Academic

Empirical Studies of Contracts: The Problem of Vapor Contracting

By Gordon Smith, Christine, Hurt, Vic Fleischer, Fred Tung, Lisa Fairfax, David Zaring

As summer approaches, my mind is slowly turning to the study of contracts. My article describing "Organizational Perspectives on Contracts" (with Brayden King) will be placed by the end of this week, and we are starting to implement some of those ideas through our study of Wisconsin cheesemakers. But I was reminded again today why empirical studies of contracts are so rare: it's tough to get your hands on the things.

Take the new contract being negotiated between Live Nation and Jay-Z and similar contracts that Live Nation concluded with Madonna and U2. Live Nation has not filed any of the existing contracts with the SEC, and I doubt they will file the Jay-Z contract when it is completed. Are these contracts not material? Pshaw! For some reason, perhaps simply benign neglect, the SEC does not routinely police the filing of material contracts. For purely selfish reasons, I wish they would get on the ball.

A few years back, The Wall Street Journal ran a story about a major new alliance between a couple of internet companies. My memory fails me, but I believe Yahoo was involved. In any event, I called the companies to ask whether they would be filing the agreement with the SEC. No, they said, they didn't want any of their competitors knowing what was in the agreements. So the companies were able to get the benefit of the publicity (based on a press release, not a contract document) without any of the accountability of a filing. In the wake of the foregoing experience, I asked a lawyer friend why Internet companies routinely announced alliances without filing the related contracts with the SEC. He responded, "Because the contracts don't bind them to do anything!" Vapor contracting!

That may be slightly hyperbolic, but not much. Many alliance agreements are highly contingent, and you are left wondering about their value. So what do the Live Nation contracts look like? Or the contract between IBM and Linden Lab?

I wish I could tell you.

P.S. I would be happy to be corrected and pointed to any of the contracts discussed above. I checked the SEC's EDGAR database and didn't find them. I also tried a number of Google searches, but was unable to locate the documents.

Full post as published by Conglomerate on April 03, 2008 (boomark / email).