Private Lawmaking
David V. Snyder*
This article argues that a significant amount of law is privately made and
suggests that privately made law should be subjected to the same kinds of
questioning as publicly made law, considering in the end whether privately
made law might be considered “molecular federalism.” Private lawmaking,
through which one private group makes rules that govern much larger groups,
extends well beyond the boundaries of relatively well-known examples of private
legislatures like the American Law Institute and the Uniform Law
Commissioners. The phenomenon includes the practical ability of private
entities to make law governing many kinds of corporate, commercial, and
consumer transactions, from credit cards to letters of credit. After suggesting the
broad scope of private lawmaking through an inductive argument, the article
shifts to linguistic analysis to show that the artifacts resulting from these private
processes are best considered law and are inadequately described by terms like
contract, norms, private ordering, or self-regulation.
The article goes on to a tentative assessment of private lawmaking, asking about
efficacy, representation, respect for autonomy, and similar matters. The article
ends by emphasizing that much of the legitimacy of private lawmaking depends
on competition in lawmaking and surmises that under competitive
circumstances, private lawmaking may function as federalism on a molecular
level. Because the number of potential lawmakers is much greater, molecular
federalism may multiply the benefits of state-based federalism. It may also
enhance its quality, enabling bottom-up lawmaking instead of top-down
imposition of rules by the state.
* Professor of Law, Indiana University School of Law, Bloomington. As a matter of full
disclosure, I note that I am a member of the American Law Institute and am chair of the
Uniform Commercial Code Subcommittee on Article 1 in the American Bar Association
Section of Business Law. I would like to acknowledge the generosity of Indiana University,
which provided a research grant, and the hospitality of Boston University School of Law,
which hosted me while I finished writing this piece last summer. Workshops at Case Western
Reserve University School of Law and Cleveland-Marshall College of Law at Cleveland State
University were invaluable in allowing me to see how ideas that seemed natural to me are
controversial in other quarters. Thanks are due also to Peter Alces, Larry Garvin, J. William
Hicks, and Ron Krotoszynski for reviewing earlier drafts, and to Timothy R. Fadel, Julie
Windhorn, and especially Ryan Hurley for helpful research assistance. Responsibility for the
arguments advanced here, as well as the errors, omissions, and misjudgments that remain, is
mine alone.
372 OHIO STATE LAW JOURNAL [Vol. 64:371
TABLE OF CONTENTS
I. PRELIMINARY TASKS...........................................................................375
II. FAMILIAR TERRITORY—RESTATEMENTS AND THE UCC ..................378
A. The Uniform Law Commissioners...............................................378
B. The American Law Institute.........................................................380
C. Political Economy in NCCUSL and ALI..................................... 383
III. SECURITIES MARKETS .........................................................................384
A. An Introduction: The New York Stock Exchange and
Its Competitors..............................................................................385
B. The Self-Regulatory Misnomer....................................................387
IV. A STEP FURTHER INTO THE PRIVATE REALM .....................................389
A. Letters of Credit and the International
Chamber of Commerce ................................................................389
B. Rules for Checks and the Abdication of Legislation...................395
C. Credit Card Associations.............................................................398
D. Its Own Little Legal World: A Weak Case, for
Comparison and Definition..........................................................402
V. CALLING IT LAW...................................................................................403
A. The Baggage Law Carries...........................................................405
1. Numbers and Groups.............................................................405
2. General Applicability.............................................................406
3. Only Default Rules?...............................................................407
4. Privately Made Mandatory Rules:
When Escape Is Impossible ...................................................410
5. A Thought Experiment...........................................................412
B. Sovereignty and the State.............................................................413
C. Objections and Concessions ........................................................414
1. Changing Private Law...........................................................414
2. Inertia, Custom, and Usage of Trade....................................417
3. The Authority of Privately Made Law...................................419
4. Only a Piece of a Piece of the World....................................420
VI. STANDARD QUESTIONS........................................................................421
A. How Well Does Privately Made Law Work?..............................421
B. Law Outside Paradise: Conjectured Costs and Benefits ...........424
2003] PRIVATE LAWMAKING 373
C. Respect for Autonomy...................................................................425
1. Escape and Competition........................................................425
2. A Note on Coordination Principles.......................................426
3. Paternalism.............................................................................428
D. Exclusivity and Equality...............................................................431
E. Representation: Maybe a Little, Haphazardly............................434
VII. MOLECULAR FEDERALISM .................................................................437
A. Competitive Private Lawmaking..................................................437
B. Federalism and Public Lawmaking.............................................439
C. Private Lawmaking as Molecular Federalism............................442
D. The Undue Constraints of Antitrust Law.....................................447
VIII. CONCLUSION .....................................................................................448
INTRODUCTION
This article focuses on a dual argument. First, much law is privately made. In
other words, there is something we should call law, that carries much of the effect
of legislation or case law, but that is privately made. It is not made in a
meaningful sense by government legislatures or courts. Public legislatures and
courts remain important, for they make law as well. Indeed, following Justice
Holmes, this article uses the word law to denote a rule that predicts how a court
will act.1 The authority of publicly made law is fully recognized here, in addition
to the authority of privately made law. Although not all law is privately made,
and most privately made law depends ultimately on the power of the state—
power the state lends, dependably and in generous measure—enough law is
privately made that we should care.
That point leads to the second argument: we need to ask the same sorts of
questions of privately made laws that we ask of publicly made laws. Later, the
second proposition will require refinement. The sorts of questions we need to ask
about privately made laws differ from the standard questions because privately
made laws result from an undemocratic but potentially market-disciplined
process. The qualification of the second point will consider the possible effect of
competition between private regulatory regimes and will also take into account
1 See Oliver Wendell Holmes, Jr., The Path of the Law, 10 HARV. L. REV. 457, 458
(1896) (“[A] legal duty so called is nothing but a prediction that if a man does or omits certain
things he will be made to suffer in this or that way by judgment of the court;—and so of a legal
right.”). This definition is not unusual, especially in the context of commercial law. See, e.g.,
James J. White, The Influence of International Practice on the Revision of Article 5 of the UCC,
16 NW. J. INT’L L. & BUS. 189, 189 (1995).
374 OHIO STATE LAW JOURNAL [Vol. 64:371
the possibility that competition may be absent. Where competition or its potential
exists, I argue that private lawmaking is a kind of “molecular federalism.”
The conceptions advanced here are new, although the underlying facts are
not. The broad role of private lawmaking in the current American polity has
largely escaped scholarly attention, although perceptive writers have noted the
phenomenon in a few instances. This article aims to show that private lawmaking
is a pervasive and important element of contemporary lawmaking, not confined to
distant medieval or nascent electronic realms2 or to the relatively limited roles of
the American Law Institute (“ALI”), the Uniform Law Commissioners,3 and
analogous organizations. Nor is private lawmaking as well tamed as in corporate
and securities law, where private regulation takes place under the watchful
monitory eye and powerful regulatory arm of the Securities and Exchange
Commission.4 The tasks undertaken here are urgent, as corporate misconduct
(measured in large part by privately made rules) and credit card power (enforced
through privately made rules) boldly make headlines. But this article is not about
those current issues in particular; they are covered simply because the
phenomenon described here is so broad. Private lawmaking has not replaced
public lawmaking, even in the commercial world, but it is a robust component of
commercial and consumer life. Private lawmaking is unavoidable now—a
political fact we would do well to recognize—and it will remain inevitable for the
foreseeable future.
After defining some key terms and disposing of other introductory points in
Part I, the argument begins in Part II on relatively familiar ground. The work of
the ALI in fashioning the Restatements of the Law is known to every law student
in the first week of law school, as is the Institute’s joint project with NCCUSL on
the Uniform Commercial Code. Not quite as well known are the private
2 See GILLIAN K. HADFIELD, PRIVATIZING COMMERCIAL LAW: LESSONS FROM THE
MIDDLE AND DIGITAL AGES (Stanford Law Sch., John M. Olin Program in Law & Econ.,
Working Paper No. 195, 2000), available at http://papers.ssrn.com/sol3/papers.cfm?
abstract_id=220252 [hereinafter HADFIELD, LESSONS]; Gillian K. Hadfield, The Price of Law:
How the Market for Lawyers Distorts the Justice System, 98 MICH. L. REV. 953 (2000)
[hereinafter Hadfield, The Price of Law]; Gillian K. Hadfield, Privatizing Commercial Law,
REGULATION, Spring 2001, at 40, available at http://www.cato.org/pubs/regulation/regv24n1/
hadfield.pdf [hereinafter Hadfield, Privatizing Commercial Law] (emphasizing this point);
Gillian Hadfield & Eric Talley, On Public versus Private Provision of Corporate Law (Oct.
2001) (unpublished manuscript), available at http://www-rcf.usc.edu/~etalley/hadtall.pdf (last
visited Apr. 13, 2003).
3 The National Conference of Commissioners on Uniform State Laws is also called
NCCUSL, the Conference, or the Uniform Law Commissioners. When the Conference was
named, people were apparently less focused on acronyms. Unwieldy as it now is, the name
used to be worse—the Conference of State Boards of Commissioners on Promoting Uniformity
of Law in the United States. See Unif. Law Comm’rs, History, at
http://www.nccusl.org/nccusl/aboutus.asp#history (last visited Apr. 13, 2003).
4 See Securities Exchange Act of 1934 § 19, 15 U.S.C. § 78s (2000).
2003] PRIVATE LAWMAKING 375
rulemaking roles of the securities exchanges, which are the subject of Part III.
That Part also discusses how private lawmaking is sometimes confused with selfregulation.
Part IV continues the inductive exercise by taking up a number of less
familiar examples of private lawmaking, by which private bodies make rules that
govern millions of people, companies, and transactions, both in consumer and
commercial contexts. The first argument—that much law is privately made—
concludes in Part V, in which I defend the idea that these privately made rules
should be considered law. For ease of exposition, the arguments are put forward
with relatively few qualifications in the first few parts. Part V acknowledges a
number of objections to the argument and grants some concessions.
The second half of the article takes up the related point, that we should
question privately made law just as we question publicly made law. Part VI
considers some of the questions of equality, exclusivity, representation,
efficiency, and other values. Part VII takes up a crucial characteristic of private
lawmaking, which is the effect of potential competition in lawmaking. The
discussion focuses on federalism and the possible federalism-related benefits that
could accrue if lawmaking occurs on a molecular level instead of being centered
on the state. In the end, the article considers a few implications of the arguments
advanced and draws some conclusions.
I. PRELIMINARY TASKS
Before beginning in earnest, some definitions are required. They will show
that the first part of the argument is not a mere tautology (of course private law is
privately made!). To be clearer, private law here refers to the law governing
relations among persons, including juridical persons such as corporations. The
law of contracts, the law of torts, and the law of commercial transactions are
prime examples. Private law is typically contrasted with public law, which
governs the relations involving the government (e.g., constitutional law, criminal
law). Sometimes people say that the provisions of a contract are the “private law”
between the parties; this article will avoid that usage because it is confusing in the
context of the current argument.5 Here, private law will refer exclusively to the
legal rules in those bodies of law that govern relations among persons. For
example, the rule that contracts generally require consideration is a rule of private
law.
Private law is not the same as privately made law. At least in the beginning,
the consideration requirement was a rule of private law, but it was not a privately
made rule. It was a rule of common law developed by the courts.6 The
5 But see White, supra note 1, at 190.
6 See J.H. Baker, Origins of the ‘Doctrine’ of Consideration, in LAWS AND CUSTOMS 336
(1977); J.H. BAKER, AN INTRODUCTION TO ENGLISH LEGAL HISTORY 386–88, 399–400 (3d ed.
1990).
376 OHIO STATE LAW JOURNAL [Vol. 64:371
consideration requirement, then, was publicly made law,7 although it is a rule of
private law. In our times, though, some of the consideration rules are privately
made. The ALI—a private organization—makes them, packages them in a
Restatement, and quite successfully encourages their adoption by public
lawmakers, usually the courts. The ALI, whose role is reasonably well
recognized, is only a small part of the private lawmaking phenomenon.
One further distinction may aid in explanation. On the one hand, some rules
are made by private legislatures like the ALI. Such bodies undertake various
projects for the good of society. The membership of these private legislatures
enjoys some benefit because the membership is part of society, but otherwise it
has no direct stake. This situation generally describes the work of the ALI and
NCCUSL. The ALI is not a significant contracting or property-holding party. It
does not concoct the Restatements of Contracts or Property for its own economic
benefit as a contracting party or property-holding party. Rather, the ALI and
NCCUSL are conceived as little legislatures, with projects considerably broader
than their economic interests. Such bodies produce what I will call legislative
rules. (The product of actual public legislatures is legislation.) On the other hand,
associations of economic actors make some rules for their own benefit. The
rulemakers, in other words, are significantly involved in the transactions being
regulated. The members of the Banking Commission of the International
Chamber of Commerce are engaged in the business of letters of credit. Those
letters of credit incorporate rules made by the Banking Commission. As such
rules are often incorporated as a matter of contract, I will refer to them as
contractual rules. Both legislative rules and contractual rules, as those phrases are
used here, are examples of private lawmaking.
Before we see how, two notes on scope are necessary. First, this article will
concentrate on what might broadly be called commercial or business law. To
some extent this focus may be a matter of happenstance; they are the areas I
happen to know best. Readers will likely come up with many other examples of
private lawmaking. Homeowners’ associations,8 standard-setting organizations,9
and others come immediately to mind. Possibly, though, the case is stronger in
the commercial area than elsewhere. In commercial law in particular, and
business law in general, many of the great legal edifices have been built on the
law of contract. Contract is an important (although perhaps not essential)
7 See Lisa Bernstein, Opting Out of the Legal System: Extralegal Contractual Relations in
the Diamond Industry, 21 J. LEG. STUD. 115, 115 (1992) (describing a similar idea referred to
as “state-created law”).
8 See Robert C. Ellickson, Cities and Homeowners Associations, 130 U. PA. L. REV. 1519
(1982) (discussing homeowners’ associations and their effects); see also Laura T. Rahe,
Student Article, The Right to Exclude: Preserving the Autonomy of the Homeowner’s
Association, 34 URB. LAW. 521 (2002).
9 See Chris Sagers, Antitrust Immunity and Standard Setting Organizations: Who, After
All, Is the Government (2002) (unpublished manuscript, on file with author).
2003] PRIVATE LAWMAKING 377
ingredient in private lawmaking. Areas less amenable to private structuring
through contractual building blocks may be less susceptible to private
lawmaking. Such questions are beyond the scope of this article.
Second, part of the point of this article is to emphasize the breadth of private
lawmaking and to draw together the interests of those who know commercial law
with those, like constitutional scholars, whose memories of contract and
commercial law may be hazy. This purpose has a significant drawback: the article
describes a number of legal institutions and transactions in enough detail so a
newcomer can understand what is happening, but without so much as to prevent
some consideration of several large fields (contracts, securities markets, and
payment systems). This approach means that the experts in a particular area will
find only the details they already know, while those unfamiliar with the area will
find only enough to discover the basic idea. More particularly, scholars of
commercial and corporate law will not be surprised by the phenomena described
in the first three or four parts of the article. Still, the argument to those scholars is
that they should be surprised, not by the mechanics, but by the character of what
has happened.
We have taken for granted the way the systems work without attending to
how the lawmaking function has been privatized before our eyes. Something
aside from “private ordering” has occurred: private groups are exercising
important segments of lawmaking power, affecting millions who are not group
members. On the other side of the equation, experts in constitutional law and
related areas will no doubt be frustrated by a commercial lawyer’s naïve approach
to democratic polity in general and American federalism in particular. But they
will perhaps be interested to see how in various commercial contexts, as a
practical matter, the lawmaking function has been partially reallocated from the
government. Similarly, economists may be surprised by a loose approach to
competition and efficiency. This article challenges the economists and the
scholars of public law to bring their expertise to bear on areas that they otherwise
might ignore.
II. FAMILIAR TERRITORY—RESTATEMENTS AND THE UCC
Scholars have occasionally written about two “private legislatures,”10 the
ALI and NCCUSL, and a description of private lawmaking begins smoothly with
10 See David M. Lawrence, Private Exercise of Governmental Power, 61 IND. L.J. 647,
688 (1986) (considering privatization issues from the standpoint of constitutional nondelegation
doctrine); Alan Schwartz & Robert E. Scott, The Political Economy of Private
Legislatures, 143 U. PA. L. REV. 595, 597 (1995) (using the term to describe the ALI and
NCCUSL); see also James J. White, Ex Proprio Vigore, 89 MICH. L. REV. 2096, 2096 (1991)
(“NCCUSL[] is a legislature in every way but one.”).
Others have followed the usage, sometimes including analogous bodies such as
UNIDROIT. See, e.g., Clayton P. Gillette, Rules, Standards, and Precautions in Payment
378 OHIO STATE LAW JOURNAL [Vol. 64:371
those examples. The ALI produces the “Restatements of the Law” of various
fields, including the Restatement of Contracts. The courts frequently and
generally follow the Restatements, and thus the Restatements constitute law
according to Justice Holmes’s definition.11 The Uniform Commercial Code,
which is a joint project of NCCUSL and the ALI, is law in a more obvious sense.
By and large, it has been enacted by statutes in every jurisdiction in the country.12
The ALI and NCCUSL, the Restatements and the UCC: they are familiar,
and they are easy to understand. They are only a starting point for the first
argument; private lawmaking happens on a vastly larger scale than these two
private legislatures represent. But we can appreciate that phenomenon by
proceeding one example at a time.
A. The Uniform Law Commissioners
For over a century the Uniform Law Commissioners have been hard at work
furnishing the country with uniform laws.13 The Conference is composed of
lawyers, appointed in various ways, who at least nominally represent their
states.14 By 1906 the Conference approved a Uniform Sales Act, which achieved
passage in most states.15 Since then, the Commissioners have approved over 200
uniform laws, most prominently in the fields of commercial law, family law,
probate, and decedents’ estates.16 By far the most successful project has been the
UCC.17 There were some fits and starts along the way,18 and the success rate is
Systems, 82 VA. L. REV. 181, 197–98 (1996); A. Brooke Overby, UNCITRAL Model Law on
Electronic Commerce: Will Cyberlaw Be Uniform?, 7 TUL. J. INT’L & COMP. L. 219, 222
(1999) (NCCUSL); Antonio F. Perez, The International Recognition of Judgments: The Debate
Between Private and Public Law Solutions, 19 BERKELEY J. INT’L L. 44, 49 (2001) (Hague
Conference); Paul B. Stephan, Accountability and International Lawmaking: Rules, Rents and
Legitimacy, 17 NW. J. INT’L L. & BUS. 681, 689–90 (1996) (including UNIDROIT, the Hague
Conference, and the ICC); Nicholas S. Zeppos, From the Trenches and Towers, 23 LAW &
SOC. INQUIRY 657 (1998) (ALI).
11 See supra note 1 and accompanying text.
12 All states have adopted at least parts of the Code. Adoption is explained further in the
next part.
13 NCCUSL was founded in 1892 after the nineteenth-century failure of the Field codes to
gain national enactment. See STEVEN J. BURTON & MELVIN A. EISENBERG, CONTRACT LAW:
SELECTED SOURCE MATERIALS vi (2001).
14 The makeup of the Conference is discussed in more detail infra in Part VI.E (on
representation in the private lawmaking process).
15 See BURTON & EISENBERG, supra note 13, at vi. The Uniform Sales Act is the
predecessor of UCC Article 2, as acknowledged passim in the comments to Article 2.
16 See Unif. Law Comm’rs, supra note 3.
17 By focusing on the UCC, the text admittedly concentrates on the stongest case. Some
other NCCUSL projects, which do not enjoy the ALI imprimatur, have met with notably less
success (e.g., the Uniform Computer Information Transactions Act). Two states have enacted
2003] PRIVATE LAWMAKING 379
not perfect, but at this point almost all of the Code has been enacted almost
everywhere. Revised Article 9 (governing secured transactions) has been adopted
by statute in every state. Article 2, which governs sales of goods, is the law in
every state but Louisiana (because of its civil-law tradition).19 There are various
exceptions; to take one example, New York has not enacted the most recent
version of Article 3, which governs negotiable instruments, continuing to use a
slightly older version. So there are certainly some minor variations here and there.
Still, the UCC is the law of the land, with only small exceptions—quite technical
except perhaps to some very specialized lawyers.
Any ordinary citizen might well think that the law of the land was publicly
made. It was not. The ALI and NCCUSL made it. There is a formal public
intermediation in that the UCC would not be the statutory law anywhere were it
not passed by the state legislatures. And it is true that the public intermediation
has some meaning some of the time. The UCC is subject to various non-uniform
amendments.20 Much of the time, though, the states do what they are told.
Whatever deal was made in the private legislature becomes the deal in the public
legislature.
UCITA. See MD. CODE ANN., COM. LAW II § 22-101 (2002); VA. CODE ANN. § 59.1-501.1
(Michie 2002). Three states have anti-UCITA statutes. See IOWA CODE § 554D.104 (2002);
N.C. GEN. STAT. § 66-329 (2002); W. VA. CODE § 55-8-15 (2003).
18 Allen R. Kamp, Downtown Code: A History of the Uniform Commercial Code 1949–
1954, 49 BUFFALO L. REV. 359 (2001) [hereinafter Kamp, Downtown Code]; Allen R. Kamp,
Uptown Act: A History of the Uniform Commercial Code 1940–49, 51 SMU L. REV. 275
(1998); Allen R. Kamp, Between-the-Wars Social Thought: Karl Llewellyn, Legal Realism, and
the Uniform Commercial Code in Context, 59 ALBANY L. REV. 325 (1995); see also Ingrid
Michelsen Hillinger, The Article 2 Merchant Rules: Karl Llewellyn’s Attempt to Achieve the
Good, the True, the Beautiful in Commercial Law, 73 GEO. L.J. 1141 (1985); Zipporah
Batshaw Wiseman, The Limits of Vision: Karl Llewellyn and the Merchant Rules, 100 HARV.
L. REV. 465 (1987).
19 Robert E. Scott, The Rise and Fall of Article 2, 63 LA. L. REV. 1009, 1046 (2003)
(detailing the conventional story as a “dramatic success”); see also David V. Snyder,
Comparative Law in Action: Promissory Estoppel, the Civil Law, and the Mixed Jurisdiction,
15 ARIZ. J. INT’L & COMP. L. 695 (1998), reprinted in LOUISIANA: MICROCOSM OF A MIXED
JURISDICTION (Vernon V. Palmer ed., 1999) (treating the unusual case of Louisiana contract
law).
Because I had access to his working paper, I was to some degree able to take into account
Dean Scott’s new work for purposes of this article. Unfortunately, I was not able to consult
prepublication versions of the other contributions to the extraordinary symposium in honor of
Chancellor William D. Hawkland, Unifying Commercial Law in the 20th Century:
Understanding the Impulse and Assessing the Effort, 62 LA. L. REV. 991 (2002), which was
published just before this article went to press.
20 The non-uniform amendments are too numerous to list. Few are prominent except to
specialists. They are listed in the Uniform Laws Annotated, whose volumes are published
and/or re-issued periodically, with supplements published annually.
380 OHIO STATE LAW JOURNAL [Vol. 64:371
There are good arguments for this result, and they can be hard to resist.
Commercial law, UCC proponents argue, is technical and apolitical: the
“Uniform Commercial Code”—even the title induces yawns. The Code is the
triumph of a “dry and technical system,”21 and the public would do well to be
grateful that the highly compensated experts who know the system voluntarily
bestow upon society the largess of their expertise. There is no real question, in
this account, of giving the political henhouse to the well-clad foxes. The work
requires experts, and the experts are the heart of the UCC drafting process. If a
legislator or legislature were to reject or revise the work of expert craftsmen, all
manner of untoward results could come about, and they would be completely
unforeseeable to the inexpert.
Moreover, the need for uniformity in commercial transactions is obvious.
Any state with the idiosyncratic gumption to reject any part of the UCC would
thereby raise transaction costs for doing business in the state. The state would put
itself at a competitive disadvantage for attracting businesses and their
transactions, and the tax revenue they bring. What legislature would reject the
UCC? Instead, legislatures have accepted the UCC with open arms, contenting
themselves with occasional tinkering that would not noticeably detract from the
proponents’ goals of enacting uniform law, controlled by expensively shod
experts.
B. The American Law Institute
The UCC is a joint project of NCCUSL and the ALI, so much of the
previous argument carries as much weight with the ALI. But just as NCCUSL
has myriad uniform laws to its credit aside from the UCC, there is also more to
the picture on the ALI side. That part of the legal landscape is made up of the
Restatements.22
The ALI was founded in 1923 to improve the law, its founders said, and
before long they settled on the idea of restatements.23 Its membership purports to
comprise the elite of the law, including the leaders of the bar, the bench, and the
21 OLIVER WENDELL HOLMES, The Profession of the Law: Conclusion of a Lecture
Delivered to Undergraduates of Harvard University on February 17, 1886, in COLLECTED
LEGAL PAPERS 29, 29–30 (1920).
22 There is a large collection of literature on the Institute, its history, its undertakings, and
its impact. They have been discussed reasonably recently by several noted scholars in a
symposium, the footnotes of which collect the important scholarship. Symposium, The
American Law Institute: Process, Partisanship, and the Restatements of the Law, 26 HOFSTRA
L. REV. 576 (1998).
23 See BURTON & EISENBERG, supra note 13, at iii. See generally Report of the Committee
on the Establishment of Permanent Organization for the Improvement of the Law Proposing an
American Law Institute, 1 A.L.I. PROC. 1 (1923) (providing information on the founding of the
ALI).
