Allgeyer v. Louisiana

As I discussed earlier, Allgeyer v. Lousiana, 165 U.S. 578 (1897) expressed the unanimous opinion of the Supreme Court that freedom of contract was a fundamental right protected by the due process clause of the Fourteenth Amendment. While this case itself was applied to limitations of out-of-state businesses operating in Louisiana, its valorization of the “liberty of contract” was extended to employment regulations as well (Hall 398).

Holden v. Hardy

Still, despite this valorization of contract as liberty the year before, hints emerged of limitations on contract that would emerge more fully in the twentieth century. In Holden v. Hardy, 169 U.S. 366 (1898), Justice Henry Billings Brown “accepted the idea that employer and employee do not stand on an equal bargaining footing” (Hall 399):

the proprietors of these establishments and their operatives do not stand upon an equality, and … their interests are, to a certain extent, conflicting. … In other words, the proprietors lay down the rules and the laborers are practically constrained to obey them.

As regulations limiting children’s working hours in factories are a valid exercise of a state’s police power — which also includes enforced vaccination, quarantine, and other protections of the public’s general welfare — so too is an act that seeks to protect workers in a particularly dangerous occupation (mining).

Lochner v. New York

At the turn of the century, the “triumph of contract” was effectively constitutionalized: Lochner v. New York, 198 U.S. 45 (1905) held that the “liberty of contract” was a fundamental right protected by the Fourteenth Amendment. Lochner invalidated legislation limiting the workweek to 60 hours on the theory that

the general right to make a contract in relation to his business is part of the liberty of the individual protected by the Fourteenth Amendment of the Federal Constitution.

The Lochner Court construed the law as an absolute interference “with the right of contract between the employer and employees,” then declared that “the general right to make a contract in relation to his business is part of the liberty of the individual protected by the Fourteenth Amendment of the Federal Constitution.” The Fourteenth Amendment’s Due Process Clause — originally intended to overturn Dred Scott and to prohibit so-called “Black Codes” — prohibits states from depriving any person of life, liberty, or property without due process of law. To the Lochner Court, the right to buy and sell labor through contract was a “liberty of the individual,” and was thus constitutionally protected.

The end of Lochner

Lochner was finally challenged successfully during the Depression, in West Coast Hotel Co. v. Parrish, 300 U.S. 379 (1937), which finally allowed for a general minimum wage in Washington State — and thus overturned the maximalist version of freedom of contract.

The black codes often required “persons of color” to sign year-long labor contracts, with wages payable at the end of the year, and punished “vagrants” found in public with mandatory labor. Newly freed slaves were often prohibited from working in many occupations and from acquiring land. But even when not forced by law or force to sign such contracts, many African-Americans — with limited options — signed such contracts voluntarily.

Despite their unfair terms and limited voluntariness, Southern courts enforced these contracts. (It was, in truth, extremely difficult for African-Americans to challenge their terms, since the codes also limited access to the courts by former slaves.)

The Freedmen’s Bureau, established by Congress in 1865 as part of the Department of War, tried to mitigate the black codes. It attempted to “provide food, shelter, education, and legal protection to the recently emancipated slaves” (Hall 266), and even heard cases where the state judicial system was inadequate or lacked due process (266). According to Paul Cymbala, the Bureau also supervised contracts — although that might well have reinforced the power of “contract slavery” by encouraging freedmen to voluntarily sign such contracts.

Regardless of the racial basis of such contracts, the law continued to pretend, at least into the twentieth century, that labor contracts were the result of free bargaining between equal parties. In Allegeyer v. Louisiana, 165 U.S. 578 (1897), the Supreme Court explained that the Fourteenth Amendment guaranteed “liberty of contract” — 

the term is deemed to embrace the right of the citizen to be free in the enjoyment of all his faculties; to be free to use them in all lawful ways; to live and work where he will; to earn his livelihood or avocation, and for that purpose to enter into all contracts which may be proper, necessary and essential to his carrying out to a successful conclusion the purposes above mentioned.

Thus, the Fourteenth Amendment had shifted from a device to free enslaved labor, to one that consigned laborers to effective enslavement and terrible working conditions — provided there was a contract to that effect.

No State shall … pass any Bill of Attainder, ex post facto Law, or Law impairing the Obligation of Contracts.

