Article

Substance-Targeted Choice-of-Law Clauses

Recent cases highlight two persistent problems in United States litigation: the frequency with which parties seek to validate an otherwise unenforceable provision through a choice-of-law clause, and the disparate results courts have reached in such cases. These problems, while not wholly new, have recently become more troublesome and widespread. Courts, however, have not grown more consistent in their approach to them. On the contrary, they increasingly reach varied results on highly similar facts, resulting in endless legal uncertainty, forum shopping, and doubts about judicial impartiality. These effects are all the more problematic because, as most conflicts scholars would agree, parties should not be allowed to choose a jurisdiction’s law solely for the purpose of validating a contested contractual provision; indeed, permitting them to do so is at odds with most purposes of contractual choice-of-law enforcement.

For this reason, this Article proposes that, rather than fall back on complicated public policy exceptions to contractual choice of law, courts should instead identify and refuse to apply choice-of-law clauses that are adopted for the purpose of making a separate contractual provision enforceable. This Article refers to such clauses as “substance-targeted.” Courts typically do not distinguish between targeted and non-targeted choice-of-law clauses. As a result, targeted clauses are often treated as if they represent an ordinary instance of allowing contracting parties the autonomy to choose the law applicable to their dispute. Yet they involve meaningfully different considerations, both because of the reasons that parties choose to include them and because of their ultimate effects. Unlike conventional choice-of-law clauses, substance-targeted clauses are neither aimed at achieving predictability nor likely to result in it. Their frequent use encourages litigation, disadvantages weaker parties, and fosters fear about results-oriented reasoning when their enforceability is tested. These pernicious effects call for a fundamentally different approach to choice-of-law analyses.

Introduction

On October 24, 2001, Christopher Ridgeway, a resident of Louisiana, accepted a job with Michigan-based Stryker Corporation selling medical supplies to Louisiana doctors and hospitals.1 1.See Stone Surgical, LLC v. Stryker Corp., 858 F.3d 383, 386 (6th Cir. 2017).Show More The offer was conditional on Ridgeway’s signing several documents, among them a noncompete agreement that included Michigan choice-of-law and forum selection clauses.2 2.Ridgeway initially disputed the authenticity of the noncompete agreement, but evidence produced in discovery suggested that Ridgeway had received a form noncompete identical to 132 others Stryker had signed with its employees over a five-year period. Id. at 387–88. A jury later found that Ridgeway had signed the noncompete.Id.at 388.Show More Ridgeway went on to become a highly successful salesman for Stryker,3 3.Id. at 386.Show More during which time, according to him, Stryker’s human resource director and other top management assured him on several occasions that no “[noncompete] agreement existed in his file.”4 4.Id. Stryker unsurprisingly disputed Ridgeway’s view of these conversations, maintaining that they related instead to whether Ridgeway had signed a second noncompete that would enable him to receive stock options. Id. at 387.Show More Based on these assurances, Ridgeway maintains, he began in 2013 to explore employment with a competitor, Biomet.5 5.Id. at 386.Show More Stryker learned of these discussions and immediately fired Ridgeway, who then began working for Biomet in Louisiana.6 6.Id. at 387.Show More A few weeks later, Stryker filed suit against Ridgeway in federal court in Michigan.7 7.Ridgeway was fired on September 10, 2013; Stryker filed suit on September 30, 2013. See Complaint for Injunctive and Other Relief at 4, 34, Stryker Corp. v. Ridgeway, No. 1:13-cv-01066 (W.D. Mich. Sept. 30, 2013), 2013 WL 5526657.Show More

Stryker’s claims—for breach of contract, breach of fiduciary duty, and misappropriation of trade secrets—all directly or indirectly involved the noncompete agreement Ridgeway had signed.8 8.See Amended Complaint at 1–2, Stryker Corp. v. Ridgeway, No. 1:13-cv-01066 (W.D. Mich. Oct. 21, 2013), 2013 WL 11276336.Show More The enforceability of noncompetes is a point on which state law differs substantially; in this case, the court noted, “Michigan law favors non-competes and Louisiana law severely restricts them.”9 9.See Stone Surgical, 858 F.3d at 391.Show More There is more consensus on contractual choice-of-law provisions, such as the one in Ridgeway’s contract. Choice-of-law provisions are generally enforced in the United States, with most states recognizing an exception when the chosen law would violate a “fundamental policy” of the state with both the “most significant relationship” to the dispute and a “materially greater interest” in the issue.10 10.See Restatement (Second) of Conflict of Laws §§ 187(2), 188(1) (Am. Law Inst. 1971) [hereinafter Second Restatement].Show More Ridgeway argued that the exception should be applied, but both the district court and the Sixth Circuit disagreed. The Sixth Circuit, while finding both that Louisiana indeed had the most significant relationship to the dispute and that its anti-noncompete policy was “fundamental,” nonetheless concluded that Louisiana’s interest was not “materially greater” than Michigan’s.11 11.Stone Surgical, 858 F.3d at 391.Show More Therefore, Michigan law applied and the noncompete was valid.12 12.Id.Show More

The lawsuit ended badly for Ridgeway. The jury entered a verdict of $745,195 for Stryker.13 13.Id. at 388. The jury also denied relief to Ridgeway in his counterclaims against Stryker, which he originally filed in a separate proceeding but were ultimately consolidated with Stryker’s action. Id.Show More Biomet, fearful of being drawn into the litigation, had terminated Ridgeway’s employment shortly after Stryker’s lawsuit was filed.14 14.Id. at 387.Show More In March 2016, Ridgeway filed for bankruptcy.15 15.See Voluntary Petition for Individuals Filing for Bankruptcy, In re Christopher Martin Ridgeway, No. 16-10643 (Bankr. E.D. La. Mar. 23, 2016).Show More

As Ridgeway was fighting his lengthy and ultimately unsuccessful legal battles, another employee in a dispute over noncompete enforceability was met with a very different result. In 2013, Nevada resident Landon Shores was hired as a sales trainee by Global Experience Specialists (GES), a Nevada company specializing in event marketing.16 16.Freeman Expositions, Inc. v. Glob. Experience Specialists, Inc., No. SACV 17-00364, 2017 WL 1488269, at *1 (C.D. Cal. Apr. 24, 2017).Show More The large majority of Shores’s sales for GES related to events in Las Vegas.17 17.See id. (“During Mr. Shores’ work at GES, eighty to ninety percent of his sales were for events in Las Vegas, Nevada, and the vast majority of his clients were primarily engaged in Las Vegas.” (internal quotation marks omitted)).Show More Three years later, Shores was promoted to sales manager, a position that required him to sign a noncompete agreement that included a Nevada choice-of-law clause.18 18.Id.Show More

In 2017, Shores gave notice at GES and made plans to move to California to accept a job with one of the California offices of Freeman Expositions, a Texas corporation.19 19.Id.Show More GES did not take the news well, and two GES employees made threatening calls to Shores.20 20.See id. at *2. One asked him “Do you really want to go down this road?” and explained that “[o]ne path is to remain with GES and the other path is to go with Freeman and get sued and go broke. It is a lot easier to get out of an offer letter than a non-compete agreement.” Id.Show More Undeterred, Shores began his job at Freeman, which shortly thereafter filed suit in federal court in California seeking a declaration that Shores’s noncompete clause was invalid.21 21.See id.Show More

In contrast to Ridgeway’s experiences in court, Shores and Freeman encountered a friendly reception. Nominally applying precisely the same doctrinal framework the Sixth Circuit had in Ridgeway’s case, the California district court nonetheless concluded that the Nevada choice-of-law clause was invalid22 22.See id. at *5.Show More—reaching this result despite connections between Shores’s employment and Nevada that were, one might conclude, objectively much stronger than Ridgeway’s with Michigan.23 23.Ridgeway, after all, had left a Louisiana-based sales job for another employer in Louisiana; his only contact with Michigan was that his former employer was headquartered there. See Stone Surgical, LLC v. Stryker Corp., 858 F.3d 383, 386–87, 390 (6th Cir. 2017). By contrast, Shores had lived and worked in Nevada prior to beginning employment with Freeman. See Freeman Expositions, 2017 WL 1488269, at *1.Show More In Shores’s case, the court had little difficulty making the determination that California had a materially greater interest in having its well-established anti-noncompete policy applied.24 24.See Freeman Expositions, 2017 WL 1488269, at *5.Show More California had a stake, the court reasoned, in allowing an employer “to hire a California resident to work in California organizing and facilitating exhibitions to showcase California goods and services.”25 25.Id. at *5.Show More While Nevada, too, had a significant interest in protecting its employer, GES, “its interest pale[d] in comparison to California’s.”26 26.Id.Show More The court declined to stay proceedings in light of an ongoing Nevada court action and instead granted Freeman summary judgment on the noncompete issue.27 27.See id. at *1, *3. The court also declined to dismiss a claim by Freeman for interference with its contractual relationship with Shores. See id. at *8.Show More

These two recent cases highlight two persistent problems in United States litigation: the frequency with which parties attempt to use a choice-of-law clause to validate an otherwise unenforceable provision, and the disparate results courts have reached in such cases. These issues are not wholly new.28 28.As early as 1993, one commentator observed that the issue of choice-of-law enforcement in difficult cases “has generated a raft of judicial decisions marked by confusion, temerity, and vacillation.” Kirt O’Neill, Note, Contractual Choice of Law: The Case for a New Determination of Full Faith and Credit Limitations, 71 Tex. L. Rev. 1019, 1020 (1993).Show More In the realm of noncompetes in particular, employers have attached choice-of-law provisions for decades, despite the fact that the enforceability of such clauses (and thus the noncompete as a whole) is often in doubt.29 29.See Catherine L. Fisk, Reflections on The New Psychological Contract and the Ownership of Human Capital, 34 Conn. L. Rev. 765, 782–83 (2002).Show More Nonetheless, both these problems have recently become more persistent and widespread.30 30.See Larry E. Ribstein, From Efficiency to Politics in Contractual Choice of Law, 37 Ga. L. Rev. 363, 367 (2003) [hereinafter Ribstein, Efficiency] (noting that “the number of cases involving contractual choice is increasing significantly over time”).Show More This is true in part because, with the growing popularity of telecommuting and other sorts of long-distance employment, many disputes over noncompetes affect multiple jurisdictions and thus are likely to require a more extended and complex choice-of-law analysis.31 31.See Norman D. Bishara & David Orozco, Using the Resource-Based Theory To Determine Covenant Not To Compete Legitimacy, 87 Ind. L.J. 979, 980, 984–85 (2012) (discussing the need to adapt the law governing noncompetes in a world where a “trend toward the greater use of noncompetes is occurring when . . . geographic boundaries are becoming less important to economic activity”); Gillian Lester & Elizabeth Ryan, Choice of Law and Employee Restrictive Covenants: An American Perspective, 31 Comp. Lab. L. & Pol’y J. 389, 389 (2010) (noting that more mobile employees and more geographically dispersed employers have contributed to a rise in noncompete litigation).Show More Further, noncompetes are spreading to industries that have not historically relied on them, with hair stylists,32 32.See Steven Greenhouse, Noncompete Clauses Increasingly Pop Up in Array of Jobs, N.Y. Times (June 8, 2014), https://www.nytimes.com/2014/06/09/­business/­noncompete-clauses-increasingly-pop-up-in-array-of-jobs.html?r=0 [https://perma.cc/4KQY-H9PV].Show More camp counselors,33 33.See id.Show More dog walkers,34 34.See Matt O’Brien, Even Janitors Have Noncompetes Now. Nobody Is Safe., Wash. Post. (Oct. 18, 2018), https://www.washingtonpost.com/business/2018/10/­18/even-janitors-have-noncompetes-now-nobody-is-safe/?utm_term=.c316c5c­61­487 [https://perma.cc/W7FU-S6M6].Show More and janitors35 35.See id.Show More sometimes being required to sign them—and facing suit by their employer if they violate them.36 36.See id. (describing suit by employer against janitor that was dropped following media coverage).Show More Moreover, employers are increasingly relying on alternatives to noncompetes, such as clauses requiring employees to pay back a portion of their salary or other financial benefits upon quitting or being fired for cause.37 37.See Stuart Lichten & Eric M. Fink, “Just When I Thought I Was Out . . . .”: Post-Employment Repayment Obligations, 25 Wash. & Lee J. Civ. Rts. & Soc. Just. 51, 54 (2018) (describing growth of such provisions’ popularity). These arrangements have recently attracted national publicity for, among other things, the threat they may pose to journalistic independence. See id. at 54–55. Many Sinclair Broadcasting employees, for example, chose to read “politically charged” statements on air, despite their personal reservations, because of worries about triggering repayment clauses in their contracts. Id. The statements were described as “prepackaged reports reflecting conservative views.” Id. at 54 n.15 (internal quotation marks and citation omitted).Show More As one might expect, state law varies significantly on the enforceability of these provisions as well,38 38.See id. at 68–69, 77–78 (noting differences in particular between the law of California and of other states on the enforceability of post-employment repayment obligations).Show More and employers thus have incentives to couple them with choice-of-law clauses.39 39.It is difficult to assess exactly how common choice-of-law clauses are in such agreements because employment contracts are often between private parties. See Norman D. Bishara, Kenneth J. Martin & Randall S. Thomas, An Empirical Analysis of Noncompetition Clauses and Other Restrictive Postemployment Covenants, 68 Vand. L. Rev. 1, 7 (2015). However, it is reasonable to speculate that employers frequently include such provisions, given their popularity in the noncompete context and the uncertainty of the law in this area. For an example of one such case, see Willis Re Inc. v. Hearn, 200 F. Supp. 3d 540, 545–47 (E.D. Pa. 2016) (discussing contractual choice-of-law clause in dispute involving repayment of a retention bonus following employee’s departure for a competitor).Show More

