Easy Cases Make Good Tests:

Analysis of Modern Pre-Contractual

Disclosure Theories
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1
Chapter I: Introduction
What is the nature of the pre-contractual disclosure dilemma
Despite over 2000 years of research, it is still unknown what factors positively determine which
information a bargaining party must voluntarily disclose to one's bargaining partner.
1
The law concerning
the precontractual duty to disclose governs this re!uirement as part of the greater obligation to conduct
negotiations in goodfaith. "roadly delineated in #sraeli legislation via both the goodfaithinnegotiations
and deception doctrines found in the $ontracts %aw &'eneral (art) and the $onsumer (rotection %aw, the
law regarding this duty suffers from a lack of consistency on every level of analysis, at times seeming more
like an ad hoc heuristic instead of a legal rule.
2
*udicial precedents, legal trends and modern academic theories all display a lack of coherency with
regards to this duty. $ourt decisions have not only failed to adopt a consistent rule governing disclosure, but
have commonly reached differing results in similar cases.
+
#n spite of a legal trend moving toward a greater
disclosure re!uirement with the normative departure from the caveat emptor doctrine towards ,The #mplied
-arranty of .itness/ doctrine and the like, the implementation of such doctrines has not resulted in an
overall increased disclosure.
0

1odern theories on disclosure remain utterly conflicted as to which criteria constitute the basic
determinant of this duty, and none have withstood the test of the positive law.
2
Theories which claim to
unify 3uridical decisions have been critici4ed as only matching the positive law through malleable,
indeterminate criteria5 while theories based on solely normative grounds have been shown as tautological or
inconsistent on their own terms5 or simply distanced from the positive law.
6

