2-1points scale1.12
By contrast, participants judged the failure to take a cost -justified, cheaperprecautionasonly 1.1 pointms ore negligent than failure to takea costly one, an effect that lacked statistical significance(p=0.134).113This was true both between subjects and within subjects.
What makes this finding challenging for AI models is that it runs against standarddoctrinal treatments. As courts have long emphasized“,what usually is done may be evidence of what ought to be done, but what ought to be done is fixed by a standard of reasonable prudence, whether it usually is complied with or not."114In other words, l egal and economic texts teach that common practice should inform but not determine reasonableness judgments1.15What should matter is the costs of precautioJnase.ger’slay participants appear to reverse this hierarchy, treating social prevalence as the primary cue for reasonable conduct.
Th e modelsreplicate this hierarchy. Pooled togethearcross model,swe find that LLMs also judge social practices as more important than economic factors.Acrossall the models andthe vignettes, the socia-lnorm manipulation moves negligence judgments substantially more than the economic

110Id.
111This is unlike Jaeger who was interested in measuring with-isnubject variance, and therefore let subjects offer answers to multiple scenarios. Id at 912. This allows human respondents to adjust their answer sequentially, or learn on the job. ca
112 ������������������������������������������������������������������ ≈ +4.98 points on the 21 -point scale ( ������90% = 15.252 ������������. ������10% = 10.268 ), t(98)=6.179p,<.001,d=0.621. The standard error of the mean difference its=4Δ./984/6.17≈90.807, so a 95% CI for Δ _commonnessis [3.39, 6.58] (i.e., 4.984 ± 1.984×0.807).
113From F(1,98)=2.279t,(98)=√2.279≈1.5,1p=.134. SE=Δt/≈1.106/1≈.501.733⇒ 95% CI for Δ _economic = [−0.35, 2.56(]1.106 ± 1.984×0.733). (Paired effectds_ize≈: t/√n≈1.51√/99≈0.15.)
114Tex. & Pac. Ry. Co. v. Behymer, 189 U.S. 468, 470 (1903) (Holmes, J.). 115Stephen G. Gilles, On Determining Negligence: Hand Formula Balancing, the Reasonable Person Standard, and the Jury, 54 VAND. L. REV . 813, 822 (2001) (“it is negligent to omit a precaution if the reduction in expected accident costs would have been grreathtean the costs of the precaution.”)

ARBEL, THE GENERATIVE REASONABLE PERSON

22/51

manipulation (

|������������������������������������������������������������������| = 9.71 ������������. |������������������������������| = 4.41; ������������������������������ ≈

2.2: 1 ). In the persona condition, a within -unit comparison shows the

commonness effect exceeds the economic effect by a4b.o8u1tpoints on average11.6

Figure 2 The Hierarchy of Reasoableness Replicate in Silicon

The replication of the relative importance of social factors over economic ones is also evident at the model leveBlr.eaking down the finding by model, we find thatin the main specificationall the models, with the exception of Gemini 2.5 Pro, replicated this hierarchy. The following Figure summarizes the per model performance:
11695% CI [4.16, 5.45], p < .001.

ARBEL, THE GENERATIVE REASONABLE PERSON

23/51

Figure 3: Hierarchy is Generally Preserved at the Model Level

The economic manipulation produced more ambiguous results. Jaeger's human subjects showed a small positive effect of -cjoussttification on negligence ratings, but the effect did not reach statistical significance (p≈0.13) given the study's sample size. Models, by contrast, showed a larger and statistically significant effect in the same direction: they judged actors more harshly when the foregone precaution was cheaper. One interpretation is that models have learned, from doctrinal sources, that cos-tefficiency should matter, and they apply that learning more heavily than lay humans do. Another possibility is that humans do harbor some sensitivity to cost, but Jaeger's study lacked power to detect it, and models are picking up a real but subtle pattern. A clean way to separate these explanations is to rerun the human study at higher power and check whether the CJ − NCJ effect rises toward the silicon estimate while the commonnes-sfirst
ordering remains. For now, what we can say with confidence is that both humans and models treat economic factors as less decisive than social conformity.
In contrast, the human “null” finding on economics does not replicate in silicon. While the positive effect with humans was small and statistically insignificant, models were far more sensitive thoe cost ofprecaution.s In other words,modelsjudge actorsmore harshly when the untaken precaution is cos-t justified. Yet, even when this stronger effect is accounted for, the genpeartatlern

ARBEL, THE GENERATIVE REASONABLE PERSON

24/51

discussed above hold–seconomic factors are less important to both humans and models.
Figure 4: Social and Economic Effects Replicate in Silicon with Different Levels

Another importantpoint the Figure shows is that, while models largely replicated the human patterns (with the caveats just noted), they did not replicate their magnitudes. In the persona condition the commonness effect was, on
average, 4.73 points larger than the human effect ≈( 1.95×), and the economic effect was 3.30 points larger than the human point estim≈a~t4e×(). As emphasized in the Methods, the key S-RCT test is replication of differentials. Still, absolute levels differ and this should constrain the wamyodelscan be usedin practice.
Bearing in mind that magnitudes are a secondary endpoint, some models do achieve notable verisimilitude. As Figure 3.3 shows, Mistral Medium is the closest joint match to human behavior across both dimensions. Its social norms
effect ���(��������������������������������������������������������������� ≈ 7.42) overshoots the human benchmark (4.98) by about 2.44 points, while its economic effect���(��������������������������� ≈ 1.69) is only about 0.58 points away from the human point estimate (1.11) and lies comfortably within the human
95 percent confidence interval for the economic effec−t [0.35, 2.56]. Gemini 2.5 Pro is even closer on social norms considered alo���n���e������������(������������������������������������������������ ≈ 6.23), well within the human 95 percent CI [3.38, 6.58]. As the figure below illustrates, a couple of outlier models pull the model averaged performance away from the human baseline, for example very large social norms effects in G-5PTChat and DeepSeek R1 andlarge economic effects in Gemini 2.5 Pro and DeepSeek R1.

ARBEL, THE GENERATIVE REASONABLE PERSON
Figure 5Calibration Landscape

25/51

To assess whether persona prompting could improve alignment with human judgment, we conducted an ablation study. Each model completed the full experimental design twice: once with detailed persona descriptions (demographics, occupation, personality, pocliatli orientation) and once in default "helpful assistant" mode.
Persona inclusion produced a modest net positive effect on alignment when pooled across models and dimensionAsv.eraging model-level mean errors from the human benchmarks (weighting models equally across the two effects), persona prompting reduced error by about 0. 77 points. Interestingly, this aggregate improvement masked opposing effects on the two dimensions, revealing how personas differentially affect model reason, iansgthe Figure below demonstrates:

ARBEL, THE GENERATIVE REASONABLE PERSON

26/51

Figure 6 Personas Increase Overall Model Alignment

For the economic manipulation, personas substantially improved alignment. The pooled absolute error dropped from 5.64 points (no persona) to 3.30 points (with person—a)a reduction of 2.34 points, or approximately 42%. This brought models meaningfully closer to the human null.117For the social norms manipulation, personas slightly worsened alignment. The pooled absolute error increased from 35.2points to 4.72 point—s an 1.2-point increase.118
It seems that persona effects alsaoffectmodels differently. Models like Gemini 2.5 pro saw large alignment benefits from personification, while models like Deepseek R1saw ambiguous effects.Mistral Medium, which was largely aligned also on magnitudes, saw little net effect from personification.
Taken together, these findings reveal several clear patterns about how models have internalized reasonableness schemas:
Overall, models captured the decision structure characterizing human reasonableness judgments: social norms dominate while economic considerations matter less. This hierarchy contradicts the-cboesntefit framework emphasized in doctrinal sources, suggesting modelsel arned from how people actually discuss and judge reasonableness rather than from prescriptive legal theory alone. All models significantly increased negligence ratings when precautions were common versus uncommon, matching the human qualitative pattern.
At the same time, we find m agnitude miscalibration with notable exceptions. Most models amplified social sensitivity beyond human levels and detected economic signals that humans showed no significant responseWtiot.h
117No persona: Δecon =-6.75 p( = 1.4×1⁻0¹⁴⁰), With persona: Δecon =-4.41 (p = 5.3×1⁻0⁸⁴), Human baseline: Δecon = -1.11 (ns)
118No persona: Δcommonness = +8.5p0 =( 9.7×1⁻0¹⁹⁰), With persona: Δcommonness = +9.7p1 =( 2.9×1⁻0²⁰¹), Human baseline: Δcommonness = +4.98