Employment contracts, however, are just the start. Contracting parties in many other areas have similarly attempted to rely on choice-of-law clauses to secure a validating law, and courts have also met those efforts with varying responses. For example, while the use of choice-of-law clauses to sidestep usury laws initially met with increasingly widespread judicial acceptance in most jurisdictions,40 40.See Erin Ann O’Hara, Opting Out of Regulation: A Public Choice Analysis of Contractual Choice of Law, 53 Vand. L. Rev. 1551, 1563–64 (2000) [hereinafter O’Hara, Opting] (noting that, in contrast to the approach of the First Restatement, courts have transitioned to “almost uniformly enforc[ing] choice-of-law provisions that enable the parties to evade state usury laws”). The Second Restatement likely played a role in this acceptance by including a fairly liberal usury provision that operates even in the absence of a choice-of-law clause, providing that a given interest rate will not be invalidated on usury grounds if it is “permissible in a state to which the contract has a substantial relationship” and “not greatly in excess of the rate permitted by the general usury law of the state of the otherwise applicable law.” Second Restatement § 203. The “substantial relationship” requirement is fairly easily satisfied—if, for example, the applicable rate is that of the lender’s place of business or the place where the loan is to be repaid. See Robert Allen Sedler, The Contracts Provisions of the Restatement (Second): An Analysis and a Critique, 72 Colum. L. Rev. 279, 315–18 (1972).Show More courts in some recent cases have declined to enforce such provisions in usury cases where the state of the chosen law lacks the most significant relationship to the dispute.41 41.See Fleetwood Servs., LLC v. Complete Bus. Sols. Grp., 374 F. Supp. 3d 361, 372 (E.D. Pa. 2019) (finding that, despite parties’ choice of Pennsylvania law, Texas law applied because Texas had the most significant relationship to the dispute and “applying Pennsylvania law would violate a fundamental public policy of Texas, namely its antipathy to high interest rates” (internal quotation marks omitted)); Am. Equities Grp. v. Ahava Dairy Prods. Corp., No. 01 Civ.5207, 2004 WL 870260, at *7–9 (S.D.N.Y. Apr. 23, 2004) (declining to enforce a choice of New Jersey law in a case involving a usury defense on the same grounds); Am. Express Travel Related Servs. Co. v. Assih, 893 N.Y.S.2d 438, 445–46 (N.Y. Civ. Ct. 2009) (declining to enforce a choice of Utah law in action to collect credit card payments based on New York’s materially greater interest and “strong public policy against interest rates which are excessive”); see also TriBar Op. Comm., Supp. Report: Opinions on Chosen-Law Provisions Under the Restatement of Conflict of Laws, 68 Bus. Law. 1161, 1161–62, 1162 n.2 (2013) (discussing analysis of this issue in New York courts and noting that it deviates somewhat from the orthodox Second Restatement approach).Show More Courts have frequently refused to enforce choice-of-law provisions in various contexts involving consumer contracts42 42.See William J. Moon, Contracting Out of Public Law, 55 Harv. J. on Legis. 323, 347 (2018) (“[C]ourts have consistently refused to enforce choice-of-law clauses in the context of . . . consumer contracts.”). In some cases, this refusal has been based on concerns about the substantive content of the chosen law. See, e.g., Masters v. DirecTV, Inc., Nos. 08-55825 & 08–55830, 2009 WL 4885132, at *1 (9th Cir. Nov. 19, 2009) (holding that California law, rather than the parties’ chosen law, applied to consumer class action waivers because such waivers were contrary to a fundamental policy in California); see also William J. Woodward Jr., Legal Uncertainty and Aberrant Contracts: The Choice of Law Clause, 89 Chi.-Kent L. Rev. 197, 207–09 (2014) [hereinafter Woodward, Aberrant] (discussing case law on enforcement of choice-of-law clauses in questions regarding the applicability of state statutes that convert one-way attorney’s-fee-shifting provisions into two-way provisions). Procedural concerns about information asymmetry and bargaining power disparities in form consumer contracts may also weigh in favor of non-enforcement. See generally Giesela Rühl, Consumer Protection in Choice of Law, 44 Cornell Int’l L.J. 569 (2011) (considering these issues and advocating for European-style limits on choice of law in consumer contracts).Show More and have also often opted for non-enforcement of provisions intended to evade state franchise law protections, such as laws prohibiting waiver of a franchisee’s right to sue under certain circumstances.43 43.See Andrew Elmore, Franchise Regulation for the Fissured Economy, 86 Geo. Wash. L. Rev. 907, 954 n.229 (2018) (“States prohibit choice of law provisions and waivers in franchise agreements to contract around state franchise law obligations, which will foreclose evasions of a liability through waiver.”). For example, in Wright-Moore Corp. v. Ricoh Corp., the court found that Indiana law applied, rather than the parties’ chosen law of New York, because Indiana had a materially greater interest in the dispute and waiver of a franchisee’s rights was against Indiana’s fundamental policy. 908 F.2d 128, 132–33 (7th Cir. 1990).Show More Recently, emerging issues such as the protection of privacy rights in biometric data44 44.See, e.g., In re Facebook Biometric Info. Privacy Litig., 185 F. Supp. 3d 1155, 1169–70 (N.D. Cal. 2016) (concluding that a California choice-of-law provision could not be enforced where “California has not legislatively recognized a right to privacy in personal biometric data and has not implemented any specific protections for that right” and biometric data protection was a fundamental policy in Illinois, the state of the most significant relationship).Show More and the practice of telemedicine45 45.See J. Kelly Barnes, Telemedicine: A Conflict of Laws Problem Waiting To Happen—How Will Interstate and International Claims Be Decided?, 28 Hous. J. Int’l L. 491, 526–28 (2006) (discussing potential enforceability of choice-of-law clauses in the context of telemedicine).Show More have also raised issues about choice-of-law clause enforceability.

The issue has arisen, too, in the area of marriage and family law. Many courts, for example, allow choice-of-law provisions to validate antenuptial agreements.46 46.See O’Hara, Opting, supra note 40, at 1564–65 (“Antenuptial agreements are also incorporating choice-of-law provisions with mounting, albeit tentative, judicial support.”); see also John F. Coyle, A Short History of the Choice-of-Law Clause, 91 Colo. L. Rev. 1147, 1162–63, 1162 n.42 (2020) (noting that an example of such a clause exists as far back as 1874).Show More But according to one commentator, “[t]he paucity of court decisions” in areas where potentially applicable law differs significantly continues to “create[] uncertainty for all migratory couples who sign such an agreement.”47 47.See Linda J. Ravdin, Premarital Agreements and the Migratory Same-Sex Couple, 48 Fam. L.Q. 397, 406 (2014).Show More Choice-of-law clauses present distinct but related issues in other areas where states are sharply divided, such as the circumstances (if any) under which gestational surrogacy contracts are enforceable.48 48.See, e.g., Hodas v. Morin, 814 N.E.2d 320, 325–26 (Mass. 2004) (applying Section 187 of the Second Restatement to determine that a surrogacy agreement was valid and finding that no state other than the state of the chosen law, Massachusetts, clearly had the “materially greater” relationship to the dispute). Martha A. Field summarizes the manifold approaches states take toward surrogacy contracts, including fairly broad enforcement, enforcement provided certain requirements are met, toleration without explicitly regulating the subject, and criminalizing paid surrogacy. See Martha A. Field, Compensated Surrogacy, 89 Wash. L. Rev. 1155, 1161–65 (2014). Parties to such contracts have sometimes selected the law of a state hospitable to surrogacy, clauses that courts have enforced in some cases “notwithstanding manipulated contacts with the selected state and strong anti-surrogacy policies in the gestational carrier’s domicile.” Susan Frelich Appleton, Leaving Home? Domicile, Family, and Gender, 47 U.C. Davis L. Rev. 1453, 1512 (2014). Parties, however, cannot count on such a result, meaning that “the safest approach [for parties to a surrogacy contract] is to do something substantial in connection with the surrogacy arrangement in that state beyond just choosing its law.” See Joseph F. Morrissey, Surrogacy: The Process, the Law, and the Contracts, 51 Willamette L. Rev. 459, 509 (2015) (also noting that “courts may not honor the choice-of-law provision” in the absence of a substantial contact such as “using a clinic in [the] state [of the chosen law], or using an agency, surrogate or egg donor from that state”).Show More

Yet despite the proliferation of situations in which the validity of choice-of-law clauses is sharply contested, courts have not grown more consistent in their approach to them. In fact, the opposite is true; as the opening examples suggest,49 49.See supra note 23 and accompanying text.Show More courts increasingly reach disparate results on highly similar facts.50 50.See Woodward, Aberrant, supra note 42, at 208–09 (discussing the uncertainty created by the “fact-based and hopelessly uncertain” analysis under Section 187).Show More In one sense, this is surprising, given that jurisdictions in the United States have widely embraced the same authority—Section 187(2) of the Second Restatement of Conflict of Laws—to guide their approach to contractual choice of law.51 51.See infra notes 89–94 and accompanying text.Show More Notwithstanding this rare consensus on choice-of-law methodology, however, courts interpret Section 187(2) in ever-diverging, often wholly contradictory ways.52 52.See infraSubsection II.B.3.Show More This means that the enforceability of choice-of-law clauses involving controversial issues is driven by judicial reasoning that takes highly variegated approaches to seemingly similar facts and is, as a result, often impossible to predict at the time of contracting.

Courts’ inconsistent resolutions of this category of cases have created several problems. To begin with, the disparate results courts have reached on similar facts have undermined faith in the judiciary’s ability to deal with many contested areas of law in a reasoned, unbiased manner.53 53.See David A. Linehan, Due Process Denied: The Forgotten Constitutional Limits on Choice of Law in the Enforcement of Employee Covenants Not To Compete, 2012 Utah L. Rev. 209, 213 (positing that courts, rather than respecting relevant constitutional constraints, “expansively apply their own restrictive rules against noncompetes to virtually any dispute tried within their borders”).Show More Different commentators have argued in parallel, for example, that decisions refusing to honor contractual choice-of-law provisions in noncompete agreements54 54.See Timothy P. Glynn, Interjurisdictional Competition in Enforcing Non-competition Agreements: Regulatory Risk Management and the Race to the Bottom, 65 Wash. & Lee L. Rev. 1381, 1386–87 (2008) (describing and positing the likely future growth of a phenomenon whereby states seek to export their employer-friendly policies extraterritorially by broadly enforcing both noncompetes and choice-of-law clauses).Show More and those insisting on enforcement55 55.See Linehan, supra note 53, at 212 (arguing that courts have applied their choice-of-law principles in noncompete cases in a way that “fail[s] to respect due process constraints on their power to prefer their own laws to those of sister states”).Show More are driven by forum-law preference or other forms of state favoritism.

Moreover, even assuming that judges are applying Section 187 scrupulously and in good faith, the sheer unpredictability of results creates a host of issues in itself.56 56.See id. at 211.Show More Contracting parties are less able to negotiate effectively if the validity of a choice-of-law provision is in doubt,57 57.See, e.g., Lawrence J. La Sala, Note, Partner Bankruptcy and Partnership Dissolution: Protecting the Terms of the Contract and Ensuring Predictability, 59 Fordham L. Rev. 619, 643 n.135 (1991) (“Because parties normally will not enter into a contract if they are unable to foresee accurately their rights and liabilities under the contract, predictability is a prime objective of contract law.”).Show More and disputes are more likely to end in litigation.58 58.See Glynn, supra note 54, at 1385 (calling attention to “the rise of interjurisdictional disputes involving [noncompete] enforcement”).Show More Further, where parties have unequal bargaining power, legal uncertainty about choice-of-law provisions often unfairly disadvantages the weaker party, who might be able to successfully challenge the clause in court but may lack the resources to try.59 59.See, e.g., Woodward, Aberrant, supra note 42, at 212 (noting that “many rational clients will forego using a lawyer in a small claim or defense if they risk paying their lawyer more (probably far more) than the claim or defense is worth”).Show More Finally, the potential to achieve different results in different courts creates an incentive not merely for forum shopping but also for a race to judgment in which parties pursue parallel litigation in hand-picked forums that each hopes will be the first to deliver a final result.60 60.See O’Hara, Opting, supra note 40, at 1566 (“Unfortunately, however, enforcement of these clauses often turns on an ex post race to judgment.”); see also Viva R. Moffat, Making Non-Competes Unenforceable, 54 Ariz. L. Rev. 939, 959 (2012) (noting that disparities in enforcement of both choice-of-law clauses and noncompetes lead to a situation in which both parties “race to the courthouse in an effort to have the jurisdiction with the more favorable law hear the case”). A widely invoked example of this situation is the litigation underlying Advanced Bionics Corp. v. Medtronic, Inc., in which parallel proceedings in Minnesota and California considered the same noncompete but arrived at different outcomes. 59 P.3d 231 (Cal. 2002) (analyzing both Minnesota and California court proceedings). The two courts each ultimately issued contradictory injunctions forbidding the parties from proceeding in the other court, a standoff only resolved when the California Supreme Court ultimately gave way and dissolved the Californian lower court’s injunction. See id. at 237–38; see also Moffat, supranote 60, at 960–63 (describing the case’s procedural history in detail).Show More

A more fundamental objection, however, is that the practice of using a choice-of-law clause to validate a specific provision not only tends to foster judicial confusion, but is out of keeping with the fundamental goals of contractual choice-of-law enforcement. At first glance, this second point might seem counterintuitive: isn’t the whole point of contractual choice-of-law provisions to allow parties to specify the law that will govern their contract? Yet, as this Article will discuss in detail, most advocates of choice-of-law enforcement have assumed that parties will generally choose a particular jurisdiction’s law for reasons other than the content of specific substantive rules—reasons such as, for example, a jurisdiction’s general expertise in a particular area, the desire to choose a law with which both parties are familiar, or the wish to avoid uncertainty.61 61.See infra notes 130–34 and accompanying text.Show More Indeed, conflicts scholars have fairly consistently agreed that contractual choice-of-law clauses should not be used to evade a jurisdiction’s public policy, particularly when it is a strongly defined one.62 62.See infra notes 155–58 and accompanying text.Show More The current approach, however, allows parties to do so in many circumstances, limiting them only through a narrow, difficult-to-apply exception to the general policy of enforcement.63 63.SeeSecond Restatement § 187(2) (delineating a three-pronged exception to the general policy of enforcement).Show More

In response to this situation, this Article argues for a new way of conceptualizing the issue. Rather than fall back on complicated public policy exceptions to contractual choice of law, courts should instead recognize, and generally refuse to enforce, a particularly problematic category of choice-of-law clauses—those that are adopted specifically in the hope of validating a separate contractual provision. This Article refers to such clauses as “substance-targeted.” A provision is substance-targeted, for example, when it reflects an employer’s wish to substitute more favorable Michigan law for the less noncompete-friendly law that would otherwise apply to its Louisiana employee.

