Article

Pretrial Detention and the Value of Liberty

How dangerous must a person be to justify the state in locking her up for the greater good? The bail reform movement, which aspires to limit pretrial detention to the truly dangerous—and which has looked to algorithmic risk assessments to quantify danger—has brought this question to the fore. Constitutional doctrine authorizes pretrial detention when the government’s interest in safety “outweighs” an individual’s interest in liberty, but it does not specify how to balance these goods. If detaining ten presumptively innocent people for three months is projected to prevent one robbery, is it worth it?

This Article confronts the question of what degree of risk justifies pretrial preventive detention if one takes the consequentialist approach of current law seriously. Surveying the law, we derive two principles: 1) detention must avert greater harm (by preventing crime) than it inflicts (by depriving a person of liberty); and 2) prohibitions against pretrial punishment mean that the harm experienced by the detainee cannot be discounted in the cost-benefit calculus. With this conceptual framework in place, we develop a novel empirical method for estimating the relative personal cost of incarceration and crime victimization that we call relative harm valuation: a survey method that asks respondents to choose between being the victim of certain crimes or being jailed for varying time periods. The results suggest that even short periods of incarceration impose grave harms, such that a person must pose an extremely high risk of serious crime in order for detention to be justified. No existing risk assessment tool is sufficient to identify individuals who warrant detention. The results demonstrate that the stated consequentialist rationale for pretrial detention cannot begin to justify our current detention rates. They suggest that the existing system is instead inflicting pretrial punishment, and they counsel a rethinking of pretrial law and policy.

Introduction

Suppose we can avert an armed robbery by incarcerating ten people for thirty days each. We do not know which of the ten would otherwise commit the crime, and the incarceration is not justified as punishment. Is it worth it? How many people should we be willing to lock up to prevent one future crime?

“None!” you may answer, on the ground that the state may never lock up any person solely to prevent future crime—at least not any person who is a responsible agent with her cognitive faculties intact. We live in a liberal democracy, not a dystopia.1 1.See generally Minority Report (20th Century Fox 2002) (depicting dystopian future in which future-criminals are incapacitated before they commit any crime).Show More You may be forgiven; this view has wide currency among thoughtful people.2 2.See, e.g., Laurence H. Tribe, An Ounce of Detention: Preventative Justice in the World of John Mitchell, 56 Va. L. Rev. 371, 376–77 (1970) [hereinafter Tribe, An Ounce of Detention]; Laurence H. Tribe, Trial by Mathematics: Precision and Ritual in the Legal Process, 84 Harv. L. Rev. 1329, 1370 (1971); see also infra notes 78–79 and accompanying text (addressing this perspective).Show More

But your indignation runs counter to the facts and the law. Contrary to common perception, preventive detention is not just the stuff of science fiction. Governments of contemporary liberal democracies routinely engage in preventive detention of many forms. Pretrial detention is one type. Other types include juvenile detention, immigration detention, and manifold variants of short- and long-term civil commitment.3 3.See infra notes 58–64 and accompanying text.Show More In each of these fields, the government claims authority to deprive people of liberty solely on the basis that custody is necessary to prevent a person from committing future harm.4 4.There are also forms of preventive detention that seek to avert unintentional rather than, or in addition to, willful acts of harm. Examples include quarantine to prevent the spread of communicable disease, as we know all too well, and jury sequestration. For discussions of the law of jury sequestration, see, e.g., Marcy Strauss, Sequestration, 24 Am. J. Crim. L. 63 (1996); James P. Levine, The Impact of Sequestration on Juries, 79 Judicature 266 (1996).Show More The state makes no claim that the person to be detained has forfeited her right to liberty or that the deprivation is deserved. The detention is not punishment. Instead, the detention is “regulatory.” The U.S. Supreme Court has long authorized such practices.5 5.See infra notes 34–43 and accompanying text.Show More Indeed, it is hard to imagine functional governance without them.

Nonetheless, preventive detention is terrifying. It does not adhere to the central constraint on criminal punishment—that it may be imposed only for a past wrongful act.6 6.See H.L.A. Hart, Punishment and Responsibility: Essays in the Philosophy of Law 1, 23 (2d ed. 2008) (explaining how this constraint on punishment “maximizes individual freedom within the coercive framework of law”); Douglas Husak, Overcriminalization: The Limits of the Criminal Law (2008) (describing conceptual constraints on punishment).Show More The justification for preventive detention is merely “risk,” and risk is amorphous. So the central question for any preventive detention regime is what kind and degree of risk is sufficient to justify the detention at issue. If we incarcerate people who have a 20% chance of otherwise committing an assault during the period of detention, for instance, we can expect to prevent one assault for every five detentions. Is such detention justified? How much liberty should we sacrifice to prevent one crime?

As is, there is nothing approaching a consensus answer to this question.7 7.See generally Christopher Slobogin, A Jurisprudence of Dangerousness, 98 Nw. U. L. Rev. 1 (2003) (urging scholars and courts to develop more coherent standards for preventive deprivations of liberty).Show More Courts and legislatures routinely assert the regulatory power of the state to detain those who pose a great enough risk, but even in long-standing preventive detention regimes, the relevant legal standards are vague at best.8 8.See infra Section I.A.Show More Generations of scholars have lamented the lack of legal guidance. Few have offered specific guidance themselves.9 9.See Alan Dershowitz, The Origins of Preventive Confinement in Anglo-American Law — Part I: The English Experience, 43 U. Cin. L. Rev. 1, 60 (1974) (“We have not even begun to ask these kinds of questions, or to develop modes of analysis for answering them.”).Show More The problem is that the question requires an explicit tradeoff between liberty and security, values that are infrequently measured and difficult to compare.

Difficulties notwithstanding, the bail reform movement has now placed the question of what risk justifies preventive detention squarely at center stage.10 10.See Sandra G. Mayson, Dangerous Defendants, 127 Yale L.J. 490, 494 (2018) [hereinafter Mayson, Dangerous Defendants] (“[Bail reform] holds great promise, but also raises an extremely difficult question: what probability that a person will commit unspecified future crime justifies detention . . . ?”).Show More Jurisdictions around the country are forsaking money bail in favor of more intentional decisions about pretrial custody. The new systems aspire to detain those arrested persons who pose a true threat and release everyone else on appropriate conditions.11 11.See Stephanie Wykstra, Bail Reform, Which Could Save Millions of Unconvicted People from Jail, Explained, Vox (Oct. 17, 2018, 7:30 AM), https://www.vox.com/future-perfect/2018/10/17/17955306/bail-reform-criminal-justice-inequality [https://perma.cc/V3Q​S-J69G].Show More Flight risk is also a concern in the pretrial context, but a distinctly secondary one in practice.12 12.Samuel R. Wiseman, Pretrial Detention and the Right to Be Monitored, 123 Yale L.J. 1344, 1351 (2014) (“Historically, the U.S. system of bail and associated pretrial detention was employed solely to prevent pretrial flight, but increasingly, the many individuals awaiting trial in jail are detained because a judge has deemed them potentially dangerous.”). For a thoughtful discussion of the various kinds of risk, often lumped together as “flight risk,” see Lauryn P. Gouldin, Defining Flight Risk, 85 U. Chi. L. Rev. 677 (2018).Show More The aspiration to limit detention to the dangerous requires each pretrial system to decide what kind of threat justifies detention. The advent of statistical risk assessment has crystallized the question further by forcing courts and stakeholders to deal in quantified probabilities and to confront the limits of prediction.13 13.John Monahan & Eric Silver, Judicial Decision Thresholds for Violence Risk Management, 2 Int’l J. of Forensic Mental Health 1, 6 (2003) (“The necessity for choosing a decision threshold for risk management decisions, long implicit in clinical risk assessment, is made apparent in actuarial prediction.”).Show More Every jurisdiction that authorizes pretrial detention, and every court that imposes it, must decide what degree of risk warrants depriving a person of liberty.

This Article tackles the question of when pretrial detention is warranted to prevent future crime.14 14.Cf. Mayson, Dangerous Defendants, supra note 10, at 557–60 (reserving judgment on the degree of risk that justifies preventive detention). This Article does not address the power of courts to detain an accused person who has violated a court-imposed condition of release.Show More Whereas the great bulk of prior scholarship on pretrial detention has focused on the shortcomings of current law,15 15.E.g., Albert W. Alschuler, Preventive Pretrial Detention and the Failure of Interest-Balancing Approaches to Due Process, 85 Mich. L. Rev. 510 (1986); Chalmous G. Reemes, United States v. Salerno: The Validation of Preventive Detention and the Denial of a Presumed Constitutional Right to Bail, 41 Ark. L. Rev. 697, 719–22 (1988).Show More we take existing law as a given. This is not to endorse existing law as representing the best possible policy approach to detention. The project, rather, is to take existing legal doctrine seriously and to ask when detention meets the law’s criteria. We present a conceptual framework for answering the question and then a novel empirical method for implementing the framework.

The conceptual framework is a straightforward consequentialist one. Constitutional law authorizes pretrial detention when the government’s interest in safety “outweighs” the individual’s interest in liberty.16 16.See infra notes 29–44 and accompanying text.Show More On our reading, this doctrine establishes a simple cost-benefit framework.17 17.See infra Section I.B.Show More In order to be justified in those terms, pretrial detention must, at minimum, avert more harm than it inflicts. The most significant harms at stake are the cost of crime to the potential crime victim and the cost of pretrial detention to the detainee. Within this calculus, prohibitions against pretrial punishment mean that the well-being of the arrestee must be fully considered. The challenge is thus to develop a direct measure of the relative harms of incarceration and crime.

To meet the challenge, the Article deploys a novel form of contingent valuation that we call “relative harm valuation” (“RHV”).18 18.We developed this concept and conducted our first study in 2017 but learned in the spring of 2020 that others have used the same method in other contexts. Most notably, the legal scholars Jane Bambauer and Andrea Roth have used a similar survey method to estimate when carceral punishment becomes “excessive” for constitutional purposes. See infra note 119. Conversations with Bambauer and Roth were valuable in refining our approach. We consider the existence of these other efforts to be a strength of the present study rather than a weakness. The other studies to have deployed RHV have also documented a surprising degree of aversion to incarceration or involuntary commitment among a sizable portion of respondents. See infra note 141.Show More It aims to estimate the relative harm of incarceration versus crime victimization while avoiding some of the distortions that plague traditional cost-benefit and contingent-valuation methods. Our method is intentionally simple, and it echoes John Rawls’ famous notion that the principles of justice are those that a rational person would choose behind a “veil of ignorance” as to her own traits and position in society.19 19.John Rawls, A Theory of Justice 118 (2d ed. 1999).Show More Adapting his effort to detach normative analysis from self-interest, we conduct a survey that requires respondents to compare the costs of detention and crime directly, imagining themselves as both detainee and as crime victim. We ask questions like, “How much time in jail is as bad as being the victim of a burglary?” and, “If you had to choose between spending a month in jail or being the victim of a burglary, which would you choose?”20 20.This method is a variant of the survey technique formally known as “contingent valuation,” which has provided most of the commonly used estimates for the costs of crime. See infra notes 103–07 and accompanying text.Show More

The survey results suggest that people view incarceration as an incredibly harmful experience. Most would choose crime-victimization over even short jail stints. The median respondent says that a single day in jail is as costly as a burglary, that three days are as costly as a robbery, and that a month in jail is as costly as an aggravated assault. Notably, these results are very consistent across race, gender, and socioeconomic class of the respondent. They are also quite similar for those who have personal experience with incarceration or crime victimization. Aversion to incarceration is broad and widespread.

By focusing on costs to the crime victim and incarcerated person, our method puts aside indirect and fiscal costs. However, we expect these to accrue on both sides of the ledger. Crime can create fear in the community, but so can incarceration. Law enforcement and prosecution are expensive to the state, but so is incarceration. Including such costs might make the analysis more nuanced, but we do not think it would meaningfully change the main result: that even a short period of incarceration inflicts very grave harms.

The severity of the harm that incarceration inflicts (according to our median respondent) means that preventive detention can only be justified on consequentialist grounds if there is a very high risk that the person would otherwise commit serious crime. Jailing a person for thirty days is justifiable only if it is expected to prevent crimes at least as harmful as a serious assault. Jailing someone for just one day is justifiable only if it averts crime as serious as burglary. These risk thresholds are higher than we can meet with statistical evidence. In studies of one widely used risk assessment tool, for instance, even defendants in the highest risk group have only a 2.5% chance of rearrest for a violent offense within a month.21 21.See Thomas Blomberg, William Bales, Karen Mann, Ryann Meldrum & Joe Nedelec, Ctr. for Criminology and Pub. Pol’y Rsch., Validation of the COMPAS Risk Assessment Classification Instrument 47 tbl.8 (2010).Show More We would have to detain forty such people for one month each, not just one person, to expect to avert one violent offense.

