RETHINKING THE EFFICIENCY OF THE COMMON LAW.

• Author: Sokol, D. Daniel

INTRODUCTION

A fundamental research question in law has been to explain how caselaw develops. Perhaps the most famous formulauon of how law works in practice in the past half century is Judge Richard Posner's idea on the efficiency of common law. He suggests that the common law, for which he meant judge-made law, (1) can reach economically efficient outcomes. (2) At its core, Posner's argument was that common-law judicial decisionmaking enjoys a comparative institutional advantage over statutory law because of the evolutionary nature of common law through adjudication and precedent. (3) This common-law process in turn leads to more "efficient" (4) outcomes as good precedents overrule bad precedents. (5) This idea is powerful, so much so that Posner is yearly on the shortlist for potential Nobel Prize recipients for economics. (6)

Since the time of the publication of Posner's work on the efficiency of common law, there have been numerous extensions of his idea. (7) Some extensions suggest that the efficiency of common law is a function of litigants looking to reshape legal doctrine. (8) In economic terms, this is a "demand-side" response. Others argue that the efficiency is a function of "supply-side" factors such as institutional factors. (9) Critiques to the efficiency of common-law hypothesis also have been significant, such as: the motivations of judges, (10) variation over particular common-law or statutory regimes, (11) selection effects in decided cases as opposed to settled cases, (12) or that the legislature (13) or courts (14) may respond to judicial overreach.

As a positive matter, common law generally is not more efficient today than Posner's observation forty-five years ago. The lack of a general shift across areas of law to more efficient outcomes is perhaps more surprising given greater economic analysis in law school curricula, (15) scholarship, (16) and judicial training in economics. (17) Posner's most famous insight seems to have been wrong.

This Article makes two contributions. First, it reframes the efficiency-of-common-law thesis by making an original point as to how prior thinkers misunderstood the structure of law and how law could, under a certain set of parameters, lead to efficient outcomes. (18) It shows how Posner and other scholars who claimed that common law was efilcicnt misunderstood the structure of common law. If common law was more efficient, there would have been a noticeable push across most, if not all, doctrines to greater efficiency. This has not been the case. Rather, common law, better understood as a platform, could, under a certain set of parameters, lead to efficient outcomes. (19) Second, this Article's analysis suggests an institutional design contribution that while not every judge thinks about efficiency in decisionmaking, there must be some architectural or governance feature pushing in the direction of efficiency--which exists in some areas of law and not in others. (20)

The basis for a better understanding of the circumstances under which the efficiency of common law is possible emerges from the writings of Nobel laureate Jean Tirole (21) and others who study what is commonly referred to as "two-sided" markets or platforms. (22) Professors Rochet and Tirole explain that "many if not most markets with network externalities are characterized by the presence of two distinct sides whose ultimate benefit stems from interacting through a common platform." (23) Such markets are ubiquitous in life, and their importance was recently recognized by the Supreme Court. (24)

There are a number of elements to a two-sided market. First, two (or more) sets of agents interact through an intermediary (or platform). Second, each of the actors of each side of the platform make decisions that impact the decisionmaking of the other set(s) of actors on the other sides of the platform. (25)

Two-sided markets have existed for thousands of years in "low tech" industries. For example, a shopping bazaar in ancient Rome, Jerusalem, or Beijing connected retailers and end consumers. Similarly, in the play Fidler on the Roof, Yente the matchmaker sets up matches between buyers and sellers for matrimonial services. Other markets for which two-sided markets exist include newspapers, (26) securities, (27) and payment systems. (28) In the online world, some of the well-known "high tech" two-sided platforms include companies like Tinder, Uber, Facebook, and Amazon.

