Contracts in the Modern Supreme Court
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California Law Review VOL. 81 MARCH 1993 No. 2 Copyright @ 1993 by California Law Review, Inc. Contracts in the Modern Supreme Court G. Richard Shell TABLE OF CONTENTS Introduction ................................................... 433 I. Background: Contract Enforcement and Public Policy ...... 440 II. The Supreme Court and the Public Policy Defense ......... 447 A. Access to the Courts: Alienating Litigation Rights ...... 452 1. The Lochner Court ................................ 452 2. The New Deal/Warren Court ...................... 454 3. The Modem Court ................................. 458 B. Exculpation and Damage Limitation Clauses: Alienating Risks of Loss .......................................... 463 1. The Lochner Court ................................ 463 2. The New Deal/Warren Court ...................... 469 3. The Modem Court ................................. 470 C. Contracts Affecting Constitutional and Statutory Policies: Alienating Fundamental Rights ................ 472 1. The Lochner Court ................................ 472 2. The New Deal/Warren Court ...................... 474 3. The Modem Court ................................. 477 D. Alienating Litigation, Risk of Loss, and Fundamental Rights: The Impact of Modem Supreme Court Public Policy Cases .......................................... 482 III. The Supreme Court and Contract: From Autonomy to Efficiency ................................................. 486 A. Contract and Sunstein's Common Law "Baselines"..... 487 B. The Supreme Court and Modem Contract Theory ...... 495 1. Current Theoretical Perspectives on Contract and Public Policy ...................................... 495 CALIFORNIA LAW REVIEW [Vol. 81:431 a. Neoclassical Realism ........................... 495 b. Law and Economics ............................ 498 c. Libertarianism .................................. 501 d. Critical Legal Studies ........................... 502 2. Theories of Justification: From Autonomy to Efficiency .......................................... 503 3. A Critique of the Court's Efficiency Approach to Contract ........................................... 509 C. Toward a Revitalized Neoclassical Realist Model of Contract .............................................. 518 1. A Revitalized Theory Must Avoid Deterministic Use of Non-Empirical Efficiency Arguments ............. 519 2. A Revitalized Theory Must Treat Standardized Form Contracts Differently from Fully Negotiated Commercial Agreements ........................... 520 3. A Revitalized Neoclassical Theory Must Find a Basis to Protect Important Rights with Immutable R ules .............................................. 523 Conclusion ..................................................... 527 1993] CONTRACTS IN THE MODERN COURT Contracts in the Modern Supreme Court G. Richard Sheilt This Article compares the modern Supreme Court's jurisprudence concerningcontract enforcement with the approach of the Court in the era of Lochner v. New York and the period stretchingfrom the New Deal through the end of the Warren Court. Taking as a bellwether the Supreme Court's consideration of the public policy exception to contract enforce- ment, the authorfinds that the modern Court has shown more fidelity to an absolute principle offreedom to contract than the Courts thatpreceded it. Indeed, the author argues that even when cast against the reputedly conservative Lochner-era Court,the modern Court's approach representsa radicalchange. In contrast to commentators such as Cass Sunstein, the author contends that the modern Court has looked beyond libertarian common law baselines such as those supported by the Lochner Court to new visions of common law rules inspired by the appealing-but danger- ously oversimplistic-reasoningof law and economics scholarship. Most crucially, the modern Court has given short shrift to the importance of public interest and participation.As an alternative, the author suggests that scholars revitalize the neoclassical theory of contract, integrating a realisticconsideration for efficiency with the vital concerns offair process and morality. INTRODUCTION Economists often assert that law serves a market economy best when it concentrates on three principal tasks: enforcing contracts, defin- ing property rights, and punishing fraud.1 Since 1971, the modem t Associate Professor of Legal Studies, the Wharton School of the University of Pennsylvania. A.B. 1971, Princeton University; J.D. 1981, University of Virginia. Funding for research on this Article was provided by the University of Pennsylvania Research Foundation and the Wharton School's Junior Faculty Research Program. Thanks go to participants in the Wharton Legal Studies Faculty Seminar, the Faculty Workshop at the University of Michigan School of Business, and Professors Daniel A. Farber, Thomas W. Dunfee, Lyman Johnson, Michael J. Phillips, Michael Les Benedict, and Eric W. Orts. My research assistant at the University of Pennsylvania Law School, W. Owings Stone, provided excellent legal research and editorial advice. 