2003] PRIVATE LAWMAKING 381
professorate.24 Their first product was the Restatement of Contracts (1932),
which purported “to clarify and simplify the law and to render it more certain.”25
By 2001 the ALI had approved Restatements on subjects ranging from agency,
property, restitution, and security to foreign relations, unfair competition, and the
law governing lawyers. Many of the Restatements are now in their second or
even third rounds, reflecting updated precedent, further thinking, and expanded
scope.26
As with uniform laws, a formal public intermediation occurs before any part
of a Restatement becomes the kind of official “law” as that term is commonly
used. Indeed, until a court or a legislature adopts a rule from the Restatement, the
“law” in the Restatements is not the law anywhere, as one prominent scholar
argued when the first Restatement was published.27 His statement is no longer
accurate, however, either in any ordinary sense of the word law, or in the sense
defined above.28 At this point, innumerable courts have adopted countless rules
from the Restatements. By and large, if the Restatement states the rule, that is the
end—as Gregory Maggs has pointed out, ipse dixit.29 Although there are
occasional exceptions to this general rule, and it is not susceptible of perfect proof
in any event, it seems generally to hold. I will refer to this idea as the ipse dixit
hypothesis.
To be sure, a court will occasionally try to resist a Restatement rule, although
such resistance is not always successful.30 Or perhaps the court might engage in a
little judicial fine-tuning of the rule. But the same is true of the rules ordinarily
called law. The appropriate point of comparison is not some perfect, ideal law.
Little if any law is perfectly authoritative: some rules will apply in some
jurisdictions but not others; some will apply at certain times and not others. Some
24 The makeup of the ALI membership and its exclusive nature are discussed in more
detail infra Part VI.E (on representation).
25 Introduction, in RESTATEMENT OF CONTRACTS viii–ix (1932).
26 For general information, see The American Law Institute web site at http://www.ali.org
(last visited Apr. 13, 2003).
27 Charles E. Clark, The Restatement of the Law of Contracts, 42 YALE L.J. 643, 654
(1933) (“[T]he resulting statement is the law nowhere and in its unreality only deludes and
misleads.”).
28 See supra note 1 and accompanying text.
29 Gregory E. Maggs, Ipse Dixit: The Restatement (Second) of Contracts and the Modern
Development of Contract Law, 66 GEO. WASH. L. REV. 508, 512–13 (1998). Contra Gary T.
Schwartz, Considering the Proper Federal Role in American Tort Law, 38 ARIZ. L. REV. 917,
948–49 (1996).
30 Eric Mills Holmes, Restatement of Promissory Estoppel, 32 WILLAMETTE L. REV. 263,
427–33, 478–83 (1996) (discussing the rejection (or perhaps more accurately, attempted but
unsuccessful rejection) of RESTATEMENT (SECOND) OF CONTRACTS § 90 by the courts of North
Carolina and Virginia); see also 3 CORBIN ON CONTRACTS 159–63 (Eric Mills Holmes &
Joseph M. Perillo eds., rev. ed. 1996).
382 OHIO STATE LAW JOURNAL [Vol. 64:371
courts even in the same jurisdiction will move to a new rule, others will find it ill
advised, or politically too soon. We still call those rules law, and we think of
them as law. The benchmark for comparison is not law in some ideal sense. The
ideal does not exist.
In another sense, the rules of the Restatements are very much the law before
a court even looks at any particular rule. Following Justice Holmes’s definition of
law (the law is simply a prediction about what a court will do),31 the Restatement
is a good predictor. Before a court makes a decision, then, the Restatement is law
simply because it is a good indicator of what the court will do. In that sense, it is
perhaps only a little different from actual precedent, which is itself a good (but far
from perfect) indicator of how a court will act. Both in the early days and
currently, the ALI itself promotes the idea that Restatements have a status similar
to judicial precedent. “Many Institute publications have been accorded an
authority greater than that imparted to any legal treatise, an authority more nearly
comparable to that accorded to judicial decisions.”32 Or, as the first Restatement
said, its sections could be regarded not only “as the product of expert opinion”
but “as the expression of the law by the legal profession.”33
All of which is to say that the Restatement itself makes up part of the
common law. Perhaps the first Restatement was not law when the ALI first
passed it. Then, no one could know how the courts would treat it.34 We know
now. And because the Restatements (as well as the UCC) are law, NCCUSL and
the ALI are legislatures—albeit private ones.
C. Political Economy in NCCUSL and ALI
The ALI and NCCUSL have been in the lawmaking business a long time,
and they now provoke a reasonably steady stream of scholarly criticism of the
sort ordinarily directed at more usual lawmaking bodies, namely public
legislatures and courts. One body of articles discusses how the ALI and
NCCUSL are subject to the same sort of political goings-on that we associate
with governmental legislatures. Scholars have uncovered the problems of
lobbying, special interests, and capture.35 Other scholars have sought to show
31 See supra note 1 and accompanying text.
32 See Am. Law Inst., About The American Law Institute, at http://www.ali.org/ali/
thisali.htm (last visited Apr. 13, 2003).
33 Introduction, supra note 25, at xii.
34 Cf. Clark, supra note 27.
35 See, e.g., Kathleen Patchel, Interest Group Politics, Federalism, and the Uniform Law
Process: Some Lessons from the Uniform Commercial Code, 78 MINN. L. REV. 83 (1993);
Edward J. Janger, Predicting When the Uniform Law Process Will Fail: Article 9, Capture and
the Race to the Bottom, 83 IOWA L. REV. 569, 584–88 (1998); Edward L. Rubin, Efficiency,
Equity and the Proposed Revision of Articles 3 and 4, 42 ALA. L. REV. 551, 586–92 (1991)
[hereinafter Rubin, Efficiency]; Edwin L. Rubin, The Code, the Consumer, and the Institutional
2003] PRIVATE LAWMAKING 383
how the ALI and the Uniform Law Commissioners are subject to the same sort of
political-scientific analysis that can be applied to other political bodies.36 Still
others have sought to defend the traditional notions about the relatively limited,
expert, apolitical role of the ALI and NCCUSL.37
These are important issues, but beside the point for the more fundamental
point pressed here. The thrust here is that the ALI and NCCUSL do make law, at
least in a practical sense. Whether ALI and NCCUSL are apolitical expert
altruists or shrewd political lawyers matters only if they are successful in their
lawmaking endeavors. If they enjoy only insignificant success, their nature is
insignificant. But as should be apparent now, their success has been highly
significant. In some areas of private law, their success has been pervasive.
Although they are not the only lawmakers, that hardly takes away from their
success. If the authoritative public decisionmakers like courts and state
legislatures follow the dictates of the ALI and NCCUSL, we have identified a de
facto source of law.
Structure of the Common Law, 75 WASH. U. L.Q. 11, 12, 67 (1997); Edward L. Rubin,
Thinking Like a Lawyer, Acting Like a Lobbyist: Some Notes on the Process of Revising UCC
Articles 3 and 4, 26 LOY. L.A. L. REV. 743, 781–87 (1993); Edward L. Rubin, Uniformity,
Regulation, and the Federalization of State Law: Some Lessons from the Payment System, 49
OHIO ST. L.J. 1251, 1253–61 (1989); see also Stephen M. Bainbridge, Independent Directors
and the ALI Corporate Governance Project, 61 GEO. WASH. L. REV. 1034, 1044–52 (1993);
Jonathan R. Macey, The Transformation of the American Law Institute, 61 GEO. WASH. L.
REV. 1212, 1216–31 (1993). Further authorities are collected in Henry Gabriel, The Revision of
the Uniform Commercial Code—How Successful Has It Been?, 52 HASTINGS L.J. 653, 659
n.18 (2001), and Fred H. Miller, Realism Not Idealism in Uniform Laws—Observations from
the Revision of the UCC, 39 S. TEX. L. REV. 707, 708 n.5 (1998).
36 See Schwartz & Scott, supra note 10; Robert E. Scott, Is Article 2 the Best We Can
Do?, 52 HASTINGS L.J. 677 (2001); see also Robert E. Scott, The Mythology of Article 9, 79
MINN. L. REV. 853 (1995); Robert E. Scott, The Politics of Article 9, 80 VA. L. REV. 1783,
1803–22 (1994); Scott, supra note 19; Robert E. Scott, The Truth About Secured Financing, 82
CORNELL L. REV. 1436, 1446–47 (1997); Clayton P. Gillette, Politics and Revision: A
Comment on Scott, 80 VA. L. REV. 1853 (1994) (refining this concept).
37 Peter A. Alces & David Frisch, On the UCC Revision Process: A Reply to Dean Scott,
37 WM. & MARY L. REV. 1217 (1996); Miller, supra note 35; A. Brooke Overby, Modeling
UCC Drafting, 29 LOY. L.A. L. REV. 645 (1996); Donald J. Rapson, Who Is Looking Out for
the Public Interest? Thoughts About the UCC Revision Process in the Light (and Shadows) of
Professor Rubin’s Observations, 28 LOY. L.A. L. REV. 249, 255–66 (1994); see also Peter A.
Alces & David Frisch, Commercial Codification as Negotiation, 32 U.C. DAVIS L. REV. 17
(1998); Iain Ramsay, The Politics of Commercial Law, 2001 WIS. L. REV. 565; Steven L.
Schwarcz, A Fundamental Inquiry into the Statutory Rulemaking Process of Private
Legislatures, 29 GA. L. REV. 909, 915–22 (1995) (suggesting how NCCUSL and ALI private
lawmaking could be reformed and constrained).
These three footnotes seem to divide the commentators into camps, but they do not always
fit neatly. I hope readers will not be confused and authors will not be offended, but this method
of rough division seemed more useful than lumping the articles into one string cite.
384 OHIO STATE LAW JOURNAL [Vol. 64:371
To be clear: I have not shown that all law is privately made, nor even that all
of the law of contracts and commercial transactions is privately made. Nor have I
shown that the law made by NCCUSL and the ALI is purely private, as formal
public intermediations by the legislatures or the courts are necessary. But I do
hope to have shown that a fair amount of law is privately made, and that there is
enough privately made law that we should care who is making it and how. Still,
we have only just begun to see how law is privately made. Private lawmaking
ranges far more widely.
III. SECURITIES MARKETS
Although reasonably well-known to scholars and practitioners of corporate
law, to most in the legal profession the rulemaking function of the securities
exchanges is less familiar than the work of the ALI or NCCUSL. The complexity
of private law in making the securities markets could easily justify extended
discussion, but the account here will be simplified. Even in outline the securities
markets provide a robust example of private lawmaking, including its potentially
competitive aspects. The historical aspects of the story also shed light on the
differences between the paradigm of the two-party contract, which is most
familiar, and the model of private lawmaking, which I argue below is more
descriptive and more accurate for the types of private ordering discussed in this
article.38 The account at this point leaves out the role of the Securities and
Exchange Commission (“SEC”); its power will be acknowledged below, where
the article suggests that the potential for government oversight detracts little from
the primary argument.39 The story begins with a group of brokers that became the
New York Stock Exchange.40
A. An Introduction: The New York Stock Exchange and
Its Competitors
For the first part of its existence, in the late eighteenth and nineteenth
centuries, the NYSE did not establish uniform or firm requirements for the
companies whose stocks it would list. The exchange did impose standards on the
companies that sought listing with the exchange, but the standards were variable,
even subject to dickering. The results of this negotiation between the exchange
and each issuer of securities were set down in the contract that constituted the
38 See also infra note 140 and accompanying text (discussing private ordering literature).
39 See infra Part V.C.1; infra note 190 and accompanying text.
40 See Bus. Law Comm. on Fed. Reg. of Sec., ABA, Special Study on Market Structure,
Listing Standards and Corporate Governance, 57 BUS. LAW. 1487 (2002). The explanation in
the text largely follows the Special Study. Because the study was unpublished at the time of
writing, subsequent citations are to sources published earlier.
2003] PRIVATE LAWMAKING 385
listing agreement.41 The listing requirements at that time are best understood
according to the contractual rather than the private-lawmaking paradigm because
they were negotiated and thus variable. A term that can be negotiated cannot even
be called a rule, much less a law. The same is true of listing standards. They were
simply matters of contract.
This state of affairs would not survive the nineteenth century, however. By
1900, contracts for listing on the NYSE required particular forms of financial
disclosure to the public, certain safeguards for investors, and annual reports to
shareholders. The twentieth century saw further evolution both of financial
disclosure requirements for listed companies and for standards of corporate
governance. Annual shareholders meetings were required in 1909, quarterly
earnings statements in 1923, and one-share/one-vote standards were in place by
1926.42 With the establishment of these uniformly applicable rules for listing
companies, the NYSE was shifting from being a contracting party to being a
private lawmaker. The rules could be enforced through fines or if necessary,
expulsion.43 The rules the NYSE made would directly affect (eventually)
thousands of companies and millions of investors.44 The indirect effects of these
rules are felt much more broadly, throughout the nation and the world, as our
economy bounds or fizzles in tandem with the stock market. As recent events
show only too well, standards for financial disclosure and corporate governance
are not matters of only academic and regulatory interest. The capitalization of
companies and of countries bears the harsh impact of these rules, their
enforcement, or their laxity.
The New York Stock Exchange, however, has been far from the only player.
From its inception in the mid-nineteenth century, the American Stock Exchange
(“Amex”)45 has sought to compete with the NYSE. One of the prime ways that it
has competed is in the requirements for listing on the exchange. Its early role was
to give companies a place to grow until they could meet the listing requirements
of the NYSE, which demands much larger companies.46 While the NYSE made
rules that applied to and affected thousands of companies and millions of
41 See Douglas C. Michael, Untenable Status of Corporate Governance Listing Standards
Under the Securities Exchange Act, 47 BUS. LAW. 1461, 1465–66 (1992).
42 See GILBERT W. COOKE, THE STOCK MARKETS 215–16 (1964); GEORGE L. LEFFLER,
THE STOCK MARKET 430 (1951); Michael, supra note 41, at 1467–68; Joel Seligman, Equal
Protection in Shareholder Voting Rights: The One Common Share, One Vote Controversy, 54
GEO. WASH. L. REV. 687, 693–98 (1986).
43 See HADFIELD, LESSONS, supra note 2, at 18.
44 See SEC. INDUS. ASSOC., SELECTED INDUSTRY STATISTICS, available at
http:/www.sia.com/reference_materials/pdf/keystats.pdf (last visited Apr. 13, 2003).
45 Originally, and well into the twentieth century, the Amex was called the New York
Curb Exchange.
46 The requirements actually sound in terms of revenues, capitalization, and the like. See
NEW YORK STOCK EXCHANGE MANUAL § 4300 (1999) [hereinafter NYSE MANUAL].
386 OHIO STATE LAW JOURNAL [Vol. 64:371
investors, the Amex did the same, but with different, more lenient rules. Other
exchanges and trading markets have performed, and currently perform, similar
functions, the Nasdaq now being the chief competitor for the NYSE.47 This is
competitive private lawmaking, a phenomenon that is of great importance to the
second half of this article.48 Here it is also worth noting that although competition
can be documented among securities exchanges, perfectly efficient markets
should not be assumed. The market in legal regimes, like other markets, can
sometimes suffer from market failures.49
B. The Self-Regulatory Misnomer
Despite the usual portrayal in the media, politics, and even statutes and
regulations, these markets are not aptly described as self-regulatory
organizations.50 The markets do not simply regulate themselves. More precisely,
those who make the rules, and even those whom the rulemakers at least
nominally represent, regulate the conduct of many entities other than themselves.
Consider the two currently predominant trading markets.
The NYSE is still a membership organization, and much of the power, if not
quite all, resides in the members of the organization (barring government
intervention).51 Simply speaking, the members traditionally have been those in
47 According to the most recently and readily available statistics, the NYSE lists about
3000 companies and the Nasdaq 5000 (plus another 1400 less capitalized companies or
“SmallCaps”). Amex now lists about 700. NYSE market capitalization was over $11 trillion in
February 2002 with dollar volume of about $800 billion. Nasdaq numbers were $2.5 trillion
and $681 billion. Amex dollar volume came in at $50 billion. The statistics are more
complicated than given here, but this picture is more than adequate for present purposes. See
Comparing Three Markets—NASDAQ, NYSE, and Amex, at
http://www.marketdata.nasdaq.com/mr_outline3.asp (last visited Mar. 18, 2003).
Further competition is already being felt from alternative trading systems or electronic
trading and communication networks. See generally Regulation of Alternative Trading
Systems, Exchange Act Release No. 34-40760, 1998 SEC LEXIS 2794 (Dec. 8, 1998);
Jonathan Macey & Maureen O’Hara, Regulating Exchanges and Alternative Trading Systems:
A Law and Economics Perspective, 28 J. LEGAL STUD. 17 (1999); see also Jonathan Macey &
Hideki Kanda, The Stock Exchange as a Firm: The Emergence of Close Substitutes for the New
York and Tokyo Stock Exchanges, 75 CORNELL L. REV. 1007 (1990). Potential consolidation
internationally could also affect competitive lawmaking in this area. See JOHN COFFEE,
COMPETITION AMONG SECURITIES MARKETS: A PATH DEPENDENT PERSPECTIVE (Columbia
Law Sch., Ctr. For Law & Econ. Studies, Working Paper No. 192, 2002), available at
http://papers.ssrn.com/abstract=283822) (discussing the potential for consolidation and
shrinkage through global and technological innovation).
48 See infra Parts VI, VII.
49 See Macey & O’Hara, supra note 47.
50 See, e.g., Securities Exchange Act of 1934 § 19(b)(2), 15 U.S.C. § 78s(b)(2) (2000).
51 See infra Part V.C.1.
2003] PRIVATE LAWMAKING 387
the business of trading in securities, such as brokerage houses. The members are
not, by and large, the companies who are listed or who want to be listed. Nor are
investors members.52 Until 1938 or so, the story ended there, and the members
could run their market as a private club—a system the members found congenial,
but that was hardly popular.53 Matters came to a head when in that year, in one of
its periodic and seemingly inevitable scandals, a Wall Street stalwart (a former
NYSE president!) was caught embezzling and was duly sent to Sing Sing.54 In
the aftermath of the scandal, a reformed constitution took some of the exchange
functions from members and assigned them to paid executives who were not
members. The new constitution also provided for some public representation on
the board of governors and enhanced representation for exchange members who
dealt with the public.55 Still, though, the power lies in members of the
exchange,56 and those members are investment bankers, dealers, and brokers, as
the Congress recognized even as it implemented so-called self-regulation.57 The
rules for who can be listed on the NYSE directly affect not only the members of
the exchange, but also companies who are listed, who want to remain listed, and
who would like to be listed. The Exchange regulates much more than itself.
Similarly, the Nasdaq, until recently, has been owned by the National
Association of Securities Dealers (“NASD”).58 As its name suggests, the NASD
is comprised of securities dealers.59 The NASD has not included, by and large,
52 Less simply, these bald statements have to be qualified for particular occasional firms.
For instance, some firms that own or control a membership on the exchange are listed on the
exchange (e.g., Citigroup). These instances are exceptional, however, and the basic point
remains. The vast majority of listed companies are not members of the exchange.
53 See WILLIAM O. DOUGLAS, DEMOCRACY AND FINANCE 64–66 (J. Allen ed., 1940); see
also LOUIS LOSS, FUNDAMENTALS OF SECURITIES REGULATION ch. 8C (2d ed. 1988). The
observations about private lawmaking are mine; Professor Loss stresses the idea of
“cooperative regulation” by both the SEC and the exchanges. See id.
54 The SEC investigation is published in three volumes, IN THE MATTER OF RICHARD
WHITNEY (1938).
55 See 4 SEC ANN. REP. 20 (1938); see also NYSE CONST. art. I, § 3(r), reprinted in 2
N.Y.S.E. Guide(CCH) ¶ 1003 (1984).
56 See NYSE CONST., art. IV, § 2, reprinted in 2 N.Y.S.E. Guide (CCH) ¶ 1153 (1984).
Although the board is divided between public members and industry members, the power of
election remains in the Exchange membership.
57 See S. REP. NO. 75-1455 at 3–4 (1938); H.R. REP. NO. 75-2307, at 4–5 (1938).
58 At the time of writing, the Nasdaq is going public. If this process is accomplished, the
situation in the text wil be altered, but not generically. One group wil still have the power to
govern many others, it appears, although the details are not set at present. See, e.g., J. Alex
Tarquinio, Why Nasdaq Sputters in Its Own Stock Sale, N.Y. TIMES, Nov. 10, 2002, § 3, at 6.
59 See Nat’l Ass’n of Sec. Dealers, Homepage, at http://www.nasd.com (last visited Apr.
13, 2003) (“[E]very securities firm doing business with the US public is a member of this
private, not-for-profit organization. . . . NASD registers member firms, writes rules to govern
their behavior, examines them for compliance and disciplines those that fail to comply.”).
388 OHIO STATE LAW JOURNAL [Vol. 64:371
the companies who are listed or who want to be listed. Nor does the NASD
include investors. To be sure, the NASD and the NYSE both have to take into
account the wishes and concerns of putatively listed companies and of the
investing public. Competitive pressure, if nothing else, would assure that. More
directly, the public enjoys some representation because of the organic reforms
instituted after the 1938 Whitney scandal.60 But the rules in the end are made by
one group and wind up governing much larger groups, and the members of those
larger groups enjoy limited representation, making them disproportionately
powerless. The difference between who the regulators are and whom they
represent, on the one hand, and those who are regulated, on the other, can be
measured in the millions. Neither the NYSE nor the Nasdaq is a self-regulatory
organization in this sense. They are private lawmakers.61
IV. A STEP FURTHER INTO THE PRIVATE REALM
The discussion so far has made some attempt at dispatch and brevity. The
ALI and the Uniform Law Commissioners, and to a lesser extent the securities
exchanges, provide a useful starting point for the argument because their role as
private legislatures is not startling. Yet the argument has barely begun. Groups
that are even more private than the ALI, NCCUSL, and the securities exchanges
show other ways that privately made rules become law. Let us start with a strident
if not exactly familiar example.62
60 See supra note 56 (on board composition and election).
61 On regulation by the markets that affects investors, for better or worse, see, for
example, George J. Benston, Regulation of Stock Trading: Private Exchanges vs. Government
Agencies, 83 VA. L. REV. 1501 (1997); John C. Coffee, Jr., The Rise of Dispersed Ownership:
The Roles of Law and the State in the Separation of Ownership and Control, 111 YALE L.J. 1
(2001); Daniel R. Fischel, Organized Exchanges and the Regulation of Dual Class Common
Stock, 54 U. CHI. L. REV. 119 (1987); David A. Lipton, The SEC or the Exchanges: Who
Should Do What and When? A Proposal to Allocate Regulatory Responsibilities for Securities
Markets, 16 U.C. DAVIS L. REV. 527 (1983); Paul G. Mahoney, The Exchange as Regulator,
83 VA. L. REV. 1453 (1997); Michael, supra note 41; Sam Scott Miller, Self-Regulation of the
Securities Markets: A Critical Examination, 42 WASH. & LEE L. REV. 853 (1985); and Adam
C. Pritchard, Markets as Monitors: A Proposal to Replace Class Actions with Exchanges as
Securities Fraud Monitors, 85 VA. L. REV. 925 (1999). See generally CAROLINE M. BRADLEY,
TECHNOLOGY, DEMUTUALISATION AND STOCK EXCHANGES: THE CASE FOR CO-REGULATION
(Soc. Sci. Research Network, Working Paper No. 312157, 2002), available at
http://papers.ssrn.com/abstract=312157; Adam C. Pritchard, Self-Regulation and Securities
Markets, REGULATION, Spring 2003, at 32, available at http://www.cato.org/pubs/regulation/
regv26n1/pritchard.pdf (comparing securities exchanges’ and government’s incentives to
regulate securities markets).
62 The example is not familiar, but it is not unknown. See Stephan, supra note 10, at 701,
714–16; White, supra note 1, at 189. Even less known is the private lawmaking world of
BOLERO, which has sought to bring bills of lading into the electronic realm. See RONALD J.
MANN & JANE K. WINN, ELECTRONIC COMMERCE 297–300 (2002). Here I would like to
2003] PRIVATE LAWMAKING 389
A. Letters of Credit and the International Chamber of Commerce
Many of the most important rules that govern letters of credit are made by the
International Chamber of Commerce, which is a private organization that to
normal Americans is largely inaccessible. One court has explained the view of
one plaintiff-citizen, for whom the ICC was something approaching Oz.63
Regardless of whether any ordinary citizen can actually find it, its role as maker
of rules for letters of credit is virtually indisputable. To understand the importance
of these rules, a little background is necessary.64
Commercial letters of credit are typically issued by banks when the parties to
a contract are unwilling to extend enough credit to each other to complete a
transaction. In the modern world, this scenario is common. We no longer live in
the days (if they ever existed) when commercial sales were expected to involve a
simultaneous exchange. Now at least, either the seller must ship the goods before
receiving payment, thus extending credit to the buyer, or the buyer must prepay
and thus extend credit to the seller. In many contexts, and especially
internationally, the parties are not willing. A letter of credit solves the problem
and allows the transaction to take place.
In a simple case, the buyer’s bank issues the letter of credit to the seller. This
“credit” (as it is called, shorthand) obligates the bank itself to pay the seller. The
bank will only pay, however, if the seller presents documents from a carrier (e.g.,
a ship line) proving that the goods have been shipped, and perhaps even an
inspection certificate from a third party attesting to the quality of the goods. The
seller feels safe because it has the payment commitment of a bank, and the buyer
feels safe because the bank will not give out any money—ultimately, the buyer’s
money—unless the necessary documents are presented. The buyer simply
stipulates beforehand what documents will provide adequate reassurance, and
these documents will be required by the terms of the letter of credit.
acknowledge a more general intellectual debt to RONALD J. MANN, PAYMENT SYSTEMS AND
OTHER FINANCIAL TRANSACTIONS: CASES, MATERIALS, AND PROBLEMS (1999); the way that
some of the material is presented in his coursebook and teacher’s manual prompted me to begin
thinking about the conceptions put forward in this article.
63 See Brower v. Gateway 2000, Inc., 676 N.Y.S.2d 569, 571 (App. Div. 1998) (“[E]fforts
to locate and contact the ICC had been unsuccessful and that apparently the only way to attempt
to contact the ICC was through the United States Council for International Business, with
which the ICC maintained some sort of relationship.”). It should be admitted that the ICC does
have a web site that is not particularly hard to find. A Yahoo search for “international chamber
of commerce” on February 15, 2002, turned up the correct site (iccwbo.org) as the first match.
On the other hand, the web site lists contact information that is almost entirely European, with
“general enquiries” to be directed to Paris. See Int’l Chamber of Commerce, Contact Us, at
http://www.iccwbo.org/home/intro_icc/contact_us.asp (last visited April 14, 2003).