ARBEL, THE GENERATIVE REASONABLE PERSON

27/51

that said, some models showed significant calibration, suggesting that future work may focus on identifying which models are most faithful.
Persona inclusion largely proved usel fiun aligning models, although the effects were not universal. Other than the possibility that personas inject random noisewhich we cannot rejec,tit is also possible that they activate deeper schemas inside the models, and those poorly understood schemas are maodrevantageous in some domains and may even be harmful in others.
In sum, t hese findings demonstrate that multiple LLM architectures have internalized the schemas driving human negligence judgments, successfully prioritizing social information over economic efficiency in ways that align with lay reasoning but contradict doctrinal emphasis. While calibration challenges remain, the consistency of directional replication across diverse models and the achievement of human -consistent magnitudes by select model -prompt combinations establish proof of concept foger nerative reasnoablepeople as tools for estimating lay perceptions of negligence.
2. Generative CommonsenseConsent
1. Background & Methods
The current study runs silicon replication of Professor Roseanna Sommers’ Yale Law Journal article Commonsense Consen, twhich studies how ordinary people judge consenint situations of deception.
In the relevant studya customer seeks to make a purchase primarily to earn points for a planned trip, caring little about the item itself since he plans to donate it to charityS. ommers studies two types of manipulatioInst.he "essential lie" condition, the clerk falsely represents the product as a bicycle when it is actually a camera, a deception about the product's fundamental identity. In the "material lie" condition, the clerk truthfully describes the product but falsely claims the purchase will earnreward points when it will no,ta deception about a transactionally material term that the customer explicitly cares aboSuot.mmers sought out to see what ordinary people care about more when it comes to consent: how much the lie mattered or how much the lie went into the essence of the good itself.
The S-RCT methodology paralleled Study 1E. ach synthetic persona was randomly assigned to one of the two deception conditions, and each model session evaluating that persona provided tw–7o r1atings: (1) agreement that there was consent, and (2) how much the deception mattered to the customer. Condition is randomized across persona, sthen held fixed for that personacross all model runs.The experiment employed the same ablation design, comparing performance with detailed persona descriptions against baisneel empty prompt conditions. This yielded 3,232 total judgments from 202 unique synthetic personas, with 99.7% successful extraction for consent ratings and 99.2% for importance ratings.R emaining cases were coded as missing.
In terms of endpoints, the replication criterion focuses on directional concordance: whether silicon people follow the same differences as human subjects.
2. Findings

ARBEL, THE GENERATIVE REASONABLE PERSON

28/51

Sommers' study revealed a striking paradox in how ordinary people evaluate consent under deception. Participants judged material lies , the misleading statements about whether goods qualified for reward points , as mattering significantly more to victims than essential lies, the misleading statements about the nature of the good. 119Yet despite acknowledging that material lies matter more, these same participants paradoxically perceivmeodre consentto begiven in material lie scenario.s120
Legal doctrine, notably, would predict the opposite.Lies that matter more to victims should vitiate consent more completely. That participants recognized material lies as moreimpactful while simultaneously seeing them as less corrosive of consent suggests lay intuitions track something other than victim welfare. They may reflect a formalist architecture: consent to "the thing itself" remains intact even when consent to "the terms"rwauadsuflently obtained. This pattern runs counter tothe canonical treamt ent, which treats material lies more seriously precisely because they affect the value of the exchange12.1The counterintuitive hierarchy presents an ideal test case for whether models have internalized lay schemas or merely recite doctrine.
The silicon replication successfully captured this paradoxical structure. Pooling across all models (N = 1,616 judgments from 202 unique personas), generative reasonablpeeople judged material lies as mattering significantly more to victims,122 while simultaneously perceiving more consent given in material lie scenarios1.23

119M_Essential = 5.46 vs. M_Material = 6.31, Δ = +0.85) 120 (M_Essential = 3.68 vs. M_Material = 4.72, Δ = +1.04). 121Roseanna Sommers, Commonsense Consent, 129 Yale L.J. 2232, 2239 (2020) (“Under the canonical view, material deception vitiates consent.”). 122(M_Essential = 5.00, M_Materia=l 6.41, Δ = +1.40, p < .001, 95% CI [1.27, 1.53]) 123(M_Essential = 2.08, M_Material = 2.42, Δ = +0.35, p < .001, 95% CI [0.19, 0.50])

ARBEL, THE GENERATIVE REASONABLE PERSON

29/51

Figure 7: Silicon Replication of Importance and Consent Hierarchy

Both effects align directionally with the human pattern, confirming that models replicate the counterintuitive decision structure where lies that matter more paradoxically produce more perceived consenCt.ontrary to legal doctrines, models learneda non trivial lesson from how peopleactually reason about consent, not from prescriptive legal theorTyh.e consistency of directional replication across independent model session,s with each serving as its own experimental uni,t demonstrates robust statisticalalrening.
Breaking down performance by individual model reveals the breadth of this replication while exposing architectural variationA. cross architectures, the paradox proved surprisingly robusOt.verall, 7 of 8 models judged consent higher under material than essential lies (binomial p = .035), and 7 of 8 judged material lies as more important to the victim (binomial p = .031524).
124For full persona.In the empty-prompt ablation, 7 of 8 models show a positive consent shift (p = .035) and 8 of 8 show a positive importance shift (p = .0039)

ARBEL, THE GENERATIVE REASONABLE PERSON

30/51

Figure 8: Most Models Follow Human Patterns

Examining the figure, a few points become salient. First, failures occurredmostlythrough flattening rather than reversal. For instance, Gemini 2.5 Pro showed a small negative consent effect (-Δ0.=10, p = .504) while maintaining the strong positive importance effect (Δ = +1.89, p < .001). This patteprnossibly suggestsincomplete schema activation rather than learning the wrong pattern entirely. Second,no single model consistently failed across conditions. Gemini 2.5 Pro and GPT-5 Chat each failed to replicate in one condition but succeeded in the other, indicating that failure stemsfrom model-prompt interactions rather than fundamental architectural limitations.
A random -effects meta analysis across models yields an average material-minus-essential shift of about 0.4 points for consent and between 1.4 and 2.4 points for importance on a seve-npoint scale, with confidence intervals that exclude zero under both promtipng regimes.
The figure further makes clear that while directional alignment is common, effect magnitudes vary considerably. On importance ratingsso,me of the models were closely related, such as Kimi K2 and Qwen 3 max, while others varied significantly, most notably Claude Son nett 4.5 and Deepseek-R1. On Consent, themagnitudedifference was much larger and more uniform, with all models seeing much less consent in both the before and after condition. One possibility, albeit speculative, is that po-straining regimes lead to the observde compression around issues of consent, to maintain strong model ethical boundaries, although the current design does not allow us to clearly identify the mechanism.
In terms of human-effect alignment, the following Figure plots each model’s delta vector, the Material minus Essential shift on consent and on importance, against the corresponding human del1t2a5sG.rok -4-Fastprovides the tightest joint match to the human benchmark (d ≈ 0.65), with Kimi K2 close behind (d≈ 0.91).Mistral Medium, which was among the be-sctalibrated systems
125 d is the Euclidean distance between a model’s delta vector and the human delta vector: ������ =
√(Δ������������−Δℎ������ )2 + (Δ������������−Δℎ������ )2 , where Δ������ is the Material minus Essential shift on consent and Δ������ is the Material minus Essential shift on importance. Lower ������indicates closer human-effect alignment.

ARBEL, THE GENERATIVE REASONABLE PERSON

31/51

in the prior negligence study, remains relatively well calibrated here as we≈ll (d 1.05), though it no longer leads the pack. At the other eDnede,pSeek R1(d ≈ 2.04)
and Claude Sonnet 4.5(d ≈ 2.27) deviate most stronglyfrom the human delta profile, largely because they substantially overstate the importance shift. More broadly, the ordering differs from the Jaeger replication, suggesting that more work is needed to identify the best aligned modaeclsross legal domain.s126

Figure 9: Calibration Landscape in Delta Space

Finally, the persona effecwt as again positive, although smaller and, once broken down by effect type, very heterogen.ous
126In the empty-prompt condition, the joint delta-distance ordering changesG: PT -5 Chat is closest to the human delta vector (d≈ 0.89), followed byMistral Medium(d ≈ 1.07) andKimi K2 (d ≈ 1.07). Two models (DeepSeek R1 and Gemini 2.5 Pro) exhibit strong ceiling behavior on mater-ialile importance (importance ≈ 7), inflating the importance shift and worsening calibration.