Courts typically do not distinguish between targeted and non-targeted choice-of-law clauses. As a result, targeted clauses are often treated as if they represent an ordinary instance of allowing contracting parties to have autonomy to choose the law applicable to their dispute.64 64.See, e.g., Stone Surgical, LLC v. Stryker Corp., 858 F.3d 383, 391 (6th Cir. 2017) (finding “no reason to disturb the parties’ choice of Michigan law” with respect to a noncompete where no state had a materially greater interest than Michigan).Show More Yet they involve meaningfully different considerations, both because of the reasons that parties choose to include them and because of their ultimate effects. Unlike conventional choice-of-law clauses, substance-targeted clauses are neither aimed at achieving predictability nor likely to result in it. Their frequent use encourages litigation, disadvantages weaker parties, and fosters fears about results-oriented reasoning when their enforceability is tested.65 65.See infra Subsection II.B.3.Show More More broadly, scholars have raised concerns about the possibility that choice-of-law clauses adopted to gain the benefit of substantive rules will “undermine the enforcement of public regulatory statutes designed to safeguard a particular vision of the market.”66 66.See Moon, supra note 42, at 325.Show More These pernicious effects—unlike the normally positive consequences of enforcing non-targeted clauses—call for a fundamentally different approach to choice-of-law analyses.

While other authors have advocated reforms in the courts’ approach to choice-of-law clauses,67 67.Notably, Larry Ribstein has argued that courts should “enforce express written choice-of-law clauses notwithstanding common law or statutory restrictions on enforcement, except when the clause is explicitly prohibited by a state where a contracting party resides and no party resides in the designated state.” Ribstein, Efficiency, supra note 30, at 368. Elsewhere, Erin A. O’Hara and Ribstein advocate for a somewhat similar approach under which “choice-maximizing rules proposed in this Article operate as default rules that legislatures can overrule by explicit statutes where necessary to preserve their power to legislate effectively.” Erin A. O’Hara & Larry E. Ribstein, From Politics to Efficiency in Choice of Law, 67 U. Chi. L. Rev.1151, 1153 (2000). In contrast to O’Hara and Ribstein, this Article’s central focus in reforming contractual choice of law is not on legislative involvement, although it does argue that a legislative role in defining areas of significant policy is desirable. See infra notes 269–70 and accompanying text. Rather, this Article argues that targeted and non-targeted choice-of-law clauses are fundamentally different and require distinct treatment.Show More this Article is the first to identify and propose a solution to the problem of substance targeting. The Article argues that it is feasible for courts to identify substance-targeted clauses68 68.See infra Section III.A.Show More and that, once so categorized, such provisions—because they fail to serve the goals of contractual choice of law more generally—should typically not be enforced.69 69.See infra Section III.B.Show More

This Article proceeds in three Parts. The first Part describes the typical framework applied to the enforceability of choice-of-law clauses in the United States. The second argues that substance-targeted choice-of-law clauses should represent a distinct category of conflicts analysis and discusses the reasons why current doctrine fails to adequately address the issues such conflicts present. Finally, the Article sets forth a proposal for reform, arguing that targeted choice-of-law clauses implicating questions of policy should be unenforceable in most cases.

  1. * Martin Luther King, Jr. Professor of Law, University of California, Davis, School of Law; visiting scholar, Freie Universität, Berlin, Germany, 2018–19. I wish to thank Afra Afsharipour and Kevin Johnson for financial support; John Coyle, David Horton, John Patrick Hunt, Lisa Ikemoto, and Courtney Joslin for insightful comments; and Niharika Sachdeva for helpful research assistance. I also thank my hosts at the Freie Universität: Dr. Andreas Fijal, Dr. Felix Hartmann, and Ms. Grit Rother. ↑
  2. See Stone Surgical, LLC v. Stryker Corp., 858 F.3d 383, 386 (6th Cir. 2017). ↑
  3. Ridgeway initially disputed the authenticity of the noncompete agreement, but evidence produced in discovery suggested that Ridgeway had received a form noncompete identical to 132 others Stryker had signed with its employees over a five-year period. Id. at 387–88. A jury later found that Ridgeway had signed the noncompete. Id. at 388. ↑
  4. Id. at 386. ↑
  5. Id. Stryker unsurprisingly disputed Ridgeway’s view of these conversations, maintaining that they related instead to whether Ridgeway had signed a second noncompete that would enable him to receive stock options. Id. at 387. ↑
  6. Id. at 386. ↑
  7. Id. at 387. ↑
  8. Ridgeway was fired on September 10, 2013; Stryker filed suit on September 30, 2013. See Complaint for Injunctive and Other Relief at 4, 34, Stryker Corp. v. Ridgeway, No. 1:13-cv-01066 (W.D. Mich. Sept. 30, 2013), 2013 WL 5526657. ↑
  9. See Amended Complaint at 1–2, Stryker Corp. v. Ridgeway, No. 1:13-cv-01066 (W.D. Mich. Oct. 21, 2013), 2013 WL 11276336. ↑
  10. See Stone Surgical, 858 F.3d at 391. ↑
  11. See Restatement (Second) of Conflict of Laws §§ 187(2), 188(1) (Am. Law Inst. 1971) [hereinafter Second Restatement]. ↑
  12. Stone Surgical, 858 F.3d at 391. ↑
  13. Id. ↑
  14. Id. at 388. The jury also denied relief to Ridgeway in his counterclaims against Stryker, which he originally filed in a separate proceeding but were ultimately consolidated with Stryker’s action. Id. ↑
  15. Id. at 387. ↑
  16. See Voluntary Petition for Individuals Filing for Bankruptcy, In re Christopher Martin Ridgeway, No. 16-10643 (Bankr. E.D. La. Mar. 23, 2016). ↑
  17. Freeman Expositions, Inc. v. Glob. Experience Specialists, Inc., No. SACV 17-00364, 2017 WL 1488269, at *1 (C.D. Cal. Apr. 24, 2017). ↑
  18. See id. (“During Mr. Shores’ work at GES, eighty to ninety percent of his sales were for events in Las Vegas, Nevada, and the vast majority of his clients were primarily engaged in Las Vegas.” (internal quotation marks omitted)). ↑
  19. Id. ↑
  20. Id. ↑
  21. See id. at *2. One asked him “Do you really want to go down this road?” and explained that “[o]ne path is to remain with GES and the other path is to go with Freeman and get sued and go broke. It is a lot easier to get out of an offer letter than a non-compete agreement.” Id. ↑
  22. See id. ↑
  23. See id. at *5. ↑
  24. Ridgeway, after all, had left a Louisiana-based sales job for another employer in Louisiana; his only contact with Michigan was that his former employer was headquartered there. See Stone Surgical, LLC v. Stryker Corp., 858 F.3d 383, 386–87, 390 (6th Cir. 2017). By contrast, Shores had lived and worked in Nevada prior to beginning employment with Freeman. See Freeman Expositions, 2017 WL 1488269, at *1. ↑
  25. See Freeman Expositions, 2017 WL 1488269, at *5. ↑
  26. Id. at *5. ↑
  27. Id. ↑
  28. See id. at *1, *3. The court also declined to dismiss a claim by Freeman for interference with its contractual relationship with Shores. See id. at *8. ↑
  29. As early as 1993, one commentator observed that the issue of choice-of-law enforcement in difficult cases “has generated a raft of judicial decisions marked by confusion, temerity, and vacillation.” Kirt O’Neill, Note, Contractual Choice of Law: The Case for a New Determination of Full Faith and Credit Limitations, 71 Tex. L. Rev. 1019, 1020 (1993). ↑
  30. See Catherine L. Fisk, Reflections on The New Psychological Contract and the Ownership of Human Capital, 34 Conn. L. Rev
    .

    765, 782–83 (2002). ↑

  31. See Larry E. Ribstein, From Efficiency to Politics in Contractual Choice of Law, 37 Ga. L. Rev. 363, 367 (2003) [hereinafter Ribstein, Efficiency] (noting that “the number of cases involving contractual choice is increasing significantly over time”). ↑
  32. See Norman D. Bishara & David Orozco, Using the Resource-Based Theory To Determine Covenant Not To Compete Legitimacy, 87 Ind. L.J. 979, 980, 984–85 (2012) (discussing the need to adapt the law governing noncompetes in a world where a “trend toward the greater use of noncompetes is occurring when . . . geographic boundaries are becoming less important to economic activity”); Gillian Lester & Elizabeth Ryan, Choice of Law and Employee Restrictive Covenants: An American Perspective, 31 Comp. Lab. L. & Pol’y J. 389, 389 (2010) (noting that more mobile employees and more geographically dispersed employers have contributed to a rise in noncompete litigation). ↑
  33.  See Steven Greenhouse, Noncompete Clauses Increasingly Pop Up in
    Array of Jobs, N.Y. Times (June 8, 2014), https://www.nytimes.com/2014/06/09/­business/­noncompete-clauses-increasingly-pop-up-in-array-of-jobs.html?r=0 [https://perma.cc/4KQY-H9PV]. ↑
  34. See id. ↑
  35. See Matt O’Brien, Even Janitors Have Noncompetes Now. Nobody Is Safe., Wash. Post. (Oct. 18, 2018), https://www.washingtonpost.com/business/2018/10/­18/even-janitors-have-noncompetes-now-nobody-is-safe/?utm_term=.c316c5c­61­487 [https://perma.cc/W7FU-S6M6]. ↑
  36. See id. ↑
  37. See id. (describing suit by employer against janitor that was dropped following media coverage). ↑
  38. See Stuart Lichten & Eric M. Fink, “Just When I Thought I Was Out . . . .”: Post-Employment Repayment Obligations, 25 Wash. & Lee J. Civ. Rts. & Soc.
    Just. 51, 54 (2018) (describing growth of such provisions’ popularity). These arrangements have recently attracted national publicity for, among other things, the threat they may pose to journalistic independence. See id. at 54–55. Many Sinclair Broadcasting employees, for example, chose to read “politically charged” statements on air, despite their personal reservations, because of worries about triggering repayment clauses in their contracts. Id. The statements were described as “prepackaged reports reflecting conservative views.” Id. at 54 n.15 (internal quotation marks and citation omitted). ↑
  39. See id. at 68–69, 77–78 (noting differences in particular between the law of California and of other states on the enforceability of post-employment repayment obligations). ↑
  40. It is difficult to assess exactly how common choice-of-law clauses are in such agreements because employment contracts are often between private parties. See Norman D. Bishara, Kenneth J. Martin & Randall S. Thomas, An Empirical Analysis of Noncompetition Clauses and Other Restrictive Postemployment Covenants, 68 Vand. L. Rev. 1, 7 (2015). However, it is reasonable to speculate that employers frequently include such provisions, given their popularity in the noncompete context and the uncertainty of the law in this area. For an example of one such case, see Willis Re Inc. v. Hearn, 200 F. Supp. 3d 540, 545–47 (E.D. Pa. 2016) (discussing contractual choice-of-law clause in dispute involving repayment of a retention bonus following employee’s departure for a competitor). ↑
  41. See Erin Ann O’Hara, Opting Out of Regulation: A Public Choice Analysis of Contractual Choice of Law, 53 Vand. L. Rev. 1551, 1563–64 (2000) [hereinafter O’Hara, Opting] (noting that, in contrast to the approach of the First Restatement, courts have transitioned to “almost uniformly enforc[ing] choice-of-law provisions that enable the parties to evade state usury laws”). The Second Restatement likely played a role in this acceptance by including a fairly liberal usury provision that operates even in the absence of a choice-of-law clause, providing that a given interest rate will not be invalidated on usury grounds if it is “permissible in a state to which the contract has a substantial relationship” and “not greatly in excess of the rate permitted by the general usury law of the state of the otherwise applicable law.” Second Restatement § 203. The “substantial relationship” requirement is fairly easily satisfied—if, for example, the applicable rate is that of the lender’s place of business or the place where the loan is to be repaid. See Robert Allen Sedler, The Contracts Provisions of the Restatement (Second): An Analysis and a Critique, 72 Colum. L. Rev. 279, 315–18 (1972). ↑
  42. See Fleetwood Servs., LLC v. Complete Bus. Sols. Grp., 374 F. Supp. 3d 361, 372 (E.D. Pa. 2019) (finding that, despite parties’ choice of Pennsylvania law, Texas law applied because Texas had the most significant relationship to the dispute and “applying Pennsylvania law would violate a fundamental public policy of Texas, namely its antipathy to high interest rates” (internal quotation marks omitted)); Am. Equities Grp. v. Ahava Dairy Prods. Corp., No. 01 Civ.5207, 2004 WL 870260, at *7–9 (S.D.N.Y. Apr. 23, 2004) (declining to enforce a choice of New Jersey law in a case involving a usury defense on the same grounds); Am. Express Travel Related Servs. Co. v. Assih, 893 N.Y.S.2d 438, 445–46 (N.Y. Civ. Ct. 2009) (declining to enforce a choice of Utah law in action to collect credit card payments based on New York’s materially greater interest and “strong public policy against interest rates which are excessive”); see also TriBar Op. Comm., Supp. Report: Opinions on Chosen-Law Provisions Under the Restatement of Conflict of Laws, 68 Bus. Law. 1161, 1161–62, 1162 n.2 (2013) (discussing analysis of this issue in New York courts and noting that it deviates somewhat from the orthodox Second Restatement approach). ↑
  43. See William J. Moon, Contracting Out of Public Law, 55 Harv. J. on Legis
    .