64 SeeMANN, supra note 62, at 215–42.
390 OHIO STATE LAW JOURNAL [Vol. 64:371
Unsurprisingly, the scenario is usually more complicated from the standpoint
of the law, although the complicated structure is meant to ease and simplify the
transaction for the buyer and seller. Consider even the paradigmatic sale of
corn,65 brought into an international context, where simultaneous exchange is
impossible. Assume that the buyer is in China and is unknown to the seller. The
buyer’s bank (say, the Hong Kong Commerce Bank)66 may also be
untrustworthy or unknown to the seller (say, an industrial resident of Gary,
Indiana). The seller might not be much more willing to trust the Hong Kong
Commerce Bank to pay than the buyer itself. If that were the case, a confirming
bank (say, J.P. Morgan Chase in New York) would be included. Hong Kong
Bank, acting on behalf of its customer (the buyer), could engage J.P. Morgan to
confirm the credit without too much difficulty or even too much cost, although
there would certainly be a fee.67 The seller would trust J.P. Morgan to pay. The
last link is that if J.P. Morgan lacks any branches in or near Gary, it engages the
Third Indiana Bank68 to advise the seller of the credit.
This simple sale of corn to an overseas buyer now involves five parties and
the publicly made law of several jurisdictions. The transaction could keep cadres
of Wall Street lawyers busy documenting the transaction for a long while. Yet no
decent Wall Street lawyer would need to spend much time on this transaction. It
can easily be ordered from a legal menu available at the bank.69 To the buyer and
the seller, this process should be simple, and it is pretty simple. The law’s job is to
take care of the complexity, and it does. Its job is two-fold: it has to specify the
fundamentals to make sure the transaction accomplishes its purpose, and it has to
assure that the terms of the credit are understandable. Across countries and
cultures, this task is daunting.
The interesting part is the source of this law.70 It is contained in the
International Chamber of Commerce Uniform Customs and Practice for
65 See Morton v. Lamb, 101 Eng. Rep. 890 (K.B. 1797).
66 I have made up the Hong Kong Commerce Bank for purposes of this explanation. So
far as I know, no such bank exists.
67 An American bank that confirms a credit issued by an ordinary bank in a reasonably
stable country would charge a fee ranging from 1/20 to 1/10 of 1% per calendar quarter that the
credit was outstanding, although conversations with bankers and businesses suggest that those
fees can vary considerably. An advising bank typically charges a small fee, such as $75. See
MANN, supra note 62, at 220–21.
68 I have made up this bank as well.
69 The bank forms may well have been drafted by the Wall Street lawyers. But because
this transaction is standard, and because of the rules discussed in this section, the drafting is
simple and need not start from scratch. Moreover, the cost of the forms can be spread over
many transactions.
70 MANN & WINN, supra note 62, at 295.
2003] PRIVATE LAWMAKING 391
Documentary Credits (“UCP 500”).71 Virtually all letters of credit incorporate it
by reference. Each letter of credit will have at least three parties (i.e., buyer, seller,
and issuing bank), but more parties would be common, for the reasons explained
above. Aside from those involved in the issuance and negotiation72 of the credit
itself, more are involved when the essential other documents are included.
Consider the transport companies and ocean lines that issue bills of lading. These
parties vary geographically as well as in sophistication, class, and presumably
politics. Yet all of these players—numbering in the hundreds of thousands, if not
millions—will have their conduct governed by the forty-nine articles of the UCP,
none of which was ever put before a legislature.
One striking characteristic of these transactions is the claim—implicit in the
assertion above that the UCP is the most important source of law—that the UCP
is more the law of letters of credit than UCC Article 5, which also purports to
govern letters of credit. A few reasons explain this claim. Most generally and
most simply, much of Article 5 is made up of default rules, which become
irrelevant if the parties so agree (e.g., by incorporating the UCP as a matter of
contract).73 Someone might object that the current Article 5 was expressly
designed to mesh well with the UCP74 and therefore will not be displaced often
by mere incorporation of the UCP into a letter of credit. Yet the objection proves
the point: as a matter of practice, the legislation—which itself originates in
privately made legislative rules, devised by the ALI and NCCUSL—molds itself
to the (practically speaking) higher authority of the UCP. The UCP has led the
way, and as the reporter for UCC Article 5 has acknowledged, in case of conflict
other concerns had to yield to the banks, and their UCP.75
The claim that the UCP is more the law than is Article 5 was even stronger
until quite recently because of a New York peculiarity. New York is the most
71 The UCP is a sixty-page pamphlet (including a few pages of ads) measuring roughly
four-by-eight inches and available from the author-cum-publisher for $14.95, plus shipping and
handling. Informal conversations with experts suggest that international letters of credit
incorporate the UCP at percentages in the high nineties; purely domestic credits are in the lower
nineties. See Ross P. Buckley, The 1993 Revision of the Uniform Customs and Practice for
Documentary Credits, 28 GEO. WASH. J. INT’L L. & ECON. 265 (1995) (95%) (citing PAUL
TODD, BILLS OF LADING AND DOCUMENTARY CREDITS vii (1990)); Sandra Stern, New York
Enacts Revised Article 5 for UCC, N.Y. L.J., Oct. 4, 2000, at 1 (“well over 90 percent”); James
G. Barnes, Internationalization of Revised UCC Article 5 (Letters of Credit), 16 NW. J. INT’L L.
& BUS. 215, 216 (1995) (“substantially all cross-border commercial letters of credit”).
72 Issuance and negotiation are explained in more detail in INT’L CHAMBER OF
COMMERCE, UNIF. CUSTOMS AND PRACTICE FOR DOCUMENTARY CREDITS arts. 2 (“meaning of
credit”), 9 (“liability of issuing and confirming banks”), and 10.b.ii (meaning of negotiation)
(1993) [hereinafter UCP 500].
73 See U.C.C. § 5-103(c) (2001). Default rules and their role are explained further infra
Part V.A.3.
74 See U.C.C. art. 5 (prefatory note) (2001).
75 See White, supra note 1.
392 OHIO STATE LAW JOURNAL [Vol. 64:371
important American jurisdiction for letters of credit since it is the foremost
financial center in the country and a well-established leader in commercial law. In
fact, the terms according to which the dominant New York banks would confirm
letters of credit were the origin of the UCP.76 The reason that UCP dominance
was so clear was that Article 5 in New York did not apply at all if the parties
incorporated the UCP,77 which they do almost all of the time.78 Almost always,
then, the UCP applied to the transaction and the UCC did not. The result is no
longer as stark because revised Article 5, now in New York as elsewhere, applies
when the parties adopt the UCP. Still, the bottom line is much the same. To the
extent that the provisions of the UCP displace Article 5, the UCP governs.79 In
letters of credit, the UCP is more “the law” than Article 5.
To get a flavor for how the UCP matters in real transactions and real disputes,
consider the tasks the drafters of UCP 500 undertook. Several problems had
arisen under the regime of UCP 400. Many, and possibly most, presentations
under letters of credit (i.e., sellers presenting documents in order to get their
money) were rejected because the documents did not strictly comply with the
requirements of the credit.80 As the UCP working group acknowledged, this fact
would not only diminish the commercial usefulness of letters of credit but could
76 See id. at 189–90.
77 See, e.g., E & H Partners v. Broadway Nat’l Bank, 39 F. Supp. 2d 275 (S.D.N.Y.
1998).
78 See supra note 71.
79 See N.Y. U.C.C. LAW § 5-103 & cmt. 2 (McKinney 2001) (effective Nov. 2000). It
should be noted that the UCP does not govern certain issues and gives incomplete guidance on
others, including fraud. Where the UCP does not resolve the issue, courts have to look to
Article 5 or other sources of law. See Mid-America Tire, Inc. v. PTZ Trading Ltd., 768 N.E.2d
619 (Ohio 2002); see also James G. Barnes & James E. Byrne, Letters of Credit: 2000 Cases,
56 BUS. LAW. 1805, 1811–12 (2002).
Under the revision, a few issues governed by Article 5 are not subject to variation by
agreement. See U.C.C. § 5-103(c) (2001). But these are not issues contradicted by the UCP
anyway and in any event are unlikely to raise much of an issue. Part of the point of revising
Article 5 was to assure its consonance with the UCP. See UCC art. 5 (prefatory note); White,
supra note 1. The invariability applies: to some conceptual definitions, variation of which
would change the nature of the transaction from a letter of credit to something else (which can
be done without any problem, just so long as the thing does not purport to be a letter of credit);
to a rule preventing issuance of a credit that remains in force in perpetuity; and to a rule
requiring reasonable consent to an assignment of proceeds in certain circumstances. The last of
these could raise an issue, but the parties’ ability to define reasonableness—so long as the
definition is not manifestly unreasonable—dulls any teeth such a rule might otherwise have.
See U.C.C. § 1-302(b) (2001) (formerly § 1-102(3)).
80 UCP 500, supra note 72, at 4 (“Some surveys indicate that approximately fifty per cent
of the documents presented under the Documentary Credit are rejected because of
discrepancies or apparent discrepancies.”); see also Ronald J. Mann, The Role of Letters of
Credit in Payment Transactions, 98 MICH. L. REV. 2494, 2495 n.3 (2000) (collecting
authorities citing discrepancies in 50% to 70% of presentations).
2003] PRIVATE LAWMAKING 393
have an important financial impact on the parties. Put more simply, if the chances
are that the bank will not in fact pay—which is the crucial function of the letter of
credit—then the viability of the product is seriously undermined, and the
beneficiary-cum-seller might find itself holding the (empty) bag.81 This situation
coincided, unsurprisingly, with a “marked increase in litigation” involving letters
of credit.82 The UCP was partially at fault for this situation, if only by error of
omission, and UCP 500 seeks to “list, in detail, the elements of acceptability for
each category of transport document.”83
Although the UCP is sometimes considered nothing more than a guide to
international banking practice, it is much more. To see how the UCP is privately
made law rather than simple custom, consider not only the dynamic of the
problem just explained but also another development in UCP 500: the definition
of negotiation. The meaning of negotiation was an important and controversial
issue in the last revision of the UCP, the dispute resting on whether a negotiation
should require giving value, now required by UCP 500, as opposed to examining
documents and passing the credit to the next bank in the chain. Money-center
banks on the coasts, which typically do give value before passing the credit along,
won the debate. At stake was the ability to charge fees for negotiation, which the
midwestern banks were doing without advancing any money.84 This was not a
descriptive process of redacting banking custom; it was a legislative process by
which some banks made the rules of the game for their gain (and the loss of
others).85
Perhaps the most salient reason that the UCP ought not be considered mere
usage of trade is that it is not sufficiently known to all of the players in the
transaction. To be a usage of trade, a practice must be so regularly followed as to
81 Mann, supra note 80, at 2498, 2521–33 (questioning whether letters of credit serve the
conventionally conceived function and suggesting that they may fulfill a signaling function); cf.
Jacob I. Corré, Reconciling the Old Theory and the New Evidence, 98 MICH. L. REV. 2548
(2000); Clayton P. Gillette, Letters of Credit as Signals, 98 MICH. L. REV. 2537 (2000); Avery
Wiener Katz, Informality as a Bilateral Assurance Mechanism, 98 MICH. L. REV. 2554 (2000).
82 See UCP 500, supra note 72, at 4.
83 Id.
84 Telephone Interview with Boris Kozolchyk, United States Council on International
Banking, Inc. (July 16, 2002) (the sole American member of the Working Group for UCP 500);
see also DOCUMENTARY CREDITS: UCP 500 AND 400 COMPARED—AN ARTICLE-BY-ARTICLE
ANALYSIS (1993) (ICC Publication No. 511) (offering a more in-depth analysis); Boris
Kozolchyk, Towards New Customs and Practices for Documentary Credits: The Methodology
of the Proposed Revision, in 1993 COMMERCIAL LAW ANNUAL; Boris Kozolchyk, The “Best
Practices” Approach to the Uniformity of International Commercial Law: The UCP 500 and
the NAFTA Implementation Experience, 13 ARIZ. J. INT’L & COMP. L. 443 (1996), reprinted in
MAKING COMMERCIAL LAW: ESSAYS IN HONOUR OF ROY GOODE 357 (Ross Cranston ed.,
1997).
85 Cf. Lisa Bernstein, The Questionable Empirical Basis of Article 2’s Incorporation
Strategy: A Preliminary Study, 66 U. CHI. L. REV. 710, 740–41 (1999).
394 OHIO STATE LAW JOURNAL [Vol. 64:371
justify an expectation that it will be followed in the transaction in question.86
Courts have often refused to visit a usage of trade of one industry on a party who
is not part of that industry.87 The buyer and seller may be unfamiliar with the
customs of international banking, and there is no reason to expect them to be.
Tellingly, the banks do not rely on a usage of trade argument. Rather than
suggesting that the UCP is ipso facto part of the agreement as a usage of trade
(which is automatically included in agreements governed by the UCC),88 the
banks incorporate them expressly.
In the end, the rules privately made by the ICC Banking Commission have a
direct impact on everyone who uses commercial letters of credit, or who is
affected by them (like transport companies, ocean lines, and express services)—a
vast proportion of those involved in international trading, and even some
domestic trading. The device through which these rules become law are
thousands or millions of contracts that incorporate unprinted contract terms. A
nice aspect of this example of privately made law is that the UCP is incorporated
so pervasively that we can see it as something appropriately called law, rather
than the particular and peculiar terms that two contracting parties happened to
include in their agreement. Since the rules of the UCP are almost always the legal
rules applicable to letters of credit, they are every bit as much law as are statutory
enactments that are indisputably called law.
Admittedly, the law of letters of credit is a small area of the varied landscape
of commercial lawmaking, and comparatively an even smaller area of the vast
world of lawmaking in general. But it is just an example—a salient one, because
of the availability of statistics about the nearly universal rate of UCP
incorporation by contract. Still, letters of credit are not the heart of the
commercial world, and Article 5 is not the best-known beauty of the UCC family.
We are only at the beginning, though. Other work is beginning to show that the
famous heart of the Code, Article 2 (on sales) is becoming irrelevant as more and
more actors opt into privately devised legal regimes.89 That is work for other
articles. The same phenomenon is demonstrated perhaps even more widely in the
rules that govern the checks written by the bulk of American society.
86 See U.C.C. § 1-303(c) (2001) (formerly § 1-205(2)).
87 See, e.g., Coregis Ins. Co. v. Fleet Nat’l Bank, 793 A.2d 254, 259–60 (Conn. App. Ct.
2002) (Peters, J.); Oil Ins. Ass’n v. Royal Indem. Co., 519 S.W.2d 148, 150 (Tex. App. Ct.
1975).
88 See U.C.C. § 1-201(b)(3) (2001) (formerly § 1-201(3)).
89 See Scott, supra note 19, at 1012 (“[L]arge numbers of commercial parties have opted
out of the sales provisions of the Code.”) .
2003] PRIVATE LAWMAKING 395
B. Rules for Checks and the Abdication of Legislation
The rules for checks directly affect almost everyone. Some people may get
along without checks, but they are few. Predictions of the check being obviated
by plastic or electronic means of payment are still awaiting fulfillment.90 This
section shows how the rules that govern checks are privately made. The example
is particularly helpful because it shows multiple facets of private lawmaking. In
this instance, we can see how what eventually became legislation started as rules
formulated by banks, as well as how those rules were eventually codified by a
private legislature, and finally passed into legislation. In addition, this example
shows a peculiar abdication of legislation, which bows humbly to bankers’
preferences.
The tale of the check laws begins with the pre-UCC rules of banks for
dealing with checks. Before the 1960s, the Negotiable Instruments Law, which
had been approved by NCCUSL in 1896 and was eventually adopted by all fortyeight
states,91 contained some rules pertaining to checks, which are negotiable
instruments. But the NIL was about negotiable instruments in general, which
include certain promissory notes and drafts other than checks. The NIL did not
regulate many of the myriad issues pertaining particularly to checks (like the
details of the check collection process). For the most part, rules on checks
particularly were contained in rules adopted by the American Bankers
Association (“Bankers”).92 When the UCC achieved widespread adoption
starting in the 1960s, Article 3 of the UCC replaced the NIL and Article 4 of the
UCC replaced the Bankers’ check collection rules. After UCC adoption, we
indisputably have a statutory law of negotiable instruments (UCC Article 3) and
checks (UCC Article 4), although as argued above, that law was privately
made.93
Before UCC adoption, the same transactions and issues were governed by
more or less the same rules, except that the law of negotiable instruments
(including checks and other instruments) was contained in a statute and the law of
90 In 1999 less than 20% of consumer spending was by credit card. See United States v.
Visa U.S.A., Inc., 163 F. Supp. 2d 322, 334 (S.D.N.Y.), modified, 183 F. Supp. 2d 613
(S.D.N.Y. 2001).
91 See Gregory E. Maggs, The Holder in Due Course Doctrine as a Default Rule, 32 GA.
L. REV. 783, 784 (1998).
92 American Bankers Association is not abbreviated here by the usual “ABA” acronym
because of the potential for confusion with the American Bar Association, which also functions
as a private lawmaking body in ways beyond the scope of this Article (e.g., the making of
ethics rules that affect not only the conduct of lawyers but the kind and quality of legal services
available to the public). See generally Ted Schneyer, Special Issue: Institutional Choices in the
Regulation of Lawyers, 65 FORDHAM L. REV. 33 (1996).
93 See supra Part II.A.
396 OHIO STATE LAW JOURNAL [Vol. 64:371
checks was contained in rules made by an industry association, which were then
adopted by statute in a number of jurisdictions.94 The adoption of UCC Article 4,
which in the end was essentially a “refurbished version” of the Bankers’ rules,95
simply brought more uniform adoption to the Bankers’ rules. If we call Article 4
law now, we should recognize that the Bankers’ rules were law then. The only
difference between the two is that the status of Article 4 as uniform legislation
displaced the status of the Bankers’ rules, which were originally matters of
custom and contract (and thus subject to displacement by common law
decisionmaking) until being enshrined in statute.96 As explained in more detail
below,97 being on a lower rung in the legal hierarchy detracts little from the status
of the Bankers’ rules as law. And more importantly, as a matter of fact, the
current equivalent of the Bankers’ rules do not occupy a lower rung.
The current equivalent of Bankers’ rules are higher in the hierarchy because
of a remarkable provision in Article 4 that perhaps is evidence of its former
existence as privately made contractual rules. (They are now privately made
legislative rules, as those terms are defined in Part I.) Article 4 gives associations
of banks the power to preempt almost anything they want. Understanding the
doctrine behind this point requires several statutory steps, but they are worth the
trouble.
Most of the steps are unremarkable. Section 4-103 begins by allowing the
rules of Article 4 to be varied by agreement.98 This rule is unsurprising; much
commercial law consists of default rules.99 The interesting part comes in
subsection (b). “Federal Reserve regulations, operating circulars, clearinghouse
rules and the like have the effect of agreements . . . whether or not specifically
assented to by all parties interested in items handled.”100 Ignore the part about the
Federal Reserve regulations; the significance comes in giving “clearinghouse
94 See generally Hal S. Scott, The Risk Fixers, 91 HARV. L. REV. 737 (1978).
95 See Rubin, Efficiency, supra note 35, at 555; see also Kerry Lynn Macintosh, Liberty,
Trade and the Uniform Commercial Code: When Should Default Rules Be Based on Business
Practices?, 38 WM. & MARY L. REV. 1465, 1523 (1997).
96 See Scott, supra note 94, at 739–62.
97 See infra Part V.C.1.
98 Here is the full text of U.C.C. § 4-103(a)–(b) (2001):
(a) The effect of the provisions of this Article may be varied by agreement, but the
parties to the agreement cannot disclaim a bank’s responsibility for its lack of good faith
or failure to exercise ordinary care or limit the measure of damages for the lack or failure.
However, the parties may determine by agreement the standards by which the bank’s
responsibility is to be measured if those standards are not manifestly unreasonable.
(b) Federal Reserve regulations and operating circulars, clearinghouse rules, and the
like have the effect of agreements under subsection (a), whether or not specifically
assented to by all parties interested in items handled.
99 Default rules are discussed in more detail infra Part V.A.3.
2003] PRIVATE LAWMAKING 397
rules and the like”101 legally binding force when not all of the parties have agreed
to them.102
To see the power given to the banks, let us move beyond law to fact. The
New York Clearing House Association (the “Clearing House”) is a group of a
few of the nation’s largest banks.103 A quick glance at the list will probably
suggest that no democratic or republican election was involved in constituting the
Clearing House, unless the constituency were a select and unusual group. In fact,
“minimal publicity” for the group is a characteristic deemed worthy of touting.104
Yet this group makes some of the most important clearinghouse rules, and those
rules will affect when people get their money and will also affect questions of
liability on issues such as stop-payment orders, checks returned for insufficient
funds, check-kiting, and so on.105 The Clearing House operates one of the largest
clearinghouses in the country and has the ability to expand to cover the nation.
Of course, practically none of the individuals or companies whose checks are
cleared through the Clearing House know anything about the Clearing House or
its rules. Nor would they suspect that the rules made up by its constituent banks
have the force of law. Perhaps not everyone will be affected by the rules of the
New York Clearing House Association. Many, if not most people, will be
governed by other clearinghouse rules, depending on where the check is going to
or coming from. That does not matter. Whatever the regional clearinghouse
association is, it will likely be made up of reasonably prominent banks. The banks
will make the rules that govern not only themselves, but also their relations with
their customers and even those who are not their customers, but whose checks
pass through the system. The clearinghouse rules will affect all check-writers,
who have no say in the rulemaking.106 Here, privately made rules do not become
100 U.C.C. § 4-103(b) (2001).
101 Id.
102 Article 4A contains a similar but less strident rule. See U.C.C. § 4A-501(b) (2001).
Article 4A, which governs certain wire transfers of money, has much narrower applicability
and limits the direct effect of system rules to consenting parties. See id. §§ 4A-102 to -104, 4A-
108, 4A-501(b).
103 See The N.Y. Clearing House Ass’n, Our Board, at http://www.theclearinghouse.org/
board.htm (last visited Apr. 13, 2003) (listing its owner banks as: ABN AMRO; Bank of
America, N.A.; The Bank of New York, Bank One, N.A.; Citibank, N.A.; Deutsche Bank Trust
Company Americas; Fleet National Bank; HSBC Bank U.S.A.; J.P. Morgan Chase Bank;
Wachovia Bank, N.A.; and Wells Fargo Bank, N.A.).
104 See id.
105 See id.
106 Perhaps one might qualify this statement by saying that customers can vote with their
feet, that is, the market endows bank customers with the power if not the right of democracy.
Such arguments will be explored further below, but in any event, they seem weak in this
context because the oligarchic power of the clearing house, be it NYCHA or a local clearing
house, will be practically inescapable for any check-writer.
398 OHIO STATE LAW JOURNAL [Vol. 64:371
law through actual agreement or contract. They are made law by the fiat of
section 4-103(b).107
C. Credit Card Associations
Our society thrives on credit, and the credit industry attempts to entice
consumers into more of it billions of times a year. The rules on credit extension
implicate the purchasing decisions of millions of American consumers.108 Less
often noticed, the rules of the credit card industry also affect millions of
merchants, including businesses large and small. Just as the credit card issuers
send millions of direct-mail solicitations to consumers, the credit card processors
(which may be the same banks) engage representatives to sign up merchants to
accept credit cards.109 The rules privately made by the Visa and MasterCard
associations thus affect millions of consumers and merchants and regulate
thievery, embezzlement, fraud, and the viability of Internet purchasing. They
determine cardholder liability for unauthorized use of credit cards, and they
impose rules on merchants, establishing when it is worth trying to prevent
unauthorized use and when it is not. These rules pervade our economy, and not
only our economic society, but our social one. Of course, the rules are made by
associations of banks that issue credit cards.
Very recently, the power of credit card associations has received a modicum
of notoriety because of two lawsuits, both of them sounding in antitrust,110 as
107 U.C.C. § 4-103(b) (2001). Credit for exposing the dynamics behind the payments
articles in particular, and the UCC more generally, should probably go to Ed Rubin, see supra
note 35 (citing sources); Frederick K. Beutel, The Proposed Uniform [?] Commercial Code
Should Not Be Adopted, 61 YALE L.J. 334, 360 (1952).
As acknowledged below, Article 4 as state statutory law is subject to preemption by
federal law, as has occurred to a limited extent in the field of check collection. See Expedited
Funds Availability Act, 12 U.S.C. §§ 4001–4010 (2000); see also Regulation CC, 12 C.F.R. pt.
229. See generally infra Part V.C.1.
108 See Trans Union LLC v. Fed. Trade Comm’n, 536 U.S. 915 (2002) (Kennedy, J.,
dissenting).
109 See E-mail from Charles N. Curry, Esq., Shannon, Gracey, Ratliff & Miller LLP, to
author (July 29, 2002) (on file with author); see also, e.g., Rodney Ho, Credit-Card Use to
Finance Business Is Soaring, Says Survey of Small Firms, WALL ST. J., Sept. 25, 1997, at B2
(detailing the sometimes neglected small businesses that use credit card debt for financing).
110 One of the cases is reported. See United States v. Visa U.S.A., Inc., 163 F. Supp. 2d
322 (S.D.N.Y.), modified, 183 F. Supp. 2d 613 (S.D.N.Y. 2001); see also David A. Balto &
Brian K. Grube, The VISA-MasterCard Decision and Its Implications for High Tech Markets,
57 BUS. LAW. 1313 (2002). The credit card associations have appealed, though the Justice
Department has not. See Brief for the United States at 1–5, United States v. Visa U.S.A., Inc.
(2d Cir. June 28, 2002) (No. 02-6074(L)) (page-proof version). The appeal is pending at the
time of writing, and the district court has stayed its order in the meantime. See United States v.
Visa U.S.A., Inc., 2002-1 Trade Cases P73,586, 2002 WL 638537, at *2 (S.D.N.Y. Feb. 7,
2003] PRIVATE LAWMAKING 399
well as the attempt to change the bankruptcy laws. Although the details of the
suits are not of immediate concern here,111 they do provide a helpful amount of
information about how the credit card industry regulates itself—and a fair
segment of the rest of society. As the facts show in United States v. Visa U.S.A.,
the rules of the Visa and MasterCard associations govern the conduct of
thousands of banks, which in turn impose corresponding rules on cardholders and
the merchants who accept the cards.