ARBEL, THE GENERATIVE REASONABLE PERSON

32/51

Figure 10: Per=Model Error Shift with Personas

In summary, three principal findings emerge. First, counterintuitive social schemas are robustly represented across model architectures. Seven of eight models independently reproduced a paradox contradicting formal legal doctrine, with binomial tests confriming replication rates substantially exceed chance (p = .035). People discuss consent in ways that prioritize authenticity about transaction fundamentals over instrumental concerns, even while acknowledging instrumental concerns matter more. Models absoerdbthis subtle hierarchy from training data across diverse architectures.
Second, magnitude biases are systematic and interpretable. Models show approximately 50% consent compression (safety alignment) and ceiling effects on importance ratings (expert mode categorical reasoning at 72.6% in default mode). Persona prompts dramataiclly mitigate importance bias by regularizing scale use (reducing ceiling to 41.7%) but cannot override consent compression, indicating the biases have different origins.
Under the empty prompt, roughly 73 percent of mate-rliaelimportance ratings sit at the scale ceiling of 7; personas cut that to about 42 percent, which explains why persona prompts improve calibration on importance while leaving the paradox itself intac.t
Third, model selection and prompting strategy matter for applied use. Kimi K2 achieved best calibration here while Mistral Medium excelled in Study 1, demonstrating domain -specific performance. Personas are experimental manipulations requiring empirical va lidation for each model -domain combination, not universal enhancements. This validates th-eRCST framework: we must treat models as experimental subjects, randomizing across conditions and measuring effects statistically.

ARBEL, THE GENERATIVE REASONABLE PERSON

33/51

3. GenerativeLanguage Sense, Fairness Sense, and Legal
Sense
1. Methods
In making reasonableness judgments, people usually lean on at least three intuitions: a language sense about what was said or signaled, a fairness sense about whether the outcome seems acceptable, and a legal sense about what courts would likely do. Sommers and Furth-Matzkin’s Stanford Law Review study puts all three on the table at once. Tihs involves a consumer who discovears$2.99 fee charged each time the payment is processed (despite ‘no fee’ oral and flyer representations), authorized only in the fine prinRte. spondents rtae, on separate 1–7 scales, how much the consumer consented to the fee, how fair the fee is, and how likely a court is to enforce the term.
The previous studies employed differential measurement, testing whether models shift in the same direction as humans when experimental parameters vary. This approach sidesteps calibration problems but leaves open a question practitioners will inevitably aks: when a generative reasonableperson speaks,whosevoice emerges? Study 3 addresses this calibration question directly. Sommers and Furth-Matzkin fielded the exact same instrument on two distinct populations: lay individuals and “legal professionals” drwan from Harvard and Yale Law Schools(these are legally trained respondents not necessarily practicing attorneys.) The result is two separate empirical anchors for the same questions. That design lets us ask a calibration question that the previou-sRSCTs were not built to answer:when models render contract judgments, do they land closer to lay baselines or professional ones? And does persona inclusion shift models toward lay calibration?
The earlier studies in this Article leaned on differential measurement. They asked whether models shifted in the same direction as humans when a factor changed, and largely sidestepped whether a model’s “4” means the same thing as a human’s “4.” In practice, however,policymakers would likely rely on absolute levels. A regulator who wants to approximate how the public reads a disclosure needs a model that sounds like members of that public, not like the agency’s lawyers. The Sommers and Fur-tMh atzkin paradigm lets us test exactly that.
Unlike the prior S -RCTs, this study does not introduce experimental manipulations beyond persona assignment. Its goal is calibration rather than causal identification. For each model, I generate synthetic respondents who see the vignette and answer the three questions in randomized order. As in the other studies, I run the experiment under two prompting regimes: an “empty” condition where the model answers in its defaulht elpful-assistant voice, and a “persona” condition where each instance is asked to ropleay a demographically specified individual drawn from a nationally representative pool.
For each model and prompt condition, I pool responses and compute mean scores on consent, fairness, and legal obligation. I then compare these three-dimensional mean vectors to Sommers and Fu-rMthatzkin’s lay and lawyer baselines in two ways. First, I check whether models replicate the qualitative hierarchy that characterizes lay judgments: legal enforceability scored highest,

ARBEL, THE GENERATIVE REASONABLE PERSON

34/51

consent in the middle, fairness lowest. Second, I quantify “closeness” to each human group by computing Euclidean distance between the model’s th-riteeem mean vector and the corresponding lay or lawyer vector. This yields a simple answer to the calibratioqnuestion: does a given configuration of silicon people sit nearer to the lay cluster or to the lawyer cluster, and does persona prompting move it.
The silicon replication repeats the original as closely as possible, which includes the shuffling of question order and a comparable number of silicon participants (N=127).127Again, LLMs were assigned a persona, which included rich descriptions1.28 As in the previous study, the models were given the opportunity to respond in free text in order to support their reasoning12.9The answers were then transformed into structured data, using a combination of LLM reasoning and hard rules1.30
2. Findings
Sommers and Furth find that lay individuals tend to be “contract formalists.”131That is, they take those deceitful charges to be more binding than they actually are, because they believe in the binding power of contract. Compared with legal professionals, lay people see more consent, more court enforcement, and possibly even more fariness in these charges1.32Importantly, both lay people and lawyers agreed to the basic hierartchheyc:harges were low on fairness, medium on consent, and high on enforceabili1t3y3.
Two headline results emerge. The first concerns structure. Acrossall eight model,ssilicon respondents reproduce the-tlreivel hierarchy that Sommers and Furth-Matzkin document in lay subjects. Predicted legal enforceability is always higher than perceived consent, which in turn is higher than perceived fairness. In other words, every model treats “what a court would do” as more robust than “what the consumer really agreed to,” and both as stronger than “how fair this feels,” exactly as lay respondents d.o This hierarchy was robust across architectures and the following Figure summarizes the average model performance1:34

127Meirav Furth-Matzkin & Roseanna Sommers, Consumer Psychology and the Problem of Fine-Print Fraud, 72 Stan. L. Rev. 503, 518 (2020). The original survey included responses from 56 lay individuals, and 92 clerks working in California courts.Id. at 519 n.69. Our replication study included 423 participants, of which 43 were lawyers.
128Sample distribution: 50% females; racial composition is predominantly white at 68%, followed by Hispanic (13%), Black (8%), Asian (5%), and other races (5%). The mean age is approximately 46 years, with a median of 43. Income data reveals a concentratiinonthe $75K to less than $150K range (30%), while education levels are most commonly high school graduation (31%) and some college (24%).
129This study, for example, not only constrained the LLM to a single letter prompt, it also used in the prompt an example of a model yielding A as the answer, potentially contaminating the results.
130A local model was asked to extract the numerical answers from the free text. Manual audit of several responses revealed a high degree of accuracy.
131See Furth-Matzkin & Sommers, supra note127, at 536. Returning to the analogy, respondents appeared to treat the legal bindingness question as referring to whether the consumer in fact has to pay. 80% of participants indicated that the consumer would indeed be legally bound if the contract conteadina clause like “Will is required to pay the fees described in this contract."
132See id., at 523 note 77. (Finding the difference in fairness perceptions was not statistically significant. 133Sommers and Furth-Matzkin rely on FTC action to support the view that this is a clear case of fraud, but as suggested by the diversity of legal responses and other aspects of doctrine, it is not clear that this constitutes “fraud,” and some courts may nodteem the practice as deceptivide., at 519, note 69. 134Friedman χ² = 16.0, p < .001

ARBEL, THE GENERATIVE REASONABLE PERSON

35/51

Figure 11: Hierarchy Preserved: Humans vs Persona Models

The second result concerns calibration and voice. Pooled across models, 23 of 24 model–question means fall within one standard deviation of the lay baselines,offering a coarse indication thamt odels operate on essentially the same scale as human respondents. But operating on the same scale does not determine whosejudgments they more closely resemble. Measuring Euclidean distance in the three-dimensional outcome space, five of eight models sit closer to the lay cluster than to the lawyer clusteGri.ven thesmall number of models assessed, this pattern does not reach statistical significan1c35eF.or the remaining thre—e Claude Sonnet 4.5, Gemini 2.5 Pro, and Mistral Medium —the professional anchor proved nearer.

135Binomial test, p=0.36.