7owever despite all of the aforementioned unpredictability and conflict there are wellestablished,
broadly consented to positions within the realm of precontractual disclosure. These ,trivial/ positions are
largely neglected by most theories, which instead focus on 'hard cases' in their attempt to forge a unifying
1
8rawiec, 8imberly D. and 9eiler, 8athryn, :$ommon %aw Disclosure Duties and the ;in of <mission= Testing the 1eta
theories: &>ovember 1, 2000). 'eorgetown %aw ? @conomics, p.025 Anthony Duggan, 1ichael "ryan, .rances 7anks,
Contractual Non-Disclosure &1elbourne= %ongman (ress, 1BB0), p.2. $icero's 3urisprudential masterpiece, De Officis, written
over 2000 years ago, discusses the boundaries of the duty to disclose. #n an oftcited passage, he distinguishes between actively
concealing information and refraining from revealing it &aliud est celare, aliud tacere) C noting that not all information material to
a contracting party need be disclosed. 7is distinction between these two circumstances seems to parallel ;cheppele's distinction
between 'deep' and 'shallow' secrets C discussed in $hapter ###.
2
$ontracts %aw &'eneral (art), 2D++1BD+ clauses 12, 125 $onsumer (rotection %aw, 1BE15 $ivil Appeal E+EFD2 ;pektor v.
T4arfati5 $ivil Appeal ++EFE2 ;piegelman v. $hapnik5 $ivil Appeal B01BFBB 8istlinger v. Aliya. #n the Spektor case, a divergence
of opinions arose between *ustice Asher and *ustice %andoi, the former arguing and ultimately determining a strict precontractual
disclosure re!uirement via the goodfaithinnegotiations doctrine. The Spiegelman case, ten years later, determined a less
stringent disclosure re!uirement, contending that if a party remained uninformed due to its own negligence it could not argue that
the informed party failed to act in good faith or deceived it. >early fifteen years later, the Kistlinger case linked the deception and
goodfaithinnegotiation doctrines, finding that a violation of clause 12 constituted a breach of the final section of clause 12, the
passive infringement of the deception doctrine.
+
8rawiec and 9eiler, p.2
0
8rawiec and 9eiler, p. +
2
;cheppeleGs theories, 8ronmanGs theories and those theories based on 7irshleiferGs productive efficiency argument are all
critici4ed for failing to truly account for the positive law in a deterministic manner.
6
All of the theories cited in this seminar, with perhaps the eHception of @isenberg's, are centered around distinctions which are
largely ambiguous and difficult to apply.
2
theory.
D
A key to the disclosure pu44le may lie in the normative 3ustification for these 'easy cases,' which
though they might seem the eHception within such an irreconcilable field Care really !uite common. #n
hindsight, it is fitting that trivial cases would illuminate the solution to a legal problem. After all, it is well
known that the bewitching 'hard cases', and not those stodgy 'easy ones', usually make 'bad law'.
;ince nearly all modern disclosure theories are based on criteria which are recogni4ed as
indeterminate &e.g. ;cheppeleGs Ie!ual accessG principle, 8ronmanGs deliberateFcasual distinction), 'easy
cases' would naturally form a better testing ground for these theories than 'hard cases,' since the answers to
the former are clear, making it obvious if a theory matches the positive law. -hen using a disclosure
criterion to approach a 'hard case,' it would be understandable if the criterion did not clearly provide an
answer matching the positive law C since the courts themselves do not possess an une!uivocal answer to the
!uestion.
#n a Ihard case,G it may even be eHpected that a theoryGs analysis fall right between the lines of
distinction5 in such a case it would be comprehensible of a sound theory to unclearly determine if the
information possessed would be considered a IdeepG or IshallowG secret, for eHample, or that the type of data
ac!uired was IproductiveG or IredistributiveG in nature, to name another.
7owever, this would not be eHpected of an easy case. #f a theory does not provide a clear answer to a
trivial case, in that the case does not fall s!uarely within the boundaries of one of the theoryGs criterion, it
remains that the theory does not perceive the case to be IeasyG or trivial, but rather borderline and more
difficult. A theory which diverges from the positive law with respect to its perception of broadly consented
to positions, i.e. Ieasy cases,G especially within a field where such consensus is so rare, plainly does not
match the present body of law.
Thus, in seeking to find a criterion by which to test the ma3or precontractual disclosure theories
with respect to the positive law, the following easy !uestion, called the Ibase case,' has been chosen. The
!uestion is as follows= Should a seller be required to voluntarily disclose information regarding a
competitors lower prices to a potential buyer?
#t is assumed that there is broad 3uridical consensus regarding the answer to this !uestion C a
resounding ,no/, which should be conse!uently be reflected in a theoryGs answer to the !uestion, both in
nature and emphasis.
E
#n the later chapters, different theoretical approaches will be analy4ed and applied to
the Ibase case,G in an attempt to determine which theories successfully account for this widespread
consensus. 7owever, before analy4ing the theories themselves, it is important to understand the position and
nature of the Ibase caseG within the realm of precontractual disclosure C which will be the sub3ect of the
following chapter.
Chapter II:
D
1ethodological errors, such as the use of a small, unrepresentative sample si4e are considered a common cause of legal theories'
inability to account for the positive law. %ee @pstein and 'ary 8ing, The Rules of nference, 6B J. $hi. %. Kev. 1 &2002)
E
The !uestion was determined to be trivial following an informal survey made in the 7ebrew Jniversity %aw .aculty and by
way of legal commonsense. ;ince the issue is assumed to be consented to, there is a lack of case law on the sub3ect and thus
difficult to prove using court decisions.
+
The nature of the !"ase case! as a pre-contractual disclosure issue
A# A $re%uently Appearin& 'ituation
The first distinguishing characteristic of the 'base case' is that it arises fre!uently within the body of
circumstances in which a disclosure decision must be made. ;ales agreements are common, as are situations
in which a seller knows more than a potential buyer about a specific competitor's lower prices. Thus this
case may be considered part of the main body of situations where a disclosure impasse arises, and not a
fringe case.
(# E)trinsic Information
The second important !uality of the 'base case' is that the data which it regards is eHtrinsic as
opposed to intrinsic to the contract
B
, in that competitor prices 'bear upon' the contract at the time of
negotiations but are not related to the character of the sub3ectmatter &i.e. the product) of the agreement. The
'base case' is a type of market information, an important subgroup of eHtrinsic information, a type of
information identified as eHempt from a disclosure re!uirement in the famous !aidla" case.
#n the landmark J; precontractual disclosure case, !aidla" v# Organ
$%
, former J; ;upreme $ourt
(resident *ohn 1arshall first 3ustified nondisclosure based on the status of the relevant information's
relationship to the contract, distinguishing between eHtrinsic and intrinsic data.
11
-hen information is
related to factors eHternal to the terms of the contract, e.g. the market price, 1arshall determined that :the
means of intelligence are e!ually accessible to both parties,/
12
hence 3ustifying a nondisclosure policy.
1arshall's decision and the facts of the case were subse!uently used as a basis for the leading
contemporary disclosure theories. 7is opinion and the facts of the case, however, have been considered
:cryptic:
1+
, and 3ustifying nondisclosure solely based on eHtrinsic circumstance has since been brought into
!uestion.
A problem with distinguishing disclosure cases based on whether information is eHtrinsic or intrinsic
is that few disclosure cases involve eHtrinsic data
10
, and as such it is difficult to measure whether this
B
*oseph ;tory, 1 $ommentaries on @!uity *urisprudence L210 &12th ed. 1EDD)5 2 *ames 8ent, $ommentaries on American %aw,
+DD &1E2D). American legal historian *oseph ;tory defined the difference between intrinsic and eHtrinsic circumstance= *#ntrinsic
circumstances are properly those which belong to the nature, character, condition, title, safety, use, or en3oyment, ... of the
sub3ectmatter of the contract5 such as natural or artificial defects in the sub3ectmatter. @Htrinsic circumstances are properly those
which are accidentally connected with it, or rather bear upon it, at the time of the contract, and may enhance or diminish its value
or price, or operate as a motive to make or decline the contract5 such as facts respecting the occurrence of peace or war, the rise or
fall of markets, the character of the neighborhood, the increase or diminution of duties, or the like circumstances.:
10
%aidlaw v. <rgan, 12 J.;. 1DE &1E12)
11
*oshua D. 8aye, nformation, Disclosure, The !a" of Contracts and the &istaken 'se of !aidla" v# Organ, "e(ress, 200D.
There is a considerable degree of misunderstanding surrounding 1arshall's opinion, however the distinction based on the relation
of the information to the contract &eHtrinsicFintrinsic) is the prevailing interpretation.
12
%aidlaw. 1arshall's language in the opinion is close to that of (rof. 8im ;cheppele, in her theory of contractual nondisclosure,
to be discussed in $hapter ###.
1+
8rawiec and 9eiler, p.25 8aye, p.D. 8aye notes that 1arshall's distinction has :proved pu44ling,: since similar circumstances
have led to divergent results.
10
8rawiec and 9eiler p.21. The source regards information about cases reaching the courts in the Jnited ;tates C presumably the
situation is no different in #srael.
0
distinction is truly significant. 8imberly 8rawiec and 8athryn 9eiler proposes three theses as to why there
are so few 'eHtrinsic' disclosure cases, and argue that the most plausible eHplanation for this phenomenon is
that the uninformed party is generally unlikely to ever reveal the eHtrinsic information.
12
C# Information Possessed "y a (uyer in the Conte)t of a (uyer-'eller +elationship
The third distinguishing characteristic of the data in the 'base case' is that it is part of the body of
knowledge possessed by the seller which is material to the buyerGs consent. -ithin the conteHt of the buyer
seller relationship, it is argued by a number of leading scholars
16
that sellers should bear a relatively strict
burden of disclosure as compared with buyers, due to, as 8im ;cheppele puts it, their :structurally superior
access to information:
1D
. (rofessor Anthony 8ronman
1E
contends that this disparity is reflected in the
positive law, as courts more fre!uently permit nondisclosure for buyers.
1B