Given the high risk-threshold for preventive detention and the limits of our predictive abilities, pretrial detention on the basis of dangerousness should be rare. But it is not. On any given day, almost 500,000 people are held in jails awaiting trial.22 22.Zhen Zeng, Bureau of Just. Stat., Jail Inmates in 2017, 1 fig.1, 5 tbl.3 (2019), www.bjs.gov/content/pub/pdf/ji17.pdf [https://perma.cc/NPM3-NP84].Show More Many more cycle through pretrial detention each year.23 23.Id. at 1.Show More A significant number of these detentions may be the unintentional result of a court setting money bail that the accused cannot afford.24 24.E.g., Sandra G. Mayson, Detention by Any Other Name, 69 Duke L.J. 1643, 1653 (2020) [hereinafter Mayson, Detention by Any Other Name] (citing statistics regarding detention on money bail).Show More A much smaller number may be justified on the basis of flight risk—a ground for detention that this paper does not address.25 25.But see Wiseman, supra note 12, at 1349 (arguing that detention is rarely necessary to manage flight risk given advancing surveillance technologies).Show More Yet the centrality of public-safety discourse in the growing backlash to bail reform efforts demonstrates that crime risk dwarfs flight risk, in the view of both courts and the public, as a concern in the pretrial phase.26 26.See, e.g., Jesse McKinley, The Bail Reform Backlash that Has Democrats at War, N.Y. Times (Feb. 14, 2020), https://www.nytimes.com/2020/02/14/nyregion/new-york-bail-reform.html [https://perma.cc/NU9F-B3RZ]; see also, e.g., H.R. 81, 2020 Leg., Reg. Sess. (Ala. 2020) (proposing amendment to state constitution to permit pretrial detention for dangerousness).Show More The focus on crime risk suggests that a substantial portion of the millions of people who cycle through jails each year are there because they were perceived to be dangerous.

There are many possible explanations for the dramatic gap between theory and practice. The most likely, we surmise, is that current practice reflects an implicit discounting of the value of detainees’ well-being relative to the well-being of potential crime victims. This might be because accused people are viewed as criminals who have forfeited the right to liberty; because accused people are disproportionately Black, brown, and poor while the paradigmatic crime victim in the public imagination is white and wealthy; because pretrial detention is assumed to be credited against legitimate punishment imposed after conviction; or all of the above.

Some of these grounds for discounting the welfare of arrestees are easier to dismiss than others. The most difficult ground to dismiss is the idea that arrestees are not entitled to the same concern as crime victims because they are not wholly innocent; they are in some manner culpable for having created the risk at issue. As one of us has written elsewhere, this notion runs headlong into the presumption of innocence and prohibition on pretrial punishment, foundational principles of the American legal order.27 27.Mayson, Dangerous Defendants, supra note 10, at 537–38.Show More It is extremely difficult to reconcile those principles with the idea that the state can discount the welfare of arrestees on the basis of their (probable) guilt. Yet the intuition that the state may treat accused persons as having impaired moral status is strong, and in some circumstances, it seems unjust not to discount an arrestee’s welfare relative to a person the arrestee is credibly alleged to have threatened.

This Article does not resolve the conflict between the prohibition on pretrial punishment and the human impulse to discount the welfare of arrestees in a cost-benefit calculus. Rather, it demonstrates that a rigorous consequentialist analysis raises deep questions about how the law ought to value individual liberty and welfare, questions that echo across many fields of law. It also demonstrates that, left unexamined, consequentialist rationales can mask decision-making processes that rely on judgments of worth or that are dictated by perverse incentives. Confronting these processes will be important to the long-term success of pretrial reform.

This Article makes four contributions. The first is to fully articulate the consequentialist conceptual framework for detention decisions that current law entails. The second is the method we devise to apply that framework: relative harm valuation, which allows for the comparison of intangible harms without resorting to the distorting intermediary of dollars. This Article’s third contribution is the information the survey reveals: Even short periods of jail detention impose harms as grave as serious crimes. The logical corollary is that if we value the liberty of accused people and crime victims by a common standard, pretrial detention for the purpose of preventing crime is almost never warranted on cost-benefit grounds. Finally, in illuminating the chasm between the cost-benefit rationale for pretrial detention and our actual practices, this Article highlights the need for policymakers, courts, and bail reformers to grapple with the retributive impulse and institutional incentives that shape detention practice on the ground.

This Article proceeds in three Parts. Part I describes the legal doctrine that authorizes pretrial preventive detention on cost-benefit grounds. It extrapolates the consequentialist conceptual framework that this doctrine implies, then explains why existing empirical methods are inadequate to weigh the harm of criminal victimization against the harm of incarceration. Part II presents our relative-harm-valuation surveys and explains the results. Part III explores the implications of the survey results for pretrial policy and beyond.

  1. See generally Minority Report (20th Century Fox 2002) (depicting dystopian future in which future-criminals are incapacitated before they commit any crime). ↑
  2. See, e.g., Laurence H. Tribe, An Ounce of Detention: Preventative Justice in the World of John Mitchell, 56 Va. L. Rev. 371, 376–77 (1970) [hereinafter Tribe, An Ounce of Detention]; Laurence H. Tribe, Trial by Mathematics: Precision and Ritual in the Legal Process, 84 Harv. L. Rev. 1329, 1370 (1971); see also infra notes 78–79 and accompanying text (addressing this perspective). ↑
  3. See infra notes 58–64 and accompanying text. ↑
  4. There are also forms of preventive detention that seek to avert unintentional rather than, or in addition to, willful acts of harm. Examples include quarantine to prevent the spread of communicable disease, as we know all too well, and jury sequestration. For discussions of the law of jury sequestration, see, e.g., Marcy Strauss, Sequestration, 24 Am. J. Crim. L. 63 (1996); James P. Levine, The Impact of Sequestration on Juries, 79 Judicature 266 (1996). ↑
  5. See infra notes 34–43 and accompanying text. ↑
  6. See H.L.A. Hart, Punishment and Responsibility: Essays in the Philosophy of Law 1, 23 (2d ed. 2008) (explaining how this constraint on punishment “maximizes individual freedom within the coercive framework of law”); Douglas Husak, Overcriminalization: The Limits of the Criminal Law (2008) (describing conceptual constraints on punishment). ↑
  7. See generally Christopher Slobogin, A Jurisprudence of Dangerousness, 98 Nw. U. L. Rev. 1 (2003) (urging scholars and courts to develop more coherent standards for preventive deprivations of liberty). ↑
  8. See infra Section I.A. ↑
  9. See Alan Dershowitz, The Origins of Preventive Confinement in Anglo-American Law — Part I: The English Experience, 43 U. Cin. L. Rev. 1, 60 (1974) (“We have not even begun to ask these kinds of questions, or to develop modes of analysis for answering them.”). ↑
  10. See Sandra G. Mayson, Dangerous Defendants, 127 Yale L.J. 490, 494 (2018) [hereinafter Mayson, Dangerous Defendants] (“[Bail reform] holds great promise, but also raises an extremely difficult question: what probability that a person will commit unspecified future crime justifies detention . . . ?”). ↑
  11. See Stephanie Wykstra, Bail Reform, Which Could Save Millions of Unconvicted People from Jail, Explained, Vox (Oct. 17, 2018, 7:30 AM), https://www.vox.com/future-perfect/2018/10/17/17955306/bail-reform-criminal-justice-inequality [https://perma.cc/V3Q​S-J69G]. ↑
  12. Samuel R. Wiseman, Pretrial Detention and the Right to Be Monitored, 123 Yale L.J. 1344, 1351 (2014) (“Historically, the U.S. system of bail and associated pretrial detention was employed solely to prevent pretrial flight, but increasingly, the many individuals awaiting trial in jail are detained because a judge has deemed them potentially dangerous.”). For a thoughtful discussion of the various kinds of risk, often lumped together as “flight risk,” see Lauryn P. Gouldin, Defining Flight Risk, 85 U. Chi. L. Rev. 677 (2018). ↑
  13. John Monahan & Eric Silver, Judicial Decision Thresholds for Violence Risk Management, 2 Int’l J. of Forensic Mental Health 1, 6 (2003) (“The necessity for choosing a decision threshold for risk management decisions, long implicit in clinical risk assessment, is made apparent in actuarial prediction.”). ↑
  14. Cf. Mayson, Dangerous Defendants, supra note 10, at 557–60 (reserving judgment on the degree of risk that justifies preventive detention). This Article does not address the power of courts to detain an accused person who has violated a court-imposed condition of release. ↑
  15. E.g., Albert W. Alschuler, Preventive Pretrial Detention and the Failure of Interest-Balancing Approaches to Due Process, 85 Mich. L. Rev. 510 (1986); Chalmous G. Reemes, United States v. Salerno: The Validation of Preventive Detention and the Denial of a Presumed Constitutional Right to Bail, 41 Ark. L. Rev. 697, 719–22 (1988). ↑
  16. See infra notes 29–44 and accompanying text. ↑
  17. See infra Section I.B. ↑
  18. We developed this concept and conducted our first study in 2017 but learned in the spring of 2020 that others have used the same method in other contexts. Most notably, the legal scholars Jane Bambauer and Andrea Roth have used a similar survey method to estimate when carceral punishment becomes “excessive” for constitutional purposes. See infra note 119. Conversations with Bambauer and Roth were valuable in refining our approach. We consider the existence of these other efforts to be a strength of the present study rather than a weakness. The other studies to have deployed RHV have also documented a surprising degree of aversion to incarceration or involuntary commitment among a sizable portion of respondents. See infra note 141. ↑
  19. John Rawls, A Theory of Justice 118 (2d ed. 1999). ↑
  20. This method is a variant of the survey technique formally known as “contingent valuation,” which has provided most of the commonly used estimates for the costs of crime. See infra notes 103–07 and accompanying text. ↑
  21. See Thomas Blomberg, William Bales, Karen Mann, Ryann Meldrum & Joe Nedelec, Ctr. for Criminology and Pub. Pol’y Rsch., Validation of the COMPAS Risk Assessment Classification Instrument 47 tbl.8 (2010). ↑
  22. Zhen Zeng, Bureau of Just. Stat., Jail Inmates in 2017, 1 fig.1, 5 tbl.3 (2019), www.bjs.gov/content/pub/pdf/ji17.pdf [https://perma.cc/NPM3-NP84]. ↑
  23. Id. at 1. ↑
  24. E.g., Sandra G. Mayson, Detention by Any Other Name, 69 Duke L.J. 1643, 1653 (2020) [hereinafter Mayson, Detention by Any Other Name] (citing statistics regarding detention on money bail). ↑
  25. But see Wiseman, supra note 12, at 1349 (arguing that detention is rarely necessary to manage flight risk given advancing surveillance technologies). ↑
  26. See, e.g., Jesse McKinley, The Bail Reform Backlash that Has Democrats at War, N.Y. Times (Feb. 14, 2020), https://www.nytimes.com/2020/02/14/nyregion/new-york-bail-reform.html [https://perma.cc/NU9F-B3RZ]; see also, e.g., H.R. 81, 2020 Leg., Reg. Sess. (Ala. 2020) (proposing amendment to state constitution to permit pretrial detention for dangerousness). ↑

  27. Mayson, Dangerous Defendants, supra note 10, at 537–38. ↑

Collaborative Intent

Why do parties—even sophisticated ones—draft contracts that are vague or incomplete? Many others have tackled this question, but this Article argues that there is an overlooked, common, and powerful reason for contractual gaps. Using original interviews with dealmakers, it introduces a theory of “collaborative intent” to show that the bureaucratic deal-building process within companies can help explain why contracts are incomplete, vague, and otherwise seemingly irrational. The institutional details of dealmaking are important but understudied, and have wide-ranging implications for contract theory, design, and interpretation.

This Article makes three contributions to the literature. First, using original interviews with in-house dealmakers, it provides the literature’s first account of how deals are made within companies. Both economists and legal scholars have tackled the puzzle of incomplete contracting, but leading explanations overlook the critical influence of companies’ internal deal-building process. Unlike individuals who enter into contracts, sophisticated business parties do not have monolithic intent. Instead, even before taking a seat at the negotiation table, business parties engage in a complex, internal bargaining process that requires many intra-corporate constituencies to weigh in and sign off on the deal. The result is that sophisticated business parties bring multiple agendas to the negotiation table, and those agendas are reflected in the contract. Second, collaboration complicates intent, especially for sophisticated parties. Rather than being the result of rational, considered contract design, contractual gaps may be mere byproducts of the contract-shepherding process within the firm. Finally, this Article offers practical guidance to courts and contract designers about the overlooked and rampant intra-corporate bargaining and pork-barreling process. It helps them account for collaborative intent in ex ante contract design and ex post contract enforcement.