ARBEL, THE GENERATIVE REASONABLE PERSON

36/51

Figure 12: Most Model’s Judgments are Closer to Lay Than Professional Judgments

Breaking it down bydimensionadds complexity to the analysis. We can see in the figure below thatht at models align very closely with human judgments on enforceability. They are mixed almost evenly on the question of consent: some of the models measure the issue as lay people would while others are closely to professional judgments. Finally, on thfeairnessquestion models appear to take a position closer to lawyers, but also, very noisy.
Figure 13: Model Ratings vs. Lay (Blue) and Lawyer (Teal) Baselines
Averaging across architectures, silicon respondents sit midway between lay and lawyer baselines on consent (t−=1.78, p = .12), lean significantly toward lower fairness ratings than lay respondents (t =−3.73, p = .007), and track lay judgments closely on legal enforceabilit—y indeed, pooled model means do not differ significantly from lay baselines on this dimension (t = 1.14, p = .29)

ARBEL, THE GENERATIVE REASONABLE PERSON

37/51

Persona prompting was tends to nudge models further toward lay calibration. Pooled across architectures, adding personas reduces the distance between silicon and lay means on all three dimensio1n36sO. n consent to the fees, persona prompting pulls the average model about tohnierd of a scale point closer to lay respondents. On fairness, it shrinks the gap by a similar margin. On legal obligation, personas also improve alignment with lay baselines, though the effect is smaller. At the model level, six of the eight systems move closer to the lay anchor once personas are introduc—eda consistent pattern, though one that falls short of conventional significance given the small sample of architectu1r3e7Ts.he shift is modest in absolute terms but consistent in direction, reaching conventional significance with a large effect size. 138 By contrast, persona prompting does not significantly alter distance to the lawyer baseline (p = .50).
Figure 14: PersonasGemerally Shift Models Toward Lay Baselines

Averaging across models, persona prompts pull the mean model about 0.3 points closer to the lay baseline on each of consent, fairness, and legal obligation, and 6 of the 8 models move closer to lay subjects and farther from lawyers once personas are turnoend.
The pattern is easiest to see if we put the three findings together. First, every model captures the formalist hierarchy that Sommers and Fu-rMthatzkin identify in lay contract reasoning: courts are expected to enforce more than people feel they consentetdo, and consent is more robust than fairness. Second, when we ask “who does this sound like” in a quantitative sense, most models land nearer to lay subjects than to elite legal professionals. Third, persona prompts push the models a little further into th e lay corner of this space. For this kind of contract scenario,generative reasonablepeople do not, by default, talk likelaw school graduates but more like the consumers Sommers and Furth -Matzkin actually surveyed, and with the right persona scaffolding they sound slightly more like them still.
136A paired t -test across the eight architectures indicates that persona prompting significantly reduces Euclidean distance to the lay baseline, t(≈7)2.4, p≈ 0.05.
137Sign test, p = 0.145. 138(paired t(7) = 2.38, p = .049, d = 0.84)

ARBEL, THE GENERATIVE REASONABLE PERSON

38/51

4. T HE PATH FORWARD

When Judge Kimba Wood was deciding Leonard v. Pepsico , she was engaging in the sort of humdrum reasoning judges are asked to perform almost every day: would any reasonable, perhaps even waonuyl,dperson view a television ad promising a harrier jet for Pepsi points as a serious promi1s3e9T?he Judge was not seeking to balanceb against somepl, nor was she trying to school consumers on media literacy. 140 Rather than crafting a normative ideal, what she was actually trying to discern was whether a “genuine issue” existed:141whether ordinary people, especially theimpressionableteenagers Pepsi targeted with its fizzy bravado, might have been misled into thinking they could trade bottle caps for a $23 millionjet that “sure beats the bu.s1”42As she noted, almost warily, the law calls on her to make such decisions alon,e“just as [s]he decides any factual issue in respect to which reasonable people cannot di”f1f4e3r.
But what tools does the law give a judge, perched on the bench, to read into the minds of teenagers?
Now, for the first time, we have a tool to assist with such determinations. Before reaching he judgment, a judge in Judge Wood’s shoes can consult models on how they, if they were roleplaying the target audience, understand the advertisement. Done correctyl, the Judge could learn important information. This does not mean Judge Wood was wrong; she may have had sound normative reasons for holding as she did. But it suggests that her empirical confide, nthcaet noreasonable person could see things otherw, miseay have outrun her evidence.
The studies replicated here show that models can serve as important adjuncts to judicial decision-making—and beyond. In the this Part I discuss use cases, best practices, and some important limitations of this new tool. Ultimately, as with any new tool, much more exploration, validation, and too-l building is required; and this study seeks to showcase the utility and relevance of such a field of inquiry.

1. Interpretation of the Findings
1. LLMs as Social Calculators The first study, replicating Jaeger's work on lay perceptions of negligence, tested a question that has long divided tort theorists: when people judge whether someone acted unreasonably, do they ask "was this efficient?" or "was this normal?1"44 Economic theories of negligence, crystallized in the Hand Formula, suggest people should engage in the former calculation. Social theories

139Leonard v. PepsiCo, Inc., 88 F. Supp. 2d 116, 127 (S.D.N.Y. 1999), aff'd, 210 F.3d 88 (2d Cir. 2000). 140 United States v. Carroll Towing Co., 159 F.2d 169 (2d. Cir. 1947) 141Indeed, the logic in many contract interpretation cases is discerning theactual intent of the parties, rather than some ideal, value-maximizing judgment by an outsider. Alan Schwartz & Robert E. Scott, Contract Theory and the Limits of Contract Law, 113YALE L.J. 541, 568 (2003) (“There is a consensus among courts and commentators that the appropriate goal of contract interpretation is to have the enforcing court find the ‘correct answer.’”). 142Leonard v. PepsiCo, Inc., 88 F. Supp. 2d 116, 121 (S.D.N.Y. 1999), aff'd, 210 F.3d 88 (2d Cir. 2000). 143Id .
144See supraPart 3.2.

ARBEL, THE GENERATIVE REASONABLE PERSON

39/51

suggest the opposite: people judge reasonableness by conformity with common practice, treating what most people do as a proxy for what one ought to do.
Jaeger's human subjects sided decisively with the social theorists. When told that 90% of people took a particular precaution, they judged failure to take it far more harshly than when only 10% did so. The economic cost of the precaution barely registered.
The models replicated this hierarchy. Across architectures, the socia- l norm manipulation moved negligence judgments substantially more than the economic manipulation. Like their human counterparts, models appeared to have learned that what others do matstemr ore than what efficiency demands.
What makes this finding notable is its resistance to doctrinal pedagogy. A model that had merely memorized legal rule, si.e., a stochastic parrot reciting case holdings, would predict the opposite pattern. Treatises and casebooks emphasize cos-tbenefit analysis; they treat custom as evidence of reasonableness but insist that "what ought to be done is fixed by a standard of reasonable prudence, whether it is usually compdliewith or not."145Yet models, like humans, inverted this doctrinal hierarchy. They learned from how people actually discuss and judge carelessness in the wild, not from prescriptive legal theory. In this sense, the models' training on natural discourse may give them betteraccess to lay reasoning than a Yal-eeducated judge whose intuitions have been shaped by three years of doctrinal instruction and decades of professional socializat1i4o6n.
2. LLMs as Consent Evaluators
The second study, replicating Sommers' work on consent under deception, presented a sharper tes14t7. Sommers documented a paradox: people perceive more consent when someone is deceived by a material lie (about terms that matter to them) than by an essential lie (about the fundamental nature of what they're agreeing to—) even while acknowledging that mateiral lies would matter more to the victim.13
This pattern defies both legal doctrine and intuition. Doctrine treats misrepresentations about value as more corrosive of consent precisely because they affect what the victim cares about. Yet human subjects showed the opposite, treating authenticity abou t a transaction's fundamental nature as more constitutive of consent than accuracy about its terms.
Models replicated this paradox with striking consistency. Seven of eight architectures reproduced both effects: material lies rated as mattering more, yet producing more perceived consent. Again, a model parroting doctrine would predict the opposite. That models captured this counterintuitive folk schema suggests they have internalized something deeper than legal ru—leas lay theory of consent that legal professionals might not even recognize they diverge from.
3. LLMs as Lay Judgment Estimators
The first two studies asked whether models shift in the same direction as humans when experimental conditions vary. This sidesteps a thorny calibration problem: we need not ask whether a model's "6 out of 10" means the same as a human's, only whether both move upward under the same conditions. But

145The T.J. Hooper, 60 F.2d 737, 740 (2d Cir. 1932) 146This observation parallels arguments in corpus linguistics that natural language usage, rather than expert intuition, should guide ordinary meaning analysisS. ee Lee & Mouritsen, supranote7.
147See supraPart 3.3.