Four companies dominate the market for credit and charge cards:112 Visa,
MasterCard, American Express, and Discover. Visa and MasterCard are joint
ventures, each comprised of thousands of banks that issue the cards. American
Express is a publicly owned company, and Discover is owned by Morgan Stanley
Dean Witter.113 Visa and MasterCard will be the focus here, largely because
more information is available about them.114
Put simply, Visa and MasterCard make rules that apply to their member
banks. If the member banks do not follow the rules, they will be penalized and
could be ejected from the association,115 depriving them of the ability to
participate in the extremely profitable Visa or MasterCard product (the profit
margin being about 26%).116 The member banks, assuming they remain in good
standing, issue cards to cardholders or make agreements to work with merchants
who accept the cards, or both. In its role of making cards available to consumers,
a bank is an “issuer.” In its role of working with a merchant, a bank is a
2002). The other case has not yet reached a judgment but is currently pending in the United
States District Court for the Eastern District of New York. See, e.g., John R. Wilke, Debit-Card
Suit Now Can Proceed as Class-Action, WALL ST. J., June 11, 2002, at A2.
111 Some of the antitrust issues, however, are discussed further infra Part VII.D.
112 Credit cards allow the cardholder to pay only part of the balance each month, while
charge card statements must be promptly settled in full. See Visa, 163 F. Supp. 2d at 331.
113 See id. at 327.
114 The kind of information about the credit card industry required for this article is
difficult to find. The two antitrust suits have made a fair amount of information public, although
it often only hints at the facts important for present purposes. To the extent possible, I have tried
to note information from the published decision in the Visa case. I have also relied on the
helpful but relatively general account available in MANN, supra note 62, ch. 2, assgt. 7, as well
as a few secondary articles. Much important information is closely guarded, kept as a trade
secret. Some of it I have uncovered through interviews with sources in the credit card industry,
both on the bank side and on the merchant side. Although the information presented here is not
proprietary or confidential, these sources could be compromised by publication of their names
or affiliations. Because of the need for scholarly assessment, however, I would welcome
inquiries from interested scholars who need more information about these sources. Sources
included lawyers or former lawyers for a major issuing and acquiring bank (one of the banks
listed supra note 103, acting through affiliates), and for a credit card association; as well as
merchants and an expert consultant to merchants.
115 See Visa, 163 F. Supp. 2d at 329, 332, 385.
116 See id. at 336.
400 OHIO STATE LAW JOURNAL [Vol. 64:371
“merchant bank” or “acquiring bank.” The rules establish fees for using the credit
card system, which processes transactions, checks authorizations, and the like.
The fees are collected largely through a “merchant discount” or “interchange
fee,” which is collected from the merchant who accepts the card. When the
merchant sends the transaction through, the merchant actually receives only
ninety-eight percent of the total amount, on average. The rest is split between the
merchant bank, which keeps about 0.6% for its services and allows the issuing
bank to keep the remaining 1.4%.117 In addition to the discounts, merchants must
also pay a small, flat per-transaction fee.118 The discounts, which can be varied
for different transactions and/or different merchants, are an important mechanism
for governing merchant conduct.
By rule, the credit card associations used to prohibit the use of credit cards in
remote transactions. A generation ago, mail and telephone orders119 could not use
Visa or MasterCard. The rule was thought necessary to prevent fraudulent
transactions, since by mail or telephone the cardholder would not be present, and
at least in some instances would not be able to provide a signature. More recently,
the credit card associations have allowed merchants to accept credit cards in
remote transactions, but the merchant must both pay an increased merchant
discount and accept the risk of a fraudulent transaction—a risk that is ordinarily
borne by the issuer.120 This rule both makes remote transactions possible and
makes them more expensive. Some of this expense is passed from the merchant
to the consumer.121
Other rules require merchants to follow particular security procedures, and
the rules establish fines—and they are indeed called “fines”—for violations of the
rules. Internet payment security is dominated by the credit card rules.122 The level
of security is set by these rules; a certain amount of security is provided,123 but
higher security has been foregone.124 In any event, the merchants must follow the
rules, and serious misconduct will result in the revocation of their ability to accept
the card. That penalty could well prove fatal for certain kinds of merchants.125
117 See id. at 332.
118 See MANN, supra note 62, at 113; see also Ronald J. Mann, Information Technology
and Non-Legal Sanctions in Financing Transactions, 54 VAND. L. REV. 1627, 1634 n.30
(2001) (including further fee information and information on debit cards).
119 In the industry these are known as MOTO transactions; they now include Internet
transactions as well.
120 See MANN, supra note 62, at 113.
121 See Visa, 163 F. Supp. 2d at 337.
122 See id. at 353–57 (STT and SET technologies).
123 See id.
124 See id. at 347–53 (discussing lack of the use of chip-based smart-card technology).
125 See id. at 337.
2003] PRIVATE LAWMAKING 401
Examples of the rules could be multiplied (the chief impediment being the
difficulty of getting information),126 but these examples should suffice. Through
rulemaking that is entirely private and even sometimes secret, associations of
banks decide to what extent credit cards can be used for payment. They decide
what level of risk is acceptable in terms of theft, fraud, and the like. They decide
who should bear the risk of the fraudulent transactions. They, in short, regulate a
market involving millions of companies and consumers. Their rules apply
uniformly—perhaps, in terms of monitoring and enforcement, even more
uniformly—than publicly made law. The rules are privately made, but they are
law.
D. Its Own Little Legal World: A Weak Case, for
Comparison and Definition
From the private regulation of the credit card industry we turn to much
smaller associations, for purposes of comparing the effect of private rules and
refining the idea of private lawmaking. Although they are not well known to the
public, among scholars of commercial law a few little self-contained legal worlds
have become known through the valuable research of Lisa Bernstein and
others.127 The diamond dealers provide the most glittering example.128 Less
picturesque but similar are the grain merchants,129 the cotton industry,130 and
others.131 Let us pause a moment with the most seductive example.
The peculiar distribution method for diamonds is notorious, with stories of
blood at the source of the rocks and a crushingly powerful monopoly at the root
of distribution. Recent developments may have softened the story a little, but the
fundamentals remain much the same. The monopolist, De Beers, sells boxes of
diamonds sight unseen to diamond merchants. At that point, the diamonds enter
the part of the market in which our interest lies. Before reaching ordinary retail
outlets, the diamonds are bought and sold among merchants who have access to
diamond “bourses” located in a few locations around the world; each bourse is a
126 See supra note 114.
127 See also HADFIELD, LESSONS, supra note 2, at 15–17.
128 See Bernstein, supra note 7; BARAK D. RICHMAN, COMMUNITY ENFORCEMENT OF
INFORMAL CONTRACTS: JEWISH DIAMOND MERCHANTS IN NEW YORK (Harvard Law Sch.,
John M. Olin Ctr. for Law, Econ. & Bus., Discussion Paper No. 384, 2002), available at
http://papers.ssrn.com/abstract=349040.
129 See generally Lisa Bernstein, Merchant Law in a Merchant Court: Rethinking the
Code’s Search for Immanent Business Norms, 144 U. PA. L. REV. 1765 (1996).
130 See generally Lisa Bernstein, Private Commercial Law in the Cotton Industry:
Creating Cooperation Through Rules, Norms, and Institutions, 99 MICH. L. REV. 1724 (2001).
131 See generally Bernstein, supra note 85.
402 OHIO STATE LAW JOURNAL [Vol. 64:371
trading club.132 The New York Diamond Dealers Club is one, and it formed the
center of Professor Bernstein’s first study.133
Disputes are inevitable. The controversies are resolved not by courts but by
arbitrators who are diamond merchants.134 They have no special knowledge of or
need for publicly made law. The law of arbitration does not require the arbitrators
to apply the law as long as there is no serious procedural irregularity or
appearance of bias.135 Instead, the arbitrators decide “on the basis of trade custom
and usage, a little common sense, some Jewish law, and, last, common-law legal
principles. There are no general rules of damages.”136 Damages assessed against
the defendant might not be paid to the plaintiff; punitive damages might be
ordered to be paid to a Jewish charity instead.137 The judgments are enforceable,
if necessary, through exclusion of the recalcitrant merchant from the bourses
worldwide and occasionally through prosecution before a Jewish rabbinical court.
These enforcement mechanisms mean that the enforcement powers of the state
(e.g., confirming the arbitration in court and initiating sheriff’s sales or the like)
are rarely necessary. Losing his business or ostracism from his community is a
plenty powerful incentive to force compliance with the final award or, if need be,
to enter the club’s private bankruptcy system.138
In many ways, these diamond merchants constitute a world unto themselves,
and at least from the standpoint of most of society, they appear to have a law of
their own. In this respect, they are a nice instance of privately made law. By my
terms, though, they present a weak example. Because they are so separate, the
law of their own is only their law. Although it might have some impact on retail
diamond prices, which affect people who are not members of the exchange, the
rules of the bourse are of little or no concern to anyone who is not a member; few
people are members. It seems closer to the paradigm of the two-party contract
than to the paradigm presented in this article, when one small group makes rules
that affect many thousands or millions of others. Compared to the rulemaking
done by so-called “self-regulatory organizations” like the securities markets,
which in fact regulate far more than themselves,139 the diamond dealers really are
quite close to the idea of self-regulation. They rule themselves; they regulate their
own transactions. They do not regulate the conduct of others. In other words, they
132 See Bernstein, supra note 7, at 117–18, 121.
133 See generally id.
134 See id. at 115, 124–26.
135 See generally Steven J. Ware, Default Rules from Mandatory Rules: Privatizing Law
Through Arbitration, 83 MINN. L. REV. 703 (1999).
136 See Bernstein, supra note 7, at 127.
137 See id.
138 See id. at 124–30.
139 See supra Part III.B.
2003] PRIVATE LAWMAKING 403
seem more like rules than like law. Pursuit of this linguistic intuition takes us to
the next section.
V. CALLING IT LAW
So far, the argument has proceeded by example, examining varying
situations across the long landscape of commercial transactions, whether
involving international finance or consumer purchases. We have seen how the
idea of private lawmaking works in each of those examples, and I have tried to be
careful and explicit about the use of the word law. The word is important; the
lawmaking functions that rest in private hands have, to my mind, been somewhat
obscured by the otherwise informative literature on private ordering.140 That
much of the private ordering literature discusses non-legal enforcement through
the use of norms, rather than law, has not helped to reveal the private power to
make law.141 Although other scholarship has recognized the lawmaking power
made available through standard form contracts, it has tended to focus on
consumer protection issues and has pressed a narrower case. These are important
phenomena, to be sure, but they differ from the private lawmaking process in
question here.142
In this part of the article, I seek to further justify use of the word law to
describe the phenomenon discussed above. Understanding the phenomenon as
mere self-regulation or private ordering is not appropriate. The artifacts of private
lawmaking are not the result of bargaining over contract terms, nor do they derive
from members of a body that is simply deciding how to govern itself, nor are they
best described as norms. In the paradigm put forward here, particular groups
succeed in governing much wider groups, as shown above, and lawmaking is a
better descriptor. In this part of the article, the argument shifts from induction to
140 Some of the leading works include: Symposium, Law, Economics, and Norms, 144 U.
PA. L. REV. 1643 (1996); Avery Katz, Taking Private Ordering Seriously, 144 U. PA. L. REV.
1745 (1996) (focusing on economic efficiency); Symposium, Empirical Research in
Commercial Transactions, 98 MICH. L. REV. 2421 (2000); and Jonathan R. Macey, Public and
Private Ordering and the Production of Legitimate and Illegitimate Legal Rules, 82 CORNELL
L. REV. 1123 (1997) (offering a more philosophical example). See also Steven L. Schwarcz,
Private Ordering, 97 NW. U. L. REV. 319 (2002) (noting private credit ratings are used to
satisfy government-established regulatory requirements). Contra Margaret Jane Radin & R.
Polk Wagner, The Myth of Private Ordering: Rediscovering Legal Realism in Cyberspace, 73
CHI.-KENT L. REV. 1295 (1998); see also infra note 219.
141 See ROBERT C. ELLICKSON, ORDER WITHOUT LAW: HOW NEIGHBORS SETTLE
DISPUTES (1991); see also Macey, supra note 140; Symposium, Law, Economics, and Norms,
supra note 140.
142 See generally W. David Slawson, Standard Form Contracts and Democratic Control
of Lawmaking Power, 84 HARV. L. REV. 529 (1971); see also infra notes 146–50 and
accompanying text (discussing Slawson).
404 OHIO STATE LAW JOURNAL [Vol. 64:371
linguistics, following in the line of linguistic and analytic inquiry that has lasted
for generations.143
A. The Baggage Law Carries
The preceding intuition—that bourse rules seem more like rules, and the
UCC, UCP, clearinghouse rules, and the like seem more like law—is accurate, as
more exploration will show. Before beginning, let us establish two clear poles.
First, a country club has rules. Lots of country clubs have various rules. Those
rules seem like rules, not like law. Second, the United States Code contains
innumerable rules that certainly seem like law.
We can now begin by unpacking the intuition. Why do the bourse rules seem
more like rules than like law? Part of the answer lies in their effect. The rules
adopted by the bourse seem to have the effect of rules; the rules adopted by
NCCUSL or the ALI or the New York Clearing House Association or Visa or
MasterCard seem to have the effect of law. The rules adopted by the bourse affect
a small, discrete group. The rules adopted by the other organizations affect
millions of people and businesses. Those who are so regulated have little practical
choice in the matter, short of using only cash. The bourse rules seem considerably
closer to the country club handbook than to the United States Code.
1. Numbers and Groups
Several separate points come out here. Law ordinarily means more than the
“law between the parties” in a two-party contract.144 Law affects many people or
businesses. It need not affect everyone. We have no trouble referring to the
Automobile Dealer’s Day in Court Act145 as a law, although few citizens are or
aspire to be automobile dealers or manufacturers. Still, the number of parties
affected certainly seems to have something to do with whether something is
called a law. The examples treated in Parts II, III, and IV, except the diamond
bourses and other trading clubs, affect many thousands or millions of people. The
examples relied on above involve not the “law” between two parties, or among
143 I have written elsewhere of the effect of Wittgenstein’s grammatical and linguistic
insights on questions of commercial law. See David V. Snyder, Language and Formalities in
Commercial Contracts: A Defense of Custom and Conduct, 54 SMU L. REV. 617 (2001).
Readers seeking further literature on the subject should see the sources cited id. at 637 n.138.
But much more prominent thinkers have shown its utility better than I could. See, e.g., Richard
Craswell, Do Trade Customs Exist?, in THE JURISPRUDENTIAL FOUNDATIONS OF CORPORATE
AND COMMERCIAL LAW 118 (Jody S. Kraus & Steven D. Walt eds., 2000) (discussing and
citing the work in so-called pragmatics—better described to non-philosophers as linguistic
pragmatism).
144 See also supra note 6 and accompanying text.
145 15 U.S.C. §§ 1221–1225 (2000).
2003] PRIVATE LAWMAKING 405
three or four, or even a hundred or a thousand. Although in some examples (e.g.,
letters of credit and credit cards) contract is the legal device by which the rules
become binding, the typical two-party contractual paradigm is inappropriate. The
two-party paradigm expands to include a few parties without too much strain.
The concerns of private law do not change that much if there are, say, four parties
in a sale of a house from one married couple to another, or even the more likely
scenario of nine parties (once financiers, agents, and an escrowee are included).
The strain comes in thinking about rules that will be imposed on thousands or
millions. The examples here involve a group or body—a lawmaker—establishing
uniformly applicable rules for thousands or millions of others. This is not the stuff
of contract.
A focus on the parties to whom the privately made law applies should also
illuminate why the two-party contractual model is inapposite to the kind of
private lawmaking discussed here. More than thirty years ago, Professor Slawson
argued that virtually all standard-form contracting constitutes private
lawmaking.146 That argument is left to the reader’s judgment; the point is that
here the case for private lawmaking is stronger. Professor Slawson was
discussing how, for instance, an automobile manufacturer makes more warranty
law in a day than Congress would dream of making, arguing that the warranty
terms are imposed on the consumers by the automaker.147 Paradigmatically, one
party “imposes” terms on another, and does so in thousands or millions of
contracts. In the cases discussed in this article, the terms are not imposed by one
party on another. The terms are supplied by some private entity or body on both
contracting parties. The ICC makes the rules that bind the banks and the other
parties to a letter of credit.148 Visa and MasterCard associations make the rules
that bind the banks, the merchants, and the consumers to credit card
transactions.149 (While none of those parties have to enter such transactions, and
while many of the rules are default rules, that does not make them any weaker
than publicly made law, as will be discussed shortly.)150 The privately made rules
discussed here present a considerably stronger case of private lawmaking than a
manufacturer’s form.
2. General Applicability
Aside from the number of parties affected, a law is expected to have
reasonably general applicability. The Automobile Dealer’s Day in Court Act
affects all automobile franchisors and franchisees. How generally applicable are
146 See Slawson, supra note 142.
147 See id. at 530–31.
148 See supra Part IV.A.
149 See supra Part IV.C.
150 See infra Part V.A.3.
406 OHIO STATE LAW JOURNAL [Vol. 64:371
the examples given in Parts II, III, and IV? Compared to the Auto Dealer’s Act,
they are quite generally applicable. The UCP is the example with the most limited
application. All of the other examples apply much more broadly, covering much
of American society. What businesses are not affected by the UCC, which is the
product of ALI and NCCUSL? Few can escape the effects of the stock market
rules, as recent events have demonstrated with high drama. Nor is it realistic for
most to avoid check rules and credit card rules.
On the other hand, a distinction is possible here. Privately made law need not
be generally applicable, and a few particulars help show how. Although it may
not be possible to escape credit card rules generally, it is not necessary to
withdraw from the credit economy if Visa rules are objectionable. MasterCard
rules might be better, or American Express or Discover. This brings up an
important point with respect to privately made law: possibilities for competition
in lawmaking are enhanced. Some competition exists in the arena of publicly
made law because of the federalist system. The opportunities for competition in
lawmaking are multiplied when the laws are made by private bodies rather than
sovereign ones.151 This point brings up the possibilities of molecular federalism,
which are treated below.152 For now, though, the point is that privately made
laws are as generally applicable, often more so, than publicly made laws.
3. Only Default Rules?
One potential objection to the argument is that in the contract-based
examples, the privately made law is not binding on anyone absent voluntary
agreement. The objection, however, detracts little from the argument. In the law
of contract and commercial transactions, the vast majority of the law is made up
of default rules, along with some coordination principles that are subject to
manipulation. Thus, even if some of the privately made law discussed above is
nothing more than default rules, that fact hardly can mean that they are not
properly called law. Much of what is commonly called law is typically made up
of default rules.
So-called default rules are rules of law that can be displaced by contrary
agreement. By contrast, mandatory rules are rules of law that cannot be displaced
by agreement. In Contracts and Sales classes, default rules are often called
gapfillers. The best example is the rule that if the parties fail to specify a place for
151 See generally Ware, supra note 135; Gary Spitko, Gone but Not Conforming:
Protecting the Abhorrent Testator from Majoritarian Cultural Norms Through MinorityCulture
Arbitration, 49 CASE W. RES. L. REV. 275 (1999); Ronald J. Krotoszynski, Jr., The
New Legal Process: Games People Play and the Quest for Legitimate Judicial Decision
Making, 77 WASH. U. L.Q. 993, 1034–42 (1999).
152 See infra Part VII.
2003] PRIVATE LAWMAKING 407
delivery of goods, the seller’s business is usually the place for delivery.153 A
more typical Article 2 gapfiller resorts to reasonableness. Suppose the parties
want to make a contract and leave the price to be agreed later, yet the later time
comes and they never come to an agreement on the price. The court can supply a
reasonable price154 rather than find the contract too indefinite to be legally
enforced.155 But in any case, if the parties agree on the place for delivery, or
agree on a price, then these sections of the UCC will have no effect on the
transaction. They are not relevant if there is no gap to be filled.
The familiar gapfillers of the Contracts course are just a small fraction of the
default rules in the Code. The rules on implied warranties frequently are not
taught as default rules, but they are. Consider the implied warranty of
merchantability, under which goods sold by a dealer in goods of the kind are
warranted by implication to be fit for their ordinary purpose.156 The parties are
free to agree, however, to an “as is” sale, in which case the goods need not be fit
for anything,157 assuming there are no other warranties. The implied warranties
of merchantability, fitness, and even title are all subject to simple—and
sometimes even implied—disclaimer.158 As they are subject to variation by
agreement, they are no more than default rules. The same is true of the damages
rules.159 Indeed almost all of the Code is taken up with default rules.160
There are some mandatory rules, but there are not many, and they are not as
mandatory as they might appear at first. Under the UCC, the parties cannot
disclaim the “obligations of good faith, diligence, reasonableness and care.”161
The parties may, however, set their own standards by which these obligations are
153 “Unless otherwise agreed (a) the place for delivery of goods is the seller’s place of
business or if he has none his residence . . . .” U.C.C. § 2-308(a) (2001); see also Snyder, supra
note 143, at 635–36.
154 U.C.C. § 2-305(1)(a)–(b) (2001):
The parties if they so intend can conclude a contract for sale even though the price is not
settled. In such a case the price is a reasonable price at the time for delivery if
(a) nothing is said as to price; or
(b) the price is left to be agreed by the parties and they fail to agree . . . .
155 The common law before the Code often held such contracts unenforceable. See id.
cmt. 1.
156 See id. § 2-314.
157 See id. § 2-316.
158 See id. §§ 2-312(2), -316.
159 See id. § 2-719.
160 See U.C.C. § 1-302 (2001) (formerly § 1-102(3)) (explaining that with some
exceptions, “[t]he effect of provisions of this Act may be varied by agreement”); see also id.
§§ 4-103(a), 4A-501(a), 5-103(c).
161 See id. § 1-302 (formerly § 1-102(3)).
408 OHIO STATE LAW JOURNAL [Vol. 64:371
to be measured as long as these “standards are not manifestly unreasonable.”162
So even these few central mandatory rules are subject to redefinition by the
parties. Moreover, they do not always apply. For instance, the obligation of good
faith applies to the performance or enforcement of a contract or a duty, but it does
not apply to all aspects of the transaction (e.g., negotiation of contract terms).163
A bank collecting a check must exercise ordinary care in four enumerated
actions,164 but no provision imposes a general duty of ordinary care on banks.
Moreover, parties can circumvent the mandatory rules altogether simply by
opting for arbitration, a device that is becoming increasingly common.165 Thus,
on examination, the core mandatory rules are hardly stalwart columns.
Some other rules are not subject to variation by agreement, although again
we will look in vain for any decently fortified mandatory regime.166 Many of
these are no more than coordination principles,167 such as the rules about where
to file public notices of security interests in personal property.168 The parties to a
transaction cannot vary such rules by agreement because the rules are largely for
the benefit of those who are not party to the agreement. A potential lender
contemplating a secured loan to a borrower needs a reliable rule to know where to
check to see whether the borrower has already given the same collateral to
another lender. If the borrower is a corporation incorporated in Delaware and the
lender searches the public records in Delaware and finds nothing, the lender
knows that it need not worry about another lender claiming priority in the same
collateral.169 The system would not work if the borrower were allowed to agree
with a previous lender that public notices would be given in Alaska; giving effect
to such an agreement would defeat the purpose of public notice.
Still, there is not much terribly mandatory here. True, there is something, but
it is abstract: the security interest in the collateral will not be effective against
third parties unless there is a public notice filed in the state of incorporation. The
162 Id.; see also id. § 4-103(a).
163 See id. § 1-304 (formerly § 1-203).
164 See id. § 4-202(a) & cmt. 1. The four actions are presentment, “sending notice of
dishonor or nonpayment or returning an item,” “settling for an item,” and giving notice of loss
or delay. Id.
165 See Ware, supra note 135.
166 See, e.g., U.C.C. § 5-103(c) (2001).
167 A standard illustration of a coordination principle is that in the United States driving
on the right side of the road is generally required. No principle of justice is implicated. People
simply need to coordinate their actions for the sake of safety and efficiency. That the law
requires driving on the left side of the road in Great Britain hardly makes it an unjust society.
Everyone coordinating according to the same principle is all that matters.
168 See generally U.C.C. §§ 9-301 to -307 (2001).
169 See id. §§ 9-308 to -310(a). The example in the text is simplified. For example, it does
not take account of the exceptional possibility of automatic perfection. See id. § 9-309. But it
should serve the illustrative purpose necessary for the textual argument.
2003] PRIVATE LAWMAKING 409
factual result of this particular rule, on the other hand, is easily manipulable. If the
borrower and an earlier lender for some reason wanted Alaska to be the
jurisdiction for filing public notices, they could simply incorporate a wholly
owned subsidiary in Alaska and transfer the collateral to the subsidiary
beforehand. Rarely is there any objection to these coordination principles. Often
the parties will not care to vary a coordination rule. If the coordination principle
interferes, they can often work around it.170
The meaning of all of this for the current argument is that much commercial
legislation is simply off-the-rack contract terms. Even putting aside the ALI and
NCCUSL, the privately made rules discussed in Part IV are the same. In a way,
the argument may be even stronger because the privately made terms are stronger
than the legislative terms. The legislatively made terms only apply in the absence
of an agreement to the contrary. As a practical matter, the privately made law will
often displace any publicly made default rules, particularly in the cases where it is
likely to matter. Thus, the privately made law is what is actually put into
operation. It winds up having legally binding effect more than the terms
contained in legislation.
This, of course, is an empirical claim, and evidence is only available to
substantiate the claim in certain areas, such as letters of credit.171 Many other
transactions are much less susceptible to counting. We know from personal
experience that the legislative default rules are displaced a lot of the time. How
often do we see disclaimers of consequential damages? What is harder to know—
perhaps impossible—is whether consequential damages are allowed in more
contracts than they are disclaimed in. It matters little, though. The primary point
is that even to the extent privately made rules are merely off-the-rack contract
terms, the same is true of legislation that is indisputably law. The privately made
rules, in this respect too, are law.