Introduction

Four weeks before Halloween in 2018, a Delaware Chancery Court decision spooked the corporate world. In an unprecedented move, the court released German pharmaceutical giant Fresenius from its $4.75 billion contract to buy U.S. generic drug manufacturer Akorn based on a contract term called the material adverse change clause.1 1.Akorn, Inc. v. Fresenius Kabi AG, No. CV 2018-0300, 2018 WL 4719347 (Del. Ch. Oct. 1, 2018), aff’d, 198 A.3d 724 (Del. 2018).Show More The decision in Akorn, Inc. v. Fresenius Kabi AG was the first time Delaware courts had found that a company triggered a material adverse change clause, and it sparked a storm of anxiety and commentary.2 2.Many major firms issued client alerts, immediately digesting the landmark case for their clients. See, e.g., David Leinwand, James E. Langston & Mark E. McDonald, Akorn v. Fresenius: A MAC in Delaware, Cleary Gottlieb Steen & Hamilton LLP (Oct. 11, 2018), https://www.clearymawatch.com/2018/10/akorn-v-fresenius-mac-delaware [https://perma.cc​/43KW-C54E]; Chris Gorman & Lisa Richards, Akorn v. Fresenius: Important Practical Lessons from First-Ever Material Adverse Effect, Fenwick & West LLP (Oct. 24, 2018), https://www.fenwick.com/publications/pages/akorn-v-fresenius-important-practical-lessons-from-first-ever-material-adverse-effect.aspx [https://perma.cc/9KPX-75MZ]; Peter A. Atkins & Edward B. Micheletti, ‘Reasonable Efforts’ Clauses in Delaware: One Size Fits All, Unless . . ., Skadden, Arps, Slate, Meagher & Flom LLP (Nov. 1, 2018), https://www.​skadden.com/insights/publications/2018/10/reasonable-efforts-clauses-in-delaware [https://p​erma.cc/JR7Z-FYAP]; Grant J. Esposito, David J. Fioccola & Robert W. May, Delaware Court of Chancery Finds a Material Adverse Event and Excuses Buyer from Obligation to Close in Akorn v. Fresenius Kabi AG, Morrison & Foerster LLP (Oct. 9, 2018), https://www.mofo.com/resources/insights/181009-delaware-material-adverse-event.html [htt​ps://perma.cc/FE72-NR7Q].Show More

In every merger and acquisition (“M&A”) deal, there is a material adverse change provision: a long-winded, heavily negotiated provision choked with exceptions and caveats. Material adverse change provisions almost always say the same thing: that if something huge and unexpected happens between the contract’s signing and the deal’s closing, one or both parties can back out of the deal.3 3.Albert Choi & George Triantis, Strategic Vagueness in Contract Design: The Case of Corporate Acquisitions, 119 Yale L.J. 848, 854 (2010) [hereinafter Choi & Triantis, Strategic Vagueness](defining a material adverse change clause in a contract as one that “permit[s] the buyer to avoid the closing of a deal if a material change has occurred in the financial condition, assets, liabilities, business, or operations of the target firm”).Show More And, perhaps most surprisingly, despite the long negotiations and dense legalese, material adverse change provisions are vague.4 4.Id. at 853 (noting that material adverse change clauses are vague, but “among the most heavily negotiated nonprice terms”).Show More

Vague provisions like these are common but surprising. In M&A contracts, for example, parties routinely haggle over whether they will use “best efforts,” “commercially reasonable best efforts,” or “reasonable best efforts” to accomplish certain tasks—and each of these standards will be left unspecified and unquantified.5 5.See Scot Baker & Albert Choi, Contract’s Role in Relational Contract, 101 Va. L. Rev. 559, 565 (2015) (describing the common “best efforts” provisions as “a fault-based and open-ended standard”); Anthony J. Casey & Anthony Niblett, Self-Driving Contracts, 43 J. Corp. L. 1, 8 (2017) (“[Parties can choose to] use a vague standard that also requires a court to fill in the details after the fact. This could be a clause that requires something like ‘reasonable efforts,’ ‘best efforts,’ or ‘commercially reasonable efforts.’”); Victor P. Goldberg, In Search of Best Efforts: Reinterpreting Bloor v. Falstaff, 44 St. Louis L. Rev. 1465, 1465 (2000) (“When contracting parties cannot quite define their obligations, they often resort to placeholder language, like ‘best efforts.’”); Robert E. Scott, Contract Design and the Shading Problem, 99 Marq. L. Rev. 1, 20 (2015) (“[I]n the past fifty years, parties have increasingly inserted vague terms such as ‘best efforts,’ reasonable best efforts,’ or ‘commercially reasonable best efforts’ as modifiers that are combined with specific of precise performance obligations under the contract.”). The contracts law case Bloor v. Falstaff, 601 F.2d 609 (2d Cir. 1979), is another famous case about best efforts clauses.Show More In debt contracts, borrowers promise to let lenders conduct “routine” inspections, without specifying what is routine.6 6.In A. Gay Jenson Farms Co. v. Cargill, 309 N.W.2d 285 (Minn. 1981), the well-known agency law case, for example, large international conglomerate Cargill lent money to a small Minnesota grain elevator operator, in part on the condition that Cargill could conduct routine inspections of the grain elevator. The intrusive nature of the inspections became one of the reasons that the grain elevator operator’s other creditors later sued Cargill, arguing that the grain elevator operator was an agent of Cargill and that Cargill should be liable for the operator’s debts. Id. at 290–91.Show More In just about any corporate contract, parties promise “material” compliance or compliance that does not rise to a “material adverse effect,” again without specifying what those thresholds might mean.7 7.Robert Malionek & Jon Weichselbaum, Five Keys to Analyzing a Material Adverse Effect, N.Y.L.J. (Mar. 6, 2019), https://www.lw.com/thoughtLeadership/five-keys-analyzing-materia​l-adverse-effect-ny-law-journal [https://perma.cc/TM95-FQKH] (noting that “[m]ateriality is both qualitative and quantitative” and that in M&A contracts, representations can be made “that reasonably would be expected to result in [a material adverse change]”).Show More In each of these circumstances, sophisticated parties, who have both the technical sophistication and financial means to draft specific, complete provisions, choose instead to embrace vague, incomplete ones.

The persistence of vague provisions, incomplete contracts, and other such contractual oddities has long plagued both legal scholars and economists—and neither literature has a shortage of explanations. Economist and Nobel Prize laureate Oliver Hart famously notes that contracts are necessarily incomplete: there are no parties, no circumstances, where every contingency can be thought of and thought out ex ante.8 8.See Oliver Hart, The Nobel Prize, https://www.nobelprize.org/prizes/economic-sciences/​2016/hart/facts/ [https://perma.cc/E6MG-HZY4] (last visited Nov. 10, 2021) (“In the mid-1980s, [Hart] contributed to the theory of incomplete contracts. . . . These analyses have been significant for, among other things, governance of companies and the design of laws and institutions.”); Oliver Hart & John Moore, Foundations of Incomplete Contracts, 66 Rev. Econ. Stud. 115 (1999) [hereinafter Hart & Moore, Foundations of Incomplete Contracts](developing a model for the idea that contracts are incomplete); Oliver D. Hart, Incomplete Contracts and the Theory of the Firm, 4 J.L. Econ. & Org. 119 (1988); Oliver Hart, Dep’t of Econ., Harvard Univ., Incomplete Contracts and Control, Nobel Prize Lecture 372–73 (Dec. 8. 2016), https://www.nobelprize.org/uploads/2018/06/hart-lecture.pdf [https://perma.cc/7TK​E-49TD] [hereinafter Hart, Incomplete Contracts & Control](noting that, although economists spent many decades working on questions involving complete contracts, “[a]ctual contracts are not like this, as lawyers have recognized for some time. They are poorly worded, ambiguous, and leave out important things. They are incomplete.”).Show More Many scholars have argued convincingly that vagueness in contracts—especially in contracts between sophisticated business parties—is intentional and rational: provisions that are rarely litigated but expensive to negotiate, such as material adverse effect provisions, are particularly well-suited to vagueness.9 9.Choi & Triantis, Strategic Vagueness, supra note 3, at 852–53, 855 (arguing that parties can use vague contract provisions efficiently—for example, material adverse change clauses in acquisition agreements may remain vague because they are rarely litigated); Robert E. Scott & George G. Triantis, Anticipating Litigation in Contract Design, 115 Yale L.J. 814, 818–22 (2006) [hereinafter Scott & Triantis, Anticipating Litigation] (examining the efficiency of investment in the design and enforcement phases of the contracting process and arguing that parties can lower overall contracting costs by using vague contract terms ex ante and shifting investment to the ex post enforcement phase); Robert E. Scott & George G. Triantis, Incomplete Contracts and the Theory of Contract Design, 56 Case W. Res. L. Rev. 187, 195–96 (2005) (considering the role of litigation in motivating contract design).Show More Still others have argued that contracts do not need to be complete or specific. Community and industry norms can and do fill the gap where contracts are vague—and sometimes even when contracts do not even exist.10 10.See Ronald J. Gilson, Charles Sabel & Robert E. Scott, Braiding: The Interaction of Formal and Informal Contracting in Theory, Practice, and Doctrine, 110 Colum. L. Rev. 1377, 1398–99 (2010) [hereinafter Gilson et al., Braiding] (discussing the “rivalry” between formal and informal enforcement for contracts and noting that the two can substitute for each other or complement each other); see also Lisa Bernstein, Opting Out of the Legal System: Extralegal Contractual Relations in the Diamond Industry, 21 J. Legal Stud. 115, 121–24 (1992) [hereinafter Bernstein, Opting Out] (describing trade association enforcement of contractual breaches); Lisa Bernstein, Private Commercial Law in the Cotton Industry: Creating Cooperation Through Rules, Norms, and Institutions, 99 Mich. L. Rev. 1724, 1725 (2001) (describing the cotton industry’s alternative system of enforcement to the typical legal system).Show More And, in those cases, it is the threat of informal sanctions, such as loss of reputation, that curbs bad behavior, even without a legally binding contract.11 11.Informal sanctions are particularly effective in small, tight-knit communities where parties have many points of contact. A robust literature has documented the role of norms and informal sanctions in a variety of interesting settings. See Robert C. Ellickson, Of Coase and Cattle: Dispute Resolution Among Neighbors in Shasta County, 38 Stan. L. Rev. 623, 628, 677 (1986) [hereinafter Ellickson, Of Coase and Cattle] (describing how rural cattle ranchers in Shasta County, California, abide by norms rather than rules and how animal trespass disputes are settled by self-help rather than formal legal enforcement mechanisms); Robert C. Ellickson, A Hypothesis of Wealth-Maximizing Norms: Evidence from the Whaling Industry, 5 J.L. Econ. & Org. 83, 84–85 (1989) (presenting evidence of informal enforcement—norms—overtaking formal enforcement in the whaling industry); Peter T. Leeson, An-arrgh-chy: The Law and Economics of Pirate Organization, 115 J. Pol. Econ. 1049, 1051 (2007) (describing the extralegal systems that pirates developed to provide checks on captain predation and to “create piratical law and order”); Bernstein, Opting Out, supra note 10, at 124 (describing how a diamond-merchant trade association in New York City helps to enforce contracts); Gillian K. Hadfield & Iva Bozovic, Scaffolding: Using Formal Contracts to Support Informal Relations in Support of Innovation, 2016 Wis. L. Rev. 981, 987, 1017 (describing the way in which commercial contracting parties across a variety of industries use a mix of formal and informal contracts to support their business relationships); Lisa Bernstein, Beyond Relational Contracts: Social Capital and Network Governance in Procurement Contracts, 7 J. Legal Analysis 561, 562 (2015) (describing how original equipment manufacturers in the Midwest have used a mix of formal contracts, relational contracts, and other tools to build and support their business relationships); Jonathan M. Barnett, Hollywood Deals: Soft Contracts for Hard Markets, 64 Duke L.J. 605, 607 (2015) (discussing the use of non-binding agreements—or “soft contracts”—in modern Hollywood filmmaking).Show More

In many contexts, these explanations are convincing. Consider a simple apartment lease signed between one landlord and one tenant. Rather than spending a lot of time up-front discussing the specific condition in which the tenant needs to leave the apartment at move-out, the parties might simply decide to agree to the vague provision that the tenant needs to leave the apartment “clean.” The law and economics view explains this decision well: in most cases, the tenant leaves the place clean enough, and the parties will never have to haggle over the details upon move-out. Relational contracting theory also explains the vagueness well: the landlord doesn’t need to be too specific about cleanliness because the tenant relies on the landlord to give her a good reference for her next apartment rental.