ARBEL, THE GENERATIVE REASONABLE PERSON

40/51

practitioners will inevitably pose a harder question: whegnenaerative reasonable person speaks, whose voice emerges? Does the model sound like a consumer scanning labels at the grocery store, or like a law professor parsing unconscionability doctrine?
The third study addressed this directly14.8Because Sommers and Furt-h Matzkin fielded identical questions to both lay individuals and legal professionals from elite law schools, it provides two benchmarks for the same judgments. This enables a different test: not just whether models reason like haunms, but which humans they resemble.
The findings suggest models, at least when personified, speak in lay registers. Every architecture replicated the structural hierarchy characterizing lay contract reasoning: hidden fees were deemed unfair, consent was judged as middling, and enforceability as high. This "formalist" pattern—where people believe courts will enforce terms they didn't truly consent to and find unfa—ir held across all eight models. Critically, when we measured distance to the two human baselines, most models landed closer to lay subjects than to legal professionals.
This finding addresses a natural concern about using AI as an empirical input: that it might launder professional intuitions under the guise of public sentiment. If models had absorbed primarily the skeptical, doctrin-einformed perspective of legal elites,they would be of limited use in checking judicial assumptions against lay understanding. That they instead track ordinary consumers suggests they can serve the function this Article envisions.
4. Synthesis: The Geometry ofReasonableness
Taken together, the three studies suggest that certain LLMs have internalized an internal "geometry" of reasonableness judgments , not just isolated responses to individual prompts, but structural relationships between factors that mirror the architecture of human morianltuition. In the negligence setting, they track the intuitive priority of what people around us do over what a Hand Formula would prescribe. In the consent study, they reproduce a paradoxical structure in which lies that matter more to vmicstierode consent less. In the contract vignette, they mirror the hierarchy in which enforceability of deceptive contractual tacticsfeels sturdier than consent, and consent sturdier than fairness. In each domain, the models converge on a pattern that is recognizably human, even where it runs against legal orthodoxy.
Several features of this internalization deserve emphasis. First, it is consistentacross domains.It seems that t he same underlying capability that enabled models to prioritize social norms in negligence judgments also enabled them to replicate the consent paradox and to capture lay formalism in contract interpretation. This consistency suggests a generalizable capaicty rather than domain-specific accident.
Second, it is robust across architectures. Eight models spanning proprietary and ope-nsource systems, different training approaches, and varying parameter counts all captured the core directional patterns.
Third, and importantly for legal applications, models aligned more closely with lay intuitions than with doctrinal orthodoxy. While the fact that

148See supraPart 3.3.

ARBEL, THE GENERATIVE REASONABLE PERSON

41/51

models are trained on large repositories of low quality online data (think comment sections or social media) is often seen as a limitation, garbage -in garabage-out, this may actually be a virtuMe.odels haveseen how humans reason in the wild. A judge seeking to understand how "ordinary consumers" would interpret a disclosure, or how a "reasonable person" would perceive a police encounter, may find that a model trained on billions of words of natural human discourse has better access to that perspectiventthhae judge's own professionally deformed intuitions.
Lastly, a critical finding is that while models showed an unexpected ability to detect the statistical patterns that drive reasonableness judgments, they struggled with calibration, the precise numbers they assigned. Models got the directionright: social norms matter more than economics, material lies produce more perceived consent than essential ones, lay people are contract formalists. But, as previous research shows, models assign different numerical scores and, as this study shows, theyoften amplified or compressed effects relative to human baselines1.49
In the negligence study, models showed even stronger sensitivity to social norms than human subjects did, and detected economic effects that humans showed only as a statistical trend. In the consent study, models compressed their consent ratings toward tmheiddle of the scale while clustering importance ratings at the ceiling. These patterns likely reflect the layering of alignment training through reinforcement learning1,50the processes designed to make models safer, more polite, and less discriminatory, that are built on top of statistical impressions of how people actually talk and argue. The result is that models are not raw pub-liocpinion pollsters. They carry instituotni al overlays that distort raw magnitudes even as they preserve directional patterns.
This limitation can be framed simply: generative reasonable people are better at answering "what tends to matter" than "how much should we adjust." The distinction matters practicallyA. regulator choosing between two disclosure formats could determine which makes a product warning feel more salient to consumers. A plaintiff's attorney deciding whether to emphasize the defendant's deviation from industry custom or the low cost of the foregone precaution could determine which framing moves simulated jurors mor.eA judge who wants to know whether the advertisers use of a specific whether including a specific disclaimer made the advertisement more or less serious in the eyes of teenagers. By contrast, a policymaker who wants to know whether a disclosure raises average consent ratings from 3.2 to 3.8 on a seven-point scale may demand a level of precision that current models cannot reliably deliver. Generative reasonable people are well suited to map the qualitative structure of folk judgment. They are not yet precision instruments for quantitative forecasting.
Beyond this specific limitation, we also cannot completely rule out all demand effects or other leakage, and having tested many models, random chance is still a possibility.It is also the case that this study only studies certain features of

149On the recurring gap between directional replication and distributional or magnitude fidelity in “silicon sampling,” including scale compression, ceiling effects, and subgroup misestimatiSoene, Bisbee et al., supra note 21(published online) (warning that synthetic survey data can diverge from human distributions even when correlations look strong); See Dominguez-Olmedo et al., supra note 100(documenting substantial prompt sensitivity and measurement instability in LLM survey responseSse);e Sarstedt et al., supranote16 (collecting reliability threats and recommending validation and design safeguards).
150Future work would want to compare effects between base models and models that underwent po- st training.

ARBEL, THE GENERATIVE REASONABLE PERSON

42/51

reasonableness and we cannot rule out that these were learned while others were not. An even more wicked problem is that we take for granted that the underlying studies reflect human perception: buiftthere are unknown faults in them or if they fail to generalize, then such inference would be unwarranted.

2. Domains of Application: Between Promise and Prudence
The findings from the three studies demonstrate that generative reasonablepeople can provide a meaningful proxy for lay judgments across different domains of reasonableness. This capability addresses the democratic tension identified earlier: while the law aspires to reflect lay understanding, it often lacks accessible tools tdoiscern it.
To explore domains of applications, it is helpful to distinguish three zones in which reasonableness standards operate:
Explicitly Descriptive Standards . Some legal tests genuinely ask what ordinary people think, believe, or understand. Consumer protection standards assessing whether an advertisement would "mislead a reasonable consumer" fall here,151as do "ordinary meaning" inquiries in statutory interpretation and the "unsophisticated consumer" test in debt collecti1o5n2I.n these domains, the legal question is the empirical question. Silicon reasonable people offer the most direct value here, and their use raises the fewest legitimacy concerns.
Explicitly Normative Standards . Some reasonableness tests are normative by design. The Hand Formula asks what precautions are-cjoustified, a question of efficiency rather than social expectation. 153 Constitutional reasonableness tests often embed substantive values that override majoritarian preferences15.4In these domains, silicon reasonable people are least appropriate as arbiters—but they retain value as transparency devices. If a court rules that "no reasonable person" would perceive a search as coercive, while simulated personas calibrated to the relevant community would perceive it as coercive, the court could profitably acknowledge that its ruling reflects a normative choice rather than an empirical finding

151See Federal Trade Comm’n,Policy Statement on Deception(Oct. 14, 1983), reprinted inIn re Cliffdale Assocs., Inc,.103 F.T.C. 110, 1–7844 (1984) (defining deception by likely effect on consumers acting reasonably under the circumstances, and emphasizing audien-ctaergeting);Williams v. Gerber Prods. Co., 552 F.3d 934, 938 (9th Cir. 2008) (applying “reasonable consumer” standard in consumer deception conFtienxkt)v;. Time Warner Cable, Inc. , 714 F.3d 739, 741 (2d Cir. 2013) (reasonable consumer standard; plausibilit-ybased dismissal where deception theory is implausible).
152For ordinary-meaning interpretation framed as the understanding of ordinary speakersS,ee Holmes, supra note33, at 417; See Tobia et al., supranote6 (survey-based approach to “ordinary meaning”). For the “least sophisticated consumer” (or closely related “unsophisticated consumer”) framework in FDCPA litigation, seeClomon v. Jackson, 988 F.2d 1314, 1–32108(2d Cir. 1993)A; vila v. Riexinger & Assocs., LLC , 817 F.3d 72, 7–576 (2d Cir. 2016); see alsoGammon v. GC Servs. Ltd. P’ship , 27 F.3d 1254, 1257 (7th Cir. 1994) (similar consumer-protective lens).
153SeeUnited States v. Carroll Towing Co., 159 F.2d 169, 173 (2d Cir. 1947) (Hand, J.) (canonical formulation of negligence as a function of burden, probability, and loss, often rendered B < PL); Richard A. PosneAr, Theory of Negligenc,e1J. Legal Stud.29 (1972) (economic account of negligence as -cjoussttified precaution); Restatement (Third) of Torts: Liability for Physical & Emotional Harm § 3 (Am. L. Inst. 2010) (reasonable care standard keyed to foreseeable risks and precaution burdeSnese);Gilles, supra note115(mapping Hand formula’s role and limits in doctrine and jury practice).
154SeeCamara v. Mun. Court, 387 U.S. 523, 5–3367 (1967) (Fourth Amendment reasonableness as balancing, not a referendum on popular viewsT);ennessee v. Garne,r 471 U.S. 1,–89 (1985) (dead-lyforce reasonableness framed as interes-tbalancing)

ARBEL, THE GENERATIVE REASONABLE PERSON

43/51

Hybrid Standards . Many reasonableness inquiries blend empirical and normative components1.55Negligence asks what a reasonable person would do,
but also what they should do; the two need not coincide. Consent inquiries ask both what people understood and what they were entitled to rely upon. 156
Contract interpretation asks what parties meant, but also what they should be held to.157In these domains, silicon reasonable people provide essential empirical input while leaving normative judgment to human decision -makers. They
answer the descriptive predicate without resolving the prescriptive conclusion. With those preliminaries in mind, let us now explore several domains of
application and promise.