4. Privately Made Mandatory Rules: When Escape Is Impossible
Not all privately made law consists of default rules or off-the-rack contract
terms. The legislation mentioned in the previous section includes some
mandatory rules, even if they are not terribly muscular. As we think about these
weakly mandatory rules, we come to see that privately made law has both
identical and similar creatures.
Identity presents the easiest case. All of the mandatory rules discussed in the
previous section are privately made law in the sense that they are made by
NCCUSL and the ALI. As acknowledged above, the argument must admit that a
formal public intermediation is necessary. The concession is not a great one,
170 A potential objection to this hypothesis (i.e., that coordination principles are
innocuous) is taken up infra Part VI.C.2.
171 See supra note 71 and accompanying text.
410 OHIO STATE LAW JOURNAL [Vol. 64:371
however, especially with respect to the UCC, almost all of which receives the
necessary approval from the public intermediary. As is also mentioned above,
much the same can be said of the Restatement rules, which courts largely adopt
according to the ipse dixit hypothesis.172 So even many mandatory rules,
speaking de facto, are privately made.
This is not all. Begin by considering whether all privately made rules (other
than the ones made by the ALI and NCCUSL) that are labeled as defaults
actually are. The UCP provides an apt illustration. Its first article recognizes that
the provisions are default rules. “They are binding on all parties . . . unless
otherwise expressly stipulated in the Credit.”173 The idea is essential to the nature
of the UCP, which only becomes binding on the parties by the parties’ own
adoption of them.174 Yet the theoretical smoothness of the idea is subject to
innumerable practical imperfections. Most importantly, just finding a bank of
national or international repute—and such a reputation is essential to the function
of the letter of credit175—to issue a credit that does not incorporate the UCP
verges near to impracticability. Moreover, it is beyond conception that the
fundamental rules on basic liability vel non could be varied.176 Is it possible to
conceive of an issuing or confirming bank that is not liable to pay a credit
according to its terms (subject, of course, to the qualifications in the UCP
itself)?177
To the extent that credits not governed by the UCP are unavailable, the UCP
becomes the essential law of letters of credit. Pause a moment here to consider the
effect of this state of affairs. For association members, that is, members of the
Banking Commission of the International Chamber of Commerce, the effect is
that adherence to the Commission-made rules (i.e., the UCP) is practically
required in order to stay in the business of letters of credit. It perhaps bears
mentioning that these constituents are large international banks or associations of
banks. The alternatives are to try to effect change in the rules, which is
theoretically possible, as the UCP is revised every decade or so,178 or to defect
from the ICC-imposed regime, which is also theoretically possible but practically
172 See supra note 29 and accompanying text.
173 See UCP 500, supra note 72, art. 1.
174 See id. (explaining that the UCP “shall apply to all Documentary Credits . . . where
they are incorporated into the text of the Credit”).
175 See U.C.C. § 2-325(3) (2001); see also supra Part IV.A (explaining the purpose of
letters of credit and how they work).
176 See UCP 500, supra note 72, arts. 7, 9.
177 See id. art. 9(a)–(b).
178 The UCP was originally promulgated in 1933, with revisions promulgated in 1951,
1962, 1974, 1983, and 1993. The UCP 500, which is the 1993 version, remains effective,
although a 12-article supplement for electronic transactions took effect April 1, 2002. See id. at
inside front cover; UCP 500 + eUCP COMPREHENSIVE BOOK VERSION (2002). Another
revision is currently being discussed. Telephone interview, supra note 84.
2003] PRIVATE LAWMAKING 411
questionable. Those who are not constituents have only the latter alternative,
which is not much of a choice, unless they think they can influence the revision
process.179 If we assume that a business needs letters of credit—and that need
applies to many buyers and sellers, especially those doing business
internationally—then it must abide by the UCP.
The situation is much the same in other examples, and they in some ways
present clearer cases. A diamond merchant must obey the “mandatory” rules of
the bourse or forego the benefits of the exchange, which would be damaging and
very possibly fatal to his business. The credit card associations are the same too.
Participants, whether members of the association or not, must adhere to the
mandatory rules or be excluded. Privately made law has at least as much bite as
publicly made law.
5. A Thought Experiment
In concluding this part of the argument, a thought experiment may be helpful.
It is drawn from reality, although somewhat stylized here for the sake of
simplicity.180 Suppose a longstanding federal statute gives persons a right or
entitlement, X, which accrues when a person buys something. While nothing in
the statute prohibits waiver of the entitlement, the Supreme Court has held that a
mere notice by the seller or manufacturer does not suffice to do so. A contract,
however, can result in a waiver. Eventually, virtually all sales contain a
contractual waiver of X. The courts uphold the waivers.
Now, in this state of affairs—and it portrays accurately almost all scenarios,
since the law rarely prohibits waivers outright—what is the law? A lawyer who
tells a buyer-client, “Federal law says you have X,” gives incomplete advice that
does not pass the test of competence. A competent lawyer, knowing the federal
statute but also having seen the contract, and knowing the others like it and the
decisions upholding them, would probably have to say, “Under the law, you do
not have X.” In only a theoretical sense is the X entitlement still the law. In
practical terms, the law has given the buyer nothing. Private lawmaking, through
179 Telephone interview, supra note 84 (explaining that extensive surveys are involved,
with the possibility for input from many banks and other players); see also UCP 500, supra
note 72, at 5 (“[T]he Working Group’s analysis was conducted by utilising various information
sources available to the banking industry and the transport industry, and by drawing upon [the
Working Group members’] own considerable knowledge.”).
180 It was inspired by Margaret Jane Radin, Humans, Computers, and Binding
Commitment, 75 IND. L.J. 1125, 1130 (2000). Many readers will see that my not-sohypothetical
example is drawn from the current controversy over potential contractual
modification of the rights afforded by the first-sale doctrine first announced by the Supreme
Court and eventually codified in the Copyright Act. It is not too far removed from other
contexts, however, such as the Magnuson-Moss Act. See Magnuson-Moss Warranty—Federal
Trade Commission Improvement Act, 15 U.S.C. §§ 2301–2308, 2310(d)(2) (2000).
412 OHIO STATE LAW JOURNAL [Vol. 64:371
nothing more than customary form terms, has undermined statutory law. It
happens all the time.181
B. Sovereignty and the State
Law carries associations of sovereignty, so to some it may seem nonsensical
to speak of privately made law. Thinking explicitly of the role of the sovereign
may help, and it will also help show the limits of the argument advanced here. I
fully admit that the sovereign could refuse to honor privately made law, whether
in the form of restatements, megalateral contracts,182 or plain old contracts.
Further, legislation and common law shape the way public institutions—which
still monopolize coercive legal power—view the law agreed by parties to a
contract; their agreement will be viewed through the lenses of the parol evidence
rule or the unconscionability doctrine.183 To some, these admissions may make it
wrong to speak of a contract as creating any sort of law. Those who would take
such a position would have a heavy fight, since courts have been referring to
contracts as “the law between the parties” for ages.184 The law agreed by the
parties is their law, but within limits, just as publicly made law has its own limits
(like federal and state constitutions, doctrines of implied repeal, and so on). To
see the limits on private lawmaking does not lead one to think that the power is
very limited; at bottom it leads to an appreciation for how much latitude current
law and politics accord to private lawmaking.185
Instead of taking on such a battle, let us instead be practical and realistic.
Although the state could refuse to honor privately made law, it does not.
Politically, doing away with private parties’ ability to make contracts is not on the
181 See, e.g., Marcel Kahan & Michael Klausner, Antitakeover Provisions in Bonds:
Bondholder Protection or Management Entrenchment?, 40 UCLA L. REV. 931 (1993).
Although done in a different context, this empirical study shows how broadly used bond terms
in a time of aggressive corporate takeovers protect management more than shareholders (who
might be thought to enjoy statutory protection) or bondholders (for whom extra-contractual
protection was contemplated). Certainly this study also shows that contractual terms can be
displaced by mandatory publicly made law, but as explained in the immediately following
sections, this fact does not detract much from the argument in the text.
182 Megalateral contracts refer to the identical contracts to which thousands or millions of
parties assent, such as identical credit card rules imposed by contract on millions of contracting
parties.
183 See HADFIELD, LESSONS, supra note 2, at 5–7.
184 See, e.g., Oil Field Supply & Scrap Material Co. v. Gifford Hill & Co., Inc., 16 So. 2d
483, 484 (La. 1943); see also White, supra note 1, at 189–90.
185 Unconscionability provides a nice example. Courts are accorded broad regulatory
power to police contracts by UCC section 2-302. The power is rarely invoked; the cases doing
so have achieved the status of curiosities. See David L. Shapiro, Courts, Legislatures, and
Paternalism, 74 VA. L. REV. 519, 534–35 (1988); Melvin A. Eisenberg, The Bargain Principle
and Its Limits, 95 HARV. L. REV. 741, 752 (1982).
2003] PRIVATE LAWMAKING 413
table.186 The idea is worthy of consideration in some academic circles, perhaps,
but such a move is not within the realm of current possibility, and that is the
realm in which this article seeks to operate. The state has ceded enough
sovereignty to private parties to make these private agreements. Plus, the state has
agreed to enforce these privately made agreements (within limits, which are
discussed below). So we might see the situation as something of a sandwich,187
and the state brings the bread. Between the two pieces of bread—that is, between
(1) the state’s cession of sovereignty to make a binding agreement and (2) the
state’s willingness to enforce that agreement—is the interesting part of the
sandwich.188 The meat of it is privately made. Put simply, the state is a necessary
part of the formula, but the actions of the state are dictated by privately made
rules.
C. Objections and Concessions
The argument advanced above is hardly bulletproof, and a number of
objections could easily be raised. This section of the article recognizes some of
the objections and answers them. Other objections require some concessions,
which can be made without detracting too much from the argument. Perhaps the
most logical starting point is that privately made law is subject to change by
publicly made law.
1. Changing Private Law
True, publicly made laws can certainly preempt privately made law. In most
cases, a legislative or judicial decision can simply abrogate a privately made rule
or substitute a publicly made one. Sometimes the public power is broad, such as
the ability of Congress to regulate commerce.189 Sometimes public power is more
limited, but still powerful, as with SEC oversight of the rules of the securities
exchanges.190 The same is just as true of publicly made law, so this objection is
186 Realistic commentators seem to confine any regulatory exhortations to drawing
attention to particular terms or to correcting for market breakdowns. See, e.g., Radin, supra note
180, at 1161–62.
187 Thanks to Tayyab Mahmud, who suggested the sandwich analogy, although he was
using it to try to explain why my argument is wrong.
188 It is of course possible to emphasize the bread, and ultimately the emphasis must be a
matter of taste. HADFIELD, LESSONS, supra note 2, at 5–9 concentrates, to my mind, on the
bread.
189 See U.S. CONST. art. I, § 8, cl. 3.
190 The power of the SEC in this regard is contained primarily in the Securities Exchange
Act of 1934 § 19, 15 U.S.C. § 78s (as amended in 1975), but it has been limited to some extent
by Business Roundtable v. SEC, 905 F.2d 406, 407 (D.C. Cir. 1990), which seems to have
seriously chilled the SEC in some respects. The argument in the text does not depend on a
414 OHIO STATE LAW JOURNAL [Vol. 64:371
not terribly strong. In other words, privately made rules are subject to
displacement by public authorities, but so are publicly made rules, which we
would certainly call law. That privately made rules are subject to displacement
does not make them any the less law. Let us examine the objection and the
facts.191
First consider state law,192 which typically governs most transactions
classified under the headings of contract and commercial law, and to a large but
lesser degree, the law of corporations and securities. State law governs these
transactions only as a matter of tradition. Since the transactions fall squarely, even
literally, within the power of Congress under the Commerce Clause, federal
legislation is possible.193 In fact Congress has exercised its power in numerous
statutes, all of which preempt state law under the Supremacy Clause.194 Federal
intervention is so common that the specifics are too numerous to list usefully.
Some examples include Magnuson-Moss, which preempts the UCC rules on
disclaimers of warranties as well as the usual American rule for attorneys’ fees,195
the Truth in Lending Act, which regulates the consumer liability rules for credit
cards,196 and the Electronic Fund Transfer Act, which does the same for debit
tightly constrained SEC, however. The argument still holds as long as Congress and the SEC
allow the exchanges to exercise a significant amount of rulemaking power.
191 Here we will leave aside the points that much publicly made law is theoretically
subject to change by private parties, and that privately made law, while also subject to such
change, is probably changed much less frequently. These points have already been addressed
above. See supra Part V.A.3. (default rules).
192 State law here refers to law publicly made by a state or commonwealth of the United
States (e.g., by the courts or by the legislature, acting on their own, and not simply adopting
what was handed them by the ALI or NCCUSL). It is not the same as “state-created law,” as
that phrase is used by Professor Bernstein. See Bernstein, supra note 7, at 115.
193 U.S. CONST. art. I, § 8, cl. 3 (“The Congress shall have Power . . . To regulate
Commerce with foreign Nations, and among the several States, and with the Indian Tribes.”).
On the question of federalization of commercial law, see, for example, E. Hunter Taylor, Jr.,
Foreword: Federalism or Uniformity of Commercial Law, 11 RUTGERS-CAM. L.J. 527 (1980);
and Neil B. Cohen & Barry L. Zaretsky, Drafting Commercial Law for the New Millennium:
Will the Current Process Suffice?, 26 LOY. L.A. L. REV. 551, 557–61 (1993). For discussions
opposing federal intervention, see Norman Silber, Why the U.C.C. Should Not Subordinate
Itself to Federal Authority: Imperfect Uniformity, Improper Delegation and Revised Section 3-
102(c), 55 U. PITT. L. REV. 441, 446–54 (1994); and Overby, Modeling UCC Drafting, supra
note 37, at 684–87.
194 See U.S. CONST. art. VI, cl. 2 (“This Constitution, and the Laws of the United States
which shall be made in Pursuance thereof . . . shall be the supreme Law of the Land.”).
195 See Magnuson-Moss Warranty—Federal Trade Commission Improvement Act, 15
U.S.C. §§ 2301–2308, 2310(d)(2) (2000).
196 See 15 U.S.C. §§ 1631–1649 (2000); see also Federal Reserve Board Regulation Z, 12
C.F.R. pt. 226 (2002).
2003] PRIVATE LAWMAKING 415
cards.197 Before Congress stepped in, state law permitted private parties more
freedom to structure their transactions, and those private parties took advantage of
that freedom. Congress changed the state law through its preemptive power to
regulate commerce, and thus changed the terms of countless transactions.
Even aside from the subjection of state law to federal law, the ways that
various publicly made laws can be displaced by other publicly made law can
easily be multiplied. State law can preempt local law, and in the commercial
context this power distribution has had a lot of bite recently. Local jurisdictions
that have attempted to regulate so-called predatory lending have sometimes found
their laws gutted by state laws protecting peddlers of mortgages and snake oil.198
Courts and legislatures, even within the same jurisdiction, constantly seesaw in a
never-ending game of law changing. Even when the Supreme Court plays the
trump card—invoking the Constitution—the seesaw slows but the teetering is
hardly over.199
Not only is there the usually unrealistic possibility of constitutional
amendment, there is the possibility of what might be termed temporal
preemption: the ability of a later lawmaker to undo the work of an earlier one.
The Supreme Court, like other courts, can overrule itself.200 What one legislature
does can be undone by a later legislature. So, while privately made rules are
subject to subsequent change by the government, so are publicly made rules. I
will grant the small concession that privately made law is a little lower in the
great hierarchy. Theoretically, therefore, it is more ephemeral than publicly made
law. From a practical (i.e., empirical) standpoint, we do not know whether
privately made law is displaced more frequently or in more important ways than
publicly made law. Publicly made law and privately made law are subject to
subsequent change.201 Both are in fact changed, with reasonable frequency and
197 See 15 U.S.C. §§ 1693–1693r (2000); see also Federal Reserve Board Regulation E,
12 C.F.R. pt. 205 (2002).
198 The reference in the text is intentionally vague, maleficent predatory lending being
difficult to distinguish from beneficial subprime lending. See generally Kathleen C. Engel &
Patricia A. McCoy, A Tale of Three Markets: The Law and Economics of Predatory Lending,
80 TEX. L. REV. 1255 (2002). For examples of state laws preempting local laws that attempt to
regulate predatory lending, and the ongoing battles in this arena, see, for example, 2001 Ohio
HB 386, Ohio 124th Gen. Ass., reg. sess. (approved by the governor Feb. 22, 2002); and Teresa
Dixon Murray, Cleveland Wins Round on Lending Law; Court Move to Block Mortgage Law
Rejected, PLAIN DEALER (Cleveland), July 27, 2002, at C1.
199 See, e.g., Garcia v. San Antonio Metro. Transit Auth., 469 U.S. 528, 557 (1985)
(overruling Nat’l League of Cities v. Usery, 426 U.S. 833 (1976)); see also United States v.
Morrison, 529 U.S. 598, 645–46 (2000) (Souter, J., dissenting). See generally Richard H.
Fallon, Jr., The “Conservative” Paths of the Rehnquist Court’s Federalism Decisions, 69 U.
CHI. L. REV. 429, 430 nn.2–3 (2002).
200 See sources cited supra, note 199.
201 The problem of change, including legal change, is a large and complex subject
involving both public and private attempts to regulate that change. See David V. Snyder, The
416 OHIO STATE LAW JOURNAL [Vol. 64:371
fair import. But both remain useful tools for planning conduct and resolving
disputes. Both are appropriately called law.
2. Inertia, Custom, and Usage of Trade
The previous section required a small qualification. I am prepared to grant
more. First, default rules contained in legislation are preexisting, and they might
be sticky.202 Although the parties can displace any default rule by agreement, and
much of the law of contracts and commercial transactions consists of default
rules, displacing them can be difficult, expensive, or both. This is easiest to see in
disclaimers of implied warranties. As mentioned above, the UCC provides that a
sale of goods by a dealer in such goods will carry an implied warranty that the
goods are fit for their ordinary purpose, among other things.203 The
merchantability rule is only a default rule, however; the parties can displace it. To
do so they must jump through certain hoops. Mere agreement is not enough;
magic words help, as does a conspicuous disclaimer.204 These special rules make
it more difficult and more expensive to change the default.
An analogy may help. In the previous section we saw that the public
legislature could bar a route that private parties might otherwise take, and might
even bar a route that everyone takes. The public legislature might also choose a
lesser step. It might not completely bar the path, but it might put up a warning by
the path, using more or less dire language depending on the state-perceived
dangers. Or the public legislature might require everyone who wants to take the
path to obtain a permit or to meet certain qualifications. The state might even put
an obstacle in front of the path, requiring people to get around it or move it.
Legislatures have done all of these things, in various ways.
For the most part (although not entirely),205 these sorts of moves are within
the power of public lawmakers but not private ones. The legislature can choose to
take the first spot, to make everyone go to the trouble and expense of displacing
Law of Contract and the Concept of Change: Public and Private Attempts to Regulate
Modification, Waiver, and Estoppel, 1999 WIS. L. REV. 607; see also E. ALLAN FARNSWORTH,
CHANGING YOUR MIND: THE LAW OF REGRETTED DECISIONS (1998).
202 See Russell Korobkin, Inertia and Preference in Contract Negotiation: The
Psychological Power of Default Rules and Form Terms, 51 VAND. L. REV. 1583 (1998). Here I
am putting aside the argument that most of the relevant legislation is in fact privately made. The
point is made supra in Part II.A.
203 See U.C.C. § 2-314 (2001).
204 See id. § 2-316(2)–(3). A conspicuous disclaimer may be required according to some
views, and making the disclaimer conspicuous certainly helps, but the statute does not expressly
require that all effective disclaimers be conspicuous. See id.
205 See Korobkin, supra note 202, at 1605–06 (on inertia of form contract terms).
2003] PRIVATE LAWMAKING 417
the publicly made rule. This may even have certain benefits as well as costs.206 In
other words, just as the public lawmakers have the power to displace privately
made law, they have the power to take advantage of inertia. They can put the
burden on the parties to agree otherwise, and the agreement to act otherwise
requires an investment on the part of the private players because agreement is
costly.
This objection does not carry as much weight as it might, however. It can be
no greater objection than the previous one (that a public lawmaker can change the
privately made law and displace it with publicly made law) as it posits a public
lawmaker doing something less than completely displacing the privately made
law. Moreover, public lawmakers have ceded a great deal of their power in this
regard through doctrines of usage and custom.
The current law of usage of trade is most familiar. Every transaction within
the UCC is presumed to include any applicable usage of trade, which is defined
as “any practice or method of dealing having such regularity of observance . . . as
to justify an expectation that it will be observed with respect to the transaction in
question.”207 The key rule is contained in the definition of agreement, which
under the UCC includes usage of trade.208 The parties are theoretically free to
displace usage of trade by express agreement,209 but this is easier said than done.
Effective displacement requires at least that the parties “carefully negate” the
usage.210 Because of this doctrine, any privately made rule that rises to the level
of usage of trade—and several of the examples discussed in Part IV may do so,
and are even so labeled—they (rather than publicly made law) gain the advantage
of inertia. Custom is itself privately made law.
More too might be said in response to this objection, with a wider geographic
view and a greater historical depth. Centuries of legal thought and legislative
action show that custom is itself law in a similar if lesser sense than legislation.
Often there will be no publicly made legislation to take advantage of inertia, and
in all such instances any prevailing custom will be the law to be displaced. When
206 The literature on penalty default rules is large. The seminal article is Ian Ayres &
Robert Gertner, Filling Gaps in Incomplete Contracts: An Economic Theory of Default Rules,
99 YALE L.J. 87, 91 (1989).
207 See U.C.C. § 1-303(c) (2001) (formerly § 1-205(2)).
208 See id. § 1-201(b)(3) (2001) (following largely former § 1-201(3)) (“ ‘Agreement’
means the bargain of the parties in fact as found in their language or by implication from other
circumstances including course of dealing or usage of trade or course of performance as
provided in this Act.”).
209 See id. §§ 1-303(e), 2-208(2)–(3).
210 See id. § 2-202 cmt. 2. See generally Snyder, supra note 201, at 632–38 & n.121
(collecting authorities).
418 OHIO STATE LAW JOURNAL [Vol. 64:371
deciding disputes, courts have turned to custom since time out of mind.211
Custom, the product of private action, has been recognized for centuries as law.
3. The Authority of Privately Made Law
When we speak of law, we refer to something authoritative. We are
accustomed by long tradition to see law as the product of king, parliament, and
court,212 brought on by social contexts from baronial power bids in the Middle
Ages213 to progressive political triumphs near the reach of our own memories.
Curiously, we consider the concept modern through a simple adjustment in
vocabulary, thus accommodating democratic American innovations, and by the
remarkably single addition of the administrative agency to the list of
lawmakers.214 Yet while we legal pedestrians have treated the law and its history
as a matter of rules and technicalities with lives of their own, masters recognize
the law in the mouths of its individual makers.215 When those makers are great
men or powerful institutions, the authority is easy to see and their product is what
we are most used to calling law.
Yet privately made law carries its own authority, and by comparison the
publicly made default rules may seem less authoritative. For it is a curious kind of
law that parties can agree to displace, and we have already noticed that much
contract and commercial law is no more than that. As far as default rules go, the
most authoritative is likely the most immediate. Publicly made default rules are
the most remote. The rules confected by an actor’s own community or association
are likely to carry much greater weight. Deviation from those readily accessible,
perhaps even internalized customs—norms—will likely prove more difficult than
stepping away from distant public solutions that are probably accessible only
211 This phenomenon occurs in both civil law and common law. See, e.g., S.F.C. MILSOM,
HISTORICAL FOUNDATIONS OF THE COMMON LAW 2 (2d ed. 1981); A.N. Yiannopoulos,
Legislation and Custom as Sources of Law: The Louisiana Experience, in ESSAYS ON
EUROPEAN LAW AND ISRAEL 201 (Alfredo M. Rabello ed., 1996); see also H.L.A. HART, THE
CONCEPT OF LAW 246 (1961); Michael Akehurst, Custom as a Source of International Law, 47
BRIT. Y.B. INT’L L. 1 (1977); Symposium, Responding to the Legal Obstacles to Electronic
Commerce in Latin America: General Questionnaire, 17 ARIZ. J. INT’L & COMP. L. 23 (2000)
(documenting Latin American sources). For a current reassessment, using more new-fangled
tools, see Francesco Parisi, Sources of Law and the Institutional Design of Lawmaking, 19 J.
PUB. FIN. & PUB. CHOICE 95 (2001) (considering “three main sources of law, namely, (a)
legislation; (b) judge-made law; and (c) customary law”).
212 See generally SIR FREDERICK POLLOCK & FREDERIC WILLIAM MAITLAND, THE
HISTORY OF ENGLISH LAW BEFORE THE TIME OF EDWARD I (reissued 2d ed. 1968).
213 See, e.g., id. at 179–80.
214 MILSOM, supra note 211, at xxiii–lxxiii. Once pious heresy, see id. at xxv, acclamation
has now made the view orthodox.
215 See id. at lxxi (“[Maitland] listened for his Alan and Bernard, his circumspect Roger
and blundering Ralph.”).
2003] PRIVATE LAWMAKING 419
through the expensive intervention of legal advice. In terms of practical authority,
privately made rules seem to compare well with publicly made ones.
4. Only a Piece of a Piece of the World
The most important qualification is that these arguments are limited in scope.
They have been limited to certain areas of the law of contracts, corporations,
securities, and commercial transactions. Perhaps many areas of the law are
different, being pervaded or even monopolized by publicly made law. The
objection is a cogent one.
The argument here has proceeded by induction, citing examples to
demonstrate a principle that applies more widely than the examples themselves.
An inductive argument cannot answer questions about how far private lawmaking
extends, leaving such questions to the reader’s knowledge and imagination.216
Partly as an instrument in that effort, I have also pressed a linguistic argument,
thinking about what artifacts or processes we can suitably call law. No doubt such
visual musing about linguistic intuition is a risky business, far removed from the
nearly tangible logic of Euclidean geometry. Such methods are not without basis,
however,217 and the law, famously, is not susceptible to geometrically logical
analysis.218 The arguments here are limited, and they need to be, but they should
suffice for the limited purpose here. First, I have sought to show that some law is
privately made. I do not suggest that all law is privately made, or even that all
contract or commercial law is privately made. As the introduction states, this
article simply seeks to expose a phenomenon that exists broadly enough that we
should care. The second purpose of the article is to show how that care might be
expressed: enough law is privately made that we should ask questions of it just as
we ask questions of publicly made law. That is the task of the next part.