(rof. 1elvin @isenberg concludes that beyond the fundamental asymmetry in access to information
between buyers and sellers, the buyer is more sensitive than the seller to changes in price resulting from
nondisclosure C a phenomenon known as lossaversion.
20
@isenberg and (rof. ;teven ;havell also assert that, in general, information possessed solely by the
seller and relevant to the buyer's consent is used primarily to drive up the price
21
and is not ac!uired as a
result of costly research
22
. $onse!uently, ;havell contends that sellers will have sufficient incentive to
ac!uire information even with a disclosure re!uirement since they will be able to benefit from it without
risking a significant loss if the data is revealed.
2+
D# The ,ri&ht- ans.er to the ,"ase case- as a market necessity:
As previously mentioned, it is the assumption of this paper that the !uestion posed in the 'base case'
is trivial. #t seems intuitive that a seller need not voluntarily disclose the lower prices of his competitor, as
the risks associated with such data are allocated to the buyer.
20
#n searching for a remonstration for this
12
(id# p.22
16
1elvin A. @isenberg, Disclosure in Contract !a", B1 $al %. Kev. 1602 &200+)5 8im %ane ;cheppele, %egal ;ecrets= @!uality
and @fficiency in the $ommon %aw &1BBE). @isenberg and ;cheppele both agree that a strict duty to disclose should be placed on
the seller as opposed to the buyer.
1D
;cheppele, p.1D0
1E
7is seminal economic approach to disclosure will be discussed in depth in $hapter #M.
1B
Anthony 8ronman, &istake, Disclosure of nformation, and the !a" of Contracts, D. *. %egal ;tud. 1 &1BDE).
20
@isenberg p.225 Daniel 8ahneman and Amos Tversky, )rospect Theor*+ ,n ,nal*sis of Decision under Risk, @conometrica 0D
&1BDB). Any price change resulting from seller nondisclosure will necessarily result in a loss for the buyer, since the seller will
only withhold information that will drive up the price. The significant psychological tendency to prefer avoiding losses than
achieving gains is known as lossaversion C coined by (rof. Daniel 8ahneman and (rof. Amos Tversky as part of their (rospect
Theory. ;ince the seller risks foregone gains while the buyer risks the same amount in losses if nondisclosure is allowed, such a
policy creates a buyerseller power asymmetry.
21
@isenberg, p.+6
22
@isenberg, p.22. This is similar to 8ronman's criteria for disclosure, which will be discussed in $hapter #M.
2+
;teven ;havell, ,c-uisition and Disclosure of nformation )rior to Sale, 22 Kand. *. @con. 20 &1BB0)
20
7ow a seller should respond if asked about the prices of his competitor does not benefit from the same consensus, while the
issue of disclosure duties when responding to !uestions is a broad and controversial topic in its own right. Theorists such as
Kandy "arnett and ;aul %evmore even argue that in certain situations it may even be desirable to fabricate an answer if the
!uestion asked is inappropriate.
2
assumed fait accompli, it may seem prima facie that market necessity is the underlying reason for this
consensus, however in final analysis this 3ustification is unconvincing.
#f sellers were re!uired to voluntarily disclose the lower prices of their competitors, one may initially
view the result as a likely disaster for the respective market, using reasoning similar to that of Akerlof in his
'1arket for %emons' model.
22
The model concludes that a lack of consumer knowledge of the latent defects
of products within a market will lead to the eventual deterioration of product standards within that market.
26

As such, a disclosure re!uirement for latent defects may effectively maintain market standards.
2D
;imilarly, one may conclude that if sellers were to be re!uired to voluntarily divulge the lower prices of
their competitors, they would be unable to effectively profit from a higher price C thus forcing the sellers to
assume the only profitable price to be the lowest one in the market. As a result, prices would all be driven
down to a low uniform rate, unless they were coordinated between sellers in a manner incompatible with
antitrust law. ;uch a situation would discourage competition and eventually form large barriers to entry
into the market C since only large sellersFproducers would be able to profit from the low prices in the
market. A lack of market competition would lead to a lack of innovation, resulting in market stagnation.
1uch as the above picture seems dim, an alternate prediction of such a disclosure re!uirement
forecasts a much brighter future. Kather than forcing prices down and smaller sellers out of a market, a
disclosure re!uirement would simply force producersFsellers to differentiate their products in order to
maintain their prices. ;ellers, rather than relying on consumer ignorance, would have to provide
distinguishing features or services in order to maintain their prices. ;uch a policy could, in this case,
predictably increase the !uality and differentiation of services and products in such a market.
Due to the lack of one unifying market scenario necessitating a nondisclosure re!uirement
regarding the 'base case,' it follows that there must be other reasons for the consensus regarding the
allocation of responsibility to the consumer to reveal a competitor's prices.
Chapter III:
The !fairness! approaches
22
'eorge A. Akerlof, The &arket for .!emons.+ /ualit* 'ncertaint* and the &arket &echanism, Nuarterly *ournal of @conomics
E0 &+) &1BD0) 0EEC200. The model is as follows= -hen there is no reliable knowledge about the !uality of a productC consumers
are forced to assume that the product's !uality is as low as possible. Thus they are unwilling to pay a higher price for a higher
!uality product, and conse!uently all producers gradually reduce the !uality of their product until consumers know the value of
the product.
26
The more general phenomenon in which information asymmetry leads to market deterioration is known as 'adverse selection'.
2D
Kichard $raswell, Taking nformation Seriousl*+ &isrepresentation and Non-disclosure in Contract !a" and 0lse"here, B2
Ma. %. Kev. &2006). $raswell argues that the endgoal of improving the !uality of products is central to many fields of regulation,
but is generally &and mistakenly) absent from the precontractual disclosure debate.
6
The term 'fairness' must be separated from 'perception of fairness,' the latter of which is the sub3ect
of the section. To declare a group of outcomes to be 'fair' is to assert the predominance of certain values
2E
,
and is a fitting topic for a normative debate. '(erception of fairness,' on the other hand, leaves the normative
underpinnings of a 'fairness' criterion un!uestioned while analy4ing the role of such a standard in 3udicial
decisionmaking C thus determining whether it is truly perceived to be fair and the eHtent of its importance
in establishing the positive law.
2B

