Article

The Option Element in Contracting

The law of contracts has often treated options quite differently from other contractual transactions; for example, the characterization of a transaction as an option contract calls forth specially required formalities, but on the other hand often has the effect of releasing parties from doctrinal limitations on their contractual freedom, such as the duty to mitigate damages or the rule that holds excessively high liquidated damages void as penalties. Such differential treatment is challenging to explain from a functional viewpoint, in part because all contracts resemble options to the extent they are enforceable in terms of monetary damages, and in part because contracts that are nominally structured as explicit options can be close economic substitutes for contracts that are nominally structured as unconditional.

This Article sets out a theoretical account of the efficient design of option contracts—one that explains how contracting parties should strike the balance among option premium, option life, and exercise price, in order to maximize the expected surplus from their transaction. It shows that the tradeoffs between these various aspects of option contracts can affect the parties incentives to acquire and disclose information, to invest in relation specific investments, and to take efficient precautions against the event of breach. It then goes on to develop an organizing framework for private parties choosing whether and how to structure their contractual arrangements as options, and for policymakers choosing whether or how to regulate such private choices. In short, the appropriate balance between option premium, option life, and exercise price will depend on the relative importance that the one attaches to these various dimensions of incentives.

Enforcement Costs and Trademark Puzzles

The standard account holds that trademark law, at its core, aims to protect consumers from deceptive and confusing uses of source-identifying marks. However, there is a problem with the standard account. It cannot explain a number of important trademark doctrines, many of which, like the protection accorded trade dress, have expanded the scope of trademark rights in recent years. Some critics argue that these puzzling doctrines reflect a radical shift away from the standard account and toward a new property theory of trademark law that focuses not so much on the quality of information available to consumers as on the seller’s ability to appropriate the full commercial value of its mark. 

This Article offers a different, and less alarming, explanation for many of the puzzling doctrines, one that does not require a radical departure from the standard account. This alternative explanation focuses on the enforcement costs of implementing law based on the standard account. Enforcement costs include the administrative costs of adjudicating trademark lawsuits and the error costs of over- and under-enforcing trademark rights. For a number of reasons, trademark law generates high enforcement costs, and many of the puzzling features of trademark doctrine can be understood as legal tools to manage these high costs. In particular, courts adopt general rules or standards that protect trademarks more broadly than the standard account’s substantive policies support, but those rules and standards can be justified by the administrative and error costs they save. In the end, the Article uses the enforcement cost approach to suggest two reforms to trademark law—the broader acceptance of disclaimers especially in merchandising rights cases, and the abolition of trade dress protection.

Virtual Liberty: Freedom to Design and Freedom to Play in Virtual Worlds

Regulation of virtual worlds has become an important issue in cyberspace law as more and more people spend increasing amounts of their lives in these spaces. This Article discusses the basic questions of freedom and regulation in virtual environments. 

There are three kinds of freedom in virtual worlds. The first is the freedom of the players to participate in the virtual world through their in-game representations, or avatars. This is the freedom to play. The second is the freedom of the game designer to plan, construct, and maintain the virtual world. This is the freedom to design. A third is the collective right of the designers and players to build and enhance the game space together. This is the freedom to design together. 

These rights overlap in important respects with the constitutional rights of freedom of speech, expression and association. Virtually all activity in virtual worlds must begin as some form of expression, and therefore virtually all forms of legally redressable injury in virtual worlds will be some form of communications tort. However, the law of the First Amendment, as it currently exists, does not adequately protect many important features of the rights to design and play. 

Many virtual spaces are rapidly becoming sites of real world and virtual world commerce. In the future game designers will likely attempt to invoke the First Amendment to avoid regulation of their business practices. However, game designers will lose First Amendment protection to the extent that they encourage real-world commodification of virtual items. The Article concludes by discussing different models of regulation of virtual worlds, including the model of consumer protection, the virtual world as company town, and virtual worlds as places of public accommodation.

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