VI. STANDARD QUESTIONS
We—citizens, lawyers, and especially academicians—are accustomed to
questioning publicly made law. Yet privately made law gets off easy. It is less
visible. But since it has the effect of law, it is just as appropriate a target as
publicly made law—possibly more so, since it is not the product of public
processes. I begin the project of asking questions in this part of the article, but this
can only be a beginning, and the ideas in this part are only meant to sketch the
216 Given recent events, the private lawmaking role of the Financial Accounting
Standards Board is on the minds of many. Numerous scholarly papers have mentioned FASB,
although many are not yet in print. A valuable and early entry to reach print is Steven L.
Schwarcz, Private Ordering, 97 NW. U. L. REV. 319 (2002).
217 For authorities, see supra note 143.
218 See OLIVER WENDELL HOLMES, JR., THE COMMON LAW 1 (1881).
420 OHIO STATE LAW JOURNAL [Vol. 64:371
kind of inquiry that might be pressed but has not been so far.219 Since we are only
beginning to see privately made rules as law, more research and thought will be
required before better answers can be advanced.220 Nevertheless, a beginning
seems useful as a way to suggest a path for future work.
A. How Well Does Privately Made Law Work?
The scholarly literature is filled with careful analysis of whether publicly
made rules work well: whether they are efficacious, whether they further sound
policy, and (above all, lately) whether they are economically efficient. For the
most part, the real objects of this work are specific rules, announced in particular
cases or promulgated in particular statutes or regulations. To some degree,
however, these kinds of questions can be asked on a broader scale. Realizing that
we are sketching in rough strokes, a few observations are possible.
Private rulemaking, one suspects, would work relatively well in a number of
contexts. As already noted, much private rulemaking focuses on default rules.
Probably the best way to make default rules is to tailor them to the preferences or
even preexisting practices of particular groups. To the extent those groups are
able to legislate for themselves, and in so doing to displace the publicly made
219 Cf. HADFIELD, LESSONS, supra note 2, at 47. Because she sees private lawmaking as
“futuristic” (i.e., in the world of cyberspace), see id. at 1, or past, except for occasional
“pockets” like trade associations, see id. at 15, or stock exchanges, Professor Hadfield does not
see much current privately made law to question. Much of her work focuses on how private
lawmaking should be fostered. See id. at 47–63. This is an important undertaking, but different
from the one suggested here. In very recent work, Professor Hadfield has directed a number of
questions at the ICANN process of private lawmaking, assessing the ICANN experience
according to the principles developed in her earlier pieces. See Gillian K. Hadfield, Privatizing
Commercial Law: Lessons from ICANN, 6 J. SMALL & EMERGING BUS. L. 257, 264–67 (2002).
Because she considers legitimate private lawmaking to be confined to the economic role of law
(and thus the promotion of efficiency), Professor Hadfield does not address the democratic
values that I seek to pursue here. See id. at 263 (stating the aim is “to explore whether it is
possible and desirable to privatize the legal regime generating those legal rules that, as a matter
of public interest, have efficiency as their only goal”) (emphasis in original); see also id. at 267.
220 Little of the scholarship undertakes this broad task, as much of the private ordering
literature focuses primarily on efficiency and other relatively narrow views of legitimacy. See,
e.g., Katz, supra note 140, at 1745 (“For economists and economically influenced lawyers, this
typically means focusing on economic efficiency.”). Steven L. Schwarcz, however, has begun
to question private ordering in ways consonant with those suggested here, and he concentrates
on the kinds of checks typically associated with administrative lawmaking (e.g., notice and
comment, direct government oversight), which is not emphasized—or advocated—here. See
Schwarcz, supra note 216, at 324–45. A different analysis is offered in Macey, supra note 140.
Another project takes on a similar task in the international arena. See Robert O. Keohane &
Joseph S. Nye, Jr., Between Centralization and Fragmentation: The Club Model of Multilateral
Cooperation and Problems of Democractic Legitimacy (Feb. 2001) (unpublished manuscript,
on file with the John F. Kennedy School of Government, Harvard University).
2003] PRIVATE LAWMAKING 421
default rules, the process seems attractive. It is more likely to achieve the goal—
Llewellyn’s goal—of molding law to commerce, and of molding the publicly
made law to immanent commercial norms.
A separate but related point is that private rulemaking seems likelier to be
nimble, responding more quickly, flexibly,221 and efficiently.222 Markets are
more likely to respond appropriately with optimal levels of regulation through
competition, rather than relying on the bureaucratic (and monopoly-prone) chop
of the state and the lawyers who can practice state-made law.223 In the past
decade or so formerly closed markets have opened. Businesses have had to adapt.
Electronic commerce was invented. The world spun past the law, creating
immeasurable friction. The law is changing and politicians have anxiously
catered to new needs. But public institutions have been slow, and there is some
real value in being slow,224 especially for the public lawmaker. Perhaps private
institutions can be faster, or at least involve less wasted effort.225 They might also
be able to avoid the entropic tendencies of law226 that push the common law into
ever greater complexity.227
This point in turn raises some important examples. As political bodies sought
to foster the new electronically based economy, especially during its boom days,
screens filled as new laws scrolled by at rates beyond comprehension. Some
states rushed in with digital signature statutes. Perhaps the most prominent was
the Utah Digital Signature Act, which was passed in 1995.228 It has been largely
irrelevant. The statute sought to implement a particular standard and to establish a
221 For a brief consideration, see Lawrence, supra note 10, at 654–55.
222 The economists’ work on private ordering suggests efficiency is relatively well served
by the competition enabled by private lawmaking, although some work also shows how
inefficiencies can result as well. See sources cited supra note 140. See also Hadfield & Talley,
supra note 2.
223 See generally Hadfield, The Price of Law, supra note 2; HADFIELD, LESSONS, supra
note 2, at 38–47. For a cautionary note, see Hadfield, supra note 219. Cf. James Boyle, A
Nondelegation Doctrine for the Digital Age?, 50 DUKE L.J. 5 (2000); Tamar Frankel, The
Managing Lawmaker in Cyberspace: A Power Model, 27 BROOK. J. INT’L L. 859 (2002); Jay
P. Kesan & Rajiv C. Shah, Fool Us Once Shame on You—Fool Us Twice Shame on Us: What
We Can Learn From the Privatizations of the Internet Backbone Network and the Domain
Name System, 79 WASH. U. L.Q. 89 (2001); Jonathan Weinberg, ICANN and the Problem of
Legitimacy, 50 DUKE L.J. 187 (2000).
224 See, e.g., Suzanna Sherry, Haste Makes Waste: Congress and the Common Law in
Cyberspace, 55 VAND. L. REV. 309, 315–16 & nn.19–21 (2002); see also Neal Devins,
Congress as Culprit: How Lawmakers Spurred on the Court’s Anti-Congress Crusade, 51
DUKE L.J. 435, 436 (2001); Francesco Parisi et al., The Value of Waiting in Lawmaking (2001)
(unpublished manuscript, on file with the George Mason University School of Law).
225 See Hadfield, Privatizing Commercial Law, supra note 2, at 41.
226 Hadfield, The Price of Law, supra note 2, at 1002.
227 See Hadfield, Privatizing Commercial Law, supra note 2, at 44.
228 See Utah Digital Signature Act, §§ 46-3-101 to -504 (2002).
422 OHIO STATE LAW JOURNAL [Vol. 64:371
coordination principle for making binding electronic contracts.229 The market has
been slow to put the technology to such a use, however, and the purported
coordination principle never became sufficiently generalized to be useful.230
Instead, most states followed the first private lawmaker on the scene. In 1999
NCCUSL promulgated a technologically neutral Uniform Electronic
Transactions Act.231 More than forty states adopted it by 2002, including
Utah.232 Now further private coordination is being sponsored and encouraged,233
which by all lights and recent experience seems a superior method of achieving
coordination than through public legislation. But this example is just one among
many. Publicly made law seems continually to disserve the developing economy.
A further related point comes up here. Privately made law, at least in a
number of instances, may be less likely to result in freezing or “encrustation,” as
some scholars have put it.234 Charles Goetz and Robert Scott have worried that
statutory and judicial encouragement and recognition of immanent commercial
law result in custom becoming rigid. This result can follow from simple path
dependence; following the status quo is easier than innovation, and a free ride on
previous effort can be nice.235 By simply following past practice, commercial
customs can thus freeze or become encrusted. What may be the worst example, as
229 See id. § 46-3-102(3), (4).
230 See, e.g., MANN & WINN, supra note 62, at 289–91; Jane K. Winn, The Emperor’s
New Clothes: The Shocking Truth About Digital Signatures and Internet Commerce, 37 IDAHO
L. REV. 353 (2001).
231 See UNIF. ELEC. TRANSACTIONS ACT § 2, cmt. 4 (1999).
232 Something of a wrench was thrown in when Congress passed the Electronic
Signatures in Global and National Commerce (E-SIGN) Act, 15 U.S.C. §§ 7001–7031 (2000).
To some degree the federal act gives way if a state adopts UETA. See 15 U.S.C. § 7002(a)(1)
(2000). The questions are complex, however, and unnecessary for the present inquiry.
233 See Industry Consortium Hopes to Issue Draft Guidelines on E-Authentication by
Mid-Year, 8 Elec. Com. & L. Rep. (BNA) 60 (Jan. 22, 2003); Industry Guidelines for
Electronic Signatures, Records Seek to Promote Online Contracting, 7 Elec. Com. & L. Rep.
(BNA) 858 (Aug. 28, 2002).
234 See Charles J. Goetz & Robert E. Scott, The Limits of Expanded Choice: An Analysis
of the Interactions Between Express and Implied Contract Terms, 73 CAL. L. REV. 261, 288–
305 (1985); see also Clayton P. Gillette, Harmony and Stasis in Trade Usages in International
Sales, 39 VA. J. INT’L L. 707, 721–32 (1999); Clayton P. Gillette, Lock-In Effects in Law and
Norms, 78 B.U. L. Rev. 813 (1998); Jody S. Kraus, Legal Design and the Evolution of
Commercial Norms, 26 J. LEGAL STUD. 377 (1997); Snyder, supra note 143, at 630–31.
235 See generally Marcel Kahan & Michael Klausner, Standardization and Innovation in
Corporate Contracting (or “the Economics of Boilerplate”), 83 VA. L. REV. 713 (1997);
Marcel Kahan & Michael Klausner, Path Dependence in Corporate Contracting: Increasing
Returns, Herd Behavior and Cognitive Biases, 74 WASH. U. L.Q. 347 (1996); Michael
Klausner, Corporations, Corporate Law, and Networks of Contracts, 81 VA. L. REV. 757
(1995); Russell Korobkin, The Status Quo Bias and Contract Default Rules, 83 CORNELL L.
REV. 608 (1998); Korobkin, supra note 202; Mark A. Lemley & David McGowan, Legal
Implications of Network Economic Effects, 86 CAL. L. REV. 479 (1998).
2003] PRIVATE LAWMAKING 423
usual,236 comes from UCC Article 4. It validates as prima facie ordinary care the
adherence to any “general banking usage not disapproved by this Article.”237
Such a provision discourages innovation by legally deeming a bank that ventures
past established usage to have sailed outside the safe harbor of ordinary care.238
Private lawmaking is obviously no solution to the general problem. Much of
the freezing that takes place is a result of the actions of the private lawmakers
themselves. The worst example is itself a product of private lawmaking. Perhaps
it is not the most private since it is the product of the generalist NCCUSL rather
than a specialized association, but it is privately made nonetheless, and all the
more so since the fingerprints of the banks’ lobbyists are unusually prominent.
But the kind of lawmaking that is at the most private end of the continuum would
seem most likely to be adapted and revised as the world changes and practices
develop. This is a matter of conjecture, but it surely seems easier for an industry
association to innovate than to get legislation passed in Congress or the many
states.
B. Law Outside Paradise: Conjectured Costs and Benefits
This is simply more conjecture, but it seems plausible to guess that in many
circumstances private lawmaking will be a relatively inexpensive process. Private
lawmaking cannot be compared to some perfect law handed down costlessly as
legal manna in paradise. Privately made law would seem to have two principal
competitors for comparison: publicly made law and two-party contracts.
Privately made law is certainly not free. How the investment is made and
how much is required will vary with the circumstances, and we do not and
probably cannot know how much it costs to make privately made law. But
picturing the bodies that make privately made law, and considering their
processes—especially when thinking of focused industry groups that do not dally
with outsiders—we may well guess that the rules are a lot cheaper than the
alternatives. The other options would be legislation drafted from scratch in fifty
states, or canned legislation in fifty states that was drafted and supplied by a
central source. Sometimes, at least, private lawmaking is likely to be considerably
less time consuming and expensive than public lawmaking.
Negotiating many discrete contracts is the other possibility. Anything
requiring actual negotiation is likely to be expensive and time-consuming,
especially when per-transaction costs are multiplied over thousands or millions of
transactions. It is easier, of course, to impose terms in adhesionary two-party
contracts. But it is easier and cheaper still to centralize the formulation and
drafting across many parties. The tentative conclusion has to remain: we cannot
236 See supra Part IV.B (discussing UCC § 4-103).
237 See U.C.C. § 4-103(c) (2001).
238 See MANN, supra note 62, at 91–92.
424 OHIO STATE LAW JOURNAL [Vol. 64:371
know for sure, and we certainly cannot know generally. But a significant amount
of the time, private lawmaking seems likely to be cheaper than the alternatives.
C. Respect for Autonomy
A typical question to ask of publicly made laws is whether they respect
individual choice, and if they do not, whether the law is worth the sacrifice of
autonomy. The answers for privately made laws appear mixed.
1. Escape and Competition
As a theoretical matter, privately made laws only have legal meaning for
those who voluntarily opt into the private regime. Parties will be subject to the
UCP only if they sign documents voluntarily submitting themselves to that
private regime. People are subject to the credit card rules only if they agree to be
bound by those rules. Because these privately made rules are meaningless without
an autonomous election into their regime, they would seem to show perfect
respect for autonomy. And the rules of the UCC and the Restatements are only
binding to the extent they are adopted or followed by public lawmakers, who
would presumably compromise autonomy only where necessary. The theoretical
answer is rosy on the autonomy score.
What makes all of these privately made rules look like law, however, is that
they are widespread in the economy and difficult or virtually impossible to
escape. On this more practical level—and the argument throughout has been on
this level—escape is impracticable. Staying free of the UCP in a letter of credit
transaction will be a tall order. Few individuals in our economy still function only
with paper money. Of those few, even fewer do so by choice. The UCP and the
credit card rules, as a practical matter, are not escapable.
On the other hand, the potential for competition provides some reassurance.
If the UCP rules were bad in some significant way for a meaningful segment of
the market, the market would presumably provide a solution (for an appropriate
price). Similarly, if another way of conducting consumer-type credit transactions
were preferable to the credit card rules, an efficient market would make the
alternative available. In other words, to the extent choice is economically
important, privately made rules remain open to competitive alternatives. While
these other options may be expensive to develop, that fact does not take away
from autonomous choice. A party who prefers the alternative only slightly will
instead take advantage of the existing (and nearly free) privately made rules. A
party who prefers the alternative more strongly will be willing to pay. It is a
matter for autonomous choice, constrained only by the fact that certain choices
are less expensive than others.
Rules made by private legislatures like NCCUSL and the ALI are not open to
the same kinds of competitive pressures as rules like the UCP or the credit card
2003] PRIVATE LAWMAKING 425
industry. Under the ipse dixit hypothesis, the product of these private lawmaking
bodies becomes legally indistinguishable from publicly made law, except with
respect to the lawmaking process itself. In other words, because these rules
actually gain the public imprimatur, they in effect are publicly made laws. What
can be said for them is that the examples we have considered generally accord a
fair amount of respect to autonomy. As we have noticed, their great bulk is
comprised of default rules, which are subject to change in accord with
autonomous decisionmaking, or coordination principles, which are discussed
next.
2. A Note on Coordination Principles
This article argued above that coordination principles are generally
innocuous in the sense that parties do not generally care to exercise choice on
issues governed by coordination principles. We do not care whether we drive on
the right side of the road or the left, just so long as everyone follows the same
rule. To the extent parties care about such issues, coordination principles are
frequently subject to manipulation.239 Coordination principles, in other words, are
important, but they are not particularly important to the arguments here.
On the other hand, in some situations coordination rules could conceivably
impinge on autonomy. This fact is essentially neutral, however, as privately made
coordination rules work the same as publicly made ones. Still, the point is worth
stating: sometimes parties will want to change the coordination principles, and in
some cases those principles will be insusceptible of the kind of change that the
parties would like. For example, records of security interests in personal property
are generally indexed according to the debtor’s name.240 This system works well
when the loan and the collateral are centered on a known debtor. Frequently, for
example, a single loan is made to a single debtor, which offers many items for
collateral. One filing against the debtor is helpful; the alternative—filing many
notices, one against each item of collateral—would be unwieldy. So for many
transactions this system seems to work fine.
In some settings, though, a debtor-centered system is inconvenient and
dangerous. Who the debtor is and what its name is can become difficult
questions, for instance, when trusts or individuals are concerned. In some cases,
an asset-centered system may work much better. Instead of filing a notice under
the debtor’s name, the secured party would file a notice under the asset itself (e.g.,
in the title registry with respect to a particular automobile, or in the copyright
registry with respect to a particular movie). A lender would not have to worry
about whether the debtor’s name is James Gibson Wheeler or Jim Wheeler or
J.G. Wheeler or the like. He would not have to worry about whether the trust
239 See, e.g., supra notes 167–69 and accompanying text.
240 See U.C.C. §§ 9-503 cmt. 2, -506(c) (2001).
426 OHIO STATE LAW JOURNAL [Vol. 64:371
owns property or the trustee owns the property. The lender can simply look up
the record for a car with a unique vehicle identification number and thus feel
considerably safer. Similarly, a lender to a film venture would not have to
concern itself with precisely what entity holds the copyright, which can be
particularly problematic if the copyright is transferred to multiple business entities
from the conception, revision, production, distribution, and archiving of the film.
A lender might feel safer filing the notice of the security interest in one central
place for the whole country, where any other potential lender or buyer would
know to look.
We can see, then, that sometimes a debtor-based system works best and
sometimes an asset-based system works best. Our law implements these
principles through the general debtor-based rule under Article 9,241 subject to
asset-based rules in particular areas.242 The law reflects the idea that different
methods of filing and search will work better or worse depending on the context.
In some instances, however, the parties will not be satisfied with the state of the
rules. While we might assume that asset-based filing works best for copyrights—
at any rate, that is the state of the law—in some copyright lending situations, the
system is grossly inconvenient, if not downright impractical. If a lender is taking
as collateral a whole film library, consisting of 145 films, 145 filings will be
necessary in an asset-based system. Only one filing would be necessary in the
usual Article 9 system.243 Yet the parties cannot change the coordination
principles by exercising autonomous choice.
The design of coordination principles, while usually innocuous,244 may
impinge upon autonomy sometimes. But this is the nature of coordination
principles—and even rules themselves245—and privately made rules do not
appear to be any different from publicly made ones. Some people may find it
more convenient to drive on the left side of the road, but it is more important to
have a rule that is simple enough for everyone to know and follow than to honor
autonomy in this situation.
241 See id.
242 See id. § 9-311; Nat’l Peregrine, Inc. v. Capitol Fed. Savs. & Loan Ass’n (In re
Peregrine Entm’t, Ltd.), 116 B.R. 194 (C.D. Cal. 1990) (Kozinski, J.); Copyright Act, 17
U.S.C. §§ 101, 201, 205 (2000).
243 See In re National Peregrine, Ltd., 116 B.R. at 202 n.10.
244 See supra Part V.A.3.
245 A particularly useful but often overlooked analysis is in Frederick Schauer, Rules and
the Rule-Following Argument, 3 CAN. J.L. & JUR. 187 (1990), reprinted in WITTGENSTEIN AND
LEGAL THEORY 225 (Dennis M. Patterson ed., 1992).
2003] PRIVATE LAWMAKING 427
3. Paternalism
On this count some difference may be observed between legislative rules and
contractual rules.246 Although both sets of rules betray occasional signs of
paternalism, the tendency seems more pronounced in legislative rules.
Contractual rules appear to tend away from paternalistic concerns, with the chief
exceptions apparently market-driven, which would suggest that they are not
paternalistic after all. Rather, they are bargained-for, valued terms, in the sense of
being demanded by the market. One interesting question, as will appear, is
exactly which market demands the concession, or better put, which competitive
forces are at work.
As one would expect, the UCP evinces little paternal solicitude, and
presumably the parties to letters of credit should rarely be in need of much
parental guidance.247 The story is much the same with the diamond dealers’ rules,
which even cut off resort to public bankruptcy protection for anyone who hopes
to remain viable in the business.248 Other contractual rules, such as those in the
credit card context, show little if any parental concern. On many views, in fact,
the credit industry does just the opposite, enticing the consumer with attractive
introductory rates only to thrust up the rates later—a business practice that hardly
shows the kind of concern associated with parents. The credit card industry
employs some devices that are even more deceptive.249
Some of the credit card rules do protect consumers, and that of course is the
interesting part of the story. Two instances demonstrate two different marketrelated
ideas. In one, the credit card associations put in place a rule limiting
cardholder liability for unauthorized transactions with a debit card. Although
federal law would permit considerably greater liability,250 the credit card
associations limited consumer liability to fifty dollars.251 Apparently because
246 Recall that the phrases legislative rules and contractual rules are defined supra Part I.
247 Cf. Lake River Corp. v. Carborundum Co., 769 F.2d 1284, 1289 (7th Cir. 1985)
(“[R]efusal to enforce penalty clauses is (at best) paternalistic—and it seems odd that courts
should display parental solicitude for large corporations.”).
248 See Bernstein, supra note 7, at 128–29.
249 Even the Office of the Comptroller of the Currency found some practices beyond the
pale. See Consumer Credit—Credit Cards: Providian National Bank Settles OCC Charges of
Unfair and Deceptive Credit Card Practices, Greenspan Says Agencies May Use FTC Act to
Target Banks’ Unfair, Deceptive Practices, 70 U.S.L.W. 2777 (June 11, 2002) (reporting the
$330 million fine of Providian National Bank of San Francisco for unfair and deceptive
practices in violation of Federal Trade Commission Act § 5, 15 U.S.C. § 45).
250 Electronic Fund Transfers Act § 909(a), 15 U.S.C. § 1693g(a) (2000); Federal Reserve
Board Regulation E, 12 C.F.R. § 205.6 (2002).
251 See, e.g., Saul Hansell, Visa Reduces Liability on Lost or Stolen Debit Cards, N.Y.
TIMES, Aug. 14, 1997, at D4 (noting Visa and MasterCard reduction of liability to $50—or zero
if reported quickly—and threat of federal legislation).
428 OHIO STATE LAW JOURNAL [Vol. 64:371
federal lawmakers were considering changes to the publicly made rules, the credit
card associations moved first, regulating the relationships between themselves,
the cardholders, and the merchants before Congress could change the regulatory
landscape.252
Another instance demonstrates how the credit card associations moved as an
apparent concession not to potential competitive lawmaking but to cardholder
demand. Consumer fears about Internet fraud were hampering the ability of the
credit card associations to capture the consumer Internet payment market (B2C or
B2P). As an apparent response to these consumer concerns, and perhaps in a
reaction to moves by American Express, the Visa and MasterCard associations
implemented zero-liability schemes for fraudulent credit card transactions over
the Internet. Consumers evidently felt reassured, and credit cards now occupy
virtually all of the B2P payment market, despite earlier predictions that credit
cards could not work on the Internet253 as well as ongoing efforts by Web-based
companies to move into the payments market.254 Competition again drove the
rulemaking.
On the legislative rulemaking end, more paternalism is apparent. Whether
this seeming pattern is anything more than accidental is hard to tell. Llewellyn put
quite a fair amount of paternalist legislation in the earlier drafts of the UCC; some
but not all of it survived the hearing and enactment process.255 Probably the most
prominent example is the unconscionability rule,256 which (at least as applied)
prevents some people from making certain presumably bad choices.257 These
paternalistic traces are not limited to Llewellyn258 or the UCC. The Restatement
(Second) of Contracts, in one of its more controversial provisions,259 shows
similar concern about the hapless victim of the ubiquitous form contract. Under
the Restatement rule, unexpected terms in a form fail to become part of the
contract if they are sufficiently important.260 The members of the ALI, at the
252 See Electronic Fund Transfers Act § 909(a), 15 U.S.C. § 1693g(a) (2000), which
remains unchanged.
253 See, e.g., MANN, supra note 62, ch. 2, assgt. 16.
254 See generally MANN & WINN, supra note 62, at 457.
255 See Kamp, Downtown Code, supra note 18.
256 See U.C.C. § 2-302 (2001).
257 See, e.g., Williams v. Walker-Thomas Furniture Co., 350 F.2d 445, 450 (D.C. Cir.
1965) (Danaher, J., dissenting).
258 See U.C.C. § 2A-108 (2001).
259 See RESTATEMENT (SECOND) OF CONTRACTS § 211 (1981); James J. White, Form
Contracts Under Revised Article 2, 75 WASH. U. L.Q. 315, 323 (1997); cf. Robert A. Hillman
& Jeffrey J. Rachlinski, Standard-Form Contracting in the Electronic Age, 77 N.Y.U. L. REV.
429, 458–59 (2002).
260 Technically, the rule is slightly more complicated, or at least circumlocutory:
2003] PRIVATE LAWMAKING 429
same time that they expect parties to be bound to agreements regardless of
whether they have read or understood the documents,261 attempt to protect such
people from any significant folly.