.airness regarding the precontractual duty to disclose may be viewed eH ante or eH post with respect
to the negotiations process, or simply in relation to eHistent social norms.
+0
That is, respectively, a 'fairness'
condition may re!uire that bargaining occur from a position of e!uality, that the negotiated result be
considered 'fair,' or that the bargaining process be conducted according to eHistent social standards, i.e.
goodfaith.
.airness in contractual relations is guarded by doctrines such as the principle of good faith or
unconscionability, which at times stand at odds with the economic approach to precontractual disclosure.
.or 'oodfaith theorists such as @ric 7olmes and .riedrich 8essler, e!uality of access, the main sub3ect of
this section, may be one of the indicators determining whether the obligation of good faith re!uires pre
contractual disclosure.
+1
The most fullydeveloped fairness theory with regards to precontractual disclosure
belongs to (rofessor 8im %ane ;cheppelle
+2
, however contends that e!uality of access is the sole
determinant the precontractual duty to disclose.
A# E%ual Access
;cheppele is the ma3or proponent of determining the precontractual disclosure re!uirement on these
grounds, claiming that e!uality of access is the most effective basis for determining disclosure both
positively and normatively.
++
1uch like 8ronman, she argues that her theory ultimately eHplains 1arshall's
decision in !aidla".
+0
;imilar to 1arshall, she does not re!uire disclosure of eHtrinsic information,
+2
but
argues that 1arshallGs eHtrinsicFintrinsic distinction is outdated and does not reflect the current positive
law.
+6

;cheppeleGs 3ustification for solely basing the disclosure re!uirement on e!uality of access is via the
contractarian view that laws are legitimate solely if they may be presumed to be consensual.
+D
This approach
holds that it may be recogni4ed that laws bear such consent if they contain :those values and arguments that
2E
Duggan, "ryan, 7anks, p.12+
2B
(id#, p. 122
+0
(id#, p.12+.
+1
(id#, p.1+D
+2
(id#, p.12+
++
(id#, p.101
+0
8aye, p.1E5 ;cheppele, p. 10D5 ;trong v. Kapide, 21+ J.;. 01B &1B0B). ;cheppele cites a 'similar' case where disclosure was
re!uired, Strong v# Rapide, as evidence of this notion.
+2
;cheppele, p.1++
+6
(id#, p#12E2B.
+D
(id#, p. 60
D
the losing side in a legal case would recogni4e as appropriate, even when the person finds oneself losing as a
result of their application:.
+E

;cheppele arrives at the above conclusion by way of philosopher *ohn Kawl's method of determining
whether a law is consensual. 7e concludes that the only true consent to a legal rule may be ac!uired before
people have knowledge of any aspect of their status in society,
+B
since only under those conditions, when
one is ignorant of his position in society, a rational actor will act to ,promote selfinterest in a broader Omore
socialP perspective./
00
Jnder such artificial circumstance, which Kawls terms a :veil of ignorance,: he
argues that the decisions made by an actor will be made in order to optimally preserve his access to
opportunities in society.
;cheppele adopts Kawl's theory with one caveat= ;he argues that rational actors in society must be
given certain crucial facts about the society and legal system framing the legal rule upon which they are
deciding, so that the 'veil' is one of tempered and not utter ignorance.
01

-ithin the regular body of disclosure cases in which disclosure is an issue, ;cheppele concludes that
both parties should have some Inontrivial chance to win,G
02
where victory is defined as the gain from the
information in !uestion. $onse!uently, she decides that disclosure should be re!uired in cases in which one
party does not have a significant chance at :winning,: and labels the undisclosed information a ,deep
secret/
0+
. $ases where one party is not immediately privy to certain pieces of information but has some
chance at revealing the information are cases where the undisclosed constitutes a ,shallow secret/
00
.
;cheppele's principle is that deep secrets must be disclosed while shallow secrets need not, unless
the ignorant party falls into either of the two following categories= the uninformed party bears a structural
asymmetry in the access to knowledge between parties,
02
such as that between a buyer and seller regarding
the !uality of a product5 or the ignorant party is fundamentally limited in his ability to make decisions, due
to either an intellectual, social or economic shortcoming.
06

;cheppele concludes that disclosure is not re!uired if both parties have e!ual access to the
information in !uestion, defining 'e!ual access' as the possession of ,&1) e!ual probabilities of finding the
information if they put in the same level of effort and &2) are capable of making this e!uivalent effort./
0D

(# 'cheppele and the ,(ase Case- as a 'hallo. 'ecret
As noted at the end of the previous chapter, market considerations fail to reflect the nature and
emphasis of the answer to the 'base case.' @!uality of access conversely provides a more natural and
+E
(id#, p.61
+B
(id#, p.66
00
(id#, p.D1
01
This difference may be eHplained by a difference in scope= -hile Kawls seeks consent to the basic legal structure of society,
;cheppele seeks consent to legal rules already eHisting within a prebuilt society with an eHistent legal framework.
02
(id#, p.D2
0+
(id#, p.D2
00
(id#, p.D2
02
(id#, p.120
06
(id#, p.120
0D
(id#, p.120
E
convincing answer. Despite the asymmetry in access to information characteri4ing the buyerseller
relationship, information about a competitorGs prices is highly accessible to even the most ignorant potential
buyer, unlike other sorts of market information
0E
, the eHistence of which a buyer may not even be aware. As
such, since practically all buyers will be aware that there may be a competitor with lower prices, the
information in the Ibase caseG epitomi4es a ,shallow secret/. Therefore, not only does it seem that
;cheppeleGs theory provides the right answer to the base case, but her theory provides the re!uisite emphasis
in answering the !uestion.
C# Criticism of 'cheppele-s ,E%ual Access- Theory
;cheppeleGs theory is critici4ed on both normative and positive grounds. >ormatively, her theory is
critici4ed for being too openended, vague
0B
, and sub3ective C as providing :no meaningful guidance for
courts:
20
to determine whether a situation re!uires disclosure. @asterbrook argues that the term 'e!ual access'
is void of significance, since no two people ever have e!ual access and as such the law must endure a
degree of ine!uality in order to be practical.
21
1ichael Trebilcock further critici4es ;cheppele for not
sufficiently emphasi4ing the importance of information production, while focusing too much on
informationsharing.
22
Trebilcock also argues that her theory fails to differentiate between situations where one party
suffers an incredible loss and those in which the loss to either party is marginal, since her theory is based on
the nature of the parties and not the terms of the proposed agreement. 7e also adds that her key terms
possess an inherent ambiguity which doesnGt afford one to truly distinguish between e!ual and une!ual
access to information, thus concluding that nearly any court ruling may be viewed as corresponding to her
theory.
2+