1. Lawmakers and Regulators: Scaling Public Voice
Policymakers wrestle with crafting rules that align policy goals with public perception.sConsider the Federal Trade Commission's task of curbing unfair or deceptive practices. 158The agency sought, in 2020, to conduct a periodical review of its rules on“made in the USA” claims made by sellers. A central challenge was to understand how consumers today interpret such claims: do they expect that virtually every part of the product was produced and assembled on the mainland? Or might they expect that key components or the mjoarity of the value be produced in the USA?
To guide their rulemaking, the FTC relied on a survey of public perceptions: problem was, it was a quarter century old. In a globalizing world, attitudes may have shifted considerably since then. 159 The agency, which undertook a full revision of its rules, would certainly have benefitted from having a more contemporary understanding, but budget constraints limited their ability to acquire this information.160
This problem applies more generally to our methods of learning about public perceptions. Consumersurvey—s perhaps the ideal form of feedba—ckare typically commissioned only for high -profile rulemakings due to cost constraints.161Other methods are also quite limited: Public comment periods overamplify mobilized voices, are subject to astroturfing, and are sometimes fall prey to mass form submission attack.s162Courts further complicate matters by
155For an argument in favor of the hybrid approachS,ee Tobia, supra note9, at 343–45 156See Restatement (Second) of Torts § 892A c.mct(Am. L. Inst. 1979) (consent as willingness in fact); id. § 892B(2) (consent induced by misrepresentation as to the essential character of the conduct is ineffective); Restatement (Second) of Contracts § 164 (Am. L. Inst. 1981) (fraudulent or mamteisrriealpresentation renders a contract voidable, subject to reliance and justification limiStse)e; Keeton et al., suprnaote9, § 18(collecting doctrine on consent and invalidation through fraud/misrepresentation). 157Lucy v. Zehmer , 196 Va. 493, 503, 84 S.E.2d 516, 522 (1954) (objective manifestations control over undisclosed intent);See Schwartz & Scott, supra note 141, at 568(framing interpretation as an attempt to reach the “correct answer,” tempered by institutional limits). 158 Federal Trade Commission Act, 15 U.S.C. §§–4518 (2018), see also N.Y. Gen. Bus. Law § 349 (McKinney 2020); Cal. Bus. & Prof. Code § 17200 (West 2020), Fla. Stat. Ann. § 501.201 et seq. (West 2020); Tex. Bus. & Com. Code Ann. § 17.46 (West 2020). 159Federal Trade Commission,Made in the USA: An FTC Workshop , BUREAU OF C ONSUMER PROTECTION STAFF R EPORT (June 2020). In addition, the FTC relied on a survey provided by Mark Hanna, the chief marketing officer of a US Jewler. 160 Id . 161On these issues,see supranote16and accompanying text. 162Danielle A. Schulkin, Improving the Management of Public Comments in a Digital A, RgeEG . R EV. (NOV. 8, 2021)(“comment process is susceptible to “astroturfing.” . . . In some recent hig-hprofile rulemakings,

ARBEL, THE GENERATIVE REASONABLE PERSON

44/51

oscillating between two interpretive poleins:some debt collection cases, they use the “least sophisticated consume”r standard,163and in others the “reasonable consumer”. 164
Generative reasonablepeople offer a way out of this impasse . They present a handy mode of estimating public understandings, with little expense. A regulator could then sample test how models understand a claim lik“emade in the USA, ” and validate—at least 165 internally—whether there is a need to commission a full study. To a more limited degree of reliability, the models can engage in a “personaified” mode, roleyplaying persona—s a harried parent scanning grocery shelves, a health-conscious gym-goer, a senior citizen with limited technical literacy—to provide perspective thadtrafters might miss and democratize insights at scale. hTus, to understand how a proposed notice might affect a reasonable consumer relative to an unsophisticated one, the agency could conjure different personas.Unlike sluggish notice -and-comment procedures, which may take months while generating skewed feedbaacnkd, unlike expensive surveys that reqiure broad expertise in survey methodologthy,is method provides rapid, diverse perspectives at minimal co16s6t.
To illustrate, imagine a regulatory agency aiming to assess whether the “made from natural frui”tlabel on a juice product misleads consumers, given that the juice contains artificial flavors. The agency could deploy silicon personas in a robust RCT with two distinct conditions: in Condition A, personas are shown only the front label stating“made from natural frui”t; in Condition B, personas would view the full packaging, including an ingredient list that reveals the presence of artificial flavors. After exposure, each persona responds to targeted questions:“Do you believe this juice contains only natural ingredien”ts(?Yes/No) and “How natural do you think this juice is”?(rated on a -15 scale). By comparing the responses between the two conditions, regulators can determine if the label alone creates false impressions about the juice’s composition. For example, if personas in Condition A are significantly more likely to as sume the juice is entirely natural compared to those in Condition B, who see the africtial flavors listed, this would demonstrate that the label is confusing. These findings provide regulators with precise, actionable data to adjust labeling standards, ensuring they reflect consumer understanding and reduce deception, all before commigtttion extensive rea-lworld consumer research.
Of course, there are tradeoffs. The method is less precise than a full survey, and the precision and reliability falls the more granular the simulated demographic is. The most useful question is the realistic alternative: if the standard mode of operation is to avoid public consultation, or have one that is susceptible to being hijacked by commercial or political interests, than a
agencies have receive—d or have appeared to receiv—emillions of comments, many of which were fake or manipulated. . . . [and] garner large numbers of similar or identical comments, frequently in response to calls to action by public interest and advocacy gorups”); Michael Herz,Fraudulent Malattributed Comments in Agency Rulemaking, 42 Cardozo L. Rev. 1, at 2 (2020) (“millions of other filings in the net neutrality docket appear to be the product of fraud”).
163Avila v. Riexinger & Associates, LLC, 817 F.3d 72 (2d Cir. 2016) 164Jason E. Tavernaro v. Pioneer Credit Recovery, Inc., 20 F.4th 1234 (10th Cir. 2022). The Supreme Court has acknowledged that this is an unresolved issue in Sheriff v. Gillie, 578 U.S. 31, 40 n.6 (2016) (J. Ginsburg). 165As a quick test, GPT 4.5 responded: “A seller assembles bicycles in California using frames imported from China and domestically sourced wheels and gears. Suppose you are about to buy bikes and see a label "made in the USA." Would you consider the seller' s representation to be accurate or misleading? … [response:] Misleading, high confidence.” Chat conversation, screenshot on file with author. 166Models differ in costs, but even a leading mo—desul ch as GPT O1—will only charge $15 per million words of input and $60 per million words of output, and prices decline rapidly. https://openai.com/api/pricing/

ARBEL, THE GENERATIVE REASONABLE PERSON

45/51

generative reasonableperson offer a robust compromise, that is not less precise. For higher stake cases, or for instances where minority groups are likely to be deeply affected, the case for actual consultation increases. Fortunately, integrating generative reasonablpeeople into the process could free up resources to that end.
2. Grounded Judicial Intuitions: Empirical Guardrails for Discretion
Consider a judge deciding whether a genuine issue exist s when a consumer claims to have been meisdl by a claim that a product contain“s33% less sugar,”167or that batteries ar“eup to 50% longer lasting”.168It is hard for judges to truly put themselves in consumer shoes, and when they attempt to do so, in earnest and with diligence, they still come under fire for theinsularity of elite intuition.169Judges, shaped by education and professional isolatinoand, vertently risk conflating their own perspectives with those of the broader polit.y170This could explain why in Beccera v. Dr Pepper, the court reasoned that consumers who see the term “diet” on the label will not understand it to imply that it will help with weight management1.71
This judicial promise hinges on methodological rigor.There are many models that a judge could select from, and an infinite number of ways to prompt them. This is why t ransparency becomes crucia,l if models inform judicial reasoning (while never replacing it), litigants should have procedural rights to know which model was used and how it was prompted. Federal Rule of Evidence 706, which governs court -appointed expert witnesses, provides a potential framework for integrating this technology while preserving adversarial testing
Under such a framework, both parties could retain rights to challenge model selection, question prompt construction, and propose alternative formulations - preserving adversarial testing while incorporating this new empirical tool. This approach acknowledegs thatgenerative reasonablpeeople are neither neutral nor infallible, but rather one perspect-ivgenerating mechanism among many.
By treating generative reasonablepeople as one empirical data point, closer to a sophisticated survey than definitive proo,fcourts can harness their insights while preserving the deliberative integrity of judicial reasoning. This approach resonates with what Kahan and colleagues t“ecromgnitive illiberalism”