But while existing explanations work well for simple, two-party contracts, and do some work in explaining sophisticated-party contracting, they fall short.12 12.In previous work, for example, I explored the puzzle of term sheets in M&A contracting. Term sheets—short, nonbinding precursors to a full-fledged M&A contract—are not contracts and are not legally binding or enforceable. Parties to term sheets do not operate in the tight-knit communities where informal sanctions are known to work. Nonetheless, once parties sign them, they behave as though bonded. Why do nonbinding term sheets have binding power? See Cathy Hwang, Deal Momentum, 65 UCLA L. Rev. 376, 380 (2018) (describing how deal lawyers use preliminary agreements in M&A deals); Cathy Hwang, Faux Contracts, 105 Va. L. Rev. 1025, 1056 (2019) [hereinafter, Hwang, Faux Contracts] (describing how M&A deals create small relational ecosystems in which both the contracting parties and their agents are incentivized to engage in consummate, rather than perfunctory, performance).Show More Certainly cost-benefit analysis and informal sanctions account for some contractual oddities—but not all. This Article offers a friendly addendum to those pathbreaking explanations: collaborative intent.

At its core, collaborative intent relies on a simple idea: businesses are not monoliths. They contain many divisions, departments, operational groups, and other constituencies. This idea is well-understood in the literature—even Ronald Coase’s seminal work on the boundary of the firm assumed that companies would contain multiple different groups within it.13 13.Ronald H. Coase, The Nature of the Firm, 16 Economica 386, 390 (1937) (posing and discussing the “boundaries of the firm” question: When should individuals be expected to form firms, and when should they be expected to cooperate through contract?).Show More Collaborative intent takes this idea a step further: it explicitly recognizes that each module within a company has its own purpose and, correspondingly, its own incentives, goals, limitations, and preferences. Internal constituencies often have a chance to veto—or at least weigh in on—both the substance and form of a proposed deal. By the time a company brings its intent to the negotiating table, that intent reflects the result of a consensus-building process within the company—in other words, the company brings what this Article calls its collaborative intent.

That collaborative intent in turn helps to account for many contractual oddities. Contracts that result from this kind of institutional collaboration are not necessarily rational, intentional, or carefully considered. Instead, they are amalgamations of many preferences within each deal party and result from the consensus-building process of getting the deal through a bureaucracy.

This Article provides a layered account of collaborative intent and its impact on deals and contracts, and proceeds as follows. Part I sets the stage. It shows how current contract theory does not account for the dealmaking process within firms. Part II presents the theory and evidence of collaborative intent. It uses two dozen original interviews with in-house dealmakers to show how the process of building consensus for a deal within the firm impacts contractual form and structure. Interview participants brought experience from a variety of industries, ranging from technology to hospitality to gaming, and uniformly reported that dealmaking within the firm is a collaborative exercise: it requires vote-whipping, pork-barreling, and balancing the needs of various constituencies into a coherent but multifaceted “intent.” Part III turns to implications. Existing literature overlooks the institutional details that impact contract design. Collaborative intent injects important and overlooked nuance and helps to build out a nuanced account of dealmaking that can help shape contract theory, enforcement, and design.

  1. Akorn, Inc. v. Fresenius Kabi AG, No. CV 2018-0300, 2018 WL 4719347 (Del. Ch. Oct. 1, 2018), aff’d, 198 A.3d 724 (Del. 2018). ↑
  2. Many major firms issued client alerts, immediately digesting the landmark case for their clients. See, e.g., David Leinwand, James E. Langston & Mark E. McDonald, Akorn v. Fresenius: A MAC in Delaware, Cleary Gottlieb Steen & Hamilton LLP (Oct. 11, 2018), https://www.clearymawatch.com/2018/10/akorn-v-fresenius-mac-delaware [https://perma.cc​/43KW-C54E]; Chris Gorman & Lisa Richards, Akorn v. Fresenius: Important Practical Lessons from First-Ever Material Adverse Effect, Fenwick & West LLP (Oct. 24, 2018), https://www.fenwick.com/publications/pages/akorn-v-fresenius-important-practical-lessons-from-first-ever-material-adverse-effect.aspx [https://perma.cc/9KPX-75MZ]; Peter A. Atkins & Edward B. Micheletti, ‘Reasonable Efforts’ Clauses in Delaware: One Size Fits All, Unless . . ., Skadden, Arps, Slate, Meagher & Flom LLP (Nov. 1, 2018), https://www.​skadden.com/insights/publications/2018/10/reasonable-efforts-clauses-in-delaware [https://p​erma.cc/JR7Z-FYAP]; Grant J. Esposito, David J. Fioccola & Robert W. May, Delaware Court of Chancery Finds a Material Adverse Event and Excuses Buyer from Obligation to Close in Akorn v. Fresenius Kabi AG, Morrison & Foerster LLP (Oct. 9, 2018), https://www.mofo.com/resources/insights/181009-delaware-material-adverse-event.html [htt​ps://perma.cc/FE72-NR7Q]. ↑
  3. Albert Choi & George Triantis, Strategic Vagueness in Contract Design: The Case of Corporate Acquisitions, 119 Yale L.J. 848, 854 (2010) [hereinafter Choi & Triantis, Strategic Vagueness] (defining a material adverse change clause in a contract as one that “permit[s] the buyer to avoid the closing of a deal if a material change has occurred in the financial condition, assets, liabilities, business, or operations of the target firm”). ↑
  4. Id. at 853 (noting that material adverse change clauses are vague, but “among the most heavily negotiated nonprice terms”). ↑
  5. See Scot Baker & Albert Choi, Contract’s Role in Relational Contract, 101 Va. L. Rev. 559, 565 (2015) (describing the common “best efforts” provisions as “a fault-based and open-ended standard”); Anthony J. Casey & Anthony Niblett, Self-Driving Contracts, 43 J. Corp. L. 1, 8 (2017) (“[Parties can choose to] use a vague standard that also requires a court to fill in the details after the fact. This could be a clause that requires something like ‘reasonable efforts,’ ‘best efforts,’ or ‘commercially reasonable efforts.’”); Victor P. Goldberg, In Search of Best Efforts: Reinterpreting Bloor v. Falstaff, 44 St. Louis L. Rev. 1465, 1465 (2000) (“When contracting parties cannot quite define their obligations, they often resort to placeholder language, like ‘best efforts.’”); Robert E. Scott, Contract Design and the Shading Problem, 99 Marq. L. Rev. 1, 20 (2015) (“[I]n the past fifty years, parties have increasingly inserted vague terms such as ‘best efforts,’ reasonable best efforts,’ or ‘commercially reasonable best efforts’ as modifiers that are combined with specific of precise performance obligations under the contract.”). The contracts law case Bloor v. Falstaff, 601 F.2d 609 (2d Cir. 1979), is another famous case about best efforts clauses. ↑
  6. In A. Gay Jenson Farms Co. v. Cargill, 309 N.W.2d 285 (Minn. 1981), the well-known agency law case, for example, large international conglomerate Cargill lent money to a small Minnesota grain elevator operator, in part on the condition that Cargill could conduct routine inspections of the grain elevator. The intrusive nature of the inspections became one of the reasons that the grain elevator operator’s other creditors later sued Cargill, arguing that the grain elevator operator was an agent of Cargill and that Cargill should be liable for the operator’s debts. Id. at 290–91. ↑
  7. Robert Malionek & Jon Weichselbaum, Five Keys to Analyzing a Material Adverse Effect, N.Y.L.J. (Mar. 6, 2019), https://www.lw.com/thoughtLeadership/five-keys-analyzing-materia​l-adverse-effect-ny-law-journal [https://perma.cc/TM95-FQKH] (noting that “[m]ateriality is both qualitative and quantitative” and that in M&A contracts, representations can be made “that reasonably would be expected to result in [a material adverse change]”). ↑
  8. See Oliver Hart, The Nobel Prize, https://www.nobelprize.org/prizes/economic-sciences/​2016/hart/facts/ [https://perma.cc/E6MG-HZY4] (last visited Nov. 10, 2021) (“In the mid-1980s, [Hart] contributed to the theory of incomplete contracts. . . . These analyses have been significant for, among other things, governance of companies and the design of laws and institutions.”); Oliver Hart & John Moore, Foundations of Incomplete Contracts, 66 Rev. Econ. Stud. 115 (1999) [hereinafter Hart & Moore, Foundations of Incomplete Contracts] (developing a model for the idea that contracts are incomplete); Oliver D. Hart, Incomplete Contracts and the Theory of the Firm, 4 J.L. Econ. & Org. 119 (1988); Oliver Hart, Dep’t of Econ., Harvard Univ., Incomplete Contracts and Control, Nobel Prize Lecture 372–73 (Dec. 8. 2016), https://www.nobelprize.org/uploads/2018/06/hart-lecture.pdf [https://perma.cc/7TK​E-49TD] [hereinafter Hart, Incomplete Contracts & Control] (noting that, although economists spent many decades working on questions involving complete contracts, “[a]ctual contracts are not like this, as lawyers have recognized for some time. They are poorly worded, ambiguous, and leave out important things. They are incomplete.”). ↑
  9. Choi & Triantis, Strategic Vagueness, supra note 3, at 852–53, 855 (arguing that parties can use vague contract provisions efficiently—for example, material adverse change clauses in acquisition agreements may remain vague because they are rarely litigated); Robert E. Scott & George G. Triantis, Anticipating Litigation in Contract Design, 115 Yale L.J. 814, 818–22 (2006) [hereinafter Scott & Triantis, Anticipating Litigation] (examining the efficiency of investment in the design and enforcement phases of the contracting process and arguing that parties can lower overall contracting costs by using vague contract terms ex ante and shifting investment to the ex post enforcement phase); Robert E. Scott & George G. Triantis, Incomplete Contracts and the Theory of Contract Design, 56 Case W. Res. L. Rev. 187, 195–96 (2005) (considering the role of litigation in motivating contract design). ↑
  10. See Ronald J. Gilson, Charles Sabel & Robert E. Scott, Braiding: The Interaction of Formal and Informal Contracting in Theory, Practice, and Doctrine, 110 Colum. L. Rev. 1377, 1398–99 (2010) [hereinafter Gilson et al., Braiding] (discussing the “rivalry” between formal and informal enforcement for contracts and noting that the two can substitute for each other or complement each other); see also Lisa Bernstein, Opting Out of the Legal System: Extralegal Contractual Relations in the Diamond Industry, 21 J. Legal Stud. 115, 121–24 (1992) [hereinafter Bernstein, Opting Out] (describing trade association enforcement of contractual breaches); Lisa Bernstein, Private Commercial Law in the Cotton Industry: Creating Cooperation Through Rules, Norms, and Institutions, 99 Mich. L. Rev. 1724, 1725 (2001) (describing the cotton industry’s alternative system of enforcement to the typical legal system). ↑
  11. Informal sanctions are particularly effective in small, tight-knit communities where parties have many points of contact. A robust literature has documented the role of norms and informal sanctions in a variety of interesting settings. See Robert C. Ellickson, Of Coase and Cattle: Dispute Resolution Among Neighbors in Shasta County, 38 Stan. L. Rev. 623, 628, 677 (1986) [hereinafter Ellickson, Of Coase and Cattle] (describing how rural cattle ranchers in Shasta County, California, abide by norms rather than rules and how animal trespass disputes are settled by self-help rather than formal legal enforcement mechanisms); Robert C. Ellickson, A Hypothesis of Wealth-Maximizing Norms: Evidence from the Whaling Industry, 5 J.L. Econ. & Org. 83, 84–85 (1989) (presenting evidence of informal enforcement—norms—overtaking formal enforcement in the whaling industry); Peter T. Leeson, An-arrgh-chy: The Law and Economics of Pirate Organization, 115 J. Pol. Econ. 1049, 1051 (2007) (describing the extralegal systems that pirates developed to provide checks on captain predation and to “create piratical law and order”); Bernstein, Opting Out, supra note 10, at 124 (describing how a diamond-merchant trade association in New York City helps to enforce contracts); Gillian K. Hadfield & Iva Bozovic, Scaffolding: Using Formal Contracts to Support Informal Relations in Support of Innovation, 2016 Wis. L. Rev. 981, 987, 1017 (describing the way in which commercial contracting parties across a variety of industries use a mix of formal and informal contracts to support their business relationships); Lisa Bernstein, Beyond Relational Contracts: Social Capital and Network Governance in Procurement Contracts, 7 J. Legal Analysis 561, 562 (2015) (describing how original equipment manufacturers in the Midwest have used a mix of formal contracts, relational contracts, and other tools to build and support their business relationships); Jonathan M. Barnett, Hollywood Deals: Soft Contracts for Hard Markets, 64 Duke L.J. 605, 607 (2015) (discussing the use of non-binding agreements—or “soft contracts”—in modern Hollywood filmmaking). ↑
  12. In previous work, for example, I explored the puzzle of term sheets in M&A contracting. Term sheets—short, nonbinding precursors to a full-fledged M&A contract—are not contracts and are not legally binding or enforceable. Parties to term sheets do not operate in the tight-knit communities where informal sanctions are known to work. Nonetheless, once parties sign them, they behave as though bonded. Why do nonbinding term sheets have binding power? See Cathy Hwang, Deal Momentum, 65 UCLA L. Rev. 376, 380 (2018) (describing how deal lawyers use preliminary agreements in M&A deals); Cathy Hwang, Faux Contracts, 105 Va. L. Rev. 1025, 1056 (2019) [hereinafter, Hwang, Faux Contracts] (describing how M&A deals create small relational ecosystems in which both the contracting parties and their agents are incentivized to engage in consummate, rather than perfunctory, performance). ↑

