Over the past 40 years, an irrelevance proposition has been prevalent in law -and -economics scholarship: bargaining power should affect only price and not non-price terms of a contract. In contrast, practitioners and commentators in industry regularly invoke bargaining power to explain static and dynamic variance in non-price contract terms. This paper unpacks and analyzes the assumptions of the strong—and weak—versions of this bargaining power irrelevance proposition, to bridge the gap between theory and the real world. In the first half of the paper, we identify and discuss a variety of explanations for the effect of bargaining power on contract design, under conditions of information asymmetry and positive transaction costs. These include the effects of shifts in market supply and demand and the effect of bargaining through lawyers. In the second half of the paper, we present an in-depth examination of one set of explanations, concerning the impact of bargaining power and information asymmetry on non-price terms, when the value and cost of non-price terms vary across contracting parties. In the extreme cases in which one or the other party enjoys overwhelming bargaining power, the efforts of that party to capture a larger share of the surplus by screening or signaling may compromise the efficiency of the non-price terms. We show that this incentive disappears or is mitigated when bargaining power is more evenly shared between the parties: for example, when a monopolist faces the threat of competition, when the parties can renegotiate, or when they engage in bilateral bargaining with more even bargaining power. As a whole, the paper provides a theoretical basis for interpreting the intuition among market participants that the impact of bargaining power extends beyond price terms. Before concluding, we briefly suggest implications for legal policy, particularly the contract law doctrine of unconscionability.
Volume 98
Making a Statement About Private Securities Litigation
In June 2011, the Supreme Court decided its latest case concerning the right of investors to sue for securities fraud under Rule 10b–5. The case, Janus Capital Group v. First Derivative Traders, completes a trio of cases beginning in 1994 which severely limit the scope of this private cause of action. In a 5-4 decision, the Supreme Court in Janus determined that only the entity with “ultimate authority” over a given statement can be its “maker” for purposes of Rule 10b–5. As a result, investors in mutual funds and arguably other securities are left with little remedy for fraud, a consequence that has drawn significant criticism to this decision.
Responding to such criticism, this Note examines the merits of the approaches taken in the majority and dissenting opinions, and argues that the case was decided correctly under an accurate construction of current securities laws. Next, this Note predicts that the Court’s ruling will be applied broadly, drastically limiting liability for corporate officers and management under Rule 10b–5.
Finally, this Note addresses potential measures of rectifying what is currently a lack of remedy for investors in securities. It then concludes by advocating that Congress expand the authority of the Securities and Exchange Commission to compensate defrauded investors for their losses.
Free Speech, Hate Speech, and the Hostile Speech Environment
Invoking 42 U.S.C. § 1983 to protect free speech rights, this Note proposes a new cause of action: the hostile speech environment claim. This claim is necessary to combat the continuing infringement of hate speakers’ First Amendment rights by public colleges and universities. After Part I reviews relevant case law to prove that hate speech is afforded First Amendment protection, Part II examines how and why public colleges and universities persist in regulating constitutionally protected hate speech. Part III explains and justifies the proposed hostile speech environment cause of action. Refuting the argument that hostile work environment law can support an analogous “hostile academic environment” claim against campus hate speakers, this Note draws the opposite inference: more protection of hate speech is needed if public universities are to abide by the First Amendment. Thus, this Note borrows from Title VII employment discrimination law to sketch the hostile speech environment claim. It consists of three elements: (1) severe or pervasive hostility (2) by the government (3) towards protected speech. Two strands of First Amendment law provide the claim’s constitutional foundation: the freedom of thought that inheres in the freedom of speech and the captive audience doctrine. Notably, nothing in its analytical mechanics restricts this new cause of action to higher education, which may lead some to argue that it opens the possibility for waves of First Amendment litigation against government speech and policy. Any such fear is illusory, however. The cause of action’s “severe or pervasive hostility” prong and the practical realities of other contexts—such as secondary education and the government workplace—make it unlikely that hostile speech environment claims could apply to other arenas.