167Danone, US, LLC v. Chobani, LLC , 362 F. Supp. 3d 109, 12–023 (S.D.N.Y. 2019) (denying preliminary injunction in part, but finding plaintiff’s survey a “persuasive extrinsic evidence” that “overwhelming percentage” of consumers misunderstood “33% less sugar” claim)
168Millam v. Energizer Brands, LLC, No. 23-55192, 2024 WL 3294883, a–t3*(19th Cir. June 14, 2024) (mem.) (affirming dismissal; “up to 50% longer” was not a promise of typical performance and would not deceive reasonable consumers)
169Even judges are aware of this issueSe. e Koehn v. Delta Outsource Grp., Inc., 939 F.3d 863, 864 (7th Cir. 2019) ("[T]he federal judges who must decide [FDCPA] motions are not necessarily good proxies for the “unsophisticated consumers” protected by the FDCPA.'"
170Jessica Guarino, Nabilah Nathani & A. Bryan Endres, What the Judge Ate for Breakfast: Reasonable Consumer Challenges in Misleading Food Labeling Claims, 3L5OY.C ONSUMER L. R EV. 82, 132 (2023) (“When a judge decides to impose their own beliefs and rationale into making determinations of whether a reasonable consumer would find a label misleading, food labeling litigation outcomes become inconsistent and inaccurate. Judges, unleikmajority of the population, are highly educated. This can result in discrepancies in the approaches in which labels are scrutinized.”)
171Becerra v. Dr Pepper/Seven Up, Inc., 945 F.3d 1225, 1231 (9th Cir. 2019) (“the allegations in the complaint fail to sufficiently allege that reasonable consumers read the word "diet" in a soft drink’s brand name to promise weight loss”)

ARBEL, THE GENERATIVE REASONABLE PERSON

46/51

in Fourth Amendment jurisprudence, where judges’ cultural cognition often diverges from broader social perceptions of reasonable1n7e2ss.
3. Litigants and Access to Justice
For litigants, particularly those from marginalized communities, the implications of handy generative reasonablepeopleextend beyond doctrinal refinement to questions of access and equality. Litigation often exacerbates resource disparities, with mock trials and consumer surveys remaining prohibitively expensive for many1.73Generative reasonablepeople could provide affordable approximations of jury perceptions, particularly for under resourced litigants. A tenantbeing told by a landlord that they are responsible for expensive repairs because they were not caused by normal wear and tear, could test such assumptions against a panel of simulated reasonable people.
Here, too, caution is advised: especially in the hands of inexperienced litigants, generative reasonablpeeople may seem to hold greater truths than they actually do. The limitations of this tool might be forgotten in the name of convenience or unhelpfully suppressed by commercial providers marketi“nAgI jury prediction” services. As with most useful tools, there is potential for harm if misused, and it may be necessary to develop ethical guidelines for their deployment in litigation —perhaps through court r ules or professional responsibility standards.
4. Guiding Firm Behavior: Better Compliance
Compliance departments can integrate silicon people into their internal processes, to effectively detect errors in corporate proceInssiemsp. lementing the “reasonable security procedures and practices” required by the California Consumer Privacy Act,174companies could usegenerative reasonablepeople to evaluate whether their data protection measures would be considered adequate by the average consumer. Alternativelyif, marketing wants to start an advertising campaign for fur coats, silicon people can be used to verify that a reasonable person would understand that the offer is subject to house rules. For firms that are trying to avoid unnecessary litigation or the ire of nudniks, such testing could prove a useful step in their comliapnce process.
In drafting mass contracts, this methodology could assist in achieving a greater degree of precision. There are many reasons why contract offers and terms are left uncertain,175O’Gorman counts twelve, some of which include routine negligence and motivate-dreasoning reasons to see how the opposing party might understand a term.176 A responsible attorney aiming to prevent future legal accidents may be able to study the contract’s reasonable implications during

172 https://scholarship.law.upenn.edu/cgi/viewcontent.cgi?article=3546&context=faculty_schol(a“rhsahtip likely did not occur to the Justices in themajority was the degree to which their own perceptions (not to mention the perceptions of those who would agree with them upon watching the tape) would be just as bound up with cultural, ideological, andotehr commitments that disposed them to see the facts in a particular way”) at 897
173SeesupranotesError! Bookmark not defined. and 8. 174C AL . C IV. C ODE §§ 1798.100 (e). 175R ESTATEMENT (SECOND ) OF C ONTRACTS § 33(1) (198S1e)e. also§ 362 cmt. a. ("If this minimum standard of certainty is not met, there is no contract at all."). 176 See Daniel P. O'Gorman, The Restatement (Second) of Contracts Reasonably Certain Terms Requirement: A Model of Neoclassical Contract Law and a Model of Confusion and Inconsis,te3n6cUy.H AW. L. R EV. 169, 200-202 (2014).

ARBEL, THE GENERATIVE REASONABLE PERSON

47/51

negotiation, perhaps feeding some plausible scenarios and seeing how they might be interpreted under the contra1c7t7.
Rather than replacing focus groups or market testing, generative reasonable people could serve as a preliminary screening tool, identifying potentially problematic language or claims before investing in more expensive consumer research. This tiered approach would allow companies to refine their compliance strategies iterativelpyo, tentially catching issues that might otherwise emerge only after costly litigation has begun.
5. Legal Debates between the Descriptive to the NormativPeerson
Reasonableness has never lacked for theorists. It has lacked for facts. For two centuries, scholars have argued over the reasonable person’s nature: descriptive or normative, majoritarian or aspirational, empirical anchor or moral ideal. The familiar movein these debates is to treat “what ordinary people think” as either dispositive (for descriptivists), irrelevant (for normativists), or a kind of loose constraint (for hybrid accounts). But across the spectrum, the arguments tend to proceed as if the empiciarl baseline is either already known, or impossible to know in any disciplined way. That assumption has quietly organized the field.
It is worth emphasizing how much contemporary scholarship still leans on descriptive imagery, even after the realist critique. Doctrinally, judges still speak in that register when they say that “no reasonable person” could think otherwise, or when theynvioke “ordinary meaning” and “reasonable consumers” as if those are empirical categories rather than rhetorical device1s7.8And when legal academics are asked, in the abstract, what should inform assessments of reasonableness, they largely endorse a hybrid: custom and ordinary practice, plus evaluative judgment about what is good or fair, with markedly less enthusiasm for efficiency as the governing fram1e7.9Even in an era that is se-lcfonscious about the socially constructed nature of legal standards, the idea that reasonableness must remain tethered, at least in part, to ordinary social understanding continues to exert gravitational pull.
Yet, the field’s ability to deliver on thereasonableperson’s promise has been light. Jury trials, in theory, instantiate community norms, but in practice they are episodic, selective, strategically framed, and usually abseSnutr.veys can help, but they are slow and expensive, and their design choices invite predictable disputes about framing and manipulation. As a result, the “empirical” side of reasonableness has often been supplied by intuition, and intuition is exactly what the realist critique targeted: the risk that judges and scholars launder their own priors through the idiom of the reasonable person.
Generative reasonable people challenge that scarcity premise. If silicon sampling can, when properly structured, recover the direction and internal architecture of lay judgments, the reasonable person debates no longer have to be fought in a vacuum. The co ntest between descriptive, normative, and hybrid
177 Reasonable implications are important throughout the law of contracts, see, e.g., R ESTATEMENT (SECOND ) OF C ONTRACTS § 211(3) (1981).
178See, e.g.L, eonard v. PepsiCo, Inc,. 88 F. Supp. 2d 116, 131 (S.D.N.Y. 1999) (“no reasonable, objective person” would treat the ad as an offer), aff’d, 210 F.3d 88 (2d Cir. 20A0n0d)e; rson v. Liberty Lobby, Inc., 477 U.S. 242, 248 (1986) (summary judgment proper where “no reasonable jury” could find for the nonmovant). On courts’ tendency to treat “ordinary meaning” as an empirically accessible baseline, often mediated through dictionaries or related toolsS, ee Lee & Mouritsen, supranote7.
179Eric Martínez & Kevin Tobia, What Do Law Professors Believe About Law and the Legal Academ,y1?12 GEO . L.J . 111, 1–3379 (2023) (describing survey recruitment and the-lparwofessor sample), 159 (tbl. 4).