    323, 347 (2018) (“[C]ourts have consistently refused to enforce choice-of-law clauses in the context of . . . consumer contracts.”). In some cases, this refusal has been based on concerns about the substantive content of the chosen law. See, e.g., Masters v. DirecTV, Inc., Nos. 08-55825 & 08–55830, 2009 WL 4885132, at *1 (9th Cir. Nov. 19, 2009) (holding that California law, rather than the parties’ chosen law, applied to consumer class action waivers because such waivers were contrary to a fundamental policy in California); see also William J. Woodward Jr., Legal Uncertainty and Aberrant Contracts: The Choice of Law Clause, 89 Chi.-Kent L. Rev. 197, 207–09 (2014) [hereinafter Woodward, Aberrant] (discussing case law on enforcement of choice-of-law clauses in questions regarding the applicability of state statutes that convert one-way attorney’s-fee-shifting provisions into two-way provisions). Procedural concerns about information asymmetry and bargaining power disparities in form consumer contracts may also weigh in favor of non-enforcement. See generally Giesela Rühl, Consumer Protection in Choice of Law, 44 Cornell Int’l L.J. 569 (2011) (considering these issues and advocating for European-style limits on choice of law in consumer contracts). ↑

  44. See Andrew Elmore, Franchise Regulation for the Fissured Economy, 86 Geo. Wash. L. Rev. 907, 954 n.229 (2018) (“States prohibit choice of law provisions and waivers in franchise agreements to contract around state franchise law obligations, which will foreclose evasions of a liability through waiver.”). For example, in Wright-Moore Corp. v. Ricoh Corp., the court found that Indiana law applied, rather than the parties’ chosen law of New York, because Indiana had a materially greater interest in the dispute and waiver of a franchisee’s rights was against Indiana’s fundamental policy. 908 F.2d 128, 132–33 (7th Cir. 1990). ↑
  45. See, e.g., In re Facebook Biometric Info. Privacy Litig., 185 F. Supp. 3d 1155, 1169–70 (N.D. Cal. 2016) (concluding that a California choice-of-law provision could not be enforced where “California has not legislatively recognized a right to privacy in personal biometric data and has not implemented any specific protections for that right” and biometric data protection was a fundamental policy in Illinois, the state of the most significant relationship). ↑
  46. See J. Kelly Barnes, Telemedicine: A Conflict of Laws Problem Waiting To Happen—How Will Interstate and International Claims Be Decided?, 28 Hous. J. Int’l L. 491, 526–28 (2006) (discussing potential enforceability of choice-of-law clauses in the context of telemedicine). ↑
  47. See O’Hara, Opting, supra note 40, at 1564–65 (“Antenuptial agreements are also incorporating choice-of-law provisions with mounting, albeit tentative, judicial support.”); see also John F. Coyle, A Short History of the Choice-of-Law Clause, 91 Colo. L. Rev. 1147, 1162–63, 1162 n.42 (2020) (noting that an example of such a clause exists as far back as 1874). ↑
  48. See Linda J. Ravdin, Premarital Agreements and the Migratory Same-Sex Couple, 48 Fam. L.Q. 397, 406 (2014). ↑
  49. See, e.g., Hodas v. Morin, 814 N.E.2d 320, 325–26 (Mass. 2004) (applying Section 187 of the Second Restatement to determine that a surrogacy agreement was valid and finding that no state other than the state of the chosen law, Massachusetts, clearly had the “materially greater” relationship to the dispute). Martha A. Field summarizes the manifold approaches states take toward surrogacy contracts, including fairly broad enforcement, enforcement provided certain requirements are met, toleration without explicitly regulating the subject, and criminalizing paid surrogacy. See Martha A. Field, Compensated Surrogacy, 89 Wash. L. Rev. 1155, 1161–65 (2014). Parties to such contracts have sometimes selected the law of a state hospitable to surrogacy, clauses that courts have enforced in some cases “notwithstanding manipulated contacts with the selected state and strong anti-surrogacy policies in the gestational carrier’s domicile.” Susan Frelich Appleton, Leaving Home? Domicile, Family, and Gender, 47 U.C. Davis L. Rev. 1453, 1512 (2014). Parties, however, cannot count on such a result, meaning that “the safest approach [for parties to a surrogacy contract] is to do something substantial in connection with the surrogacy arrangement in that state beyond just choosing its law.” See Joseph F. Morrissey, Surrogacy: The Process, the Law, and the Contracts, 51 Willamette L. Rev. 459, 509 (2015) (also noting that “courts may not honor the choice-of-law provision” in the absence of a substantial contact such as “using a clinic in [the] state [of the chosen law], or using an agency, surrogate or egg donor from that state”). ↑
  50. See supra note 23 and accompanying text. ↑
  51. See Woodward, Aberrant, supra note 42, at 208–09 (discussing the uncertainty created by the “fact-based and hopelessly uncertain” analysis under Section 187). ↑
  52. See infra notes 89–94 and accompanying text. ↑
  53. See infra Subsection II.B.3. ↑
  54.  See David A. Linehan, Due Process Denied: The Forgotten Constitutional Limits on Choice of Law in the Enforcement of Employee Covenants Not To Compete, 2012 Utah L. Rev. 209, 213 (positing that courts, rather than respecting relevant constitutional constraints, “expansively apply their own restrictive rules against noncompetes to virtually any dispute tried within their borders”). ↑
  55.  See Timothy P. Glynn, Interjurisdictional Competition in Enforcing Non-competition Agreements: Regulatory Risk Management and the Race to the Bottom, 65 Wash. & Lee L. Rev. 1381, 1386–87 (2008) (describing and positing the likely future growth of a phenomenon whereby states seek to export their employer-friendly policies extraterritorially by broadly enforcing both noncompetes and choice-of-law clauses). ↑
  56. See Linehan, supra note 53, at 212 (arguing that courts have applied their choice-of-law principles in noncompete cases in a way that “fail[s] to respect due process constraints on their power to prefer their own laws to those of sister states”). ↑
  57. See id. at 211. ↑
  58.  See, e.g., Lawrence J. La Sala, Note, Partner Bankruptcy and Partnership Dissolution: Protecting the Terms of the Contract and Ensuring Predictability, 59 Fordham L. Rev. 619, 643 n.135 (1991) (“Because parties normally will not enter into a contract if they are unable to foresee accurately their rights and liabilities under the contract, predictability is a prime objective of contract law.”). ↑
  59.  See Glynn, supra note 54, at 1385 (calling attention to “the rise of interjurisdictional disputes involving [noncompete] enforcement”). ↑
  60.  See, e.g., Woodward, Aberrant, supra note 42, at 212 (noting that “many rational clients will forego using a lawyer in a small claim or defense if they risk paying their lawyer more (probably far more) than the claim or defense is worth”). ↑
  61.  See O’Hara, Opting, supra note 40, at 1566 (“Unfortunately, however, enforcement of these clauses often turns on an ex post race to judgment.”); see also Viva R. Moffat, Making Non-Competes Unenforceable, 54 Ariz. L. Rev
    .

    939, 959 (2012) (noting that disparities in enforcement of both choice-of-law clauses and noncompetes lead to a situation in which both parties “race to the courthouse in an effort to have the jurisdiction with the more favorable law hear the case”). A widely invoked example of this situation is the litigation underlying Advanced Bionics Corp. v. Medtronic, Inc., in which parallel proceedings in Minnesota and California considered the same noncompete but arrived at different outcomes. 59 P.3d 231 (Cal. 2002) (analyzing both Minnesota and California court proceedings). The two courts each ultimately issued contradictory injunctions forbidding the parties from proceeding in the other court, a standoff only resolved when the California Supreme Court ultimately gave way and dissolved the Californian lower court’s injunction. See id. at 237–38; see also Moffat, supra note 60, at 960–63 (describing the case’s procedural history in detail). ↑

  62. See infra notes 130–34 and accompanying text. ↑
  63. See infra notes 155–58 and accompanying text. ↑
  64. See Second Restatement § 187(2) (delineating a three-pronged exception to the general policy of enforcement). ↑
  65. See, e.g., Stone Surgical, LLC v. Stryker Corp., 858 F.3d 383, 391 (6th Cir. 2017) (finding “no reason to disturb the parties’ choice of Michigan law” with respect to a noncompete where no state had a materially greater interest than Michigan). ↑
  66. See infra Subsection II.B.3. ↑
  67. See Moon, supra note 42, at 325. ↑
  68. Notably, Larry Ribstein has argued that courts should “enforce express written choice-of-law clauses notwithstanding common law or statutory restrictions on enforcement, except when the clause is explicitly prohibited by a state where a contracting party resides and no party resides in the designated state.” Ribstein, Efficiency, supra note 30, at 368. Elsewhere, Erin A. O’Hara and Ribstein advocate for a somewhat similar approach under which “choice-maximizing rules proposed in this Article operate as default rules that legislatures can overrule by explicit statutes where necessary to preserve their power to legislate effectively.” Erin A. O’Hara & Larry E. Ribstein, From Politics to Efficiency in Choice of Law, 67 U. Chi. L. Rev.
     

    1151, 1153 (2000). In contrast to O’Hara and Ribstein, this Article’s central focus in reforming contractual choice of law is not on legislative involvement, although it does argue that a legislative role in defining areas of significant policy is desirable. See infra notes 269–70 and accompanying text. Rather, this Article argues that targeted and non-targeted choice-of-law clauses are fundamentally different and require distinct treatment. ↑

  69. See infra Section III.A. ↑
  70. See infra Section III.B. ↑

The Structures of Local Courts

Local courts are, by far, the most commonly used courts in our justice system. Cases filed in local courts outnumber those filed in federal court by a factor of over two hundred. Few litigants who receive local-court judgments appeal the matter further. The justice we possess is thus largely the justice created by local courts, but they are largely absent from the law school curriculum. We know astonishingly little about them.

This Article begins to remedy that absence by providing a structural account of local courts that situates them as distinct institutions within the justice system. Because local courts are influenced by all levels of government—federal, state, and local—they exhibit a radical diversity—not just between states but within them, and not just in the way that they operate but in their organizing principles. The Article links the many problems experienced by local courts—chronic underfunding and a lack of oversight cause problems that run deep—with the state and federal structures that shape local-court function and administration. On the state side, the Article analyzes hand-coded, raw survey data from the National Center for State Courts to describe the interactions between local courts and administrative bodies within state judicial branches. Although states differ, administrative distance between state and local institutions joined with the rarity of appeals from local-court judgments makes local courts meaningfully independent from the state system. Federal law compounds this independence by sheltering local courts from external scrutiny. Judicial federalism doctrines like preclusion, abstention, and habeas corpus require federal courts to defer to the legal and factual findings of local courts. Federal enforcement doctrines like standing and immunity protect local courts from legal reform efforts.

The Article then reevaluates our theories of judicial federalism in light of the diversity and problems of local courts. It argues that the values of judicial federalism invoked by both courts and scholars rely on the fiction that state courts are monoliths. In fact, the reality of state courts—including the diversity and relative obscurity of local courts—frustrate these values. Instead, the Article argues that the more valuable conceptual function of local courts is not normative but rather descriptive: they provide us with an understanding of the justice we have, not the justice we aspire to or the justice required by law. They—and not federal courts—are the starting points from which we should define and evaluate our system of justice.