To some observers, the private lawmaking process is particularly prone to
such paternalism, fraught as the ALI and NCCUSL are with left-leaning
academics.262 Certainly one may see such tendencies in the process, but the final
outcomes seem to be considerably softened by business interests that appear
thoroughly capable of protecting their interests.263 Softened even unto mush, one
might say.264 Too much consumer protection could turn the privately made rules
into academic debates265 rather than privately made law. The bottom line seems
to be that privately made law, at least in the examples under examination here,
shows some traces of paternalist tendencies, but they rarely rise to the point of
raising serious concerns about respect for autonomy. Closely related to paternalist
concerns—what may in fact be the same concern, differently stated—arises from
problems of exclusivity.
D. Exclusivity and Equality
Although privately made legislative rules seem innocuous enough, in that
they usually reach a general adoption level that approximates publicly made laws
and thus raise few exclusivity problems, many contractual rules raise grave issues
of exclusivity, and thus of equality. A number of private lawmaking regimes
Where the other party has reason to believe that the party manifesting assent [to a writing
when he has reason to believe like writings are regularly used to embody terms of
agreements of the same type] would not do so if he knew that the writing contained a
particular term, the term is not part of the agreement.
RESTATEMENT (SECOND) OF CONTRACTS § 211 (1981).
261 See id. § 211(2).
262 As the former reporter for the Article 2 revision has said (with tongue perhaps only
partly in cheek), at least the first part of the process was perceived as being shaped by “a bunch
of liberal law professors.” See Audio tape: Proceedings of Joint Session of Sections on
Contracts and Legislation, Association of American Law Schools: Statement of Richard E.
Speidel (Jan. 7, 2001) (on file with Cleveland State University Law Library).
263 See Richard E. Speidel, Revising UCC Article 2: A View from the Trenches, 52
HASTINGS L.J. 607, 617 (2001). See generally Symposium, Perspectives on the Uniform Laws
Revision Process, 52 HASTINGS L.J. 603 (2001) (including views of Fred Miller, Gail
Hillebrand, Lance Liebman, Henry Gabriel, Neil B. Cohen, and Robert E. Scott); Linda J.
Rusch, A History and Perspective of Revised Article 2: The Never Ending Saga of a Search for
Balance, 52 SMU L. REV. 1683 (1999).
264 This is largely the view of Schwartz and Scott, supra note 10, as Jean Braucher noted,
see Symposium, Questions and Answers, 52 HASTINGS L.J. 691, 699 (2001).
265 See James J. White, Comments at the 1997 AALS Annual Meeting: Consumer
Protection and the Uniform Commercial Code, 75 WASH. U. L.Q. 219 (1997).
430 OHIO STATE LAW JOURNAL [Vol. 64:371
envision an economic club (and what some might call a cartel).266 Some aspects
of this clubbishness raise antitrust concerns, which receive treatment
separately.267 The issue for the moment is the kind of exclusivity that has more
paternalist and efficiency-related concerns in mind, although we should note
clearly that this supposedly “benign” exclusivity could easily have the same
monopolistic or oligarchic effects.
Perhaps the problem might be described by analogy to a private garden. The
commons is the place of tragedy.268 The private garden is the place for idylls.
Readers who have enjoyed some probing London walks will know the private
garden: it is often a fenced green space in a city square, surrounded by graceful
well-kept townhouses. The fence has a gate, and the gate is locked. Often dense
shrubbery lines the inside of the fence, but a peek through a break will reveal a
space that is beautiful and green. The garden is not open to the public. It is owned
by an association of private parties, frequently the proprietors of the surrounding
townhouses. The garden is exclusive, membership being confined to those who
can afford it, those who have a sufficient stake in it, those who will treat it well,
perhaps even those who will not detract too much from its atmosphere. Too many
people would undo the privacy of the garden, condemning it to the commons
tragedy. If the commons is tragic, why not a private garden?
Commerce knows private gardens too. The New York Diamond Dealers
Club is a commercial private garden. It is kept small enough to be manageable.
Even qualified merchants are excluded.269 We might call this an efficiency
concern: too many traders would be unwieldy and inefficient. Sufficiently small
groups help establish reputations that make doing business easier and more
efficient.270 Reputation is particularly important in contracting contexts, since the
legal remedy is undercompensatory.271 In smaller groups helpful shortcuts and
customs can also become readily established.
266 See John R. Wilke, Debit-Card Suit Now Can Proceed as Class Action, WALL ST. J.,
June 11, 2002, at A2 (quoting plaintiff’s counsel with respect to “credit-card cartel”); see also
United States v. Visa U.S.A., Inc., 163 F. Supp. 2d 322 (S.D.N.Y.), modified, 183 F. Supp. 2d
613 (S.D.N.Y. 2001).
267 See infra Part VII.D.
268 See Garrett Hardin, The Tragedy of the Commons, 162 SCIENCE 1243, 1244–45
(1968); see, e.g., ELINOR OSTROM, GOVERNING THE COMMONS: THE EVOLUTION OF
INSTITUTIONS FOR COLLECTIVE ACTION 182–84 (1990). Of course the anti-commons can have
tragedies of its own. See, e.g., Michael A. Heller, The Tragedy of the Anticommons: Property in
the Transition from Marx to Markets, 111 HARV. L. REV. 621 (1998).
269 See Bernstein, supra note 7, at 119.
270 See id.; Richman, supra note 128; Clayton P. Gillette, Reputation and Intermediaries
in Electronic Commerce, 63 LA. L. REV. 1165 (2002).
271 The law school orthodoxy is that expectancy damages are awarded in contracts cases,
putting the aggrieved party in the position it would have occupied had the contract been kept.
See E. ALLAN FARNSWORTH, CONTRACTS § 2.1 (3d ed. 1999). In reality the damages are
2003] PRIVATE LAWMAKING 431
Other private gardens are essentially paternalist in nature. This is the case
with the select group of people known as accredited investors. Special
opportunities for investing are reserved for these accredited investors, who are
generally institutions or “high net worth individuals.”272 The returns are high, but
so are the risks. Hoi polloi are thus excluded. It is for their own good, after all;
they would not understand the risk involved. (But they will not enjoy the gains
either.)273 This example illustrates the paternalistic urge behind exclusivity.
Let us now see how these principles might hypothetically be put into
operation in the context of private lawmaking. The New York Diamond Dealers
Club is predominantly Jewish,274 and observation suggests that a large number
are Orthodox Jews.275 For the sake of efficiency (and all the other goodies that go
with small and exclusive clubs), confining membership to the Orthodox might
make excellent sense. Perhaps the rule might be slightly better tailored by
confining membership to those who speak Yiddish fluently. That way non-Jews
would not be excluded on grounds of religion, and a fair number of Jews would
be excluded, since many Jews would lack the language skills. As important
business is actually conducted in Yiddish,276 this would be an eminently sensible
rule, one might argue. Everyone could understand each other; members would be
working within their own communities of discourse;277 unusual customs and
hours would not seem odd,278 and everything would be very efficient. Moreover,
ignorant Christians, Muslims, Jews, and others would be protected from the
seriously undercompensatory. See, e.g., United States v. Stump Home Specialities Mfg., Inc.,
905 F.2d 1117, 1121–22 (7th Cir. 1990) (Posner, J.).
272 See Rule 501(a), 17 C.F.R. § 230.501, Rule 506(b)(2)(ii), 17 C.F.R. § 230.506 (2002);
see also 17 C.F.R. § 230.144A (2002). See generally Securities Act § 4(2), 15 U.S.C. § 77d(2)
(2000). Some scholars suggest a similar rule to protect homeowners from inappropriate loans
by imposing a “suitability” requirement. See Engel & McCoy, supra note 198.
273 Theoretically hoi polloi might participate by engaging a qualified “purchasers
representative.” See Rule 501(h), 17 C.F.R. § 230.50(h). The practical effect of this theoretical
possibility, however, is limited. At the very least, it raises a barrier to entry, and the barrier is
imposed on those most likely to be deterred by added cost because, by definition, they do not
enjoy high net worth.
274 See Rabinowitz v. Olewski, 473 N.Y.S.2d 232, 234 (N.Y. Sup. Ct. 1984).
275 See Richman, supra note 128, at 9.
276 See Bernstein, supra note 7, at 121 (“[H]andshake accompanied by words mazel
u’broche creates a binding agreement.”) I am grateful to Professor Jeffrey Veidlinger for
linguistic assistance.
277 See Snyder, supra note 143, at IV.B; see also Randy E. Barnett, The Sound of Silence:
Default Rules and Contractual Consent, 78 VA. L. REV. 821, 882 (1992); Richard A. Epstein,
Confusion About Custom: Disentangling Informal Customs from Standard Contractual
Provisions, 66 U. CHI. L. REV. 821, 824 (1999).
278 Orthodox Jews need to stop work Friday afternoon to prepare for the Shabbos, which
takes place from Friday at sundown until Saturday at sundown. During the Shabbos, no work
(as defined by recondite religious law) is allowed.
432 OHIO STATE LAW JOURNAL [Vol. 64:371
inevitable missteps, misunderstandings, and mistakes—some potentially quite
costly—that would arise from doing business with the Orthodox.
From the standpoint of respect for equal human worth and dignity, of course,
this hypothetical rule would border on the egregious. This kind of judgment is
expressed in the 1866 Civil Rights Act, in which the right to contract and to own
property is protected without regard to race and religion, among other things.279
Innumerable state laws express similar judgments, including the laws that would
apply in New York.280 And to be clear, the New York Diamond Dealers Club has
no such rule,281 and I presume would certainly never consider one. Still, the kind
of private lawmaking power that we accord to groups through the power of
contract raises these sorts of questions. Whenever we allow private gardens—and
they are beautiful—questions of exclusivity and equality arise.
E. Representation: Maybe a Little, Haphazardly
The most obviously troubling aspect of privately made laws is that they are
privately made. They are not a product of public democratic processes, except in
occasional haphazard ways. Often, the sponsoring organizations for legislative
rules like the idea of representation and make efforts to include those who might
be affected. The sponsors will even subsidize some groups in order to hear their
voices. The makers of contractual rules tend to be less magnanimous.282
The clearest example of the exclusive lawmaking process of contractual rules
is the credit card rules. Not only are they not subject to public input when they are
made, they are kept secret. Although the rules will affect many people aside from
the rulemakers, the rulemaking is done by a group that excludes many of the
affected parties. Slightly less extreme is the UCP. It is a product of a working
group within the Banking Commission of the ICC and in the end was made by
ten men, almost all of whom represent banks or associations of banks. All are
279 42 U.S.C. § 1981(a):
All persons within the jurisdiction of the United States shall have the same right in every
State and Territory to make and enforce contracts, to sue, be parties, give evidence, and to
the full and equal benefit of all laws and proceedings for the security of persons and
property as is enjoyed by white citizens . . . .
280 N.Y. EXEC. LAW § 296 (Gould 2002); N.Y. CITY ADMIN. CODE § 8-101 (McKinney
2002).
281 In fact, about 10% of members are not Jewish. See Richman, supra note 128, at 9 n.24
(citing Robin Pogrebin, Struggling to Bring Back the Glitter, N.Y. TIMES, Aug. 23, 1998, § 14,
at 1).
282 See Miller, supra note 35. For a different take on the question of democracy in private
lawmaking, see Slawson, supra note 142. Professor Slawson sees the democratic question as
revolving around the real agreement of the two parties to the contract. See, e.g., id. at 530; see
also supra notes 146–47 and accompanying text (discussing Slawson).
2003] PRIVATE LAWMAKING 433
European or British in affiliation, save one. Nine represent banks (or associations
of banks) or are bankers. The tenth was an ICC employee, who provided staff
support.283
In considering the impact of private lawmaking on representation, it is useful
to remember who the lawmaking bodies are. The ALI does not purport to be
representative or democratic. The founding ideal was the opposite. The ALI
founders set out to fix the law that resulted from public and democratic processes,
and they aimed to do a better job at lawmaking than could happen without their
elite guidance. The last thing the ALI founders wanted was a political lawmaking
process answerable to the populace.284 So the ALI is not a representative
lawmaking body, and historically, at least, it has not aimed to be.
The National Conference is a bit different, although it certainly has its own
elitist aspects.285 It is quasi-political, in the sense that the governor appoints the
commissioners from most states.286 Some might say it is a governmental
organization,287 or even a democratic body;288 primarily NCCUSL insiders, and
most prominently, its former executive director take this line.289 The funding
comes from state appropriations, grants, and royalties on the UCC.290 While the
funding through state appropriations may give NCCUSL the appearance of
governmental status, it is not part of any government. And in terms of funding,
the reliance on royalties from the UCC, its most successful product, emphasizes
its private nature. Governments do not habitually depend upon royalties derived
from asserting intellectual property rights in and charging money for the laws
they produce.
Regardless of how public or political these private lawmaking bodies claim
to be, their vulnerability to industry influence is inevitable. It has become
common enough to discuss whether interest groups have “captured” legislatures
or agencies, and this sort of question is now leveled with some frequency at the
ALI and NCCUSL.291 The mere prospect of capture in the enacting statehouses
283 See UCP, supra note 72, at 6; Telephone Interview, supra note 84. For a mild
qualification (about the use of surveys and soliciting comments from affected parties or
industries), see supra note 178.
284 See Lance Liebman, The ALI and the UCC, 52 HASTINGS L.J. 645, 647 (2001)
(quoting G. Edward White, The ALI and the Triumph of Modernist Jurisprudence, 15 LAW &
HIST. REV. 1 (1997)).
285 See White, supra note 10, at 2096–97.
286 See Fred Miller, The View from Experience, 52 HASTINGS L.J. 621, 623 (2001).
287 Id. at 621.
288 Neil B. Cohen, Taking Democracy Seriously, 52 HASTINGS L.J. 667 (2001) (conflating
the NCCUSL process with democracy).
289 Fred Miller was the executive director of NCCUSL through 2001. The current
executive director is William Henning.
290 Miller, supra note 286, at 623.
291 See, e.g., Schwartz & Scott, supra note 10, at 643; see also supra notes 35–37.
434 OHIO STATE LAW JOURNAL [Vol. 64:371
may effectively render the private lawmaking bodies the objects of capture
themselves.292 A subsidiary point of this article, though, is that in many important
instances, no capture is needed. Capture implies that a once independent being
has been reduced to possession or control. The organizations that make the credit
card rules and that formulate the practices for letters of credit were never public
bodies captured by a particular industry. So when we broaden the view to include
private lawmaking bodies other than the ALI and NCCUSL, we can see that
many were born in captivity.
Even for the ALI and NCCUSL, which purport to make decisions
independent of the wishes of industry or other special interests, capture is a
constant theme. It has been discussed ably elsewhere,293 and this is not the place
to rehash the arguments. However, in summary it is worth noting that the
arguments, which are at least plausible and to many convincing, suggest that
wealthy, well-organized groups exert disproportionate power.294
Capture is not unique to private lawmaking bodies. Public bodies are even
more prominently accused.295 The question becomes whether private lawmaking
bodies—at least those that were not born in captivity—are easier to capture than
public ones. The answer appears complex, and certainly too complicated to
consider in detail here. The easy observation is that the answer is likely to vary
according to the characteristics of the different lawmaking bodies—and, not to be
forgotten—the characteristics of the group attempting the capture.
Scholars have only begun to consider these questions. As discussed above,
Professors Schwartz and Scott have compared the private lawmaking process of
the UCC with potential public analogs. And as Professor Janger has argued,
NCCUSL and the ALI may be effectively captured more easily because they
need to anticipate potential capture of (at least some) statehouses. On the other
side of the equation, the putative captors are differently placed. Wealthy business
or industry groups seem to have a decided advantage when the playing field is
larger.296 That is to say, when the lawmaking process is more protracted and
diffuse, ranging over many years or many states, the wealthy seem to have more
success. Less wealthy and more diffuse interest groups seem to do better in
Congress, which, whatever its faults, is located in one place. Certainly there are
292 See Janger, supra note 35, at 579; Larry T. Garvin, The Changed (and Changing?)
Uniform Commercial Code, 26 FLA. ST. U. L. REV. 285, 359–60 (1999).
293 See supra notes 35–37 (collecting conflicting authorities).
294 For the most part, these are the authorities cited supra note 35.
295 See generally GORDON ADAMS, THE POLITICS OF DEFENSE CONTRACTING: THE IRON
TRIANGLE (1981). For a collection of authorities, see Einer R. Elhauge, Does Interest Group
Theory Justify More Intrusive Judicial Review?, 101 Yale L.J. 31, 42 (1991); and Ronald J.
Krotoszynski, Jr., The Inevitable Wasteland: Why the Public Trustee Model of Broadcast
Television Regulation Must Fail, 95 MICH. L. REV. 2101, 2117–18 (1997).
296 Gail Hillebrand, What’s Wrong with the Uniform Law Process?, 52 HASTINGS L.J.
631 (2001).
2003] PRIVATE LAWMAKING 435
countless examples of the UCC giving the advantage to business or banking
interests, with countervailing consumer protections to be found in reactive and
preemptive federal legislation. Rules on warranties of goods,297 availability of
funds,298 and protection from creditors’ remedies299 quickly come to mind.
The problem of capture, then, while fitting snugly under the rubric of
representation, is really a separate issue. Public bodies whose representativity is
monitored with extraordinary care, such as the United States House of
Representatives, appear just as subject to accusations of capture. But this fact
should not diminish the unavoidable fact that private lawmaking will be
representative in, at best, a haphazard way. Some private rulemaking
organizations might constitute themselves in such a way as to achieve good
representation. Some will not. Whether they do seems irrelevant to their success
in getting their privately made rules accepted as law. The purportedly “state
governmental” body of NCCUSL has had no more success than the avowedly
elitist ALI.
As we cannot depend on representation as a justification for private
lawmaking,300 the alternative justification—and perhaps a better one, given the
vulnerability of representative bodies to capture—is competition. Representation
does not work well; can competition work better? Theoretical arguments suggest
that it might. Whether theory will survive the marketplace is, as always, a more
difficult question. At the moment—before too much reality interferes—there is
reason for optimism. The hope comes from viewing competitive lawmaking as a
form of federalism.
VII. MOLECULAR FEDERALISM
A. Competitive Private Lawmaking
The hopeful side is premised on the potential for bottom-up lawmaking,301
and the necessarily non-exclusive character of truly private lawmaking. The
297 See Magnuson-Moss Warranty—Federal Trade Commission Improvement Act, 15
U.S.C. §§ 2301–2308, 2310(d)(2) (2000).
298 See Expedited Funds Availability Act, 12 U.S.C. §§ 4001–4010 (2000).
299 While state law often emphasizes creditors’ rights, the rights of consumer debtors have
traditionally received significantly better protection under the federal bankruptcy laws. Perhaps
the most useful debtor-protection citation is 11 U.S.C. § 362 (2000), providing an automatic
stay of creditors’ collection actions the instant that someone files for federal bankruptcy
protection.
300 For consideration of the representation question in contexts very different from those
discussed here, see Lawrence, supra note 10, at 669–72.
301 See JAY P. KESAN & ANDRES A. GALLO, OPTIMIZING INTERNET REGULATION (Univ.
of Ill. Coll. of Law, Law & Econ., Working Paper No. LE02-001, 2003), available at
http://papers.ssrn.com/abstract=289668 (discussing and analyzing both regulatory models).
436 OHIO STATE LAW JOURNAL [Vol. 64:371
usual, public lawmaking model depends on some public body deciding what the
law is and announcing it in the appropriate mode (enacting a statute,
promulgating a regulation, issuing an executive order, handing down a
judgment). Although in the United States most public lawmaking bodies have at
least some pretense at representation and accountability, this model is top-down
lawmaking. The rule is authoritatively made by the public authority, which is the
apex of the pyramid; and the rule will apply to everyone in the jurisdiction, the
wide base of the pyramid. This is the form of our representative, republican
democracy, and seems inherent in public lawmaking where direct democracy is
impracticable.302
By contrast, in a private, competitive lawmaking scheme, different putative
private lawmakers can compete for adherents. Those adherents could be
legislatures, courts, or contracting parties. If the terms of the UCP became
objectionable to enough users of letters of credit, they could seek alternatives
through the marketplace. Less simply, they could devise their own regime, which
they could publish and incorporate as a contractual term in letters of credit. In any
event, competition remains possible. Obviously the ICC and the UCP may have
considerable advantages because they came first.303 The effects of path
dependence in private lawmaking will make themselves felt as in public
lawmaking.304
The obstacles to reform are not nearly as great with private lawmaking,
however. No new legislation is required, no reversal of judicial precedent, no
instigation of an administrative agency. Market participants simply need to
convince—whether through force of argument or more straightforwardly, by
paying a price—a counterparty to accept a different regime. Just as citizens
(including corporate citizens) are not bound to stay in a state, they are not bound
to a private legal regime. Terms of some kinds of corporate contracts may
become so highly standardized as to become law, in a sense: If issuance of
corporate bonds requires Terms A and B because of standardized expectations,
where A and B come to have legally standard judicial meanings, then terms A and
B are law just as much as a state law that says that issuance of large bonds
requires board approval. Yet exit to another state, or paying a higher interest rate
Less hopeful about private lawmaking, albeit in the different context of legal development (or
lack thereof) through increased arbitration, is Chris A. Carr & Michael R. Jencks, The
Privatization of Business and Commercial Dispute Resolution: A Misguided Policy Decision,
88 KY. L.J. 183 (1999–2000) (arguing that since the common law aids commercial
development and privatizing dispute resolution stunts the growth of the common law,
privatized dispute resolution is misguided).
302 See DONALD KAGAN, PERICLES OF ATHENS AND THE BIRTH OF DEMOCRACY (1991)
(discussing classical Athens, the most prominent example of direct democracy). For the idea of
direct democracy, see id. at xiii, 1–2.
303 Cf. United States v. Visa U.S.A., Inc., 163 F. Supp. 2d 322, 353 (S.D.N.Y. 2001).
304 Cf. supra note 235 (citing sources).
2003] PRIVATE LAWMAKING 437
in order to avoid terms A and B, both remain viable. American experience has
witnessed all of these phenomena. With molecular federalism, the consumers of
the laws are always free to make other laws of their own.305
In this way, privately made laws give hope for bottom-up lawmaking, that is,
lawmaking done by the consumers rather than by the state. The laws come from
the base of the pyramid, not the apex. By this light, everyone is a potential
lawmaker. Whether the potential lawmaker becomes an actual lawmaker is
simply a question of whether enough other parties decide to join the regime. That
dynamic raises the idea of molecular federalism. Just as private lawmaking
should be subject to question and criticism, it also holds great potential. With
good reason, Americans can be enthusiastic about federalism. Molecular
federalism, based on the small-scale compounds of private lawmaking, offers
similar potential. To understand the molecular dynamic, let us first consider the
shape of public federalism.
B. Federalism and Public Lawmaking
Federalism in the United States is a double phenomenon. In its first aspect,
power is divided between the national government (the federal government) and
more local governments (the states). In its second aspect, the power of the states
is allotted to many entities (about fifty at the moment, depending on how one
counts), each of which is sovereign in its jurisdiction. The second aspect is
subject to the first; the sovereignty of each state within its own borders is subject
to the power conceded to the nation. 306 In other words, federalism has a vertical
aspect (the first) and a horizontal aspect (the second).307
Federalism permits experiments in democracy,308 but viewed differently, it
allows for competitive lawmaking. For the lawmaking to take on a fully
305 See generally Kahan & Klausner, supra note 235; Klausner, supra note 235; Jody S.
Kraus, Legal Design and the Evolution of Commercial Norms, 26 J. LEGAL STUD. 377 (1997).
306 This power derives from the Supremacy Clause, U.S. CONST. art. VI, cl. 2, subject to
whatever limits there are on federal power. See generally id. amends. X, XI; United States v.
Morrison, 529 U.S. 598 (2000) (invalidating Violence Against Women Act); United States v.
Lopez, 514 U.S. 549 (1995) (invalidating Gun-Free School Zones Act).
307 On the horizontal and vertical characterization, see Kevin H. Smith, Justice for All?:
The Supreme Court’s Denial of Pro Se Petitions for Certiorari, 63 ALB. L. REV. 381, 409
n.101 (1999) (citing, inter alia, Dan L. Burk, Federalism in Cyberspace, 28 CONN. L. REV.
1095, 1100 (1996)).
308 See New State Ice Co. v. Liebmann, 285 U.S. 262, 311 (1932) (Brandeis, J.,
dissenting) (“It is one of the happy incidents of the federal system that a single courageous State
may, if its citizens choose, serve as a laboratory and try novel social and economic
experiments.”); see also FELIX FRANKFURTER, THE PUBLIC AND ITS GOVERNMENT 49 (1930)
(“[O]ur federalism calls for the free play of local diversity in dealing witih local problems.”);
Akhil Reed Amar, Five Views of Federalism: “Converse-1983” in Context, 47 VAND. L. REV.
1229 (1994) (elaborating on this point).
438 OHIO STATE LAW JOURNAL [Vol. 64:371
competitive character, we need to conceive of consumers of laws. Although
perhaps a bit strange, the concept is not too difficult. Parties can, within limits,
choose the law that will apply to their transaction. Courts generally honor choice
of law clauses, at least if the chosen jurisdiction bears a reasonable relation to the
transaction.309 More recent trends allow even greater freedom, at least for
commercial parties,310 following the lead of some prominent commercial
jurisdictions311 and business practices in international transactions.
Scholars have begun to consider the idea of regulatory competition, primarily
in the public realm. They have focused their attention on corporate law and
securities markets312 or on the effect of choice-of-law clauses,313 particularly in
309 See former U.C.C. § 1-105 (still in force in these states, although now replaced by
NCCUSL and ALI with U.C.C. § 1-301).
310 See U.C.C. § 1-301 (2001); see also U.C.C. §§ 4A-507(b), 5-116(a) (2001) (validating
choice of law in particular contexts). This freedom is tempered by paternalism in consumer
transactions, see U.C.C. § 1-301 (2001); U.C.C. § 2A-106 (2001), and the need for immutable
rules for the sake of coordination. See, e.g., id. §§ 9-301 to -307. For other specific choice of
law rules, see id. §§ 4-102, 4A-507, 5-116, 8-110.