C# The /It-s 0ust 1ot +i&ht2 Intuiti3e Approach
An interesting 3ustification for the 'base case' is an intuitive !uasiapproach, coined the :it's 3ust not
right proposition: by (rof. 7enry 1anne in his discussion of insider trading in the securities market.
20
The
approach utili4es public perception of fairness as an indicator of desirable legal policy. -hile 1anne argued
0E
$ompare, for eHample, the information in !aidla" to the 'base case'. #n !aidla", although the market information was
accessible to both parties, knowledge of the eHistence of information regarding a competitorGs prices seems far more present in
any potential buyerGs psyche.
0B
Duggan, "ryan and 7anks, p.201
20
8rawiec and 9eiler p.22
21
Duggan, "ryan and 7anks, p. 2025 .rank. 7. @asterbrook, nsider Trading, Secret ,gents, 0videntiar* )rivileges and the
)roduction of nformation, ;upreme $ourt Keview 11 &1BE1), p.++0.
22
#t is unclear, however, whether ;cheppele's e!ual access approach gives priority to ,informationsharing/ over ,information
production/. #f she gives priority to data production, then her theory shares a substantial likeness to the law and economics
approaches. $onversely, if she favors informationsharing, then there may be a problem with her fundamental claim of
legitimacy using Kawl's :veil of ignorance:.
2+
1ichael Trebilcock, The %imits of the .reedom of $ontract, &$ambridge= 7arvard Jniversity (ress, 1BB+), p.111.
20
7enry 1anne, n Defense of nsider Trading, 7arvard "usiness Keview 00 &1B66), p. 11+
B
against the use of such propositions, deeming them academically unproductive
22
, other scholars agree that a
gutlevel sense of unfairness :cannot be ignored:.
26
#n the same vein, a preliminary 3ustification for the
consensus view regarding the 'base case' is that it '3ust doesn't seem right' to people. The widespread accord
with respect to this !uestion may be a sign of our basic intuitive sense that in3ustice would be inflicted upon
the seller were he to bear the burden of disclosure.
%ater academics found efficiencybased eHplanations for the intuitive sense of unfairness in allowing
insider trading. Their eHplanation, :only one step removed from footstamping O1anne's other name for the
'3ust not right propositions'P:, is that investors would be reluctant to invest in a market thought of as unfair.
2D

#n order to determine a more broad policy of precontractual disclosure, one must determine which
situations people perceive as fundamentally fair. 7offman and ;pit4er, in a 1BE2 study, found that people
only view une!ual chance distributions, competitive circumstances in which one party has an advantage
over the other, as fair if the winner has earned entitlement to his preferred status.
2E
This may support the
economic approaches to the disclosure dilemma, which grant disclosure eHemptions to those parties which
earn entitlement. A study conducted one year later argued that a business deal would be perceived as more
unfair when losses were increased as opposed to when gains were reduced. This phenomenon, as mentioned
in $hapter ##, is called :loss aversion:.
2B
Chapter I4:
Economic Theories
A# Introduction
22
'ary %awson, The 0thics of nsider Trading, 7arvard *ournal of %aw and (ublic (olicy 11 &1BEE), p.DD6
26
(id, p.DD2
2D
Duggan, "ryan and 7anks, p.12+
2E
@. 7offman and 1. %. ;pit4er, The Coase Theorem+ Some 01perimental Tests, *ournal of %aw and @conomics 22 &1BE2), p.D+
2B
8ahneman and Tversky, p.26+2B1.
10
#n his book, 0conomic ,nal*sis of !a", (rofessor and *udge Kichard (osner eHplains that the
aspiration of the law and economics approach to law is to interpret legal phenomena via principles of
efficiency.
60
Although (osner makes clear that these principles have been sub3ect to a number of
criticisms
61
, he notes that the school of law and economics, of which he is a founder, has survived longer
than other approaches, and predicts further increases in its significance. 7e highlights the following ideal
functions of contract law so as to ensure efficiency= .irst, the role of the law is to protect a weaker party
from opportunistic behavior and both parties from avoidable mistakes5 ;econd, the law should allocate risk
to the better e!uipped risk bearer and determine efficient terms5 and lastly the law should reduce the costs of
resolving disputes. -ithin the conteHt of the disclosure dilemma, each of these functions, apart from the
last, plays a central and sometimes conflicting role
62
in determining the preferred and most efficient rule.
1ore specifically, the economic approach to precontractual negotiations incorporates market
efficiency into the spectrum of concerns determining disclosure policy. Despite the pervasiveness of both
the economic approach to law in general and specifically with regards to precontractual disclosure, the
approach generally suffers from a large disparity between recommendations of the law and economics
literature and court decisions.
6+
The application of these theories to the Ibase caseG will highlight this gap.
(# 5ronman-s ,Procedural Approach- $ocusin& 6n Allocati3e Efficiency
The landmark economic approach developed by (rofessor Anthony 8ronman bases a disclosure
re!uirement on the general
60
procedure by which information is ac!uired. 7e founds this approach on the
premise that disclosure may provide disincentive to discover essential information, and in situations where
such discoveries occur it would be inefficient should the researcher be re!uired to disclose his revelations.
8ronman distinguishes between two types of research= That which results in information which is
deliberately ac!uired and thus protected from disclosure, and that which is adventitiously ac!uired and must
be disclosed. According to 8ronman, those who ac!uire information fue to these incentives will effectively
relay the data to the market by offering a price reflective of this knowledge, thus contributing to the
accuracy of market prices. Thus market actors will be bettere!uipped to decide which resources are worthy
of investment.
62
The sort of efficiency reached in such a state is allocative, in that it optimi4es the
60
Kichard A. (osner, @conomic Analysis of %aw &>ew Qork= Aspen, ;iHth @dition, 200+), p.2D
61
(id#, p. 26,2D. The %aw and @conomics approach is mainly critici4ed for having a conservative political bias and for neglecting
3ustice and fairness concerns, contentions which (osner refutes. Konald Dworkin argues, for eHample, that economic efficiency is
itself neither an inherently attractive social goal nor a component of an inherently attractive social goal. *ules $oleman argues that
the efficiency of legal rules is not correlated with otherwise attractive social goals, such as consent by those affected by the rules
or the advancement of utility for those affected by the rules. $ritical %egal ;tudies scholar 1ark 8elman, a radical critic of
economic analysis, argues that efficiency criteria are so indeterminate that decision makers cannot apply them consistently or
meaningfully.
62
These principles tend to conflict with each other within the realm of precontractual disclosure. .or eHample, within 8ronman's
theory the interest of preventing avoidable mistakes conflicts with the determination of efficient terms and proper assignment of
risk.
6+
<fer 'rosskopf and "arak 1edina, , Revised 0conomic Theor* of Disclosure Duties and 2reak-'p 3ees in Contract !a",
&;;K>, 2006), p.22. 8rawiec and 9eiler, p.1B C This policy may be seen regarding the issue of reimbursement for reliance costs
when negotiations fail C courts don't usually re!uire such reimbursement, despite the 'vigorous' support of law and economics
scholars.
60
8ronman focuses on classes of cases, rather than specific cases C in determining if the re!uisite amount of effort eHists.
62
@isenberg, p.+1
11
distribution of resources within the market C deciding the most efficient way to divide the ,market pie./
66
#n
this sense 8ronmanGs vision of efficiency is fundamentally different from the other ma3or class of economic
approaches to disclosure, which emphasi4e making the ,market pie/ larger.
6D
8ronmanGs ma3or breakthrough is his differentiation between casually and deliberately ac!uired
information, but recogni4ing that it is impossible for courts to use this criterion in each case he instead
proposes to ,apply a blanket rule &of disclosure) across each class of cases involving the same sort of
information./
6E