Introduction

Ten years ago, I visited the courthouse in Wilkinson County, a small, majority-Black county in the southwest corner of Mississippi. It had an old and genteel Beaux-Arts façade and stood in the center of a town square, lending a sense of history to the diners and clothing stores around. Inside, dust yellowed the windows, blotches deepened the color of the carpets, holes in the ceilings exposed electrical wires. Marriage records labeled “White” and “Colored” through 1984 filled the county clerk’s bookcases. Many forms of history.1 1.Courthouse architecture is a fascinating topic in its own right. See Judith Resnik & Dennis Curtis, Representing Justice: Invention, Controversy, and Rights in City-States and Democratic Courtrooms (2011); Norman W. Spaulding, The Enclosure of Justice: Courthouse Architecture, Due Process, and the Dead Metaphor of Trial, 24 Yale J.L. & Human. 311, 315 (2012) (“[T]he American concept of due process of law is itself intimately bound up with the location, design, and use of law’s administrative space.”). For recent images of local courts around the country, see American Courthouses: A Photo Archive by John Deacon, http://www.courthouses.co/ (last visited Apr. 12, 2020) [https://perma.cc/K2MQ-UYMN].Deteriorating physical conditions of local courthouses are not unique to Wilkinson County and go beyond “complaints about the color of the carpeting.” ISBA Special Comm. on Fair & Impartial Courts, Ill. State Bar Ass’n, Report on the Funding Crisis in the Illinois Courts 20 (2013) [hereinafter ISBA Report], https://www.isba.org/sites/default/files/­committees/Report%20on%20the%20Funding%20Crisis%20in%20the%20Illinois%20Courts.pdf [https://perma.cc/B54U-CMAP]. An Illinois State Bar Association report, for example, describes local courthouses with “mold visibly growing on the ceilings” and courthouses with heating and air conditioning systems so ineffective that “some rooms . . . are almost as warm as a sauna and other rooms . . . are ridiculously cold all on the same day.” Id. at 20 & 20 n.45. For more examples, see generally infra Section I.B.Show More

Local courts like this one—including both general-jurisdiction trial-level courts and limited-jurisdiction hyperlocal courts like municipal and justice courts2 2.The diversity of local courts makes defining the category an important part of the analysis. For a more detailed explanation, see infra Part I.Show More—are overwhelmingly likely to have both the first and final words in any dispute within the justice system. Litigants file tens of millions of cases in local courts each year, outnumbering cases filed in federal court by a factor of over two hundred.3 3.See infra Part I.Show More Few litigants who receive local-court judgments appeal the matter further.

The justice we possess is thus largely the justice created by local courts. It is a diverse justice. Because local courts are influenced by all levels of government—federal, state, and local—they exhibit a radical diversity—not just between states but within them, and not just in the way that they operate but in their organizing structures. We tolerate, even celebrate, that diversity. We believe it encourages the “creative ferment of experimentation.”4 4.See Paul M. Bator, The State Courts and Federal Constitutional Litigation, 22 Wm. & Mary L. Rev. 605, 634 (1981) (“Do we not derive enormous benefits from having a variety of institutional ‘sets’ within which issues of federal constitutional law are addressed? The creative ferment of experimentation which federalism encourages is not irrelevant to the task of constitutional adjudication.”).Show More And sometimes, local courts vindicate this promise. At their best, local courts can be laboratories for innovative approaches to justice tailored to the communities they serve.5 5.For examples of how local courts have piloted programs meant to improve justice for individuals, communities, and businesses, see generally infra Section I.A.Show More

But this innovation, when it exists, is matched—at times overmatched—by the injustice that takes place there. Chronic underfunding and a lack of oversight cause problems that run deep. Some local courts are full of violations of federal law, including overlong waits for trial, a dearth of interpreters, ineffective and non-existent public defense programs, inaccessible facilities, and fines and debtor’s prisons that have devastating impacts on indigent defendants. These problems are not only deep; they are vast: most states have some identified problem with their local courts.6 6.See infra Section I.B.Show More

Despite these massive stakes, despite the place of local courts at the heart of the justice system, and despite even the compelling human stories that unfold in these courts, we know very little about them.7 7.See Annie Decker, A Theory of Local Common Law, 35 Cardozo L. Rev. 1939, 1943–44 (2014) (noting a lack of empirical studies about local courts); Ethan J. Leib, Localist Statutory Interpretation, 161 U. Pa. L. Rev. 897, 898–99 (2013) (“[L]egal scholars have almost universally ignored the law in local courts, favoring the study of federal courts and state appellate courts.”); Stephen C. Yeazell, Courting Ignorance: Why We Know So Little About Our Most Important Courts, 143 Daedalus 129, 129 (2014) (“[A]s we drown in data about everything else under the sun, we know remarkably little about how [local] courts actually work.”).Show More Their opinions are often unpublished and their proceedings are rarely transcribed.8 8.See infra Subsection II.A.2.Show More They are completely absent from the core law school curriculum.9 9.Others have offered explanations for this erasure. Annie Decker has speculated that the number and diversity of local courts overwhelm us with “anticipatory fatigue.” See Decker, supra note 7, at 1943. Ethan Leib has suggested that we ignore local courts because their opinions are unpublished and inaccessible. See Leib, supra note 7, at 907–08 (“Admittedly, it is not easy to ascertain what is occurring in these local courtrooms with a high level of confidence. Because local courts are much less likely to publish their decisions than state courts higher in the judicial hierarchy, a scholar would need to sit in local courtrooms for long periods of time and read reams of motion papers to discover with any degree of reliability what goes on in these halls of justice.”). As I describe later, these explanations are likely correct, but incomplete.Though local courts are largely absent from doctrinal classes, they are not absent from clinical work, which often takes place within local courts.Show More

This Article begins to remedy that absence by providing a structural account of local courts that situates them as distinct institutions within the justice system. It links the problems experienced by these courts with the state and federal laws that influence local-court function and administration. On the state side, the Article provides new accounts of the administrative and substantive relationships between local courts and state government. It describes how states create and shape the basic contours of local courts through policies that determine how local courts are funded and how local judges are selected.10 10.See infra Subsection II.A.1.Show More It uses hand-coded, raw survey data from the National Center for State Courts (NCSC) to illustrate the kinds of formal and informal interactions that exist between local courts and state judicial administrative offices. Although states differ, legal and administrative distance between state and local institutions joined with the rarity of appeals from local-court judgments and the scarcity of other quality control mechanisms makes local courts meaningfully independent from their state systems.11 11.See infra Subsection II.A.2.Show More

Federal law compounds this independence by sheltering local courts from external scrutiny. Judicial federalism doctrines—specifically preclusion, abstention, and habeas corpus—require federal courts to defer to the legal and factual findings of state courts. In practice, these doctrines require deference to local courts.12 12.See infra Subsection II.B.1.Show More As a consequence, federal courts provide surprisingly little oversight of the workings of local courts. And federal enforcement doctrines like standing and immunity protect local courts from legal reform efforts.13 13.See infra Subsection II.B.2.Show More

This structural analysis provides insights not only into local-court functioning but into scholarship on federalism, judicial federalism, and our justice system broadly. Theories of judicial federalism that promote state courts as useful administrators of federal law, invoked by both courts and scholars that draw from the general values of federalism, rely on the myth that state courts are monolithic institutions. In fact, the reality of state courts—including their diversity, relative obscurity, and independence from state institutions—frustrates these values and counsels against deference to local-court decision making.14 14.See infra Section III.A.Show More

In addition, theories of judicial federalism miss what I believe is the principal conceptual function of local courts: providing us with an understanding of the justice we have, not the justice we aspire to or the justice required by law. If we look closely enough, we can see that where local courts fail, they fail in part because we allow them to fail. We underfund local courts; we tolerate state systems that do not supervise them; and we have declined to create a federal bureaucracy to monitor them. Local courts—and not federal courts—are the starting point from which we should define and evaluate our system of justice.15 15.See infra Section III.B.Show More

This analysis requires some methodological novelty. To build a structural argument, the Article weaves together state and local laws, state judicial administration, federal courts doctrines, and federal enforcement laws. What might appear to be a motley collection of legal authorities actually underscores one reason why studying local courts has been such a challenge: no single discipline offers an analytic framework sufficient to capture the reality of local courts. Four areas deeply informed by these courts—federal courts, civil procedure, state government, and local government—all ignore them. The field of federal courts, for one, addresses jurisdictional questions that directly affect the reach of local courts. And yet to the extent federal courts scholarship acknowledges local courts at all, it describes them in generalities and fails to engage with, or even inquire into, their structural and experiential realities.16 16.By their own admission, federal courts scholars have treated local courts as “the neglected stepchild of the field.” Michael E. Solimine & James L. Walker, Respecting State Courts: The Inevitability of Judicial Federalism 141 (1999). As an example, consider the question of “parity,” a foundational concept in federal courts which refers to the relative competence of state and federal courts to adjudicate federal claims. Though parity directly bears upon the abilities of local courts, parity literature has never considered the diversity of local court ability, the particular challenges that local courts face, or the complex relationships these courts have with the rest of the state system. See, e.g., Bator, supra note 4, at 622–23 (calling state and federal courts “partners” in the endeavor to enforce federal constitutional principles and elaborating on federal-court competence); Burt Neuborne, The Myth of Parity, 90 Harv. L. Rev. 1105, 1105–06 (1977) (arguing that a belief in parity is “at best, a dangerous myth” and that jurisdictional decisions are not outcome-neutral).Show More Civil procedure scholarship focuses “primarily, if not exclusively, on federal litigation and the Federal Rules of Civil Procedure.”17 17.See Barbara A. Babcock, Toni M. Massaro & Norman W. Spaulding, The Ideal and the Actual in Procedural Due Process, in A Critical Guide to Civil Procedure (Brooke Coleman et al. eds., forthcoming 2020) (manuscript at 2) (on file with author); see also id. at 1–2 (“[T]he study of how due process works outside the federal courts in the spaces where the vast majority of ordinary people encounter the administration of justice generally does not resurface. . . . This is most unfortunate. . . . Students are increasingly taught ideal procedural justice . . . . Meanwhile, what most Americans experience is nothing like what the models of either administrative or judicial process describe, nothing like what we debate in studying procedure in the federal courts, whatever its defects.”).Show More Scholarship on state law, including my own, has ignored local courts in favor of the state legislative and executive branches.18 18.See Jessica Bulman-Pozen, Partisan Federalism, 127 Harv. L. Rev. 1077 (2014) (situating state identity and partisanship within the larger system of federalism); Miriam Seifter, Further from the People? The Puzzle of State Administration, 93 N.Y.U. L. Rev. 107 (2018) (exploring the lack of transparency in state bureaucracy and its consequences); Miriam Seifter, Gubernatorial Administration, 131 Harv. L. Rev. 483, 484 (2017) (providing a history and functional analysis of gubernatorial power); Justin Weinstein-Tull, State Bureaucratic Undermining, 85 U. Chi. L. Rev. 1083 (2018) (describing the ways in which conflict between and among the state legislative and executive branches can undermine federal rights).Scholarship on state courts and the benefits of state-court constitutionalism—“new judicial federalism” scholarship—has also ignored local courts. See, e.g., Lawrence Friedman, The Constitutional Value of Dialogue and the New Judicial Federalism, 28 Hastings Const. L.Q. 93, 94–98 (2000) (arguing for state supreme courts to embrace a new role in constitutional interpretation without mentioning local courts).Show More Even local government literature, the usual stomping grounds for vital but non-national issues otherwise overlooked by the academy, has ignored local courts.19 19.Local government scholarship has “for too long failed to see local judges as the complex players they are in municipal governments.” Ethan J. Leib, Local Judges and Local Government, 18 N.Y.U. J. Legis. & Pub. Pol’y 707, 739 (2015); see also id. at 737 (“[L]ocal government scholars who spend time thinking about optimizing the relationships among different levels of government—federal, state, local—have much more work to do to situate local courts within this matrix.”).Instead, local government theory has largely focused on the balance of policymaking authority between state and local governments, see, e.g., David J. Barron, Reclaiming Home Rule, 116 Harv. L. Rev. 2255 (2003); Richard Briffault, Our Localism: Part I—The Structure of Local Government Law, 90 Colum. L. Rev. 1 (1990); Gerald E. Frug, The City as a Legal Concept, 93 Harv. L. Rev. 1057 (1980), the liminal legal space occupied by local governments, see, e.g., Richard Thompson Ford, The Boundaries of Race: Political Geography in Legal Analysis, 107 Harv. L. Rev. 1841 (1994); Richard C. Schragger, The Limits of Localism, 100 Mich. L. Rev. 371 (2001); Joan C. Williams, The Constitutional Vulnerability of American Local Government: The Politics of City Status in American Law, 1986 Wis. L. Rev. 83, land use, urban planning, and governance problems unique to local government, see, e.g., Michelle Wilde Anderson, The New Minimal Cities, 123 Yale L.J. 1118 (2014); Nestor M. Davidson, Localist Administrative Law, 126 Yale L.J. 564 (2017); David Schleicher, City Unplanning, 122 Yale L.J. 1670 (2013), and federal-state-local relationships in various policy areas, see, e.g., Roderick M. Hills, Jr., Dissecting the State: The Use of Federal Law to Free State and Local Officials from State Legislatures’ Control, 97 Mich. L. Rev. 1201 (1999); Cristina M. Rodríguez, The Significance of the Local in Immigration Regulation, 106 Mich. L. Rev. 567 (2008); Justin Weinstein-Tull, Election Law Federalism, 114 Mich. L. Rev. 747 (2016). This is not, of course, an exhaustive list of categories.Show More