  13. Ronald H. Coase, The Nature of the Firm, 16 Economica 386, 390 (1937) (posing and discussing the “boundaries of the firm” question: When should individuals be expected to form firms, and when should they be expected to cooperate through contract?). ↑

Frankenstein’s Baby: The Forgotten History of Corporations, Race, and Equal Protection

This Article highlights the crucial role corporations played in crafting an expansive interpretation of the Fourteenth Amendment. Exposing the role of race in the history of the constitutional law of corporate personhood for the first time, this Article argues that corporations were instrumental in laying the foundation of the Equal Protection Clause that underlies civil rights jurisprudence today. By simultaneously bringing cases involving both corporations and Chinese immigrants, corporate lawyers and sympathetic federal judges crafted a broad interpretation of equal protection in order to draw a through-line from African Americans, to Chinese immigrants, and finally to corporate shareholders. At the same time that corporate litigation expanded the umbrella of protected “persons,” however, it limited the capacity of the Fourteenth Amendment to address issues of substantive inequality.

This Article reveals that central to the argument in favor of corporate constitutional personhood was a direct analogy between corporate shareholders and racial minorities. This Article thus highlights the intersection of corporate personhood and race, a connection that has rarely, if ever, been explored. Corporate lawyers’ expansive interpretation of equal protection ultimately triumphed in the Supreme Court with the twin cases of Yick Wo v. Hopkins, a bedrock of modern civil rights doctrine, and Santa Clara v. Southern Pacific Railroad, a case credited with extending equal protection rights to corporations. This is the first Article to juxtapose these two seminal cases and to expose the deep and long-standing connections between them. In so doing, this Article uncovers a neglected history of the link between corporations and race, as well as a lost history of the Fourteenth Amendment.

Introduction

“Like Frankenstein’s baby, there was no end to its growing, and no limit to its voracity. And, like that wonderful child, it started in to devour its author.”

– Records of the California Constitutional Convention (1878)

“The Fourteenth Amendment . . . stands in the constitution as a perpetual shield against all unequal and partial legislation by the states, and the injustice which follows from it, whether directed against the most humble or the most powerful; against the despised laborer from China, or the envied master of millions.”

– The Railroad Tax Cases (9th Cir. 1882)

Since the controversial cases of Citizens United v. Federal Election Commission1 1.558 U.S. 310 (2010).Show More and Burwell v. Hobby Lobby,2 2.573 U.S. 682 (2014).Show More which recognized the political speech and religious freedom rights of corporations,3 3.In Citizens United, the Supreme Court struck down a federal law, 2 U.S.C. § 441b (2006), that banned direct corporate spending on political campaigns. 558 U.S. at 372. Citizens United was part of a long line of cases in which the Court had recognized the First Amendment rights of corporations, including: NAACP v. Alabama ex rel. Patterson, 357 U.S. 449, 459 (1958) (freedom of association); NAACP v. Button, 371 U.S. 415, 428–29 (1963) (freedom of expression and association); New York Times Co. v. Sullivan, 376 U.S. 254, 264 (1964) (freedom of speech and the press); and First National Bank of Boston v. Bellotti, 435 U.S. 765, 784 (1978) (campaign expenditures as political speech). Hobby Lobby concluded that corporations were “persons” under the Religious Freedom Restoration Act, 42 U.S.C. §§ 2000bb–1, and held that Health and Human Services regulations requiring employers to provide insurance that covered contraceptives unconstitutionally burdened closely held corporations’ exercise of religion. 573 U.S. at 736.Show More respectively, activist groups have been lobbying for a constitutional amendment to eliminate corporate constitutional personhood.4 4.See Move to Amend, https://www.movetoamend.org/ [https://perma.cc/RH9L-2FZT] (last visited Aug. 19, 2020); United for the People, http://united4thepeople.org/ [https://perma.cc/XS9X-LZNR] (last visited Aug. 19, 2020).Show More Granting corporations constitutional rights, they argue, gives powerful mega-corporations even greater means to avoid regulation and manipulate elections, thus threatening “the democratic promise of America.”5 5.United for the People, supra note 4; Move to Amend, supra note 4. See Joanna M. Meyer, The Real Error in Citizens United, 69 Wash. & Lee L. Rev. 2171, 2198 (2012).Show More In 2019, Rep. Pramila Jayapal (D-WA) introduced a bill to provide that “the rights extended by the Constitution are the rights of natural persons only” and that corporations “shall have no rights under this Constitution.”6 6.H.R.J. Res. 48, 116th Cong. (2019) (proposing an amendment to the Constitution of the United States providing that the rights extended by the Constitution are the rights of natural persons only). Other bills introduced in both the House and the Senate have targeted specific constitutional rights, such as one “waiving the application of the first article of amendment to the political speech of corporations.” H.R.J. Res. 39, 116th Cong. (2019). See United for the People, http://united4thepeople.org/amendments/ (last visited Oct. 31, 2021) [https://perma.cc/QGU7-883U], for an up-to-date list of proposed amendments relating to corporate constitutional rights.Show More Supporters of this amendment showcase buttons and bumper stickers that proclaim: “Corporations are not People!”7 7.See Move to Amend, https://move-to-amend.myshopify.com/collections/frontpage [https://perma.cc/8JVP-CYAD] (last visited Dec. 28, 2021).Show More

Corporate constitutional rights have been debated since the early years of the American Republic.8 8.For early cases debating the constitutional rights of corporations, see Bank of United States v. Deveaux, 9 U.S. (5 Cranch) 61, 63–64 (1809); Hope Insurance Co. of Providence v. Boardman, 9 U.S. (5 Cranch) 57, 58 (1809); Terrett v. Taylor, 13 U.S. (9 Cranch) 43, 46–47 (1815); Trustees of Dartmouth College v. Woodward, 17 U.S. (4 Wheaton) 518, 556 (1819); Proprietors of Charles River Bridge v. Proprietors of Warren Bridge, 36 U.S. (11 Peters) 420, 421 (1837); and Louisville, Cincinnati & Charleston Railroad Co. v. Letson, 43 U.S. (2 Howard) 497, 499 (1844). See also Adam Winkler, We the Corporations: How American Businesses Won Their Civil Rights, at xxi (2018) (describing how the country’s most powerful corporations have persistently tried to use the Constitution to evade unwanted government regulations); Margaret M. Blair & Elizabeth Pollman, The Derivative Nature of Corporate Constitutional Rights, 56 Wm. & Mary L. Rev. 1673, 1680 (2015) (explaining how the Supreme Court was tasked with determining the applicability of constitutional provisions to corporations in an 1809 case involving the first Bank of the United States).Show More Missing from histories of corporate personhood, however, is the central role that race played in the development of corporate constitutional rights.9 9.Legal historians of corporate personhood have discussed corporate Fourteenth Amendment cases in some detail but have neglected the role that race played in the development of these cases. For representative writings on corporate personhood and constitutional rights, see Morton J. Horwitz, Santa Clara Revisited: The Development of Corporate Theory, 88 W. Va. L. Rev. 173, 174 (1985); Blair & Pollman, supra note 8, at 1677; Reuven S. Avi-Yonah, Citizens United and the Corporate Form, 2010 Wis. L. Rev. 999, 1033–34; Gregory A. Mark, The Personification of the Business Corporation in American Law, 54 U. Chi. L. Rev. 1441, 1443 (1987); Herbert Hovenkamp, The Classical Corporation in American Legal Thought, 76 Geo. L.J. 1593, 1640–41 (1988); David K. Millon, Theories of the Corporation, 1990 Duke L.J. 201, 205–07; Elizabeth Pollman, Reconceiving Corporate Personhood, 2011 Utah L. Rev. 1629, 1630; Margaret M. Blair, Corporate Personhood and the Corporate Persona, 2013 U. Ill. L. Rev. 785, 796–97; Kent Greenfield, In Defense of Corporate Persons, 30 Const. Comment. 309, 310–12 (2015); Tamara R. Piety, Why Personhood Matters, 30 Const. Comment. 361, 362–63 (2015); Turkuler Isiksel, Corporations as Rights-Bearers, J. Pol. (forthcoming) (manuscript at 1–2) (on file with the author).Show More This Article uncovers this link by highlighting the strategy of a group of corporate lawyers and Ninth Circuit10 10.At the time, the Circuit Court for the District of California, where the cases discussed in this Article arose, was located in the federal circuit encompassing California and Oregon. This court exercised both original and appellate jurisdiction and was staffed by one Supreme Court Justice (Stephen Field), one circuit court judge (Lorenzo Sawyer), and one district court judge (Ogden Hoffman), any two of which could hear a case. Christian G. Fritz, Federal Justice in California: The Court of Ogden Hoffman, 1851–1891, at 29–30 (1991). To avoid confusion, this Article follows contemporary scholarship that refers to these cases as occurring in the Ninth Circuit. Id. at 29; Howard J. Graham, Everyman’s Constitution: Historical Essays on the Fourteenth Amendment, the “Conspiracy Theory,” and American Constitutionalism 573 (1968); Winkler, supra note 8, at 153–54. However, this should not be confused with the modern-day U.S. Court of Appeals for the Ninth Circuit, which was not created until the federal appellate system was redesigned in 1891. Joshua Glick, On the Road: The Supreme Court and the History of Circuit Riding, 24 Cardozo L. Rev. 1753, 1826 (2003).Show More judges to expand the Fourteenth Amendment using cases involving both corporations and race. As this Article reveals, modern ideas about corporate personhood are predicated on a historical analogy between corporate shareholders and racial minorities.11 11.A growing area of scholarship explores the connections between corporations and race. See, e.g., Cheryl L. Wade, Attempting to Discuss Race in Business and Corporate Law Courses and Seminars, 77 St. John’s L. Rev. 901 (2003); Alfred Dennis Mathewson, Race in Ordinary Course: Utilizing the Racial Background in Antitrust and Corporate Law Courses, 23 St. John’s J. Legal Comment. 667, 685 (2008); Cheryl L. Wade, Introduction to Symposium on People of Color, Women, and the Public Corporation: The Sophistication of Discrimination, 79 St. John’s L. Rev. 887, 890 (2005); Thomas W. Joo, Corporate Hierarchy and Racial Justice, 79 St. John’s L. Rev. 955 (2005); Thomas W. Joo, Race, Corporate Law, and Shareholder Value, 54 J. Legal Ed. 351 (2004); Juliet E.K. Walker, White Corporate America: The New Arbiter of Race? in Constructing Corporate America: History, Politics, Culture, 246, 253, 260 (Kenneth Lipartito & David B. Sicilia eds., 2007).Show More Yet racial analogies not only helped corporations gain constitutional rights; corporations themselves created constitutional guarantees that ultimately protected racial minorities. This neglected history shows that corporations have been crucial players in shaping rights guarantees—particularly an expansive interpretation of equal protection under the Fourteenth Amendment—that apply to individuals as well. In revealing these complex interconnections, this Article exposes the multifaceted legacy of litigation over corporate personhood in the development of modern equal protection jurisprudence.