#t is unclear what 'blanket rule' would apply to the 'base case'. <n the one hand, information
regarding a competitor's prices may be viewed as part of a class of information
6B
deliberately ac!uired by the
seller in order to better understand his market, or conversely seen as adventitious information ac!uired by
mere virtue of the seller's presence in the market. This lack of clarity is incongruent with the emphatic and
clear answer resounding from the 'base case'.
The normative 3ustification of 8ronmanGs theory is that it aspires to efficiently allocate resources
towards the production of goods with the highest utilities. 7owever, not all markets involve production, and
as such 8ronman implicitly limits nondisclosure of deliberately ac!uired information to markets generally
D0
involving production and not only eHchange, as opposed to those in which the Ipool of eHchanged goods
remains constant.G
D1

As mentioned in $hapter ##, 8ronman asserts that courts more fre!uently permit nondisclosure for
buyers rather than sellers. This assertion matches his analysis if one assumes that data ac!uired by buyers is
by and large a result of deliberate investment, as opposed to that obtained by sellers C who attain such data
more casually, as a result of their possession of the asset being sold.
D2
This proposition leads to the
conclusion that the information in the Ibase case,G data obtained by the seller C should be disclosed
according to 8ronmanGs criteria since it is part of the class of information generall* ac!uired casually.
(# Criticism of 5ronman-s approach:
#n kinship with ;cheppeleGs theory, 8ronman's approach has been widely. .irst, it is critici4ed on a
positive basis for not successfully embodying the ma3ority and essence of disclosure cases.
D+
Disputes
arriving in court where the deliberate investment of one of the parties is an issue are :relatively rare,:
D0
66
8ronman, p.26. 7e emphasi4es ,the importance of information in allocating social resources to their highest valued uses./
6D
@isenberg, p.22
6E
8ronman, p.+D
6B
;uch as relevant market information, perhaps.
D0
8ronmanGs generali4ations about the nature of a market are related to his ,blanket rule/ method of analy4ing disclosure cases.
D1
8ronman, p.D C supra note +05 @isenberg, p.+1. @isenberg adds that this distinction may have been considered ,trivial/ by
8ronman because he thought that most markets involved production. 8ronman argues that the information in !aidla" contributed
to the ,the allocation of social resources/ in deciding which good to produce and for that reason the deliberate ac!uisition of such
information 3ustified nondisclosure. #f the information in !uestion in !aidla" was one of ,pure eHchange,/ one in which neither
party to the contract was a producer of the good transferred, he essentially implies that the outcome of !aidla" would have been
different.
D2
.ederal Deposit #nsurance $orp. v. -. K. 'race ? $o,, EDD .. 2d 610 &D
th
$ir. 1BEB) cert# denied J.;. 1026 &1BB0).
D+
8rawiec and 9eiler, p.2+
D0
Mirg. %aw article= R26B
12
whereas most cases involve information revealed during the ,ordinary course of business/
D2
. >ormatively,
8ronmanGs theory is also admonished for its assumption that all deliberately ac!uired information
encourages allocative efficiency.
D6
#n addition, ;cheppele chides the scope of 8ronmanGs thesis for not
necessarily re!uiring disclosure in fiduciary relationships.
DD