The legal academy’s failure to account for local courts—with two narrow exceptions20 20.The first exception is misdemeanor criminal process. Scholars have unearthed fascinating (and horrifying) details of how criminal procedure works in the context of minor offenses tried in local courts. See, e.g., Malcolm M. Feeley, The Process is the Punishment: Handling Cases in a Lower Criminal Court (1992); Issa Kohler-Hausmann, Misdemeanorland: Criminal Courts and Social Control in an Age of Broken Windows Policing (2018) (describing the “procedural hassle” of criminal procedure in New York local courts); Alexandra Natapoff, Punishment Without Crime: How Our Massive Misdemeanor System Traps the Innocent and Makes America More Unequal (2018); Alexandra Natapoff, Misdemeanors, 85 S. Cal. L. Rev. 1313, 1315 (2012) [hereinafter Natapoff, Misdemeanors] (“Most U.S. convictions are misdemeanors, and they are generated in ways that baldly contradict the standard due process model of criminal adjudication.”). And a deep literature exists that probes the rise of pleas and the process surrounding them. See, e.g., Josh Bowers, Punishing the Innocent, 156 U. Pa. L. Rev. 1117 (2008); George Fisher, Plea Bargaining’s Triumph, 109 Yale L.J. 857 (2000); Thea Johnson, Fictional Pleas, 94 Ind. L.J. 855 (2019); Stephen J. Schulhofer, Plea Bargaining as Disaster, 101 Yale L.J. 1979 (1992).The second exception is the response to Michael Brown’s killing in Ferguson, Missouri. After Brown’s death, the U.S. Department of Justice issued a report that detailed the failures of the Ferguson municipal court, including that the court handled criminal charges “not with the primary goal of administering justice or protecting the rights of the accused, but of maximizing revenue.” See U.S. Dep’t of Justice, Civil Rights Div., Investigation of the Ferguson Police Department 42 (2015) [hereinafter DOJ Ferguson Report] https://www.justice.gov/sites/default/files/opa/press-releases/attachments/2015/03/04/fergu­son_police_department_report.pdf [https://perma.cc/26R9-AB4B]. Scholars have since done illuminating work on local-court reform using Ferguson as a case study. See, e.g., Beth A. Colgan, Lessons from Ferguson on Individual Defense Representation as a Tool of Systemic Reform, 58 Wm. & Mary L. Rev. 1171 (2017) (describing the many constitutional rights violated by Ferguson’s local-court system and the impact of individual defense counsel on reform efforts); Fred O. Smith, Jr., Abstention in the Time of Ferguson, 131 Harv. L. Rev. 2283 (2018) (arguing that the Younger abstention doctrine precludes meaningful oversight of local courts and governments).Show More—has essentially divorced legal theory from the most fundamental and common experiences of our justice system. As a consequence, the study of local courts is unexpectedly nascent.21 21.Although there is essentially no academic legal scholarship on local courts as courts, illuminating scholarship does exist on specific issues that take place in local courts, including problems relating to problem-solving and subject-matter courts. See, e.g., Richard C. Boldt, Problem-Solving Courts and Pragmatism, 73 Md. L. Rev. 1120 (2014) (considering how pragmatism informs the judicial process in problem-solving courts); Erin R. Collins, Status Courts, 105 Geo. L.J. 1481 (2017) (describing the promise and pitfalls of local courts that are tailored to certain types of defendants); D. James Greiner, Cassandra Wolos Pattanayak & Jonathan Hennessy, The Limits of Unbundled Legal Assistance: A Randomized Study in A Massachusetts District Court and Prospects for the Future, 126 Harv. L. Rev. 901 (2013) (empirically evaluating different kinds of legal services in Massachusetts district courts).But in the same way that we don’t consider the study of federal criminal law to satisfy our need to understand federal courts more broadly, neither does the study of specific legal issues that arise in local courts satisfy our need to understand local courts.Show More That status is perverse. Why should most litigants’ primary experiences with the legal system be academic afterthoughts?

Part I of this Article explains the high stakes—both practical and conceptual—associated with local courts. Part II links these problems with the structures of local courts by arguing that the state and federal systems do not provide significant oversight of these courts. Section II.A provides new accounts of the administrative and substantive relationships between local courts and their states. Section II.B describes how federal law shelters local courts from external scrutiny. Whereas Part II examines the effects of the state and federal systems on the internal workings of local courts, Part III does the opposite: it looks outward and reevaluates our thinking on judicial federalism in light of the diversity and problems of local courts.

I conclude by arguing that local courts should not be relegated to the status of quirky hybrid within the academy. I speculate about what a field of local courts would look like and suggest that treating local courts as a fundamental building block within the law would both solve a number of problems and create a promising set of questions for further study.

  1. * Associate Professor of Law, Arizona State University. I owe many thanks. First, to my fantastic research assistants: Samantha Burke, Lucas Hickman, Kelsey Merrick, Austin Marshall, and Jack Milligan. Second, to the judges and court administrators who told me stories and offered their ideas. Third, to the many readers whose generosity, thoughts, and suggestions I have not done justice: Michelle Anderson, Abbye Atkinson, Richard Briffault, Beth Colgan, Laura Coordes, Nestor Davidson, George Fisher, Deborah Hensler, Ethan Leib, Ron Levin, Kaipo Matsumura, Ben McJunkin, Jeannie Merino, Martha Minow, Michael Pollack, Dara Purvis, Trevor Reed, Michael Saks, Erin Scharff, Rich Schragger, Joshua Sellers, Michael Selmi, Bijal Shah, Jonathan Siegel, Shirin Sinnar, Fred Smith, Ji Seon Song, Norm Spaulding, David Super, Andrea Wang, participants of the Stanford/Harvard/Yale Junior Faculty Forum, Junior Faculty Federal Courts Workshop, the State and Local Government Law Works-in-Progress Workshop, the American Constitution Society Junior Scholars Public Law Workshop, the Grey Fellows Forum, and faculty workshops at Arizona State University and U.C. Irvine. And finally, to Jordan Walsh and the editors of the Virginia Law Review for their thorough and tireless work. ↑
  2. Courthouse architecture is a fascinating topic in its own right. See Judith Resnik & Dennis Curtis, Representing Justice: Invention, Controversy, and Rights in City-States and Democratic Courtrooms (2011); Norman W. Spaulding, The Enclosure of Justice: Courthouse Architecture, Due Process, and the Dead Metaphor of Trial, 24 Yale J.L. & Human. 311, 315 (2012) (“[T]he American concept of due process of law is itself intimately bound up with the location, design, and use of law’s administrative space.”). For recent images of local courts around the country, see American Courthouses: A Photo Archive by John Deacon, http://www.courthouses.co/ (last visited Apr. 12, 2020) [https://perma.cc/K2MQ-UYMN].Deteriorating physical conditions of local courthouses are not unique to Wilkinson County and go beyond “complaints about the color of the carpeting.” ISBA Special Comm. on Fair & Impartial Courts, Ill. State Bar Ass’n, Report on the Funding Crisis in the Illinois
    Courts 20 (2013) [hereinafter ISBA Report], https://www.isba.org/sites/default/files/­committees/Report%20on%20the%20Funding%20Crisis%20in%20the%20Illinois%20Courts.pdf [https://perma.cc/B54U-CMAP]. An Illinois State Bar Association report, for example, describes local courthouses with “mold visibly growing on the ceilings” and courthouses with heating and air conditioning systems so ineffective that “some rooms . . . are almost as warm as a sauna and other rooms . . . are ridiculously cold all on the same day.” Id. at 20 & 20 n.45. For more examples, see generally infra Section I.B. ↑
  3. The diversity of local courts makes defining the category an important part of the analysis. For a more detailed explanation, see infra Part I. ↑
  4. See infra Part I. ↑
  5. See Paul M. Bator, The State Courts and Federal Constitutional Litigation, 22 Wm. & Mary L. Rev. 605, 634 (1981) (“Do we not derive enormous benefits from having a variety of institutional ‘sets’ within which issues of federal constitutional law are addressed? The creative ferment of experimentation which federalism encourages is not irrelevant to the task of constitutional adjudication.”). ↑
  6. For examples of how local courts have piloted programs meant to improve justice for individuals, communities, and businesses, see generally infra Section I.A. ↑
  7. See infra Section I.B. ↑
  8. See Annie Decker, A Theory of Local Common Law, 35 Cardozo L. Rev. 1939, 1943–44 (2014) (noting a lack of empirical studies about local courts); Ethan J. Leib, Localist Statutory Interpretation, 161 U. Pa. L. Rev. 897, 898–99 (2013) (“[L]egal scholars have almost universally ignored the law in local courts, favoring the study of federal courts and state appellate courts.”); Stephen C. Yeazell, Courting Ignorance: Why We Know So Little About Our Most Important Courts, 143 Daedalus 129, 129 (2014) (“[A]s we drown in data about everything else under the sun, we know remarkably little about how [local] courts actually work.”). ↑
  9. See infra Subsection II.A.2. ↑
  10. Others have offered explanations for this erasure. Annie Decker has speculated that the number and diversity of local courts overwhelm us with “anticipatory fatigue.” See Decker, supra note 7, at 1943. Ethan Leib has suggested that we ignore local courts because their opinions are unpublished and inaccessible. See Leib, supra note 7, at 907–08 (“Admittedly, it is not easy to ascertain what is occurring in these local courtrooms with a high level of confidence. Because local courts are much less likely to publish their decisions than state courts higher in the judicial hierarchy, a scholar would need to sit in local courtrooms for long periods of time and read reams of motion papers to discover with any degree of reliability what goes on in these halls of justice.”). As I describe later, these explanations are likely correct, but incomplete.Though local courts are largely absent from doctrinal classes, they are not absent from clinical work, which often takes place within local courts. ↑
  11. See infra Subsection II.A.1. ↑
  12. See infra Subsection II.A.2. ↑
  13. See infra Subsection II.B.1. ↑
  14. See infra Subsection II.B.2. ↑
  15. See infra Section III.A. ↑
  16. See infra Section III.B. ↑
  17. By their own admission, federal courts scholars have treated local courts as “the neglected stepchild of the field.” Michael E. Solimine & James L. Walker, Respecting State Courts: The Inevitability of Judicial Federalism 141 (1999). As an example, consider the question of “parity,” a foundational concept in federal courts which refers to the relative competence of state and federal courts to adjudicate federal claims. Though parity directly bears upon the abilities of local courts, parity literature has never considered the diversity of local court ability, the particular challenges that local courts face, or the complex relationships these courts have with the rest of the state system. See, e.g., Bator, supra note 4, at 622–23 (calling state and federal courts “partners” in the endeavor to enforce federal constitutional principles and elaborating on federal-court competence); Burt Neuborne, The Myth of Parity, 90 Harv. L. Rev. 1105, 1105–06 (1977) (arguing that a belief in parity is “at best, a dangerous myth” and that jurisdictional decisions are not outcome-neutral). ↑
  18. See Barbara A. Babcock, Toni M. Massaro & Norman W. Spaulding, The Ideal and the Actual in Procedural Due Process, in A Critical Guide to Civil Procedure (Brooke Coleman et al. eds., forthcoming 2020) (manuscript at 2) (on file with author); see also id. at 1–2 (“[T]he study of how due process works outside the federal courts in the spaces where the vast majority of ordinary people encounter the administration of justice generally does not resurface. . . . This is most unfortunate. . . . Students are increasingly taught ideal procedural justice . . . . Meanwhile, what most Americans experience is nothing like what the models of either administrative or judicial process describe, nothing like what we debate in studying procedure in the federal courts, whatever its defects.”). ↑
  19. See Jessica Bulman-Pozen, Partisan Federalism, 127 Harv. L. Rev. 1077 (2014) (situating state identity and partisanship within the larger system of federalism); Miriam Seifter, Further from the People? The Puzzle of State Administration, 93 N.Y.U. L. Rev. 107 (2018) (exploring the lack of transparency in state bureaucracy and its consequences); Miriam Seifter, Gubernatorial Administration, 131 Harv. L. Rev. 483, 484 (2017) (providing a history and functional analysis of gubernatorial power); Justin Weinstein-Tull, State Bureaucratic Undermining, 85 U. Chi. L. Rev. 1083 (2018) (describing the ways in which conflict between and among the state legislative and executive branches can undermine federal rights).Scholarship on state courts and the benefits of state-court constitutionalism—“new judicial federalism” scholarship—has also ignored local courts. See, e.g., Lawrence Friedman, The Constitutional Value of Dialogue and the New Judicial Federalism, 28 Hastings Const. L.Q. 93, 94–98 (2000) (arguing for state supreme courts to embrace a new role in constitutional interpretation without mentioning local courts). ↑
  20. Local government scholarship has “for too long failed to see local judges as the complex players they are in municipal governments.” Ethan J. Leib, Local Judges and Local Government, 18 N.Y.U. J. Legis. & Pub. Pol’y 707, 739 (2015); see also id. at 737 (“[L]ocal government scholars who spend time thinking about optimizing the relationships among different levels of government—federal, state, local—have much more work to do to situate local courts within this matrix.”).Instead, local government theory has largely focused on the balance of policymaking authority between state and local governments, see, e.g., David J. Barron, Reclaiming Home Rule, 116 Harv. L. Rev. 2255 (2003); Richard Briffault, Our Localism: Part I—The Structure of Local Government Law, 90 Colum. L. Rev. 1 (1990); Gerald E. Frug, The City as a Legal Concept, 93 Harv. L. Rev. 1057 (1980), the liminal legal space occupied by local governments, see, e.g., Richard Thompson Ford, The Boundaries of Race: Political Geography in Legal Analysis, 107 Harv. L. Rev. 1841 (1994); Richard C. Schragger, The Limits of Localism, 100 Mich. L. Rev. 371 (2001); Joan C. Williams, The Constitutional Vulnerability of American Local Government: The Politics of City Status in American Law, 1986 Wis. L. Rev. 83, land use, urban planning, and governance problems unique to local government, see, e.g., Michelle Wilde Anderson, The New Minimal Cities, 123 Yale L.J. 1118 (2014); Nestor M. Davidson, Localist Administrative Law, 126 Yale L.J. 564 (2017); David Schleicher, City Unplanning, 122 Yale L.J. 1670 (2013), and federal-state-local relationships in various policy areas, see, e.g., Roderick M. Hills, Jr., Dissecting the State: The Use of Federal Law to Free State and Local Officials from State Legislatures’ Control, 97 Mich. L. Rev. 1201 (1999); Cristina M. Rodríguez, The Significance of the Local in Immigration Regulation, 106 Mich. L. Rev. 567 (2008); Justin Weinstein-Tull, Election Law Federalism, 114 Mich. L. Rev. 747 (2016). This is not, of course, an exhaustive list of categories. ↑
  21. The first exception is misdemeanor criminal process. Scholars have unearthed fascinating (and horrifying) details of how criminal procedure works in the context of minor offenses tried in local courts. See, e.g., Malcolm M. Feeley, The Process is the Punishment: Handling Cases in a Lower Criminal Court (1992); Issa Kohler-Hausmann, Misdemeanorland: Criminal Courts and Social Control in an Age of Broken Windows Policing (2018) (describing the “procedural hassle” of criminal procedure in New York local courts); Alexandra Natapoff, Punishment Without Crime: How Our Massive Misdemeanor System Traps the Innocent and Makes America More Unequal (2018); Alexandra Natapoff, Misdemeanors, 85 S. Cal. L. Rev. 1313, 1315 (2012) [hereinafter Natapoff, Misdemeanors] (“Most U.S. convictions are misdemeanors, and they are generated in ways that baldly contradict the standard due process model of criminal adjudication.”). And a deep literature exists that probes the rise of pleas and the process surrounding them. See, e.g., Josh Bowers, Punishing the Innocent, 156 U. Pa. L. Rev. 1117 (2008); George Fisher, Plea Bargaining’s Triumph, 109 Yale L.J. 857 (2000); Thea Johnson, Fictional Pleas, 94 Ind. L.J. 855 (2019); Stephen J. Schulhofer, Plea Bargaining as Disaster, 101 Yale L.J. 1979 (1992).The second exception is the response to Michael Brown’s killing in Ferguson, Missouri. After Brown’s death, the U.S. Department of Justice issued a report that detailed the failures of the Ferguson municipal court, including that the court handled criminal charges “not with the primary goal of administering justice or protecting the rights of the accused, but of maximizing revenue.” See U.S. Dep’t of Justice, Civil Rights Div., Investigation of
    the Ferguson Police Department 42 (2015) [hereinafter DOJ Ferguson Report] https://www.justice.gov/sites/default/files/opa/press-releases/attachments/2015/03/04/fergu­son_police_department_report.pdf [https://perma.cc/26R9-AB4B]. Scholars have since done illuminating work on local-court reform using Ferguson as a case study. See, e.g., Beth A. Colgan, Lessons from Ferguson on Individual Defense Representation as a Tool of Systemic Reform, 58 Wm. & Mary L. Rev. 1171 (2017) (describing the many constitutional rights violated by Ferguson’s local-court system and the impact of individual defense counsel on reform efforts); Fred O. Smith, Jr., Abstention in the Time of Ferguson, 131 Harv. L. Rev. 2283 (2018) (arguing that the Younger abstention doctrine precludes meaningful oversight of local courts and governments). ↑
  22. Although there is essentially no academic legal scholarship on local courts as courts, illuminating scholarship does exist on specific issues that take place in local courts, including problems relating to problem-solving and subject-matter courts. See, e.g., Richard C. Boldt, Problem-Solving Courts and Pragmatism, 73 Md. L. Rev. 1120 (2014) (considering how pragmatism informs the judicial process in problem-solving courts); Erin R. Collins, Status Courts, 105 Geo. L.J. 1481 (2017) (describing the promise and pitfalls of local courts that are tailored to certain types of defendants); D. James Greiner, Cassandra Wolos Pattanayak & Jonathan Hennessy, The Limits of Unbundled Legal Assistance: A Randomized Study in A Massachusetts District Court and Prospects for the Future, 126 Harv. L. Rev. 901 (2013) (empirically evaluating different kinds of legal services in Massachusetts district courts).But in the same way that we don’t consider the study of federal criminal law to satisfy our need to understand federal courts more broadly, neither does the study of specific legal issues that arise in local courts satisfy our need to understand local courts. ↑