311 See N.Y. GEN. OBLIG. LAW § 5-1401 (McKinney 2002) (allowing parties to choose
New York law in large transactions even if the transaction does not bear a reasonable relation to
New York).
312 Lucian Arye Bebchuk & Assaf Hamdani, Vigorous Race or Leisurely Walk:
Reconsidering the Competition over Corporate Charters, 112 YALE L.J. 553 (2002); Lucian
Arye Bebchuk & Allen Ferrell, A New Approach to Takeover Law and Regulatory
Competition, 87 VA. L. REV. 111 (2001); Jonathan R. Macey, Displacing Delaware: Can the
Feds Do a Better Job Than the States in Regulating Takeovers, 57 BUS. LAW. 1025 (2002);
Lucian Arye Bebchuk & Allen Ferrell, On Takeover Law and Regulatory Competition, 57 BUS.
LAW. 1047 (2002); Stephen J. Choi, Law, Finance, and Path Dependence: Developing Strong
Securities Markets, 80 TEX. L. REV. 1657 (2002); Anthony Ragozino, Domesticating the
United States’ Securities Laws: The Ninth Circuit Joins the Majority in Enforcing Forum
Selection and Choice of Law Clauses Displacing U.S. Law in Richards v. Lloyd’s of London,
10 PACE INT’L L. REV. 31 (1998); see also Richard Revesz, Federalism and Regulation: Some
Generalizations, in REGULATORY COMPETITION AND ECONOMIC INTEGRATION: COMPARATIVE
PERSPECTIVES 3 (Daniel C. Esty & Damien Geradin eds., 2000) [hereinafter REGULATORY
COMPETITION]; Daniel C. Esty & Damien Geradin, Regulatory Co-Opetition, in REGULATORY
COMPETITION, supra, at 30; Daniel Shaviro, Some Observations Concerning Multijurisdictional
Tax Competition, in REGULATORY COMPETITION supra, at 49; Jonathan R.
Macey, Regulatory Competition in the US Federal System: Banking and Financial Services, in
REGULATORY COMPETITION supra, at 95; Paul B. Stephan, Regulatory Cooperation and
Competition: The Search for Virtue, in TRANSATLANTIC REGULATORY COOPERATION: LEGAL
PROBLEMS AND POLITICAL PROSPECTS 167 (George A. Bermann et al. eds., 2000); Hadfield &
Talley, supra note 2. For a discussion of why the usual public choice analogy of politics to
markets falls short, see ROBERT D. COOTER, THE STRATEGIC CONSTITUTION (2000), and Parisi,
supra note 205.
313 Erin Ann O’Hara, Opting Out of Regulation: A Public Choice Analysis of Contractual
Choice of Law, 53 VAND. L. REV. 1551 (2000); Erin A. O’Hara & Larry E. Ribstein, From
Politics to Efficiency in Choice of Law, 67 U. CHI. L. REV. 1151 (2000); Amelia Boss, The
2003] PRIVATE LAWMAKING 439
the electronic context.314 There is also some work on the uniform law process.315
The scholarship is still new, and it has not yet achieved a consensus. As might be
expected, there are optimists and pessimists, depending in part on politics,
method, and discipline. Even scholars with the same basic approach have not yet
come together.316 All of this scholarship has implications for molecular
federalism, although little of it is squarely on point.
To extrapolate on the optimistic side, we might gather from these scholars
that the parties will choose the most efficient rules among the many choices.
Efficiency is most likely to be fostered when choices are available. Different
parties can choose different regimes for different needs. A unitary regime, to
achieve efficiency, would have to devise the most efficient rule, and it would
have to work efficiently across countless industries and transactions. A unitary
regime is therefore an unattractive option. More choices, at least initially, are
better: assuming the parties behave as the economists would have them do, a
competitive rulemaking environment will allow not only the most efficient rules
but also an efficient degree of uniformity or diversity. In other words, molecular
federalism, in the presence of competition and an efficient market, should lead
not only to relatively efficient rules but also to an appropriate number of
regulatory choices.
Needless to say, the assumptions may not hold, and other problems could
arise. The benefits of competition can be great, but realists must temper their
optimism with knowledge of potential market failure and the occasional
emergence of markets for lemons.317 If such a race to the bottom were to occur,
Jurisdiction of Commercial Law: Party Autonomy in Choosing Applicable Law and Forum
Under Proposed Revisions to the Uniform Commercial Code, 32 INT’L LAW. 1067 (1998);
William J. Woodward, Jr., “Sale” of Law and Forum and the Widening Gulf Between
“Consumer” and “Nonconsumer” Contracts in the UCC, 75 WASH. U. L.Q. 243 (1997); see
also Richard K. Greenstein, Is the Proposed UCC Choice of Law Provision Unconstitutional?,
73 TEMP. L. REV. 1159 (2000).
314 Bruce H. Kobayashi & Larry E. Ribstein, Uniformity, Choice of Law and Software
Sales, 8 GEO. MASON L. REV. 261 (1999); Macey & O’Hara, supra note 47; Larry E. Ribstein
& Bruce H. Kobayashi, State Regulation of Electronic Commerce, 51 EMORY L.J. 1 (2002).
315 Larry E. Ribstein & Bruce H. Kobayashi, An Economic Analysis of Uniform State
Laws, 25 J. LEGAL STUD. 131 (1996).
316 See Erin Ann O’Hara, Economics, Public Choice, and the Perennial Conflict of Laws,
90 GEO. L.J. 941, 941 n.2 (2002); Paul B. Stephan, The Political Economy of Choice of Law,
90 GEO. L.J. 957, 957 n.2 (2002). Both O’Hara and Stephan discuss Andrew T. Guzman,
Choice of Law: New Foundations, 90 GEO. L.J. 883 (2002), and Andrew T. Guzman, Public
Choice and International Regulatory Competition, 90 GEO. L.J. 971 (2002).
317 Sometimes competition simply results in all suppliers racing to the bottom. This can
happen because consumers do not have enough information about quality and are therefore
unwilling to pay for higher quality. When this phenomenon occurs, only low quality products
will be available. See George Akerlof, The Market for “Lemons”: Quality Uncertainty and the
Market Mechanism, 84 Q.J. ECON. 488 (1970). A debate, though not new, still rages among
440 OHIO STATE LAW JOURNAL [Vol. 64:371
the competition will have failed. That result, of course, is not limited to private
lawmaking.318 Yet all of these possibilities are still largely at the stage of question
and hypothesis. More solid conclusions will have to await further research.
C. Private Lawmaking as Molecular Federalism
Molecular federalism can be conceived in the same double mold as the more
familiar variety. In its vertical aspect, private lawmaking power is subject to the
preemptive power of governmental lawmaking, to the extent the state has such
lawmaking power. (Just as the limits on federal preemptive power are currently
subject to changing and controversial decisions of the Supreme Court, so are the
limits on general governmental power changing in controversial ways.)319 In its
horizontal aspect, competing bodies can put forth different potential regimes and
seek adherents. When they start getting many thousands of contractual adherents,
or achieve public passage of the privately made rules, then the private rules have
become law, as argued in the first half of the article.
If we like federalism, then we must like molecular federalism all the more.
Privatized federalism, or molecular federalism, shares the attributes of American
federalism but multiplies the benefits. In addition, it does not depend on awkward
and unrealistic geographic boundaries. This fact is particularly important because
of increased globalization and technological innovation. As the world slips from
its geography, the traction of multiplicitous private jurisdictions that are not tied
to geographical boundaries grows.320 Competition among private lawmakers
corporate law scholars about whether a race to the bottom has occurred or is happening in the
law of corporations. See William L. Cary, Federalism and Corporate Law: Reflections upon
Delaware, 83 YALE L.J. 663 (1974); Ralph K. Winter, Jr., State Law, Shareholder Protection,
and the Theory of the Corporation, 6 J. LEGAL STUD. 251 (1977); Roberta Romano, Law as
Product: Some Pieces of the Incorporation Puzzle, 1 J.L. ECON. & ORG. 225 (1985); Carol R.
Goforth, The Rise of the Limited Liability Company: Evidence of a Race Between the States,
but Heading Where?, 45 SYRACUSE L. REV. 1193 (1995); see also supra note 312 (citing
sources).
318 Leading articles on the question of a race to the bottom in corporate law are cited in
the preceding note.
319 See generally U.S. CONST. amends. X, XI. Perhaps most interesting is the question of
when the government must pay compensation in order to make laws. For a recent treatment of
the question, which implicates the Takings Clause as well as substantive due process, see
Ronald J. Krotoszynski, Jr., Expropriatory Intent: Defining the Proper Boundaries of
Substantive Due Process and the Takings Clause, 80 N.C. L. REV. 713 (2002).
320 The danger, however, is that increasing globalization could lead to increased
centralization and bureaucratization—word-izations all evocative of a future without
federalism. Cf. Barry Friedman, Federalism’s Future in the Global Village, 47 VAND. L. REV.
1441, 1443, 1471–83 (1994) (“[A]s we become subject to regulation that develops farther and
farther from our grasp, there will be a strong incentive to reinvogorate local and state
government.”).
2003] PRIVATE LAWMAKING 441
offers further benefits too. Competitive private lawmaking is likely to produce
regulatory products that are more highly differentiated. Molecular federalism, in
other words, is more likely to meet different kinds of diverse regulatory needs.321
A couple of examples will help illustrate the idea.
The standards of corporate and securities laws vary from jurisdiction to
jurisdiction, within the United States (because the states retain control of much
corporate law) as well as in other countries. In addition, the standards—for
financial disclosure and corporate governance—for listing on stock exchanges
vary from exchange to exchange, both within the United States and without. This
multiplicity of jurisdictions gives benefits not only to the exchanges, who are able
to differentiate themselves by focusing on different parts of the securities-trading
market,322 but to companies who want to be listed and investors who want to
consider whether to invest.
The multiplicity of regulatory regimes allows the companies and investors to
decide which set of laws is most beneficial. Because investing, like life, is neither
simple nor monolithic, the many different regimes offer different benefits for
different people, companies, and circumstances. Investors and companies can
even choose to use several regulatory regimes.323 Some portion of investment
dollars might be used for newer, riskier, smaller ventures that do not meet the
listing requirements, say, of the NYSE. Some other part of the portfolio can be
targeted toward surer investments, such as American companies listed on the
NYSE. So the portfolio is mixed and diversified, taking advantage of different
jurisdictions just as companies take advantage of the most advantageous
jurisdictions when deciding where to locate their operations.
On the company side, the benefits are similar. A new company may need
access to the capital markets but lack the size or capitalization required by some
markets.324 On the other hand, a successful and highly capitalized new company
can signal its success and capitalization by opting into one of the more stringent
markets. Recent evidence shows how some foreign firms are opting into the more
demanding regime applicable to American companies by identifying themselves
as “U.S. issuers” even though they qualify for the less stringent rules applicable to
321 This conclusion has been shown by work in the provision of corporate law. See
Hadfield & Talley, supra note 2; see also Garvin, supra note 292, at 349–50 (uniform law, if ill
advised, could have serious effects because it is unavoidable).
322 See, e.g., 1 LOUIS LOSS & JOEL SELIGMAN, SECURITIES REGULATION 220 (3d ed.
1990); Michael, supra note 41.
323 See Press Release, Citigroup, Citigroup to Begin Trading Today, Following
Completion of Merger of Citicorp and Travelers Group (Oct. 8, 1998), at
http://www.citigroup.com/citigroup/press/981008a.htm (stock traded on two exchanges).
324 Perhaps the most stringent is that of the NYSE. Compare NYSE MANUAL § 102.01
(1999), with NASD MANUAL § 4300 (1999).
442 OHIO STATE LAW JOURNAL [Vol. 64:371
“foreign private issuers.”325 The diversity of regimes is thus useful for different
companies of different status.
Similar phenomena can now be observed in electronic commerce. The
electronic realm, by its nature, is independent of territory. From any perspective,
territoriality is defeasible at best, and generally artificial. For a company whose
relevant actions happen only in cyberspace, where is the company located? It
need not be a corporation or other registered organization, so it may have no
jurisdiction of organization. Its actual place may be unknown, unidentifiable, or
mobile. One could look at where the server is, but server locations are easily
moved. The person may be anywhere, and may be constantly moving.326 These
facts make territorial ideas of jurisdiction impracticable.
Because of this fact, and perhaps because of the lack of any specific
regulation, several competing private lawmaking regimes have arisen. Privacy,
which has received much talk and attention, is most prominent. Web-based
businesses can join a voluntary regulatory regime and can signify adherence to
their customers. Just as some investors once sought the “quality” supposedly
represented by American companies,327 customers of web businesses who care
about such matters can choose to do business only with companies that have
signed on to the non-territorial, privately made laws sponsored by TRUSTe,
BBBOnLine, or WebTrust.328 Again, however, experience teaches caution.329
325 EDWARD B. ROCK, COMING TO AMERICA? VENTURE CAPITAL, CORPORATE IDENTITY
AND U.S. SECURITIES LAW (Univ. of Penn. Law Sch., Inst. For Law & Econ., Research Paper
No. 02-07, 2002), available at http://papers.ssrn.com/abstract=313419; see also Stephen J. Choi
& Andrew T. Guzman, Portable Reciprocity: Rethinking the International Reach of Securities
Regulation, 71 S. CAL. L. REV. 903, 916–17 (1998) (discussing the making of multiple choices
available to issuers and investors).
326 See generally MANN & WINN, supra note 62, at 743.
327 See, e.g., Sharon R. King, Dow Tumbles 207 in Global Decline, N.Y. TIMES, June 16,
1998, at A1 (“A flight to quality has helped the American markets all year, but only the
Treasury market benefited yesterday.”).
328 See David R. Johnson & David Post, Law and Borders—The Rise of Law in
Cyberspace, 48 STAN. L. REV. 1367, 1399 (1996). TRUSTe is its own nonprofit company.
BBBOnLine is sponsored, as its name suggests, by the Better Business Bureau. WebTrust is
sponsored by the American Institute of Certified Public Accountants. Thousands of ebusinesses
had signed on to one of these “seal” programs by 2000. See MANN & WINN, supra
note 62, at 213; see also HADFIELD, LESSONS, supra note 2; KARIM JAMAL ET AL., PRIVACY IN
E-COMMERCE: DEVELOPMENT OF REPORTING STANDARDS, DISCLOSURE AND ASSURANCE
SERVICES IN AN UNREGULATED MARKET (Yale Int’l Ctr. for Fin., Working Paper No. 02-17,
2002), available at http://papers.ssrn.com/abstract=309753.
329 See, e.g., MARK R. PATTERSON, ON THE IMPOSSIBILITY OF INFORMATION
INTERMEDIARIES (Fordham Univ. Sch. of Law, Law & Econ., Research Paper No. 13, 2001),
available at http://papers.ssrn.com/abstract=276968; see also supra note 316 and
accompanying text.
2003] PRIVATE LAWMAKING 443
Of course privacy is not the only issue of concern online, and in fact, it may
not be the most important. General questions of trust- and creditworthiness seem
at least as important and at least as susceptible to competitive private lawmaking.
In theory the solution appears elegant, and there seem to be enough Internet
activists to hope that competitive private lawmaking would not simply be a
monopolistic or cartel-based exercise in so-called self-regulation.330 This hope
must be considered together with the concomitant fear of private power on the
Internet, unchecked by competitive forces.331 I would suggest that considering
these issues from the standpoint of competitive private lawmaking, and asking
questions not only about equality, dignity, and freedom, but also about
competition, might be fruitful.
The benefits of privatized federalism must be tempered by the knowledge
that the privately made laws are not the product of democratic processes. As
discussed in the previous section, much of the normative good in privately made
rules depends on the existence of competition, or at least the potential for it. To
make normative judgments about whether molecular federalism is good we
cannot depend on the warm “federalism” label. Instead, we have to ask whether
the rules that result from allowing private lawmaking—i.e., privatized
federalism—are the result of a competitive process, given that they are not the
product of a democratic one. And if there was not any actual competition, then
we must ask whether there was a reasonable possibility of competitive
lawmaking. Put in opposite terms, if the privately made rules were not right for a
significant part of the market, was there any reason that the adversely affected
parties could not devise a private legal regime of their own?
This is not the sort of question we are used to asking of laws. We do not ask
whether laws that were passed by a state legislature or by Congress were subject
to competition. Because much of the justification for privately made laws must
come from competition, we must ask the question.332 The alternative is to
kowtow to a monopolistic or oligarchic lawmaker who has no known source of
legitimacy. This is a crucial point, and it is the qualification mentioned at the
330 See supra Part III.B. (differentiating true self-regulation from private lawmaking); see
also Hadfield, supra note 219.
331 The most prominent writer in this vein is LAWRENCE LESSIG, CODE: AND OTHER
LAWS OF CYBERSPACE (1999).
332 Note that the text does not suggest that democratic legitimacy is not a concern when
considering issues of “corporate-to-corporate commercial dealings,” nor does it suggest that the
state must monopolize the “justice sphere” of the legal system “for reasons of democratic
legitimacy,” unlike Hadfield, Privatizing Commercial Law, supra note 2, at 40, 44–45. See also
Hadfield, supra note 219, at 263 (seeking to disaggregate democratic function of law from
market function of law); cf. Hadfield & Talley, supra note 2, at 23 (corporate and commercial
law may implicate questions of justice in addition to efficiency). The approach in text is more
consonant with that of Schwarcz, supra note 216 (recognizing the fairness and justice stakes in
commercial regulation).
444 OHIO STATE LAW JOURNAL [Vol. 64:371
outset of the article. The introduction said that we would want to ask the same
questions of privately made laws as we ask of publicly made laws, subject to one
qualification. We have now gone through a tentative interrogatory exercise,
asking about efficiency, equality, representation, and so on. The difference,
highlighted in that exercise, is that competition plays the crucial role of giving
legitimacy to privately made laws.
The inquiry into competition or potential competition is not a simple one.
Experience suggests that even in an initially competitive environment,
unregulated competition will not always last. In other words, it is unrealistic to
see no role for government. Regulation of private lawmaking may therefore be
necessary in some circumstances, just as regulation is necessary in policing more
conventional sorts of markets—for example, to prevent monopolization. The
regulation, when needed, does not have to be invasive. Regulation may happen
through the passage of enabling rules,333 allowing parties to opt for private or
alternative regulatory frameworks when such options would otherwise be
precluded. As Professor Hadfield has pointed out, publicly made laws can
facilitate efficient competition between private lawmakers.334 There is good
reason to be hopeful about such enabling governmental intervention. Current
work suggests that the method works well in capital markets subject to the
jurisdiction of the SEC, even if there is also reason for caution.335
The government might foster competition in other ways as well. It can set up
markets, encourage standardization where it would be helpful for competition,
reduce transaction costs, instigate market development, or spark reform. An
example will illustrate: Compared to credit cards, potential consumer liability for
misuse of ATM and debit cards is lightly regulated. While consumer liability for
fraudulent use of a stolen credit card is capped, almost absolutely, at fifty dollars,
similar liability for a debit card can increase from fifty to five hundred dollars, or
even an unlimited amount, depending on what the consumer does and when.
When the government began to move toward changing the debit card rules, the
debit card industry itself began to compete by decreasing or eliminating
cardholder liability altogether.336 Nothing was required from the government
aside from lumbering around a bit. Once the issue was raised, competition took
333 Potentially, government enabling of private lawmaking could raise issues under the
constitutional non-delegation doctrine. At one point, the doctrine had real teeth. See generally
A.L.A. Schechter Poultry Corp. v. United States, 295 U.S. 495 (1935); Carter v. Carter Coal
Co., 298 U.S. 238 (1936); Panama Refining Co. v. Ryan, 293 U.S. 388 (1935). It may now
have passed into desuetude, or perhaps it may be ready for a decent burial. Cf. Lawrence, supra
note 10. See generally Eric A. Posner & Adrian Vermeule, Interring the Nondelegation
Doctrine, 69 U. CHI. L. REV. 1721 (2002). Those questions are beyond the scope of this article.
334 See Hadfield, Privatizing Commercial Law, supra note 2, at 45; HADFIELD, LESSONS,
supra note 2, at 61–63.
335 Macey & O’Hara, supra note 47; see Hadfield, supra note 219.
336 See supra note 251–52 (citing sources relating to zero-liability or $50 cap).
2003] PRIVATE LAWMAKING 445
care of the rest, and consumers can hardly complain about it any more.
Competition did the job in the end, but some loud government inaction appears to
have been necessary.
D. The Undue Constraints of Antitrust Law
Given the heightened emphasis on competition, the antitrust laws come
immediately to mind. The problem is that the antitrust laws were designed for
regulating markets in commodities other than laws, and laws are different from
commodities in important ways. Further, while questions about competition or
the potential for it are important, they are not the only inquiry. Because these
rules come to have the effect of law, we also need to ask the hard questions about
autonomy, dignity, paternalism, and equality. For these reasons, antitrust law has
a role to play in regulating the market in privately made laws, but the traditional
antitrust inquiries are considerably too constrained to give normative assurance
that the laws that regulate so much of American life are legitimate.337
The decision in United States v. Visa, U.S.A., Inc.,338 is an example of how
the antitrust inquiry is too constrained. The court could ask only whether the rules
made by the association of card-issuing banks “resulted in a significant adverse
effect on competition or consumer welfare,”339 all of which the court defined in
solely economic terms. The emphasis under the antitrust laws had to be on harm
in particular markets, as defined by strictly economic analysis.340 At best, the
antitrust analysis will always revolve around economic questions, and often quite
technical ones.341 Often, even the economic questions are not asked, since at least
some private lawmaking is currently exempted from antitrust laws.342 We—the
millions of members of the public who use credit cards and the millions of
businesses who take them—are the ones being regulated by the rules made by
associations of banks. They have the same effect as law, to us. It is not enough for
us to know the answers to some economic questions.
337 A law is legitimate, as the term is used here, only if—among other things—the law is
not the product of a nongovernmental monopoly. Cf. Macey, supra note 140 (arguing that it is
impossible to distinguish legitimate rules from illegitimate ones); Schwarcz, supra note 216, at
324–29.
338 United States v. Visa U.S.A., Inc., 163 F. Supp. 2d 322 (S.D.N.Y.), modified, 183 F.
Supp. 2d 613 (S.D.N.Y. 2001).
339 See id. at 327.
340 See id. at 334–40.
341 See, e.g., id.
342 See Miller v. Am. Stock Exch., Inc., 317 F.3d 134; Friedman v. Salomon/Smith
Barney, Inc., 313 F.3d 796 (2d Cir. 2002); Sagers, supra note 9 (discussing standard-setting
organizations and the Noerr-Pennington doctrine of antitrust immunity).
446 OHIO STATE LAW JOURNAL [Vol. 64:371
VIII. CONCLUSION
The ideas suggested here have advanced along three paths. Beginning with
an inductive argument, I have tried to show that much lawmaking rests in private
hands. The literature that has gone before has often been too narrowly particular
or theoretically abstract, obscuring the practical ability of private bodies to make
law. The inductive exercise is meant to show how private bodies govern many
disparate areas of corporate and commercial law. The examples also demonstrate
how this private lawmaking power is not adequately described simply as “selfregulation”
or “private ordering,” nor is the power implemented through the kind
of bargaining assumed by a contractual analysis. Instead, private lawmaking is
accomplished through a variety of means, including legislative and judicial
adoption. The private lawmaking that is put in place through contracts involves
mass contracting in which uniform rules are incorporated across countless
transactions, binding millions of parties, a tiny fraction of whom have any
practical or moral responsibility for the making of those rules. The examples
show how the private lawmaking phenomenon slices across the continuum of
commercial transactions, whether they involve letters of credit used by relatively
sophisticated, purely commercial actors, or credit cards used by consumers.
Linguistic inquiry reinforces the tentative conclusions drawn from induction.
The rules that are privately made bind mindless numbers of people and
businesses, uniformly and generally. They do not bind with perfect uniformity or
generality, but they are often as uniformly and generally binding as publicly
made law, sometimes more so. Put more technically, careful consideration of the
rules that are indubitable law reveals that much commercial legislation and
common law is comprised of default rules or coordination principles; by
comparison, privately made law is put into binding operation perhaps as much as,
or more than, publicly made law. Whether privately made law binds more often
or less is an empirical question, for which available data is spotty. We do know
that in some areas, like letters of credit, the privately made law is pervasive. In
other areas we can only surmise.
These are quantitative questions, and well worth exploring, but they do not
detract from the qualitative point: much law is privately made. Exactly how much
is a matter of little import; enough law is privately made that we should care. The
fact that law is privately made hardly relieves us of our duty to ask difficult
questions of the private lawmaking process and the rules that result from it, to
assure that such rules that have the effect of law are consonant with democratic
values, even if those laws are not the product of democratic processes. Questions
about respect for autonomy and equality, representation and efficiency, are as
important in the private lawmaking realm as in the public one. The arguments
offered here, I hope, should help show the political dimension to questions that
2003] PRIVATE LAWMAKING 447
otherwise might glaze the eyes, seeming like technical issues of economic
plumbing.
Reflection on these questions, at this point, can only be tentative. The
conceptions are too different; the beginnings of social scientific analysis have not
yet reached firm conclusions. But novelty does not excuse the exercise, and a
start is offered here. Some thought has accentuated the hopeful: private
lawmaking, potentially, can work as molecular federalism. It multiplies the
benefits of state-based federalism by increasing the sheer number of potential
lawmakers. At the same time, molecular federalism offers inherent, nonquantitative
advantages. It gives power to the base of the pyramid, allowing
control to the demos instead of confining it to the apex. The potential for
competition permits this dynamic, as everyone is a potential private lawmaker—
not through the negotiation of a two-party contract, which only helps two parties,
but through the confection of a little regime to which whole groups can adhere.
A focus on the hopeful should not obscure reality. Hope must be tempered by
knowledge of market failures and monopolies, markets for lemons and rules of
oligarchs. Sometimes, experience teaches, competition fails, and competition is
the cornerstone of the hopeful side of private lawmaking. Without it, or its
realistic potential, molecular federalism is no more than practical abdication.
Current realities have only begun to be explored, and we do not know much even
about the current state of private lawmaking, much less about its potentials.
Before we can know these things, we must pay better attention to private
lawmaking, and to the law-like effects of privately made rules.