17 April 2016

You Keep Using That Word

Kris Rusch's most-recent column on writers-putting-themselves-in-position-to-succeed has some interesting thoughts in it, but it misuses a couple of words in a way that makes it less useful than it should be. Here, I'm going to focus on just one.

The short version:

Yes, all contracts must be fair to both sides. The problem is that "fair" does not have a simple or consistent meaning.

And now, the longer version.

There is an entire legal field devoted to "unfair business practices," and their legal consequences. Copyright can be viewed as a regulation of unfair business practices (copying another's expression and denying the original author credit, compensation, control, etc. over that reuse). Trademark directly arises from unfair business practices, specifically counterfeiting of silverware in seventeenth-century London. So "fair" obviously comes into the discussion in a fundamental way...

...for wildly different and inconsistent definitions of "fair" that can change even regarding the same transaction or relationship. There is no content here without context. Specifically, it matters whether:

  1. One side in a transaction/relationship is legally a "consumer"
  2. Any party in a transaction/relationship is acting outside the normal course of business for that party
  3. Any aspect of a transaction/relationship is subject to specific regulation due to a party's status (e.g., a foreign citizen, a child, etc.), even if it is an otherwise simple/obvious context

This is a far-from-exhaustive list, but I think it suffices for illustrating that "fair" doesn't always — and perhaps even usually doesn't — mean the same thing, even in the relatively narrow area of contract law.

  1. This is not at all the same thing as "is an individual" or "has a distinct power/information deficit." The law is, in many ways, either stupid or a blunt instrument on this (often both). Consider, for example, loans. When one goes to buy a car in the US, one must receive — in a specific format — disclosure of certain terms of the loan, including the principal, the total repayments, the total finance charge, and the interest rate. Further, there are complicated rules for what is and is not a finance charge, which in turn affects the actual interest rate.1 But almost none of these rules apply to business loans. If the lender discloses comparable information, it need only be comparable — even the definition of "finance charge" and "interest rate" can be different!

    Needless to say, this can create a lot of confusion — and a lot of opportunities for "unfairness" — when an individual is often/usually acting as a consumer, but sometimes acting as an author-businessperson. "Fair" has a different meaning, because for reasons both good and bad, both political and historical, the law (both the common law of the US and UK, and civil law elsewhere) assumes that businesses always are sophisticated, always have sophisticated advisors on both the economics and legalities involved, and always have practical, economically viable alternatives to the particular terms being offered for a particular transaction or relationship... and that for consumers, one must substitute "never" where "always" occurs in the first part of this sentence. It doesn't matter that the business is a sole proprietor engaged in his/her first transaction ever involving the entertainment industry or is Comcast: The law treats disclosure and general "fairness" requirements identically.

    The problem for authors and other creators is most readily apparent when the author brings his or her expectations from consumer contracts — and especially from regulated consumer contracts like phone service and apartment leases — into the wild, wild Antarctic of business-to-business transactions. Those expectations are downright misleading... at best.

  2. Again, the law, and modern finance systems, assume that everyone in business is smart enough to only ever act within their own experience or expertise. That's one reason that even though the actual law of, for example, fraudulent inducement2 is usually supposed to be the same for consumers as it is for business-to-business contracts like publishing agreements, in practice a court will allow a lot of inferences in a consumer's favor that it will not allow for a business... that is, when the law doesn't explicitly bend over backwards for the consumer in the first place. But this also has an effect on the trier of fact (jury, or judge sitting without a jury) when one party is acting outside of its expertise. Consider, for example, a business that has been operating for thirty years whose output has suddenly and unexpectedly been made part of listed commodity futures and options. A judge (or jury) hearing a dispute arising from the first few transactions in this thrust-upon-the-business, outside-the-normal-course-of-business circumstance will treat that business differently than it will a commodities brokerage with offices across the street from the Chicago Merc for that same thirty years, even if the contracts and dispute are otherwise identical.

    This distinction usually comes back to bite authors and other creators in the butt. Bluntly, there is no normal course of business in the entertainment industry, except that imposed by certain large distributive actors.3 But that's a circular definition, even if the law refuses to acknowledge that circularity. It is, for example, how we got to "25% of net is the appropriate e-book royalty from commercial publishers"; it is how we got to remarkably uniform 10%/12.5%/15% royalty escalators for casebound trade fiction; and so on. Unfortunately, once something is established as "industry custom," it is itself enshrined as quasilegal — even if it arose from "unfair" transactions and practices.4

  3. Going into the details here would be rather fruitless, because whether party status has an effect on a contract is highly fact-bound. In the entertainment industry, there are more obvious examples than one can shake a stick at, usually involving individual child performers, and they need not resemble Mommie Dearest to be abusive — just ask Lindsay Lohan or any other child star who later accuses a parent of looting.

    This is a particular problem for creators' estates. The executor or trustee is often obligated to act in ways that are not consistent with protecting or enhancing the reputation of the creator, or (more often) protecting or enhancing the noneconomic interests of the heirs. This frequently leads to even-more-abusive-than-the-norm contracts allowing or enabling even more assaults on "artistic integrity" than usual (e.g., "We Can Remember It For You Wholesale" becoming Total Recall; or... anything related to Dune).

    Status problems can get hypertechnical. They also provide many of the best-known examples used to "prove" the validity (or invalidity, as convenient to the speaker) of various kinds of behavior in the entertainment industry. Even noncontractual status problems intrude, such as being the child of alcoholics who is accused of being drunk in public by a sleazy tabloid. The key point is that what is "fair" depends a great deal on status issues that may not be immediately apparent... or subject to "business as usual."5

*  *  *

As Inigo Montoya said, "You keep using that word. I do not think it means what you think it does." And whether we say "inconceivable" or "fair," we have the same problem when discussing contracts.

  1. Specific example from my misspent past: Gibson v. Bob Watson Chevrolet-Geo, Inc., 112 F.3d 283 (7th Cir. 1997) (dealer's retained upcharge on extended warranty must be disclosed as a finance charge and not treated as just part of the cost of the vehicle).
  2. This is an unfortunate term descended from common law that has only a passing acquaintance with ordinary meanings of "fraud." Unlike fraud, fraudulent inducement is a pure contract circumstance holding that no valid agreement was reached because one side improperly induced the other to sign, usually by withholding either information (which might be "fraud by omission") or general knowledge and context to interpret the circumstances in which the contract is supposed to take place (which is almost never due to specific intent to defraud, or at least is defensible as "mere hard negotiating").
  3. Whether this does, or should, raise concerns about abuse of monopsony power is for another time. And no, that's not a typo: In antitrust and unfair-competition law, a "monopsony" exists when there is substantial market control not by the supplier, but by the recipient. That is precisely what the author/commercial-publisher relationship looks like. All of the math for determining market concentration, effects, etc. is — or at least should be — different.
  4. Cf., e.g., Uniform Commercial Code § 1—303(c). The common law is actually even harsher on this in business-to-business transactions, especially in New York. Cf., e.g., Rest. (2d) Contracts § 222.
  5. The racial-discrimination connotation of "business as usual" — especially regarding the entertainment industry — is entirely intentional.