Designing Business Forms to Pursue Social Goals

The long-standing debate about the purpose and role of business firms has recently regained momentum. Business firms face growing pressure to pursue social goals and benefit corporation statutes proliferate across many U.S. states. This trend is largely based on the idea that firms increase long-term shareholder value when they contribute (or appear to contribute) to society. Contrary to this trend, this Article argues that the pressing issue is whether policies to create social impact actually generate value for third-party beneficiaries—rather than for shareholders. Because it is difficult to measure social impact with precision, the design of legal forms for firms that pursue social missions should incorporate organizational structures that generate both the incentives and competence to pursue such missions effectively. Specifically, firms that have a commitment to transacting with different types of disadvantaged groups demonstrate these attributes and should thus serve as the basis for designing legal forms.

While firms with such a commitment may be created using a variety of control and contractual mechanisms, the related transaction costs tend to be very high. This Article develops a social enterprise legal form that draws on the legal regime for community development financial institutions (CDFIs) and European legal forms for work-integration social enterprises (WISEs). This form would certify to investors, consumers, and governments that designated firms have a commitment as social enterprises. By obviating the need for costly social impact measurement, this form would facilitate the provision of subsidy-donations to social enterprises from multiple groups, particularly investors (through below-market investment) and consumers (via premiums over market prices). Thus, this social enterprise form would be to altruistic investors and consumers what the nonprofit form is to donors.

Moreover, the proposal could facilitate the flow of investments by foundations in social enterprises (known as program-related investments, “PRIs”) because it would help foundations verify the social impact of their investees. In addition, by giving subsidy-providers greater assurance that social enterprises pursue social missions effectively, the proposed legal form could facilitate public markets for social enterprises.

Introduction

In recent years, there have been efforts to encourage firms to pursue social goals. In a striking statement to public corporations, Larry Fink, Blackrock’s CEO, wrote: “Society is demanding that companies, both public and private, serve a social purpose. To prosper over time, every company must not only deliver financial performance, but also show how it makes a positive contribution to society.”1 1.Letter from Larry Fink, Chairman & Chief Exec. Officer, Blackrock, to CEOs (2018), https://www.blackrock.com/corporate/investor-relations/2018-larry-fink-ceo-letter [https://­perma.cc/7QRQ-9DG6]. For a similar statement by Martin Lipton, the renowned legal advisor for public corporations, see Martin Lipton et al., The New Paradigm: A Roadmap for an Implicit Corporate Governance Partnership Between Corporations and Investors To Achieve Sustainable Long-Term Investment and Growth, Harv. L. Sch. F. on Corp. Governance (Jan. 11, 2017), https://corpgov.law.harvard.edu/2017/01/11/corporate-governance-the-new-para­digm/ [https://perma.cc/B5AJ-EWNW].Show More The imperative that firms pursue social goals, however, is very vague. What range of permissible non-pecuniary goals should companies be encouraged to pursue?2 2.See generally Oliver Hart & Luigi Zingales, Companies Should Maximize Shareholder Welfare Not Market Value, 2 J.L. Fin. & Acct. 247 (2017) (arguing that company and asset managers should pursue policies consistent with the non-pecuniary preferences of their investors).Show More This question reflects a much re-hashed debate regarding the role and purpose of corporations. Many studies view this topic as a matter of corporate governance. That is, the key question is whether policies that seek to create social impact—often referred to as “CSR” (for corporate social responsibility)—maximize shareholder value in the long term. If the answer is yes, then it is a win-win situation for all because such policies are assumed to benefit society.

This Article takes a different approach by arguing that the pressing question should be: Does the pursuit of social missions by for-profit organizations actually benefit the intended beneficiaries? While the literature is not conclusive,3 3.Compare Ronald W. Masulis & Syed Walid Reza, Agency Problems of Corporate Philanthropy, 28 Rev. Fin. Stud. 592, 619–21 (2015) (claiming that corporate donations advance CEO interests and reduce firm value), with Allen Ferrell, Hao Liang & Luc Renneboog, Socially Responsible Firms, 122 J. Fin. Econ. 585, 585–91, 596–605 (2016) (arguing that well-governed firms are more engaged in CSR, and there is a positive association between CSR and shareholder value).Show More it is easy to see how a reputation for being socially responsible can help companies sell more products, attract investments, or even get more lenient treatment from regulators. However, just having a good reputation does not mean that CSR policies achieve their putative purpose of helping stakeholders and society at large. Without a mechanism for ensuring that CSR actually benefits the stakeholders, companies can easily use it as a means of “greenwashing.”4 4.“Greenwashing occurs when a corporation increases its sales or boosts its brand image through environmental rhetoric or advertising, but in reality does not make good on these environmental claims.” Miriam A. Cherry, The Law and Economics of Corporate Social Responsibility and Greenwashing, 14 U.C. Davis Bus. L.J. 281, 282 (2013).Show More Greenwashing may be particularly conducive to shareholder value because it promotes a strong reputation and higher sales without actually doing anything substantial for society.5 5.This arguably explains why well-governed firms that are more accountable to their shareholders tend to engage in value-enhancing CSR. See generallyFerrell, Liang & Renneboog, supra note 3. For a similar argument in the context of regulation, see Steven L. Schwarcz, Misalignment: Corporate Risk-Taking and Public Duty, 92 Notre Dame L. Rev. 1, 3–4 (2016) (arguing that regulation designed to align managers’ and investors’ interests does not necessarily help address negative externalities).Show More But—while false signals of doing good may increase shareholder value—those who support companies for their good deeds would presumably be disappointed were the truth to come to light.

The problem is that it is extremely difficult to verify companies’ social impact. Existing measures of social impact tend to be vague, include metrics that are difficult to quantify, and even mix shareholder protection metrics with environmental or societal ones.6 6.This is most obviously manifested in the ESG metrics because they include both (i) governance metrics, which are supposed to increase accountability to shareholders and (ii) social and environmental metrics, which are supposed to measure firms’ contributions to social and environmental objectives.Show More But if measurement is rarely available, how do we know that firms are pursuing social goals effectively?

The legal approach to addressing these questions has been to introduce legal hybrid forms—in particular, the benefit corporation.7 7.See infra Part II.Show More These forms are supposed to communicate to investors, consumers, workers, and society at large that firms’ activities benefit society. To date, as many as thirty-six states, including Delaware, have adopted one or more such legal forms.8 8.B Lab, State by State Status of Legislation, Benefit Corp., http://benefitcorp.net/policy­makers/state-by-state-status? [https://perma.cc/X524-35UE] (last visited Mar. 18, 2020).Show More However, existing legal forms fail to clarify the actual impact of companies’ social goals.9 9.See, e.g., John E. Tyler III, Evan Absher, Kathleen Garman & Anthony Luppino, Purposes, Priorities and Accountability Under Social Business Structures: Resolving Ambiguities and Enhancing Adoption, 19 Advances Entrepreneurship Firm Emergence & Growth 39, 39 (2017) (arguing that “social business models do not meaningfully prioritize or impose accountability to ‘social good’ over other purposes”).Show More Just like CSR, these forms could portray a misleading picture of companies’ social contributions. Many of the companies that adopt these legal forms have little or no discernible social impact.10 10.See Ofer Eldar, The Role of Social Enterprise and Hybrid Organizations, 2017 Colum. Bus. L. Rev. 92, 99 (discussing Laureate University, a for-profit network of universities incorporated as a benefit corporation but that uses aggressive promotional tactics and has low graduation and loan repayment rates); see also Michael B. Dorff, James Hicks & Steven Davidoff Solomon, The Future or Fancy? An Empirical Study of Public Benefit Corporations 46 (Eur. Corp. Governance Inst., Working Paper No. 495, 2020), https://papers.ssrn.com­/sol3/papers.cfm?abstract_id=3433772 [https://perma.cc/D9R8-VZWC]. Dorff et al. list standard firms, such as Ripple Foods, as having incorporated as benefit corporations, even though these firms do not have any clear social impact other than producing goods (such as dairy-free milk) that appeal to certain consumers.Show More And companies that appear to be highly successful in pursuing social missions already had such impact before they adopted the legal forms.11 11.Two such examples include the Greyston Bakery and Patagonia. See Eldar, supra note 10, at 189 n.270.Show More

Why have these forms seemingly failed to generate greater social impact? In this Article, I claim that they suffer from the same underlying problem as CSR policies. These forms are simply not structured in a way that makes companies more likely to pursue social goals effectively. Therefore, the legal forms cannot serve as useful signals to investors or consumers that the firms benefit society in the ways they purport to.

An effective legal form must meet two conditions. First, the form must give firms incentives to pursue social missions effectively. At the very least, the goal of maximizing shareholders’ profits should not interfere with the firm’s social mission. Ideally, the firm should have a financial stake in the accomplishment of the social mission. Second, the firm should have the competence to pursue such missions. Competence is particularly important because social goals, such as unemployment or access to capital, tend to be complex. Accomplishing complex social goals requires the firm to tailor its social programs to the specific attributes and needs of the beneficiaries.