1. EDWIN MANSFIELD, EcoNoMIcs 66 (5th ed. 1986) (stating that, for a price system to function, "government must see to it that contracts are enforced, that private ownership is protected, and that fraud is prevented"); RICHARD A. POSNER, ECONOMIC ANALYSIS OF LAw 29 (3d ed. 1986) (explaining, in economic terms, that the common law has three parts: the law of property to create and define rights of exclusive use; the law of contracts to facilitate the movement of property to those who value it most highly; and the law of torts to protect property rights); Benjamin Klein & Keith B. Leffiler, The Role of Market Forces in Assuring ContractualPerformance, 89 J. POL. EON. CALIFORNIA LAW REVIEW [Vol. 81:431 Supreme Court2 has shown an increasing interest in advancing this 3 model of legal regulation by enhancing protection for private property and by approving the innovative use of criminal' and civil liability5 stat- 615, 615-16 (1981) ("An implicit assumption of the economic paradigm of market exchange is the presence of a government to define property rights and enforce contracts" as well as to "sanction stealing and reneging."). 2. This Article dates the "modern Supreme Court" from 1971 when President Nixon's appointees Chief Justice Burger and Justices Blackmun, Rehnquist, and Powell decisively altered the makeup of the Warren Court. Thus, the term "modern Supreme Court" encompasses both the Burger and the Rehnquist Courts, although, as will be seen, the more radical of the developments discussed in this Article date from 1986, when Rehnquist became Chief Justice. 3. The modern Court has strengthened private property using a number of different sources of law. First, it has actively interpreted the Constitution's Takings Clause, U.S. CONsT. amend. V, to protect property. One of the most anticipated decisions of the 1991-92 Term, Lucas v. South Carolina Coastal Council, 112 S. Ct. 2886 (1992), held that state environmental legislation that eliminated the value of beachfront property constituted a taking that required compensation. See RICHARD A. EPSTEIN, TAKINGS: PRIVATE PROPERTY AND THE POWER OF EMINENT DOMAIN (1985); Lawrence Blume & Daniel L. Rubinfeld, Compensationfor Takings: An Economic Analysis, 72 CALIF. L. REV. 569, 573-76 (1984); see also, eg., Nollan v. California Coastal Comm'n, 483 U.S. 825 (1987) (a zoning permit conditioned on conveyance of an easement across beachfront property constitutes a taking); First English Evangelical Lutheran Church v. County of L.A., 482 U.S. 304 (1987) (damages are recoverable for the time period between enactment of a regulation and a determination that it constituted a taking); Hodel v. Irving, 481 U.S. 704 (1987) (a statute providing that fractional interests in Native American lands could not descend but must escheat to the tribe constitutes a taking); Loretto v. Teleprompter Manhattan CATV Corp., 458 U.S. 419 (1982) (a statute requiring landlords to permit installation of cable facilities constitutes a taking); Kaiser Aetna v. United States, 444 U.S. 164 (1979) (creation of public right of access across a pond developed privately at great expense constitutes a taking). Second, the Court's interest in private property has been evident in both its First Amendment and Due Process jurisprudence. See, eg., International Soc'y for Krishna Consciousness v. Lee, 112 S. Ct. 2711 (1992) (municipal airport financed by user fees and operated for profit is not a "public forum" and may ban solicitation activities on its premises); Lyng v. Northwest Indian Cemetery Protective Ass'n, 485 U.S. 439 (1988) (Free Exercise Clause does not prevent the federal government from exploiting timber resources on its own land even though this use impinges on Native American holy ground); Mennonite Bd. of Missions v. Adams, 462 U.S. 791 (1983) (due process requires that property owners receive more than mere publication notice of tax foreclosure proceedings). Finally, the Court has been solicitous of private property in its interpretations of a variety of federal statutes. See, eg., Lechmere, Inc. v. NLRB, 112 S. Ct. 841 (1992) (under federal labor laws, employer may bar nonemployee union organizers from employer's privately owned parking lot); San Francisco Arts & Athletics, Inc. v. United States Olympic Comm., 483 U.S. 522 (1987) (grant of an exclusive property right in the word "olympic" is within Congress' constitutional powers); Kewanee Oil Co. v. Bicron Corp., 416 U.S. 470 (1974) (federal patent laws do