%ikewise, the deliberateFcasual distinction is carped for not being a significant factor in 3uridical
decisions regarding fraudulent silence.
DE
8ronman's distinction is considered a less prominent factor than,
for eHample the e!ual access distinction or nature of the relationship between the contracting parties.
DB
1ore generally, 8ronman's assumption that the discovery of useful information is necessar* may be
mistaken, despite the utility derived.
E0
Thus, even if the addition of useful information will benefit a market,
it does not follow that the imposition of a rule encouraging such behavior is legally efficient.
E1
#n fact, if the
cost of ac!uiring such information is greater than the utility it provides, then such a rule would be decidedly
inefficient.
E2
#sraeli scholars 1edina and 'roskopf re3ect the use of 8ronmanGs assumption that using non
disclosure as an incentive to conduct research in all cases is necessary, effective
E+
or both. They argue
That nondisclosure is unnecessary in the many cases where the knowledgeable party deliberately ac!uires
information in order to improve his position against third parties, in addition to his bargaining partner, and
disclosure would not prevent him from preserving an advantage against these third parties.
E0
Thus no legal
incentive to ac!uire information in these situations may be necessary. #n other words, the disclosed
information still ensures the buyer a margin of ,standard profit/
E2
due to the advantage attained over
competitors, although profits taken from oneGs bargaining partner may be foregone.
E6
$onse!uently, in order to understand if there is such competition between third parties they
recommend that each market be evaluated in order to determine the validity of using nondisclosure as an
incentiveprotecting mechanism.
ED

They also propose that deliberately ac!uired information may be subdivided into IconventionalG and
IeHceptionalG methods of ac!uisition, the latter of which is the result of an eHpensive, nonstandard research
process. Accordingly, only IeHceptionalG information is eHempted from disclosure.
EE
C# (arnett!s allocati3e approach:
D2
Mirg. %aw art icle= R26B
D6
@isenberg, p.2B
DD
;cheppeleGs book, p.1612
DE
'rosskopf and 1edina, pp.12165 8rawiec and 9eiler, p.20
DB
8rawiec and 9eiler, p.60. .or eHample, if the parties have a fiduciarybeneficiary relationship.
E0
Meller, p.D0
E1
K.%. "irmingham, The Dut* to Disclose and the )risoner.s Dilemma+ !aidla" v# Organ, -ill. ? 1ary %. Kev. 2B, p. 22E,22B
E2
Meller, p.D2
E+
The effectiveness of a disclosure re!uirement will be discussed in the subsection of this chapter dealing with break up fees.
E0
'rosskopf and 1edina, p.20
E2
(id#, p.20
E6
(id#, p.20
ED
(id#, p.2D
EE
'rosskopf and 1edina, p.26
1+
A proponent of using disclosure to achieve allocative efficiency, Kandy "arnett agrees with
8ronmanGs ob3ective but not with his distinction. %imiting his discussion to transactions involving scarce
resources, he asserts that any information contributing to such ends be eHempt from disclosure regardless of
the IprocessG by which it was ac!uired.
EB