In Law in America: A Short History, Lawrence Friedman explains that “the clause was probably intended to make it impossible for states to interfere with the rights of creditors [or] to go too far in helping out debtors” (53). Legislatures had been known to pass laws relieving influential persons of debt, for example, a practice that was both unfair to those less influential and potentially ruinous to the overall economic system:

There was a shortage of hard money in the country, no real banking system in the modern sense; yet the whole structure of enterprise floated on a sea of credit. Businesses sold on credit and bought on credit. … When one link in the chain began to weaken, there was trouble up and down the line. (53)

Aside from the appearance of this clause in 1787, the law of contracts before the nineteenth century was minimal, especially as compared to it’s more developed cousin, the law of property. But the nineteenth century — which Friedman called “the golden age of contract law” — saw contract law in the United States become the pre-eminent form of private law.

The common law before the nineteenth century required contracts to be fair and reasonable: a “sound price warrants a sound commodity.” But by mid-century, William Wetmore Story’s famous treatise on contracts recognized that this basic understanding had radically altered. Contracts now required only “mutual assent of the parties” and “valuable consideration.” Fairness — roughly defined as similar levels of benefit for each party — was now irrelevant. Kermit Hall‘s American Legal History: Cases and Materials puts it this way:

the law of the nineteenth century recognized and supported the belief that unfair bargains were necessary for the commercial and industrial development of the day.

Martin Horwitz, in The Transformation of American Law, 1780-1860, adds that

judges and jurists finally reject[ed] the longstanding belief that the justification of contractual obligation is derived from the inherent justice or fairness of the exchange. In its place, they asserted for the first time that the source of the obligation of contract is the convergence of the wills of the contracting parties.

Put another way, “the law of the nineteenth century recognized and supported the belief that unfair bargains were necessary for the commercial and industrial development of the day” (Hall 197).

Seixas and Seixas v. Woods

The shift to a caveat emptor model of contract — distinct from the earlier common law and also from then-current European civil law — emerged early in the newly formed United States.

In 1804, a court in New York rejected the idea of an “implied warranty” absent intentional fraud, and required that, “without a warrant by the seller, or fraud on his part, the buyer must stand to all losses arising from latent defects.” Judge Kent argued that this was unlike civil law, but was indeed “well and elegantly vindicated … as most happily reconciling the claims of convenience with the duties of good faith.”

The New York court argued — as courts often did (and do) that this articulation was long-standing, and nothing new at all — even though Martin Horwitz explains that this was not the case in the seventeenth country at all:

[A]s late as 1792 Blackstone’s successor in the Vinerian Chair at Oxford, Richard Wooddeson, proclaimed the “sound price” doctrine to be good law (167).
Nonetheless, the trend away from the “sound price” interpretation of contracts continued.

McFarland v. Newman

A Pennsylvania case from 1839, McFarland v. Newman, Watts (Pa.) 55, argued that any adoption of the “civil law maxim … that a sound article is warranted a sound price” by the common law was a mistake:

The [common-law] judges, in pursuit of a phantom in the guise of a principle of impracticable policy and questionable morality, broke away from the common law.”

Instead, Judge Gibson argues, the “maxim caveat emptor, disposes of all,” unless there is “willful misrepresentation.” Gibson goes on to explain the principle:

the naked averment of a fact is neither a warranty itself, nor evidence of it. … [I]t certainly may be taken into consideration … but the jury must be satisfied from the whole that the vendor actually, and not constructively, consented to be bound for the truth of his representation.”

Seymour v. Delancey, et al.

Back in New York, the highest court of appeals rejected a lower-court opinion finding that equity forbid ordering specific performance of contracts with very unequal levels of consideration. The lower-court judge had argued that there was a

“very great weight of authority against enforcing a contract, where the consideration is so inadequate as to render it a hard bargain, and an unequal and an unreasonable bargain.”

On the contrary, wrote the higher-court majority in Seymour v. Delancey, et al., 3 Cow. (N.Y.) 445 (1824), “mere inequality in value” was “not sufficient … in withholding a decree for specific performance.” As in Pennsylvania, contracts had to be enforced, “where thee is no fraud, misrepresentation, imposition, or concealment of facts.”

Kermit Hall suggests that this New York opinion “anticipates a modern marketplace” where “purchases are constantly made upon speculation” (202). The court prefers to support this new marketplace of “risky investments,” even “at the expense of those who might enter into blatantly unfair bargains out of ignorance” (202).

Fletcher v. Peck

As I noted above, unlike most other areas of non-criminal law, contracts have a constitutional component. As a result, state legislatures cannot “impair” existing contracts.

The implications of this clause were felt early in United States history, when the 1795 Georgia legislature sold land for less than market value — benefitting many legislators and other government officials. The 1796 Georgia legislature then attempted to rescind the sale because of the blatant corruption involved, but in Fletcher v. Peck, 10 U.S. 87 (1810), the Supreme Court held this rescission by the legislature unconstitutional:

The state of Georgia was restrained, either by general principles which are common to our free institutions, or by the particular provisions of the constitution of the United States, from passing a law whereby the estate of the plaintiff in the premises so purchased could be constitutionally and legally impaired and rendered null and void.

