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  • STICKINESS AND INCOMPLETE CONTRACTS

    Julian Nyarko*

    ABSTRACT

    Both economic theory and legal theory assume that sophisticated parties

    routinely aim to write contracts that are optimal, in the sense of maximizing

    the parties’ joint surplus. But more recent studies analyzing corporate and

    government bond agreements have suggested that some contract provisions

    are highly path dependent, or “sticky,” with future agreements only rarely

    improving upon previous ones.

    Analyzing half a million contracts using automated text analysis, this

    Article demonstrates that the stickiness hypothesis explains the striking lack

    of choice-of-forum provisions that can be found in agreements between even

    the most sophisticated commercial parties. When drafting these contracts,

    external counsel relies heavily on templates, and whether or not a contract

    includes a forum selection clause is almost exclusively driven by the template

    that is used to supply the first draft. There is no evidence to suggest that

    counsel negotiate over the inclusion of choice-of-forum provisions, nor that

    law firm templates are revised in response to changes in the costs and

    benefits of incomplete contracting.

    Together, the findings reveal a distinct apathy towards the issue of forum

    selection. From an institutional perspective, this suggests that the role of

    contract law is significantly more important than is often assumed. Whereas

    traditional accounts hold that commercial actors would simply contract

    * Assistant Professor of Law, Stanford Law School. For helpful comments and

    suggestions, I thank Adam Badawi, Douglas Baird, Robert Bartlett, Andrew Bradt, Benjamin

    Chen, Adam Chilton, Albert Choi, Ryan Copus, Robert Cooter, Kevin Davis, John

    DeFigueredo, Jeffrey Gordon, Joe Grundfest, Mitu Gulati, Andrew Guzman, Tim Holbrook,

    Bert Huang, William Hubbard, Matthew Jennejohn, Francine Lafontaine, Katerina Linos,

    Jonathan Masur, Justin McCrary, Joshua Mitts, Kevin Quinn, Bertrall Ross, Sarath Sanga,

    Robert Scott, Eric Talley, Glenn West, Eyak Zamir as well as the participants of workshops at Columbia Law School, NYU School of Law, Stanford Law School, The University of

    Chicago Law School, the 2020 American Bar Association M&A Committee Meeting, the

    2020 Association of American Law Schools Annual Meeting, the 2019 Northwestern

    Conference on Law and Textual Analysis, the 2018 Conference on Empirical Legal Studies,

    the 2018 Conference on Empirical Legal Studies in Europe and the 2018 International

    Conference on the Economics of Litigation.

  • The University of Chicago Law Review (forthcoming)

    2

    around inefficient defaults, the evidence produced in this paper highlights

    that default rules are of significant importance for transactions between even

    the most sophisticated commercial actors.

    TABLE OF CONTENTS

    INTRODUCTION ........................................................................................................... 3

    I. A BRIEF PRIMER ON FORUM CHOICE ........................................................................ 10

    II. PARTY PREFERENCES AND STICKINESS .................................................................... 13

    A. Forum Selection Clauses: The Benefits ........................................................... 16

    B. Forum Selection Clauses: The Costs ............................................................... 19

    C. Law Firms and Contractual Stickiness ............................................................ 22

    D. Hypotheses ..................................................................................................... 27

    III. DATA ................................................................................................................... 28

    IV. LAW FIRM INFLUENCE .......................................................................................... 40

    A. Main Analysis ................................................................................................. 41

    B. Identification Through law Firm Closure ........................................................ 44

    V. STICKINESS AND FIRST-MOVER ADVANTAGE ......................................................... 47

    VI. RESISTANCE TO CHANGE ...................................................................................... 50

    A. Limits on Personal Jurisdiction ...................................................................... 50

    B. Affirming Enforceability of Forum Selection Clauses ...................................... 53

    C. The Effect of Judicial Interventions................................................................. 54

    VII. LIMITATIONS & NORMATIVE IMPLICATIONS ......................................................... 58

    VIII. CONCLUSION ..................................................................................................... 67

    APPENDIX ................................................................................................................... 68

    A.I. FORMALIZING INCENTIVE COSTS ......................................................................... 68

    A.II. REGRESSION RESULTS AS TABLES ...................................................................... 69

    A.III. ABNORMAL RETURNS ....................................................................................... 72

    A.IV. DETAILED DESCRIPTION OF TEXT ANALYSIS PROCEDURE .................................. 73

    A. Identification of Parties .................................................................................. 73

    B. Identification of Contract Format and Date .................................................... 75

    C. Identification of Forum Selection Clauses....................................................... 76

    A.V. AREA UNDER THE RECEIVER OPERATING CHARACTERISTIC CURVE ..................... 79

  • Stickiness and Incomplete Contracts

    3

    INTRODUCTION

    In the 1990s, Sprint PCS (“Sprint”), one of the leading

    telecommunications companies in the United States, created a wireless

    affiliate program. Under the affiliate program, Sprint and its partners would

    conclude several agreements1 which established a cooperation between the

    parties. Under the terms of these agreements, the affiliates would invest

    “hundreds of millions of dollars”2 in order to offer services on behalf of Sprint

    under the Sprint name. In return, a non-compete clause stipulated that the

    affiliates would be the exclusive providers of Sprint services in their regions

    covered by the affiliate program.3

    On December 15th 2004, Sprint announced a planned merger with Nextel

    Communications, Inc. (“Nextel”), the then fifth leading provider in the U.S.

    mobile phone industry. Nextel operated stores and offered services in many

    parts of the United States, including regions covered by Sprint’s affiliate

    program. After the merger, the Nextel services would be rebranded under the

    Sprint name. The affiliates did not look favorably upon the planned merger.

    They alleged that the rebranding of the Nextel stores and services would

    cause the newly formed Sprint Nextel to directly compete against them in

    their service areas, thus constituting a violation of the non-compete provision.

    Consequently, they filed for an injunction seeking to prevent the merger,

    alleging a breach of contract.

    Conspicuously, however, while the agreements that Sprint concluded

    with its partners under the affiliate program included a choice-of-law clause

    determining the substantive law applicable in the dispute, none of them

    included choice-of-forum provision that would determine where the partners

    could sue.4 To Sprint, this omission would become detrimental.

    1 These agreements typically included a management agreement, a trademark and

    service mark license agreement and a services agreement. 2 UBIQUITEL INC. and UbiquiTel Operating Company, Plaintiffs, v. SPRINT

    CORPORATION, Sprint Spectrum L.P., Wirelessco, L.P., Sprint Communications

    Company LP., Sprint Telephony PCS, L.P., Sprint PCS License, L.L.C., and Nextel

    Communications, Inc., Defendants., 2005 WL 5758593 (Del.Ch.). 3 See Section 2.4 of Sprint PCS Management Agreement between Sprint and

    Shenandoah Personal Communications Company (November 5, 1999), available at

    https://www.sec.gov/Archives/edgar/data/354963/000116923204001600/d58657_ex10-

    4.txt. The agreements that Spectrum used with its other affiliates were virtually identical. 4 The agreements did include an arbitration provision for certain subject matters that did

    not cover injunctions. See Section 14.2.

    https://www.sec.gov/Archives/edgar/data/354963/000116923204001600/d58657_ex10-4.txt https://www.sec.gov/Archives/edgar/data/354963/000116923204001600/d58657_ex10-4.txt

  • The University of Chicago Law Review (forthcoming)

    4

    In 2005 the affiliates commenced parallel suits in both Delaware5 and

    Illinois.6 In 2008, in the context of a separate dispute regarding th

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