This Article explains two-sided markets, or platforms, generally and applies the modular open-source platform model to law. In doing so, it explores concepts that impact the efficiency of such platforms--platform governance, modularity, and fragmentation. (29) Then, this Article applies the understanding of platforms to a number of areas of law that might be understood as more prone to economic analysis because the issues addressed in law tend to be more "economic," such as torts, bankruptcy, corporations, and patents. (30) In these areas, no combination of platform architecture and modularity has allowed for the development of more efficient legal rules as a general matter. Finally, this Article studies antitrust law as the one area of law that suggests that the efficiency of common law is possible and explores the causal mechanism of necessary conditions that needs to be met. (31) Antitrust law is different than other areas of law because of a singular goal, an architectural governance based on a single federal court (the Supreme Court) with few substantive legislative changes in the past one hundred years, which provide for coherent governance of the platform. This Article concludes by discussing the implications of an efficient platform design for other areas of law.

1. EFFICIENCY OF COMMON LAW

   Posner argued that the common-law system created a set of incentives to produce efficient behavior by parties both in formal and informal markets. (32) This was based on an evolutionary approach to law. Under the evolutionary approach, judges could self-correct inefficient rulings with efficient rulings over time. (33)

   Others built off of Posner's idea of the efficiency of the common law. Professor Rubin set up a model in which an increase in the amount of funds for a particular case makes parties more willing to create doctrinal change because of the long-term value in the shift in doctrine for future potential cases. (34) Rubin's evolutionary theory of how the market shapes efficient rules was that cases with more efficient rules would settle more often than cases of less efficient rules. This would lead to a shift in which litigation would be more likely to overturn inefficient rules. (35) This is a bottom-up formulation of common law.

   At roughly the same time, Professor Priest argued that the reason for efficiency of the common law was demand based. Priest set up an evolutionary model that was also bottom up in which inefficient legal rules would yield to more efficient rules because there would be more cases in litigation due to the inefficient rules. (36) As such rules became more efficient as a result of litigation, they would no longer be challenged, which would lead to maintenance of the more efficient rules. The more inefficient the rule, the greater the stakes for high-stakes litigants to litigate to a decision to change the rule. (37) Priest's further work in his Priest-Klein model suggests that the party with the greater stake in the litigation is more likely to prevail. (38) This extension would suggest that eventually there would be greater efficiency in common law over time. Professors Cooter and Kornhauser similarly modeled how common law might shift to efficient outcomes even without the assistance of judges. (39)

   The broader claim of the efficiency of the common law has even taken a macro-level implication, that economic growth and property overall are tied specifically to the use of common law. (40) Such finance work on the efficiency of common law is among the most cited work in the past twenty years. (41)

   All of these thinkers were only partially correct in their analysis of the efficiency of common law. These approaches only point to the particular mechanism of bottom-up change. They do not address goals of the legal system from a top-down perspective that shapes the bottom-up development of common law. (42)

   In later work, Posner provided a general analysis of the top-down model of judicial thinking (43) that is different from many of the tradidonal bottom-up models of how the judiciary changes law. The top-down model is a supply-side model of common-law efficiency, in which judges supply the framework for the efficiency of the common law. Posner argued that in top-down lawmaking, the judge creates a theory about how law works to organize decided cases to make them conform to the theory. (44) There is nothing to suggest that a legislature would not be equally good at creating a top-down singular goal. However, most enabling statutes have vague goals or multiple goals.

   Multiple goals play an important role in inefficient outcomes, as noneficiency concerns impact judges. (45) In stich circumstances, when presented with certain multiple goals, cases can come out in ways that are inefficient but meet other goals, such as equitable goals. The design structure based on multiple goals may lead to doctrinal incompatibility and legal uncertainty in decisionmaking.

   Multiple goals, and nonefficiency goals in particular, explain many case outcomes. Some argue that law is always political. (46) Under this approach, the idea of the efficiency of common law is nothing other than a highly ideological deregulatory approach to governance. Even the law-and-economics movement, and particularly the public-choice literature, embraces a political economy explanadon to law's development. Public choice suggests that common law may be more efficient than statutory-based law because an independent judiciary is better shielded...