Justice Marshall added that, if this were not the case, then “[a]ll titles would be insecure, and the intercourse between man and man would be very seriously obstructed.”

(The issue was eventually handled by an act of Congress in 1814 that indemnified purchasers with a buyout, instead of rescinding the contract of sale.)

Antebellum Conclusions

If it’s fair to say, as Kermit Hall does, that before the nineteenth century “a legally enforceable contract had to be fair,” then it’s also fair to say that caveat emptor — ”let the buyer beware” — triumphed early on the 1900s:

[C]ontract law generally favored sellers over buyers and employers over laborers and served as an instrument that aided the industrial and commercial entrepreneurs of the nineteenth century. This led to the “triumph of contract” over property, tort, and equity, as the law came “to ratify those forms of inequality that the market system produces.” (196-97)

The Civil War did little to change contract law, even if contracts to own persons were no longer enforceable. (Note that the Contracts Clause does not apply to the federal government, so there was no Contracts Clause problem with Abraham Lincoln’s Emancipation Proclamation.)

Modern contract law has added some complexity to the doctrine of caveat emptor. Many states have added statutory provisions that create “implied warrantees of merchantability,” for example, and the United Kingdom has moved away from it for consumer purchases. Still, in general American courts have not strayed too far from the rule (except Louisiana, which continues to follow the civil-law doctrine of “redhibition”: “a sound price warrants a sound commodity”).

Specifically, the Supreme Court ruled 5-2 against the old Charles River Bridge Company, saying that Massachusetts had not violated the federal constitution’s Contracts Clause — a victory, it was held at the time, for state’s rights (as was Dred Scott). Justice Taney, generally very conservative and pro-property rights (and incidentally in favor of preserving slavery, as abolition would deprive owners of property), ruled against the contracts claim of the private corporation in favor of the public good:

While the rights of private property are sacredly guarded, we must not forget that the community also have rights, and that the happiness and well-being of every citizen depends on their faithful preservation. Charles River Bridge, 36 U.S. at 548.

Taney aligned the “public good” with progress and technological improvements. Ruling in favor of the entrenched Charles River Bridge Corporation would mean that the country would “be thrown back to the improvements of the last century, and obliged to stand still.” Id. If an exclusive monopoly were upheld, then incumbent highway corporations would hold back development of new railroads and canals, which were booming as the new technologies of the nineteenth centuries.

New developments and new approaches had permitted a new corporation to build a new bridge at a lower cost — and to make it free within a few years of its opening, while still turning a profit for its investors. But in doing so, the profit-making potential of the old bridge was destroyed (although investors had already made back their initial investment multiple times over).

But hadn’t the old company taken a risk initially? Didn’t its investors deserve to reap their new profits because they had taken the risk initially? Wouldn’t setting a precedent that their state-granted monopoly could be limited later actually inhibit future investment?

If these questions all seem rather familiar in the 21st century, it’s because these are the same kinds of arguments advanced by patent and copyright holders today. Pharmaceutical companies want their patent monopolies to extend further, and argue that failing to grant a sufficient monopoly would inhibit development and investment. Music and movie companies argue that their copyright monopolies should extend even further than it does now — because otherwise creation and investment would suffer.

Taney said “no” to this argument in 1837. I’ll ask the obvious question, then: did this decision to limit a monopoly contract reduce investment and technological development in the nineteenth century? The (equally obvious) answer is, “no”: the nineteenth century gave us railroads, the telegraph, the telephone, and much, much more. If there’s anything we can learn from Taney’s 1837 decision, it’s that minimizing monopoly rights does not inhibit development — and, I think, the reverse is even more likely.

It’s a lesson we would do well to keep in mind when considering the length and extent of patent and copyright monopolies.

William Styron may have been one of the leading literary lions of recent decades, but his books are not selling much these days. Now his family has a plan to lure digital-age readers with e-book versions of titles like “Sophie’s Choice,” “The Confessions of Nat Turner” and Mr. Styron’s memoir of depression, “Darkness Visible.”

But the question of exactly who owns the electronic rights to such older titles is in dispute, making it a rising source of conflict in one of the publishing industry‘s last remaining areas of growth.

via Authors and Publishers Argue Over Digital Rights to Older Books – NYTimes.com.

While the dispute is, in many respects, not really new, I still think its interesting that the courts so far seem to be on the side of authors (but remember, this is really about individual contract interpretations, not really about broad categories of disputants, although broad cases could influence future decisions):

In 2002, Random House sued RosettaBooks, an e-book publisher, for copyright infringement when Rosetta signed contracts with authors  —  including Mr. Styron  —  to release digital versions of previously published novels.