This Article juxtaposes two seminal cases, decided on the same day in 1886 and brought by the same lawyers: Santa Clara County v. Southern Pacific Railroad,12 12.118 U.S. 394 (1886).Show More credited with establishing corporate Fourteenth Amendment rights,13 13.See Horwitz, supra note 9, at 173; Blair & Pollman, supra note 8, at 1694–95; Avi-Yonah, supra note 9, at 1033–34.Show More and Yick Wo v. Hopkins,14 14.118 U.S. 356 (1886).Show More a touchstone of modern civil rights jurisprudence.15 15.See 2 Encyclopedia of American Civil Rights and Liberties 482, 1055 (Kara E. Stooksbury, John M. Scheb, II & Otis H Stephens, Jr. eds., rev. and expanded ed. 2017); Peter Irons, Jim Crow’s Children: The Broken Promise of the Brown Decision 53 (2004); see also infra notes 327–35 (noting early civil rights cases citing Yick Wo).Show More This Article uncovers the conjoined history of these two Fourteenth Amendment cases, one involving a corporation and the other a Chinese immigrant, and their antecedents.16 16.Scholars have studied the connection between Fourteenth Amendment claims of Chinese immigrants and the Supreme Court’s desire to protect economic rights. See Thomas Wuil Joo, New “Conspiracy Theory” of the Fourteenth Amendment: Nineteenth Century Chinese Civil Rights Cases and the Development of Substantive Due Process Jurisprudence, 29 U.S.F. L. Rev. 353, 354–55 (1995); Thomas W. Joo, Yick Wo Re-Revisited: Nonblack Nonwhites and Fourteenth Amendment History, 2008 U. Ill. L. Rev. 1427, 1428; Charles McClain, Jr., In Search of Equality: The Chinese Struggle Against Discrimination in Nineteenth-Century America 83 (1994); Graham, supra note 10, at 15; Daniel W. Levy, Classical Lawyers and the Southern Pacific Railroad, 9 W. Legal Hist. 177, 211, 216 (1996); Paul Kens, Justice Stephen Field: Shaping Liberty from the Gold Rush to the Gilded Age 209 (1997); Winkler, supra note 8, at 153. However, no prior scholarship has specifically examined the intersection of Fourteenth Amendment claims by corporations and by Chinese immigrants.Show More Drawing on little-known archival sources, it traces how the same coterie of corporate lawyers simultaneously brought Fourteenth Amendment cases involving Chinese and corporate litigants before the sympathetic Ninth Circuit in order to strategically craft a broad interpretation of the Equal Protection Clause that applied to all “persons,” natural and artificial alike.17 17.See In re Ah Fong, 1 F. Cas. 213, 213 (C.C.D. Cal. 1874) (No. 102); Ho Ah Kow v. Nunan, 12 F. Cas. 252, 252 (C.C.D. Cal. 1879) (No. 6,546); In re Ah Chong, 2 F. 733, 737 (C.C.D. Cal. 1880); In re Tiburcio Parrott, 1 F. 481, 482 (C.C.D. Cal. 1880); The Railroad Tax Cases, 13 F. 722, 727 (C.C.D. Cal. 1882); In re Quong Woo, 13 F. 229, 233 (C.C.D. Cal. 1882); County of Santa Clara v. S. Pac. R.R. Co., 18 F. 385, 386, 397 (C.C.D. Cal. 1883), aff’d, 118 U.S. 394 (1886); In re Yick Wo, 9 P. 139, 139 (Cal. 1885), rev’d sub nom. Yick Wo v. Hopkins, 118 U.S. 356 (1886); In re Wo Lee, 26 F. 471, 475 (C.C.D. Cal. 1886).Show More Although in the Slaughter-House Cases the Supreme Court had suggested that it would read the Fourteenth Amendment narrowly,18 18.Slaughter-House Cases, 83 U.S. (16 Wall.) 36, 80–81 (1873).Show More in Yick Wo and Santa Clara the Court changed course and adopted the Ninth Circuit’s expansive interpretation of equal protection, a doctrinal shift with lasting effects today.

This is not a story of unintended consequences. By expanding the scope of the Equal Protection Clause to include Chinese immigrants, corporate lawyers were able to use the Chinese cases to draw a through-line from African Americans—the original beneficiaries of the Fourteenth Amendment—to Chinese immigrants, to corporate shareholders.19 19.The social and political connections of Chinese “coolies” with railroad and mining corporations in the context of Greater Reconstruction debates over the meaning of “free labor” and “equality” are explored in Evelyn Atkinson, Slaves, Coolies, and Shareholders: Corporations Claim the Fourteenth Amendment, 10 J. Civ. War Era 54 (2020).Show More This comparison was made possible because corporate lawyers and federal judges intentionally portrayed the corporation as simply an aggregate of rights-bearing shareholders who did not forsake their constitutional rights when they joined the corporation. In this framing, shareholders were members of a persecuted group, the same as racial minorities.

This view of the corporation as solely an aggregate of rights-bearing shareholders was at odds with an older common law vision of the corporation as both an aggregate of individuals and a separate legal person with special rights and duties distinct from those of “natural” persons.20 20.See John Dewey, The Historic Background of Corporate Legal Personality, 35 Yale L.J. 655, 656 (1926); 3 The Collected Papers of Frederic William Maitland 307 (H. A. L. Fisher ed., 1911).Show More In Part I below, this Article exposes a contour of common law corporate personhood that has not previously been noted: incorporation was a status in which corporate legal persons existed in a hierarchical relationship with the public, akin to master-servant or parent-child.21 21.See discussion infra Part I.Show More The common law view of the corporation as a “child” or “servant” of the public justified more stringent state regulation of corporations than of individuals: the state was the benevolent parent, overseeing its corporate child to ensure the corporation acted in the public interest.22 22.William Novak discusses the extensive power of state legislatures to regulate in the “public interest” in William J. Novak, The People’s Welfare: Law and Regulation in Nineteenth-Century America 19–20 (1996).Show More

Yet as Part II discusses, throughout the nineteenth century, corporate lawyers challenged this view, arguing that corporations were not “children” who owed a special duty of obedience to the parental state but private, profit-making entities whose interests were unrelated or even potentially opposed to those of the public. In this view, the corporation was a naturally arising market phenomenon, akin to any other private market actor, with no special obligation to the public welfare.23 23.This has been called the “natural” or “real entity” theory of the corporation, that corporations are naturally emerging market entities controlled by their managers. See Avi-Yonah, supra note 9, at 1000–01; Blair, supra note 9, at 805; Pollman, supra note 9, at 1642; Arthur W. Machen, Jr., Corporate Personality, 24 Harv. L. Rev 253, 262 (1911).Show More In support of this argument, corporate lawyers reframed the corporation not as a group of individuals authorized to act as one “artificial,” “legal person” for certain purposes, but as solely an aggregation of constitutional-rights-bearing shareholders.24 24.This is called the “aggregate” or “associational” theory. See Horwitz, supra note 9, at 182; Mark, supra note 9, at 1462; Hovenkamp, supra note 9, at 1597–98; Pollman, supra note 9, at 1662. Morton Horwitz argues that the aggregate theory was short-lived because of the increasing separation of management and control and that the “entity” theory replaced the aggregate theory in the early twentieth century. Horwitz, supra note 9, at 182. However, Citizens United, Hobby Lobby, and other recent cases have invoked an aggregate view of the corporation to justify extending freedom of speech and religion to corporations. See Citizens United v. FEC, 558 U.S. 310, 356 (2010) (“Yet certain disfavored associations of citizens—those that have taken on the corporate form—are penalized for engaging in the same political speech.”); Burwell v. Hobby Lobby Stores, Inc., 573 U.S. 682, 720 (2014) (attributing the religious beliefs of the shareholders of a closely held corporation to the corporate entity itself). But see Avi-Yonah, supra note 9, at 1040 (arguing that “both the majority and the dissent [of Citizens United] adopted the real entity view of the corporation”). Actually, the Court tacked back and forth between different conceptions of corporate personality.Show More By framing the corporation simply as a collection of private, rights-bearing individuals, corporate lawyers were able to argue that the rights and duties of corporations were simply the rights and duties of the natural persons who composed them, and no more.25 25.See infra Part I.Show More

This debate over whether the corporation was a state creation granted legal personhood in certain contexts for the purpose of furthering the public interest, or simply a group of private, rights-bearing individuals pursuing their own economic gain, was central to the cases involving corporate Fourteenth Amendment rights. While Morton Horwitz, Gregory Mark, and others have shown that key to the Ninth Circuit’s reasoning in Santa Clara was a view of the corporation as an aggregate of shareholders,26 26.Horwitz, supra note 9, at 223; Mark, supra note 9, at 1464.Show More they have not examined the equally viable, alternative vision of the corporation as a “child of the state” presented by opposing counsel and reflected in public opinion. More importantly, they have overlooked the racial analogy underlying the precedents to Santa Clara on which the doctrine of corporate constitutional personhood was built.27 27.Mark and Horwitz have explained the reliance on the aggregate theory of corporate personhood as primarily rooted in property protection. Mark, supra note 9, at 1464; Horwitz, supra note 9, at 177.Show More This Article reveals the background and reasoning behind this significant judicial reframing of corporate personhood: the aggregate theory of the corporation allowed corporate lawyers and judges to analogize shareholders to racial minorities as similarly persecuted groups targeted by discriminatory legislation.

This analogy, of course, disregarded the immense power discrepancy between corporate shareholders and persecuted racial groups. By holding that the Equal Protection Clause applied to “the despised laborer from China” as much as the “envied master of millions,”28 28.The Railroad Tax Cases, 13 F. 722, 741 (C.C.D. Cal. 1882).Show More the Ninth Circuit endorsed an interpretation of the Amendment as treating all persons alike, regardless of their social and economic power. This reasoning bolstered a “formal equality” interpretation of the Fourteenth Amendment, in contrast to claims that the Amendment embodied a commitment to “substantive equality” or anti-subordination—part of a trend towards limiting the Amendment’s ability to address long-standing inequalities that continues today.29 29.“Substantive equality,” or “anti-subordination,” consists not only in eliminating discrimination but also in “alter[ing] the circumstances that are identified as giving rise to equality questions in the first place.” Catharine A. MacKinnon, Substantive Equality: A Perspective, 96 Minn. L. Rev. 1, 11 (2011) [hereinafter MacKinnon, Substantive Equality]; see also Ruth Colker, Reflections on Race: The Limits of Formal Equality, 69 Ohio St. L.J. 1089, 1090 (2008) (contrasting a “formal equality” with an “anti-subordination” perspective); Kimberlé Williams Crenshaw, Race, Reform, and Retrenchment: Transformation and Legitimation in Antidiscrimination Law, 101 Harv. L. Rev. 1331, 1336 (1988) (contrasting “equality as a process” with “equality as a result”). For an extensive analysis of “formal” versus “substantive” concepts of equality, see generally Catharine A. MacKinnon, Sex Equality (2007) [hereinafter MacKinnon, Sex Equality].Show More

This is not a case of manipulation by corporate lawyers of disempowered minority litigants. Chinese litigants were willing partners in the strategy to join forces with corporations to expand the Fourteenth Amendment. As this Article reveals, the economic and social connections between industrial corporate magnates and the elite Chinese mercantile and political community were long-standing. Both relied financially on the continued immigration of Chinese laborers, and both had long been represented by the same corporate lawyers. They were also both the target of discriminatory regulations that aimed to simultaneously curb corporate power and stem Chinese immigration. The Fourteenth Amendment provided a valuable tool for corporate lawyers to advocate on behalf of both sets of clients. By eliding the difference between Chinese immigrants and shareholders in these interrelated lines of cases, corporate lawyers cemented an interpretation of equal protection that culminated in the success of the twin cases of Santa Clara and Yick Wo.