The issues of incentives and competence are very similar to standard issues in corporate governance. Broadly stated, the main goal of corporate governance policy is to ensure that managers have both (i) the incentives to maximize shareholder value and (ii) the competence to make decisions on behalf of the corporation.12 12.See Zohar Goshen & Richard Squire, Principal Costs: A New Theory for Corporate Law and Governance, 117 Colum. L. Rev. 767, 784 (2017) (identifying conflict costs and competence costs as the two main sources of costs that corporate governance is designed to address).Show More What complicates things when it comes to social responsibility is that a firm that purports to pursue CSR not only makes profits on behalf of the investors, but it also serves as a conduit for a subsidy or a donation. As I explain elsewhere, these subsidies or donations need not be direct transfers from the government or donors. In fact, they are usually latent in the sense that they reflect premium prices paid by consumers or below-market returns from investors.13 13.Eldar, supra note 10, at 104–05.Show More

For policy makers, the main design issue is how to assure those who provide subsidy-donations that they will be used effectively. Thus, the principal goal of this Article is to develop a legal form with key structural elements that give managers the incentives and competence to accomplish this. This form can signal to stakeholders that firms professing to promote social impact actually do what they claim.

The policy I propose is modeled on the structural elements found in social enterprises that transact with their beneficiaries (e.g., as consumers or workers), which I have addressed in previous work.14 14.See id.; see also Ofer Eldar, The Organization of Social Enterprises: Transacting Versus Giving 10–15 (July 27, 2018) (unpublished paper), https://papers.ssrn.com/sol3/papers.­cfm?abstract_id=3217663 [https://perma.cc/S36D-3LWP].Show More The transactional relationship with its beneficiaries gives the firm a stake in helping them develop, and also enables the firm to observe beneficiaries’ abilities and needs. Thus, such firms have both the incentives and competence to serve certain social goals. The proposal builds on the regulatory regime for community development financial institutions (CDFIs), which certifies financial institutions as firms that serve low-income populations,15 15.The CDFI regime is currently limited to low-income borrowers, but it could be extended to a wider class of beneficiaries, and extended beyond the U.S.Show More and combines this regime with certain elements found in benefit corporations.16 16.Specifically, as in benefit corporations, a qualified majority voting is required to change the mission of the firm. See infra text accompanying note 111.Show More

In essence, the proposal is to introduce a new social enterprise (SE) legal form. Firms organized under the SE legal form would be required to obtain a government certification as a “Social Enterprise” if they commit, in their charters, to transacting with one or more carefully defined classes of beneficiaries. These beneficiaries may include, among others, workers, borrowers, and consumers. Beneficiaries will be divided into different classes in accordance with certain criteria of need (e.g., level of income). To maintain the certification, firms must commit to having a minimum percentage of their business associated with beneficiary transactions. Whereas current benefit corporation laws permit companies to choose a third-party standard that measures their social purpose,17 17.The MBCL provides criteria for third-party standards, but companies have discretion to select how their performance will be measured. See infra Part II.Show More my proposed reform would require companies to adhere to one federal standard defined by a single federal certifier.

The main goal of this proposed policy is to facilitate the flow of subsidized capital and income to social enterprises. This legal form is necessary to attract subsidies from dispersed subsidy-providers, such as investors and consumers. Currently, investors and consumers mainly rely on costly contractual and ownership mechanisms to ensure that relevant firms transact with their beneficiaries. Under the proposed system, investors and consumers would have notice that the firm transacts with beneficiaries before they purchase shares or products. In this respect, the proposed law would be to altruistic investors and consumers essentially what the nonprofit form is to donors.18 18.The nonprofit form assures donors that the managers of donative organizations have limited incentives to expropriate the subsidy-donations; hence, they are more likely to distribute donations to the intended beneficiaries. Henry B. Hansmann, The Role of Nonprofit Enterprise, 89 Yale L.J. 835, 838–39 (1980). Similarly, the proposed legal form would assure investors and consumers that the firm has incentives to use subsidies effectively.Show More Thus, the proposal is likely to unlock much-needed capital to scale social enterprises and increase social impact.

The ability of the SE legal form to source subsidies from a wider range of subsidy-providers could serve two additional complementary objectives. First, it could help facilitate the process for allocating subsidized investments (known as program-related investments or “PRIs”) from foundations. While most policy initiatives seek to attract institutional shareholder investment to channel capital for social goals, the best candidates for investing in social impact are foundations. The reason is that they have vast amounts of capital that they are supposed to employ to further philanthropic goals.19 19.See, e.g., Matt Onek, Philanthropic Pioneers: Foundations and the Rise of Impact Investing, Stan. Soc. Innovation Rev. (Jan. 17, 2017) https://ssir.org/articles/entry/­philanthropic_pioneers_foundations_and_the_rise_of_impact_investing# [https://perma.cc/­MJ7A-52Q8].Show More Paradoxically, foundations often resist making PRIs in for-profit social enterprises because such investments could expose them to tax penalties if they cannot verify the social mission of their investees. Currently, such verification is cumbersome and subject to legal uncertainty. Thus, making certified firms eligible for PRIs would facilitate the process for allocating such investments.

Second, more ambitiously, the proposal has the potential to meet a long-awaited goal of social entrepreneurs: facilitating their access to capital markets. The inability of social enterprises to tap into capital markets substantially burdens their ability to grow and increase their social impact. Attempts to establish social exchanges for firms that combine profit and missions have largely been futile, primarily due to the difficulties of measuring social impact. A new legal form could help by providing adequate assurance to the investors who are expected to subsidize such impact.

One objection to this proposal might be that a legal hybrid form based solely on firms’ transactional relationships with their beneficiaries is overly reductive or too narrow. Should a legal hybrid form not capture the universe of social missions, such as the protection of the environment, diversity, and human rights? These objectives are indeed laudable, but it does not follow that legal forms can adequately address them. In the absence of credible certification mechanisms and clear metrics of social impact, legal forms for organizations with broad social purposes are not likely to signal that these firms pursue social missions effectively. Furthermore, the class of organizations that transact with disadvantaged persons is large and highly consequential.20 20.For example, they range from microfinance institutions to firms that provide eyeglasses in developing countries.Show More Concentrating on these firms could transform legal hybrid forms from a marginal phenomenon to a remarkable vehicle for promoting development.

This Article proceeds as follows: Part I describes how legal hybrid forms are supposed to serve as a commitment device to potential subsidy providers and explains why a new form is necessary to facilitate the formation of social enterprises. Part II critically evaluates the principal existing legal forms for companies with a social purpose and explains why they fail to serve as adequate commitment devices. Part III discusses the key elements of the CDFI regime and why other certification mechanisms do not work as well. Part IV proposes a design for a new legal form for social enterprises and discusses its principal elements in detail. Part V discusses the design of possible government subsidies for the proposed legal hybrid form.

  1. * Duke University School of Law; Duke Innovation and Entrepreneurship Initiative. I thank Richard Brooks, Jamie Boyle, John Coyle, Elisabeth De Fontenay, Brian Galle, Henry Hansmann, Yair Listokin, Richard Schmalbeck, Steven Schwarcz, Michael Simkovic, Emily Strauss, Rory Van Loo, Andrew Verstein, and participants in seminars at Duke University School of Law and Boston University School of Law for helpful comments and suggestions. I am also grateful to Heather Cron, Zach Lankford, Renuka Medury, Kelsey Moore, Catherine Prater, and Hadar Tanne for excellent research assistance. Email: eldar@law.duke.edu. ↑
  2. Letter from Larry Fink, Chairman & Chief Exec. Officer, Blackrock, to CEOs (2018), https://www.blackrock.com/corporate/investor-relations/2018-larry-fink-ceo-letter [https://­perma.cc/7QRQ-9DG6]. For a similar statement by Martin Lipton, the renowned legal advisor for public corporations, see Martin Lipton et al., The New Paradigm: A Roadmap for an Implicit Corporate Governance Partnership Between Corporations and Investors To Achieve Sustainable Long-Term Investment and Growth, Harv. L. Sch. F. on Corp. Governance (Jan. 11, 2017), https://corpgov.law.harvard.edu/2017/01/11/corporate-governance-the-new-para­digm/ [https://perma.cc/B5AJ-EWNW]. ↑
  3. See generally Oliver Hart & Luigi Zingales, Companies Should Maximize Shareholder Welfare Not Market Value, 2 J.L. Fin. & Acct. 247 (2017) (arguing that company and asset managers should pursue policies consistent with the non-pecuniary preferences of their investors). ↑
  4. Compare Ronald W. Masulis & Syed Walid Reza, Agency Problems of Corporate Philanthropy, 28 Rev. Fin. Stud. 592, 619–21 (2015) (claiming that corporate donations advance CEO interests and reduce firm value), with Allen Ferrell, Hao Liang & Luc Renneboog, Socially Responsible Firms, 122 J. Fin. Econ. 585, 585–91, 596–605 (2016) (arguing that well-governed firms are more engaged in CSR, and there is a positive association between CSR and shareholder value). ↑
  5. “Greenwashing occurs when a corporation increases its sales or boosts its brand image through environmental rhetoric or advertising, but in reality does not make good on these environmental claims.” Miriam A. Cherry, The Law and Economics of Corporate Social Responsibility and Greenwashing, 14 U.C. Davis Bus. L.J. 281, 282 (2013). ↑
  6. This arguably explains why well-governed firms that are more accountable to their shareholders tend to engage in value-enhancing CSR. See generally Ferrell, Liang & Renneboog, supra note 3. For a similar argument in the context of regulation, see Steven L. Schwarcz, Misalignment: Corporate Risk-Taking and Public Duty, 92 Notre Dame L. Rev. 1, 3–4 (2016) (arguing that regulation designed to align managers’ and investors’ interests does not necessarily help address negative externalities). ↑
  7. This is most obviously manifested in the ESG metrics because they include both (i) governance metrics, which are supposed to increase accountability to shareholders and (ii) social and environmental metrics, which are supposed to measure firms’ contributions to social and environmental objectives. ↑
  8. See infra Part II. ↑
  9. B Lab, State by State Status of Legislation, Benefit Corp., http://benefitcorp.net/policy­makers/state-by-state-status? [https://perma.cc/X524-35UE] (last visited Mar. 18, 2020). ↑
  10. See, e.g., John E. Tyler III, Evan Absher, Kathleen Garman & Anthony Luppino, Purposes, Priorities and Accountability Under Social Business Structures: Resolving Ambiguities and Enhancing Adoption, 19 Advances Entrepreneurship Firm Emergence & Growth 39, 39 (2017) (arguing that “social business models do not meaningfully prioritize or impose accountability to ‘social good’ over other purposes”). ↑
  11. See Ofer Eldar, The Role of Social Enterprise and Hybrid Organizations, 2017 Colum. Bus. L. Rev. 92, 99 (discussing Laureate University, a for-profit network of universities incorporated as a benefit corporation but that uses aggressive promotional tactics and has low graduation and loan repayment rates); see also Michael B. Dorff, James Hicks & Steven Davidoff Solomon, The Future or Fancy? An Empirical Study of Public Benefit Corporations 46 (Eur. Corp. Governance Inst., Working Paper No. 495, 2020), https://papers.ssrn.com­/sol3/papers.cfm?abstract_id=3433772 [https://perma.cc/D9R8-VZWC]. Dorff et al. list standard firms, such as Ripple Foods, as having incorporated as benefit corporations, even though these firms do not have any clear social impact other than producing goods (such as dairy-free milk) that appeal to certain consumers. ↑
  12. Two such examples include the Greyston Bakery and Patagonia. See Eldar, supra note 10, at 189 n.270. ↑
  13. See Zohar Goshen & Richard Squire, Principal Costs: A New Theory for Corporate Law and Governance, 117 Colum. L. Rev. 767, 784 (2017) (identifying conflict costs and competence costs as the two main sources of costs that corporate governance is designed to address). ↑
  14. Eldar, supra note 10, at 104–05. ↑
  15. See id.; see also Ofer Eldar, The Organization of Social Enterprises: Transacting Versus Giving 10–15 (July 27, 2018) (unpublished paper), https://papers.ssrn.com/sol3/papers.­cfm?abstract_id=3217663 [https://perma.cc/S36D-3LWP]. ↑
  16. The CDFI regime is currently limited to low-income borrowers, but it could be extended to a wider class of beneficiaries, and extended beyond the U.S. ↑
  17. Specifically, as in benefit corporations, a qualified majority voting is required to change the mission of the firm. See infra text accompanying note 111. ↑
  18. The MBCL provides criteria for third-party standards, but companies have discretion to select how their performance will be measured. See infra Part II. ↑
  19. The nonprofit form assures donors that the managers of donative organizations have limited incentives to expropriate the subsidy-donations; hence, they are more likely to distribute donations to the intended beneficiaries. Henry B. Hansmann, The Role of Nonprofit Enterprise, 89 Yale L.J. 835, 838–39 (1980). Similarly, the proposed legal form would assure investors and consumers that the firm has incentives to use subsidies effectively. ↑
  20. See, e.g., Matt Onek, Philanthropic Pioneers: Foundations and the Rise of Impact Investing, Stan. Soc. Innovation Rev. (Jan. 17, 2017) https://ssir.org/articles/entry/­philanthropic_pioneers_foundations_and_the_rise_of_impact_investing# [https://perma.cc/­MJ7A-52Q8]. ↑
  21. For example, they range from microfinance institutions to firms that provide eyeglasses in developing countries. ↑
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