In its suit, Random House relied on wording in its contracts that granted it all rights to publish the works “in book form.” In its letter to agents on Friday, Random House invoked the same wording to defend its right to publish e-books of backlist titles.

In 2002, a federal judge in Manhattan denied Random House’s request for a preliminary injunction against RosettaBooks, ruling that “in book form” did not automatically include e-books. An appellate court similarly denied Random House’s request.

What I find most telling in this is the argument that authors and their estates are seeking alternatives to traditional publishers because those publishers are not offering a very competitive royalty rate on digital editions. After all, they argue, digital works costs less to produce and distribute  —  so publishers, who do less work, deserve a smaller slice of the pie.

Obviously traditional publishers do not like this, since it cuts into their potential profits  —  and backlist titles account for a significant amount of steady income for publishers.

Still, if the market can support paying authors more  —  isn’t that the “natural” path the book industry will take in the future? The Web certainly can support non-traditional publishing avenues, and while these leave off many of the benefits publishers provide (marketing and editing, especially), why couldn’t electronic editions find a different way to market? (This is especially true when the editing has already been paid for through earlier, hard-copy sales. And are publishers really pushing backlist publications enough to justify their payout?)

Can traditional publishers fend off this move through litigation and forceful contract negotiations? Or will we see increasing alternatives to traditional publishers in the e-book realm?

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Randy Picker responds by saying:

We should review how the public domain works. The public domain is sold every day. Every time you buy a copy of Hamlet you are paying for a public domain work. I do H.G. Wells’s The War of the Worlds in my copyright class on this starting with Project Gutenberg  —  free, of course  —  and then heading to Barnes & Noble and Amazon, where the prices range from $2.50 to $13.95 see slides 3 to 13. That is precisely the nature of the public domain: anyone can use it for whatever they want, including selling it. The AP is fully within its rights to sell public domain content just as Amazon does every day.

via The University of Chicago Law School Faculty Blog: The Associated Press: Selling the Public Domain?

To restate: there is absolutely nothing legally wrong with the AP licensing or selling public-domain content. To paraphrase concepts from the open source world, public-domain content is free (as in speech, “libre”) not free as in beer.

As Picker puts it, “Public domain content is outside the copyright system. Again that is its nature.”

You have no right to access of public-domain materials (perhaps unfortunately). You have no right to get them without paying. Instead, such materials are free for anyone to use in any way they wish. The AP can sell the material. You can sell the content. Anyone can do with it what they wish.

(A side note: a license by the AP to such content may be invalid, in the sense that once you have it, you can do with it as you wish  —  although potentially you may still breach a contract you have with the licensor. Picker, for example, writes, “Ordinary rules regarding contracts and licenses should apply to circumstances under which someone is given access to public domain content.” I can envision counterarguments. In other words: it’s complicated. Thus the existence of lawyers.)

Bizarre? Unfair? Strange? Perhaps. But consider that the protections of copyright are a modern addition to the world. Pre-18th century (to grossly simplify things), if you sold your manuscript, you sold the “copyright” as well. All intellectual creations were, in a sense, in the public domain (although the concept didn’t quite exist  —  without modern copyright, there is no concept of “public domain” either  —  there is simply one state, not too).

Modern copyright changed this, and arguably encouraged creation  —  but it also locks up works in various ways as well. Thus the need for a balance, I believe, between the protections of intellectual property (which is not quite like ordinary property, which is why you only “infringe” IP) and the dizzying freedoms of the public domain.

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Ed Kohler points us to a long, but fascinating blog post, by Stuart Shieber, a CS professor at Harvard, discussing the somewhat ridiculous copyright situation that many academics deal with in trying to promote their own works. I’ve heard similar stories from other professors I know, but this one is worth reading. Shieber points out the importance of academics getting their research published in journals, but how annoying it is that most journals require those academics to give up all sorts of rights – including the right to distribute their own research on their websites. However, he notes that most published academics simply ignore this rule, and you end up with a “don’t ask, don’t tell” policy. Even though they’re legally prevented from putting up a PDF of their work on their website, they do so anyway, and journals just look the other way.

via The Ridiculous Copyright Situation Faced By Academics Who Want To Promote Their Own Research | Techdirt.

Traditional journals and publishers make this deal required for authors, especially in the sciences. In medical journals, the NIH open-access mandate has opened up this to some extent, since it requires authors to get consent to put their article in PubMed Central. The restriction is understandable, though, given publisher’s old business models. But the world is changing, and journals – scientific and otherwise – are having to adapt.

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