For years, scholars have pondered Chief Justice Morrison Waite’s famously blithe comment at the outset of oral argument in Santa Clara that the Justices did not wish to hear argument on whether the Fourteenth Amendment applied to corporations, as they were “all of [the] opinion that it does.”30 30.Santa Clara County v. S. Pac. R.R. Co., 118 U.S. 394, 396 (1886); see, e.g., Howard Jay Graham, The Waite Court and the Fourteenth Amendment, 17 Vand. L. Rev. 525, 530 (1964) (“Nowhere in the United States Reports are there to be found words more momentous or more baffling than these.”); Horwitz, supra note 9, at 173 (“[The decision] has always been puzzling and controversial”); Pollman, supra note 9, at 1644 n.92 (“[T]he unusual circumstances of this case have evoked skepticism and debate.”).Show More Gregory Mark has pointed out that Waite expressly avoided addressing the constitutional question and argued that his statement indicated that the Court merely intended to accept the argument that the corporate property in this case was protected as property of the shareholders.31 31.Mark, supra note 9, at 1464.Show More Elizabeth Pollman has also explained Waite’s statement as concerned with protecting the shareholders’ property interests.32 32.Pollman, supra note 9, at 1644–45.Show More Howard Graham, dismissing the claim as “dictum,” went so far as to contend that “the recording of this statement was a fluke––the Court reporter’s after-thought!”33 33.Graham, supra note 30, at 530.Show More Adam Winkler has likewise claimed that Waite never intended his quote to become part of the opinion, but that it was intentionally misrepresented in the case report by a perfidious court reporter.34 34.Winkler, supra note 8, at 153.Show More

J. Willard Hurst even posited that, given late nineteenth-century law’s general embrace of economic activity, extending the Fourteenth Amendment to corporations “provoked no significant contemporary controversy.”35 35.James Willard Hurst, The Legitimacy of the Business Corporation in the Law of the United States 1780–1970, at 68 (1970).Show More

This Article offers a novel interpretation of this puzzle. By reading Santa Clara in light of Yick Wo and the preceding line of corporate and Chinese Fourteenth Amendment cases, this Article illuminates the context of equal protection jurisprudence surrounding Waite’s enigmatic statement—specifically, the interplay between corporate personhood and race. As this Article reveals, the definition of equal protection that the Court adopted in Yick Wo had been developed in Ninth Circuit corporate and Chinese Fourteenth Amendment cases throughout the preceding decade and was central to the arguments of counsel in both Yick Wo and Santa Clara. By the time the Waite Court heard Santa Clara, the link between racial minorities and corporate shareholders had become well established in equal protection jurisprudence.36 36.Elizabeth Pollman notes the precedential effect of the Ninth Circuit’s equal protection jurisprudence but does not explore the explicit connections to race. Pollman, supra note 9, at 1644.Show More Although the Court announced its expanded interpretation of equal protection in Yick Wo rather than Santa Clara, its reasoning had long been applied equally to corporate litigants. This Article suggests that one reason why the Court declined to hear arguments on whether the Fourteenth Amendment protected corporations was because the combined precedent of Chinese and corporate cases had already established that it did.

The success of corporations at claiming constitutional rights has produced a forked legacy. Critics of Citizens United and Hobby Lobby have contended that corporate personhood has been used to trump the rights of individuals37 37.As Justice Ruth Bader Ginsburg argued in Hobby Lobby, the majority prioritized religious rights of employers over the reproductive rights of female employees. Burwell v. Hobby Lobby Stores, Inc., 573 U.S. 682, 740 (2014) (Ginsburg, J., dissenting); see also Jessica L. Waters & Leandra N. Carrasco, Untangling the Reproductive Rights and Religious Liberty Knot, 26 Yale J.L. & Feminism 217 (2014).Show More and to subvert the democratic process.38 38.One outcome of Citizens United has arguably been to permit dark-money groups to sway elections. See Heather K. Gerken, The Real Problem with Citizens United: Campaign Finance, Dark Money, and Shadow Parties, 97 Marq. L. Rev. 903, 905 (2014); Danny Emmer, Shedding Light on “Dark Money”: The Heightened Risk of Foreign Influence Post-Citizens United, 20 Sw. J. Int’l L. 381, 382 (2014).Show More In contrast, supporters of the decisions have argued that corporations are collections of shareholders who do not lose their fundamental rights simply because they do business as a corporation.39 39.Citizens United v. FEC, 558 U.S. 310, 339–40 (2010); Hobby Lobby, 573 U.S. at 706–07; see, e.g., Richard A. Epstein, The Defeat of the Contraceptive Mandate in Hobby Lobby: Right Results, Wrong Reasons, 2014 Cato Sup. Ct. Rev. 35, 45; Paul Horwitz, The Hobby Lobby Moment, 128 Harv. L. Rev. 154, 162–63 (2014).Show More Yet even those who oppose corporate constitutional personhood must acknowledge the discomfiting reality that corporate rights litigation has been, and continues to be, an important means of expanding rights protections for natural persons. Today, corporations play an important role in protecting civil rights in other contexts, such as by bringing claims for racial discrimination on behalf of their members under the 1866 Civil Rights Act.40 40.42 U.S.C. § 1981(a). Because corporations are typically the contracting party in these cases, not the natural persons against which the actual discrimination is directed, under common law principles of contract law the corporation is the only “person” that has standing to sue. See infra note 342.Corporate litigation has also laid the groundwork for individual claims regarding religious freedom. Hobby Lobby has been invoked by smaller corporations, nonprofits, individuals, and partnerships claiming freedom of religion rights in similar contexts. See, e.g., Brief for Petitioners at 38 n.6, Masterpiece Cakeshop, Ltd. v. Colo. C.R. Comm’n, 138 S. Ct. 1719 (2018) (No. 16-111); Reply Brief for Petitioners in Nos. 14-1418, 14-1453 & 14-1505, at 7–8, Zubik v. Burwell, 578 U.S. 403 (2016) (Nos. 14-1418, 14-1453, 14-1505, 15-35, 15-105, 15-119 & 15-191); Brief for Petitioners in Nos. 15-35, 15-105, 15-119 & 15-191, at 2, Zubik, 578 U.S. 403 (Nos. 14-1418, 14-1453, 14-1505, 15-35, 15-105, 15-119 & 15-191). The wealth and institutional knowledge of large corporations like Hobby Lobby and their lawyers make them ideally suited to pursue impact litigation that establishes precedent for non-corporate claims of religious freedom violations.Show More This does not mean we should rehabilitate constitutional-rights-bearing corporate persons; but we must admit that a blanket condemnation of corporate personhood ignores the important historical legacy of corporate rights litigation and the continued interconnection—even interdependency—of corporations and racial minorities.

The Article proceeds in three Parts. Part I addresses the common law vision of the corporation as both an aggregate of individuals and a “child of the state” with rights and duties different from those of natural persons and traces the continued viability of this vision throughout the period in which Santa Clara was decided. Part II concerns corporate challenges to this traditional view in Fourteenth Amendment litigation, examining the strategy of corporate lawyers’ and Ninth Circuit judges’ reliance on the aggregate theory of corporate personhood to analogize Chinese immigrants to corporate shareholders in order to support a broad reading of the Equal Protection Clause. Part III examines the background of Santa Clara and reveals how the meaning of equal protection established by the Chinese and corporate Fourteenth Amendment cases informed the Court’s ultimate rulings in Santa Clara and Yick Wo, laying the groundwork for modern equal protection doctrine today.