ARBEL, THE GENERATIVE REASONABLE PERSON

48/51

accounts has always been partly conceptual, but it has also bpereangmatic: what would it even mean to “track community standards” at scale, with reproducibility, and without a litigation budget? Once that question has a plausible answer, some familiar theoretical positions look less like principled jurisprudence and more likeescond-best adaptations to institutional incapacity.
Because it is easy to see what generative reasonable people offer to the descriptivist, let us consider what it has in store for the normativist position. Normativists have long been right about one point that gets lost in caricature: the law often must depart from lay intuition. Efficiency, equality, constitutional constraints, and minority protection regularly require courts and regulators to resist majortiarian sentiment. But normativism faces its own recurring difficulty, one that typically remains impilcit. Normative standards still have to operate in the world. They must be legible enough to guide behavior, stable enough to coordinate expectations, and administrable enough to be applied without constant second-guessing. This is where descriptive baselni es matter even for those who reject their authority. If a proposed refinement of the negligence standard, the consent doctrine, or a disclosure regime relies on distinctions that most people do not grasp, the reform may be normatively attractive yet functionally self-defeating.
Generative reasonable people create a way to stre-stsest that problem early. Scholars can pilot normative proposals against simulated public comprehension, not to decide whether the proposal is justified, but to see whether it is communicable and where it predictably fails. That is a different kind of “constraint” than majoritarian deference, but it is a real one. Most importantly, the method sharpens the honesty of normative argument. Reasonableness rhetoric often invites a subtle slide. Courts announceraesult in the language of description, “no reasonable person would…,” while doing prescriptive work that could have been defended explicitly as policy. When a usable empirical baseline is available, that slide becomes harder to sustain. A judge or schowlahro insists on a result that conflicts with lay understanding can still defend it, but the defense must be candid: the choice is normative, not a report about what ordinary people think. The rhetoric of the reasonable person stops functioning as a camougflea for discretion and becomes what it ought to be, a point of contestation that must be justified.
6. Principles and Best Practices
These are early days, so it would be imprudent to provide a definitive list of rules for application. Nevertheless, we can identify certain principles and best practices that should guide the use ogfenerative reasonablepeople. A successful framework must balance three core tensions: between empirical fidelity and normative judgment, between majoritarian patterns and minority perspectives, and between technological capability and democratic accountability. Drawing on thi s Article's findings and their theor etical implications, the following considerations offer a preliminary roadmap.
1. Silicon Models as Adjuncts, Not Arbiters
First and foremost, generative reasonablepeople should augment— never supplan—t human judgment. Their value lies not in resolving disputes but in surfacing latent assumptions about reasonableness that shape legal outcomes. Judges might use LLMs to test whether their intuitive application of“ordinary

ARBEL, THE GENERATIVE REASONABLE PERSON

49/51

meaning” or “community standards” aligns with statistically common understandings, much as corpus linguistics aids textual analysis. Yet final determinations must remain tethered to law's normative commitments.
This principle yields two practical corollaries. First, transparency protocols should govern any legal use of these tools. Courts employing LLMderived insights should disclose the model, prompt, and persona parameters, enabling adversarial testing throughrebuttal via alternative models or prompts. Second, decision-makers should practice confidence calibration, treating model outputs as Bayesian priors rather than conclusive evidence. In Leonard v. Pepsico, for instance, a judge might note“:While GPT -4 suggests 68% of teenagers would perceive the advertisement as an offer, this finding aligns poorly with contract doctrine's objectivity standard, warranting significant discountin”g.
2. Addressing Bias as a Firs-tOrder Legal Concern
Generative reasonablepeople inherently feature a majoritarian be—nta characteristic that offers both advantages and risks. On the positive side, this tendency counters elite judicial intuition with aggregated lay perspectives. Yet this majoritarianism risks entrenching what critical scholars term the “reasonable man's” hegemony— the exclusion of marginalized voices from reasonableness's conceptual core1.80Feminist critiques of“objective” standards in discrimination cases have long revealed how unexamined majorities distort fair1n8e1 ss.
Several mitigation strategies deserve consideration. Legal actors should engage in adversarial persona testing, probing minority viewpoints by prompting models to simulate intersectional identities and contrasting those outputs with majority responses.Regular empirical validation of model predictions against actual community feedback or surveys should be conducted to verify that persona-driven simulations accurately capture nuanced minority perspectives.
Institutions should adopt formalized audits analogous to Title VII's disparate impact framework. These audits should quantitatively measure differences in mode-l generated judgments across personas representing various protected classes. Models should undeorgroutine bias stress tests, deliberately introducing scenarios that historically trigger stereotypes or biases to evaluate whether the model reinforces or mitigates such biases.
Practitionersof this methodshould publicly disclose persona definitions and testing protocols to allow external scrutiny and accountability, facilitating ongoing refinement of methods.
Perhaps most critically, practitioners must maintain meaningful engagement with rea-lworld minority communities. Model-generated outputs rapidly lose accuracy when intersectional complexity increases, and therefore these tools must complement —not replace —direct interaction with marginalized voices.
3. Acknowledging the Limits of Mimesis
While LLMs capture broad patterns in reasonableness judgments, their statistical abstractions cannot replicate the phenomenological richness of lived experience. Models may identify that 70% of simulated jurors consider a hidden contract term unfair, but t hey cannot articulate the visceral distrust of

180 SeeDimock , supra note77and accompanying text. 181Martha Chamallas, Feminist Constructions of Objectivity: Multiple Perspectives in Sexual and Racial Harassment Litigation, 1T EX . J. WOMEN & L . 95 (1992).

ARBEL, THE GENERATIVE REASONABLE PERSON

50/51

institutions that animates such judgments. This limitation necessitates contextual grounding practices.
Triangulation provides one essential safeguard: in hig-shtakes contexts, model outputs should be validated against traditional methods like surveys and focus groups. The FTC, for example, might compare LLM predictions about consumer confusion with A/B test ing of actual advertisements. Narrative elicitation offers another approach, using prompting techniques to generate explanatory rationales, then assessing their coherence with qualitative accounts of reasonableness. Comparing mod-eglenerated narratives whitjury deliberation transcripts, for instance, might reveal both alignments and divergences in reasoning patterns.
4. Ensuring Dynamic Representation
Legal standards of reasonableness evolve, but LLMs' training data freeze societal norms at a historical moment. This creates a “democratic lag” where models reflect past majorities, not present ones. The challenge mirrors originalism's dilemma: Should 2025 negligence judgments rely on a model trained pre-#MeToo or pre-pandemic?
Adaptive measures can partially address this concern. Temporal tagging—deploying metadata indicating a model's knowledge cutoff date— enables users to adjust for subsequent cultural shifts. Domain awareness represents another important safeguard: practitioenrs should avoid deploying these tools in contexts where social attitudes are shifting rapidly. For some applications, regular retraining or fine -tuning of models may be necessary to maintain alignment with contemporary social norms.

ARBEL, THE GENERATIVE REASONABLE PERSON
5. C ONCLUSION

51/51

For two centuries, the reasonable person has been’slamwost convenient fiction: a figure invoked constantly, defined never, and measured almost not at all. When Judge Wood declared that "no reasonable, objective person" would see Pepsi's ad as a serious offer, she was not reporting a finding. 182 She was placing a bet that her intuition about teenage consumers tracked reality closely enough that no reasonable juror could disagree. The law gave her no tools to check.
This Article has shown that such tools now exist. Across three replications and nearly 10,000 simulated judgments, large language models recovered the internal architecture of lay reasonableness judgments. They did so not by memorizing doctrine, but by abs orbing the patterns of human discourse from which reasonableness intuitions emerge. Models learned that social conformity trumps economic efficiency in negligence, that lies about essence corrode consent more than lies about value, and that ordinary consumers are contract formalists who expect courts to enforce terms they never meaningfully accepted. In each case, models captured schemas that run counter to what legal treatises teach, suggesting they learned from how people actually reason rather than frwohmat lawyers say they should.
The implication is not that judges should outsource judgment to algorithms. It is that the empirical predicate of reasonableness standards (what ordinary people actually think) is no longer a black box accessible only through intuition, expensive surveys,or the episodic lottery of jury trials. It can be measured, at scale, for a fraction of traditional costs.
This changes the terms of an old debate. Scholars have long argued over whether the reasonable person is descriptive or normative, majoritarian or aspirational. But much of that debate was shaped by a constraint that seemed immutable: that lay judgments were too expensive and slow to surface reliably. Positions hardened around what was tractable rather than what was right. With that constraint loosened, we can ask the question more honestly. When courts depart from lay understanding, is that departure jusftied, or is it elite intuition dressed in populist clothing?
The reasonable person standard has always promised democratic legitimacy: law speaking in the voice of those it goverBnust. what ordinary people think, how they experience the world, and what they mean by their words, has always been illegible to the statGee. nerative reasonable people help make real ordinary people visible.

182Leonard v. PepsiCo, Inc., 88 F. Supp. 2d 116, 127 (S.D.N.Y. 1999), aff'd, 210 F.3d 88 (2d Cir. 2000).