  1. * Postdoctoral Teaching Fellow, University of Chicago. Ph.D, University of Chicago; J.D., Harvard Law School. Many thanks to Amy Dru Stanley, Laura Weinrib, Alison LaCroix, Jonathan Levy, Ajay Mehrotra, Christopher Schmidt, Naomi Lamoreaux, Gregory Mark, Adam Winkler, Paul Kens, Nikolas Bowie, Naama Maor, Lael Weinberger, and the American Bar Foundation Doctoral Fellows Workshop (2018–2020) for their comments and insights. Thank you also to the editors of the Virginia Law Review for their deep engagement with this text, as well as their technical prowess. ↑
  2. 558 U.S. 310 (2010). ↑
  3. 573 U.S. 682 (2014). ↑
  4. In Citizens United, the Supreme Court struck down a federal law, 2 U.S.C. § 441b (2006), that banned direct corporate spending on political campaigns. 558 U.S. at 372. Citizens United was part of a long line of cases in which the Court had recognized the First Amendment rights of corporations, including: NAACP v. Alabama ex rel. Patterson, 357 U.S. 449, 459 (1958) (freedom of association); NAACP v. Button, 371 U.S. 415, 428–29 (1963) (freedom of expression and association); New York Times Co. v. Sullivan, 376 U.S. 254, 264 (1964) (freedom of speech and the press); and First National Bank of Boston v. Bellotti, 435 U.S. 765, 784 (1978) (campaign expenditures as political speech). Hobby Lobby concluded that corporations were “persons” under the Religious Freedom Restoration Act, 42 U.S.C. §§ 2000bb–1, and held that Health and Human Services regulations requiring employers to provide insurance that covered contraceptives unconstitutionally burdened closely held corporations’ exercise of religion. 573 U.S. at 736. ↑
  5. See Move to Amend, https://www.movetoamend.org/ [https://perma.cc/RH9L-2FZT] (last visited Aug. 19, 2020); United for the People, http://united4thepeople.org/ [https://perma.cc/XS9X-LZNR] (last visited Aug. 19, 2020). ↑
  6. United for the People, supra note 4; Move to Amend, supra note 4. See Joanna M. Meyer, The Real Error in Citizens United, 69 Wash. & Lee L. Rev. 2171, 2198 (2012). ↑
  7. H.R.J. Res. 48, 116th Cong. (2019) (proposing an amendment to the Constitution of the United States providing that the rights extended by the Constitution are the rights of natural persons only). Other bills introduced in both the House and the Senate have targeted specific constitutional rights, such as one “waiving the application of the first article of amendment to the political speech of corporations.” H.R.J. Res. 39, 116th Cong. (2019). See United for the People, http://united4thepeople.org/amendments/ (last visited Oct. 31, 2021) [https://perma.cc/QGU7-883U], for an up-to-date list of proposed amendments relating to corporate constitutional rights. ↑
  8.  See Move to Amend, https://move-to-amend.myshopify.com/collections/frontpage [https://perma.cc/8JVP-CYAD] (last visited Dec. 28, 2021). ↑
  9. For early cases debating the constitutional rights of corporations, see Bank of United States v. Deveaux, 9 U.S. (5 Cranch) 61, 63–64 (1809); Hope Insurance Co. of Providence v. Boardman, 9 U.S. (5 Cranch) 57, 58 (1809); Terrett v. Taylor, 13 U.S. (9 Cranch) 43, 46–47 (1815); Trustees of Dartmouth College v. Woodward, 17 U.S. (4 Wheaton) 518, 556 (1819); Proprietors of Charles River Bridge v. Proprietors of Warren Bridge, 36 U.S. (11 Peters) 420, 421 (1837); and Louisville, Cincinnati & Charleston Railroad Co. v. Letson, 43 U.S. (2 Howard) 497, 499 (1844). See also Adam Winkler, We the Corporations: How American Businesses Won Their Civil Rights, at xxi (2018) (describing how the country’s most powerful corporations have persistently tried to use the Constitution to evade unwanted government regulations); Margaret M. Blair & Elizabeth Pollman, The Derivative Nature of Corporate Constitutional Rights, 56 Wm. & Mary L. Rev. 1673, 1680 (2015) (explaining how the Supreme Court was tasked with determining the applicability of constitutional provisions to corporations in an 1809 case involving the first Bank of the United States). ↑
  10.  Legal historians of corporate personhood have discussed corporate Fourteenth Amendment cases in some detail but have neglected the role that race played in the development of these cases. For representative writings on corporate personhood and constitutional rights, see Morton J. Horwitz, Santa Clara Revisited: The Development of Corporate Theory, 88 W. Va. L. Rev. 173, 174 (1985); Blair & Pollman, supra note 8, at 1677; Reuven S. Avi-Yonah, Citizens United and the Corporate Form, 2010 Wis. L. Rev. 999, 1033–34; Gregory A. Mark, The Personification of the Business Corporation in American Law, 54 U. Chi. L. Rev. 1441, 1443 (1987); Herbert Hovenkamp, The Classical Corporation in American Legal Thought, 76 Geo. L.J. 1593, 1640–41 (1988); David K. Millon, Theories of the Corporation, 1990 Duke L.J. 201, 205–07; Elizabeth Pollman, Reconceiving Corporate Personhood, 2011 Utah L. Rev. 1629, 1630; Margaret M. Blair, Corporate Personhood and the Corporate Persona, 2013 U. Ill. L. Rev. 785, 796–97; Kent Greenfield, In Defense of Corporate Persons, 30 Const. Comment. 309, 310–12 (2015); Tamara R. Piety, Why Personhood Matters, 30 Const. Comment. 361, 362–63 (2015); Turkuler Isiksel, Corporations as Rights-Bearers, J. Pol. (forthcoming) (manuscript at 1–2) (on file with the author). ↑
  11. At the time, the Circuit Court for the District of California, where the cases discussed in this Article arose, was located in the federal circuit encompassing California and Oregon. This court exercised both original and appellate jurisdiction and was staffed by one Supreme Court Justice (Stephen Field), one circuit court judge (Lorenzo Sawyer), and one district court judge (Ogden Hoffman), any two of which could hear a case. Christian G. Fritz, Federal Justice in California: The Court of Ogden Hoffman, 1851–1891, at 29–30 (1991). To avoid confusion, this Article follows contemporary scholarship that refers to these cases as occurring in the Ninth Circuit. Id. at 29; Howard J. Graham, Everyman’s Constitution: Historical Essays on the Fourteenth Amendment, the “Conspiracy Theory,” and American Constitutionalism 573 (1968); Winkler, supra note 8, at 153–54. However, this should not be confused with the modern-day U.S. Court of Appeals for the Ninth Circuit, which was not created until the federal appellate system was redesigned in 1891. Joshua Glick, On the Road: The Supreme Court and the History of Circuit Riding, 24 Cardozo L. Rev. 1753, 1826 (2003). ↑
  12. A growing area of scholarship explores the connections between corporations and race. See, e.g., Cheryl L. Wade, Attempting to Discuss Race in Business and Corporate Law Courses and Seminars, 77 St. John’s L. Rev. 901 (2003); Alfred Dennis Mathewson, Race in Ordinary Course: Utilizing the Racial Background in Antitrust and Corporate Law Courses, 23 St. John’s J. Legal Comment. 667, 685 (2008); Cheryl L. Wade, Introduction to Symposium on People of Color, Women, and the Public Corporation: The Sophistication of Discrimination, 79 St. John’s L. Rev. 887, 890 (2005); Thomas W. Joo, Corporate Hierarchy and Racial Justice, 79 St. John’s L. Rev. 955 (2005); Thomas W. Joo, Race, Corporate Law, and Shareholder Value, 54 J. Legal Ed. 351 (2004); Juliet E.K. Walker, White Corporate America: The New Arbiter of Race? in Constructing Corporate America: History, Politics, Culture, 246, 253, 260 (Kenneth Lipartito & David B. Sicilia eds., 2007). ↑
  13. 118 U.S. 394 (1886). ↑
  14. See Horwitz, supra note 9, at 173; Blair & Pollman, supra note 8, at 1694–95; Avi-Yonah, supra note 9, at 1033–34. ↑
  15. 118 U.S. 356 (1886). ↑
  16.  See 2 Encyclopedia of American Civil Rights and Liberties 482, 1055 (Kara E. Stooksbury, John M. Scheb, II & Otis H Stephens, Jr. eds., rev. and expanded ed. 2017); Peter Irons, Jim Crow’s Children: The Broken Promise of the Brown Decision 53 (2004); see also infra notes 327–35 (noting early civil rights cases citing Yick Wo). ↑
  17. Scholars have studied the connection between Fourteenth Amendment claims of Chinese immigrants and the Supreme Court’s desire to protect economic rights. See Thomas Wuil Joo, New “Conspiracy Theory” of the Fourteenth Amendment: Nineteenth Century Chinese Civil Rights Cases and the Development of Substantive Due Process Jurisprudence, 29 U.S.F. L. Rev. 353, 354–55 (1995); Thomas W. Joo, Yick Wo Re-Revisited: Nonblack Nonwhites and Fourteenth Amendment History, 2008 U. Ill. L. Rev. 1427, 1428; Charles McClain, Jr., In Search of Equality: The Chinese Struggle Against Discrimination in Nineteenth-Century America 83 (1994); Graham, supra note 10, at 15; Daniel W. Levy, Classical Lawyers and the Southern Pacific Railroad, 9 W. Legal Hist. 177, 211, 216 (1996); Paul Kens, Justice Stephen Field: Shaping Liberty from the Gold Rush to the Gilded Age 209 (1997); Winkler, supra note 8, at 153. However, no prior scholarship has specifically examined the intersection of Fourteenth Amendment claims by corporations and by Chinese immigrants. ↑
  18. See In re Ah Fong, 1 F. Cas. 213, 213 (C.C.D. Cal. 1874) (No. 102); Ho Ah Kow v. Nunan, 12 F. Cas. 252, 252 (C.C.D. Cal. 1879) (No. 6,546); In re Ah Chong, 2 F. 733, 737 (C.C.D. Cal. 1880); In re Tiburcio Parrott, 1 F. 481, 482 (C.C.D. Cal. 1880); The Railroad Tax Cases, 13 F. 722, 727 (C.C.D. Cal. 1882); In re Quong Woo, 13 F. 229, 233 (C.C.D. Cal. 1882); County of Santa Clara v. S. Pac. R.R. Co., 18 F. 385, 386, 397 (C.C.D. Cal. 1883), aff’d, 118 U.S. 394 (1886); In re Yick Wo, 9 P. 139, 139 (Cal. 1885), rev’d sub nom. Yick Wo v. Hopkins, 118 U.S. 356 (1886); In re Wo Lee, 26 F. 471, 475 (C.C.D. Cal. 1886). ↑
  19. Slaughter-House Cases, 83 U.S. (16 Wall.) 36, 80–81 (1873). ↑
  20. The social and political connections of Chinese “coolies” with railroad and mining corporations in the context of Greater Reconstruction debates over the meaning of “free labor” and “equality” are explored in Evelyn Atkinson, Slaves, Coolies, and Shareholders: Corporations Claim the Fourteenth Amendment, 10 J. Civ. War Era 54 (2020). ↑
  21. See John Dewey, The Historic Background of Corporate Legal Personality, 35 Yale L.J. 655, 656 (1926); 3 The Collected Papers of Frederic William Maitland 307 (H. A. L. Fisher ed., 1911). ↑
  22. See discussion infra Part I. ↑
  23. William Novak discusses the extensive power of state legislatures to regulate in the “public interest” in William J. Novak, The People’s Welfare: Law and Regulation in Nineteenth-Century America 19–20 (1996). ↑
  24. This has been called the “natural” or “real entity” theory of the corporation, that corporations are naturally emerging market entities controlled by their managers. See Avi-Yonah, supra note 9, at 1000–01; Blair, supra note 9, at 805; Pollman, supra note 9, at 1642; Arthur W. Machen, Jr., Corporate Personality, 24 Harv. L. Rev 253, 262 (1911). ↑
  25. This is called the “aggregate” or “associational” theory. See Horwitz, supra note 9, at 182; Mark, supra note 9, at 1462; Hovenkamp, supra note 9, at 1597–98; Pollman, supra note 9, at 1662. Morton Horwitz argues that the aggregate theory was short-lived because of the increasing separation of management and control and that the “entity” theory replaced the aggregate theory in the early twentieth century. Horwitz, supra note 9, at 182. However, Citizens United, Hobby Lobby, and other recent cases have invoked an aggregate view of the corporation to justify extending freedom of speech and religion to corporations. See Citizens United v. FEC, 558 U.S. 310, 356 (2010) (“Yet certain disfavored associations of citizens—those that have taken on the corporate form—are penalized for engaging in the same political speech.”); Burwell v. Hobby Lobby Stores, Inc., 573 U.S. 682, 720 (2014) (attributing the religious beliefs of the shareholders of a closely held corporation to the corporate entity itself). But see Avi-Yonah, supra note 9, at 1040 (arguing that “both the majority and the dissent [of Citizens United] adopted the real entity view of the corporation”). Actually, the Court tacked back and forth between different conceptions of corporate personality. ↑
  26. See infra Part I. ↑
  27. Horwitz, supra note 9, at 223; Mark, supra note 9, at 1464. ↑
  28. Mark and Horwitz have explained the reliance on the aggregate theory of corporate personhood as primarily rooted in property protection. Mark, supra note 9, at 1464; Horwitz, supra note 9, at 177. ↑
  29. The Railroad Tax Cases, 13 F. 722, 741 (C.C.D. Cal. 1882). ↑
  30.  “Substantive equality,” or “anti-subordination,” consists not only in eliminating discrimination but also in “alter[ing] the circumstances that are identified as giving rise to equality questions in the first place.” Catharine A. MacKinnon, Substantive Equality: A Perspective, 96 Minn. L. Rev. 1, 11 (2011) [hereinafter MacKinnon, Substantive Equality]; see also Ruth Colker, Reflections on Race: The Limits of Formal Equality, 69 Ohio St. L.J. 1089, 1090 (2008) (contrasting a “formal equality” with an “anti-subordination” perspective); Kimberlé Williams Crenshaw, Race, Reform, and Retrenchment: Transformation and Legitimation in Antidiscrimination Law, 101 Harv. L. Rev. 1331, 1336 (1988) (contrasting “equality as a process” with “equality as a result”). For an extensive analysis of “formal” versus “substantive” concepts of equality, see generally Catharine A. MacKinnon, Sex Equality (2007) [hereinafter MacKinnon, Sex Equality]. ↑
  31. Santa Clara County v. S. Pac. R.R. Co., 118 U.S. 394, 396 (1886); see, e.g., Howard Jay Graham, The Waite Court and the Fourteenth Amendment, 17 Vand. L. Rev. 525, 530 (1964) (“Nowhere in the United States Reports are there to be found words more momentous or more baffling than these.”); Horwitz, supra note 9, at 173 (“[The decision] has always been puzzling and controversial”); Pollman, supra note 9, at 1644 n.92 (“[T]he unusual circumstances of this case have evoked skepticism and debate.”). ↑
  32. Mark, supra note 9, at 1464. ↑
  33. Pollman, supra note 9, at 1644–45. ↑
  34. Graham, supra note 30, at 530. ↑
  35. Winkler, supra note 8, at 153. ↑
  36. James Willard Hurst, The Legitimacy of the Business Corporation in the Law of the United States 1780–1970, at 68 (1970). ↑
  37. Elizabeth Pollman notes the precedential effect of the Ninth Circuit’s equal protection jurisprudence but does not explore the explicit connections to race. Pollman, supra note 9, at 1644. ↑
  38. As Justice Ruth Bader Ginsburg argued in Hobby Lobby, the majority prioritized religious rights of employers over the reproductive rights of female employees. Burwell v. Hobby Lobby Stores, Inc., 573 U.S. 682, 740 (2014) (Ginsburg, J., dissenting); see also Jessica L. Waters & Leandra N. Carrasco, Untangling the Reproductive Rights and Religious Liberty Knot, 26 Yale J.L. & Feminism 217 (2014). ↑
  39. One outcome of Citizens United has arguably been to permit dark-money groups to sway elections. See Heather K. Gerken, The Real Problem with Citizens United: Campaign Finance, Dark Money, and Shadow Parties, 97 Marq. L. Rev. 903, 905 (2014); Danny Emmer, Shedding Light on “Dark Money”: The Heightened Risk of Foreign Influence Post-Citizens United, 20 Sw. J. Int’l L. 381, 382 (2014). ↑
  40. Citizens United v. FEC, 558 U.S. 310, 339–40 (2010); Hobby Lobby, 573 U.S. at 706–07; see, e.g., Richard A. Epstein, The Defeat of the Contraceptive Mandate in Hobby Lobby: Right Results, Wrong Reasons, 2014 Cato Sup. Ct. Rev. 35, 45; Paul Horwitz, The Hobby Lobby Moment, 128 Harv. L. Rev. 154, 162–63 (2014). ↑

  41. 42 U.S.C. § 1981(a). Because corporations are typically the contracting party in these cases, not the natural persons against which the actual discrimination is directed, under common law principles of contract law the corporation is the only “person” that has standing to sue. See infra note 342.

    Corporate litigation has also laid the groundwork for individual claims regarding religious freedom. Hobby Lobby has been invoked by smaller corporations, nonprofits, individuals, and partnerships claiming freedom of religion rights in similar contexts. See, e.g., Brief for Petitioners at 38 n.6, Masterpiece Cakeshop, Ltd. v. Colo. C.R. Comm’n, 138 S. Ct. 1719 (2018) (No. 16-111); Reply Brief for Petitioners in Nos. 14-1418, 14-1453 & 14-1505, at 7–8, Zubik v. Burwell, 578 U.S. 403 (2016) (Nos. 14-1418, 14-1453, 14-1505, 15-35, 15-105, 15-119 & 15-191); Brief for Petitioners in Nos. 15-35, 15-105, 15-119 & 15-191, at 2, Zubik, 578 U.S. 403 (Nos. 14-1418, 14-1453, 14-1505, 15-35, 15-105, 15-119 & 15-191). The wealth and institutional knowledge of large corporations like Hobby Lobby and their lawyers make them ideally suited to pursue impact litigation that establishes precedent for non-corporate claims of religious freedom violations. ↑

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