According to "arnett's approach, the information in the 'base case' need not be disclosed if it
contributes to allocative efficiency within the market.
B0
Assuming that a seller would capitali4e on his
revelation of a change in competitor prices, such information would likely affect the transaction price,
moving the overall market price in an IinformationrevealingG direction, however marginally.
B1
<n the other
hand, since the information in the Ibase caseG is probably already present within the market, the data may
not be of importance to "arnett since any shifts in resource allocation would have already occurred.
#f one does assume an allocative value to the data in the Ibase case,G the information, much like that
in !aidla", represents the essence of "arnettGs theory, for it is the same sort of Ihard caseG where the
allocative benefits of the transaction are marginal.
B2
7e asserts that even if the information in !uestion
would be revealed momentarily, it contributes to forging a more accurate market price more !uickly if used.
7e emphasi4es that the significance &or insignificance) of the contribution is irrelevant, eHplaining that the
aggregate of all of these transactions which determine the market price C and not each one by itself C and
that each one of many transactions is important.
7owever in cases similar to the Ibase caseG and !aidla", in which the social benefit of non
disclosure is marginal, such revelations may end up being more costly overall to society if the cost of
ac!uiring such information surpasses the allocative utility derived.
B+
-hen regarding these types of
information, which distinguish "arnettGs theory from 8ronmanGs and those centered on productive
efficiency, this overall social loss becomes more likely C and "arnettGs argument is weakened.
B0
"arnett also reasons that most of the disclosure cases which distinguish his theory from the others do
not involve information which will momentarily be revealed to the market, as in !aidla" and the Ibase
case,G and as such the benefits reaped by nondisclosure are usually more significant. The fre!uently
appearing Ibase case,G however, sheds doubt on this conclusion.
D# The /conse%uential2 approach: focusin& on producti3e efficiency
The other ma3or economic approach may be described as Iconse!uential,G as it grants a disclosure
eHemption if the information produces social benefit, increasing the wealth per capita of each market actor.
-hile 8ronman's and "arnett's approaches focus on allocative efficiency
B2
as their aspiration, this aim is
aptly named productive efficiency
B6
.
EB
Kandy @. "arnett, Rational 2argaining Theor* and Contract+ Default Rules, 4*pothetical Consent, The Dut* to Disclose and
3raud, 7arv. *. of %. ? (ub. (ol'y 12 &1BB2), p.DBE.
B0
(id#, p.DE6
B1
(id#, p.DED
B2
"arnett argues that nondisclosure of the information in !aidla" contributed to allocative efficiency in spite of the fact that the
information was about to be revealed to the market regardless of the transaction.
B+
@isenberg, p. +6.
B0
(id#, p.+D
B2
Allocating resources to their optimal possessor.
10
Nuestioning when an investment in information was socially efficient, *ack 7irshleifer first
distinguished between discovered information which :makes the pie larger:
BD
and foreknowledge,
information creating wealth only for the information bearer at the eHpense of the other negotiating party,
forging a basis for this set of theories.
BE
7e argued that the ac!uisition costs of foreknowledge eHceeded
their social value and should not be legally encouraged.
Kobert $ooter and Thomas Jlen formally applied 7irshleifer's theories to the field of precontractual
disclosure, drawing a similar distinction between productive and redistributive information. -hile
productive data is used to produce more wealth, redistributive data serves solely as a bargaining advantage
for its bearer.
BB
;ince the ac!uisition costs of redistributive information eHceed their social benefit, the
information is unworthy of a disclosure eHemption.
100
<ther law and economics theorists use similar
distinctions. (rof. ;teven ;havell draws a distinction between foreknowledge and socially valuable
information
101
, as does (rofessor Konald $oleman, distinguishing between what he terms ,technological/
and redistributive information.
102
<verall, this body of theories has been considered problematic in application since most information
contains both productive and redistributive !ualities, and may not be clearly categori4ed as one or the
other.
10+
The information in the Ibase caseG is clearly redistributive since it regards information already
present within the market, and thus cannot Imake the pie larger.G Thus none of the 'conse!uential'
approaches would consider it worthy of a disclosure eHemption, amounting to a contradiction between it and
the consensus view.
E# Posner!s 3ie. on disclosure 7 A +educti3e Approach
Kichard (osner contributes a simpler approach, contending that one should usually disclose
information ac!uired at a lower cost than would oneGs bargaining partner.
100
7e argues that ,the case for
re!uiring disclosure is strongest when a product characteristic is not ascertainable by the consumer at low
cost./ The purpose of this distinction is to Iallocate risk to the superior risk bearer,G the party which is best
e!uipped to perform the re!uired research.
This criterion too suffers from problems in positive implementation, since C as will be shown when
applied to the 'base case' C it is unclear in many situations which party can ac!uire the information at a
lower cost. (osner's method is also critici4ed, much like 8ronman's distinction, as being overinclusive and
B6
@isenberg, p.+2. ;uch information can be used to produce more wealth for society, as opposed to redistributive information,
which only benefits its possessor during negotiations.
BD
*ohn 7irshleifer, The )rivate and Social 5alue of nformation and the Re"ard to nventive ,ctivit*, Am. @con. Kev. 61 &1BDD)
p.621.
BE
(id6 @isenberg, p.+2# 7irshleifer's theory influenced 8ronman's, and preceded it by four years.
BB
Kobert $ooter and Thomas Jlen, The @conomics of $ontract %aw &1BE6)
100
(id#, p.+2
101
;havell, p.26
102
"arnett, p.E00
10+
Meller, p.D6
100
(osner, p.11+. 7e argues that ,%iability for nondisclosure should depend on which of the parties to the transaction, seller or
consumer, can produce, convey, or obtain the pertinent information at lower cost./
12
not accounting for other contributing factors, such as the nature of the relationship between the two
parties.
102
-ith regards to the 'base case,' (osner's theory remains unclear. Although the seller may likely
possess superior access to the information, his advantage is nominal. To complicate things, the 'superior risk
bearer' may in fact be the buyer and not the seller, who already bears a responsibility to himself to seek out
the best price.
$# Eisen"er&: An Inte&rati3e Approach
;eeking to weather the implementation problems of the economic theories previously cited, J$%A
(rofessor 1elvin @isenberg compiled a large number of principles outlining the duty to disclose, creating a
comprehensive law and economicsbased approach. 7is normative framework contains a system of
overarching disclosure rules, much like the previous theories C but unlike the other methods, he includes a
number of eHceptions to each of the rules. 7is fundamental principle, which he calls IThe Disclosure
(rinciple,G re!uires disclosure of ,material facts eHcept in those classes of cases in which a re!uirement of
disclosure would entail significant efficiency costs./
106
7e incorporates both the IproceduralG and
Iconse!uentialG approaches to disclosure in determining this efficiency criterion, re!uiring disclosure in
cases where data was either ac!uired adventitiously or when it considered foreknowledge.
@isenberg also provides special eHceptions re!uiring disclosure when information was ac!uired
improperly or if the parties were in a fiduciary or other trustbased relationship, an element only present in
;cheppele's theory.
7e adds a final set of three circumstances &of which only two are relevant) 3ustifying a disclosure
eHemption, unless those situations involve fiduciary relationships or an improper method of information
ac!uisition. #t is within these three eHceptions that his answer to the Ibase caseG may be interpreted. The first
circumstance is one in which the informationbearing party has information regarding a risk allocated to that
uninformed party C similar to (osner's criterion.
10D
#n other words, regardless of the social value or effort
involved in discovering a piece of data, if there was eHplicit or implied consent that the burden of the risks
regarding that data would be placed on the uninformed party, disclosure is not re!uired. @isenberg doesnGt
highlight the reasons for the allocation of such risk to the uninformed party, beyond being common trade
practice or an eHistent or implied contractual provision.
10E
#t is within the conteHt of this condition that the correct answer to the Ibase caseG is found, since non
disclosure of competitor prices is clearly common trade practice, as seen by the broad consensus regarding
this practice. 7owever, @isenberg's theory does not shed light on the reasons for this broad consensus,
102
De 1ott, p.D0= (osner was the presiding 3udge in the -.K. 'race case &previously cited), in which the court obligated a buyer
to disclose to a seller a change in the financial situation of his guarantor. #n a later case, however, a seller was not obligated to
inform a buyer's guarantor of a change in the financial state of the buyer. (osner's theory is critici4ed by De 1ott for not being
able to positively differentiate between these two cases, and reaches the conclusion that his distinction is overinclusive.
106
@isenberg, p.B
10D
(id#, p.02
10E
(id#, p.06
16
instead utili4ing it as evidence of a specific risk allocation, an efficiency consideration. Thus, although
@isenberg clearly answers the 'base case' in a desirable manner, it is not via his 'Disclosure (rinciple' or
another efficiency consideration, perhaps implying that efficiency is an improper norm for the 'base case.'
@isenberg's second supplementary condition 3ustifying nondisclosure regards states where the unknowing
party was :on notice that his mistaken assumption was unfounded: or could have revealed the information
had he conducted a reasonable search.
10B
This eHception also provides the correct answer to the 'base case', if
one considers the broad consensus as evidence of an appended contract placing the buyer on InoticeG to
conduct a Ireasonable searchG. The first eHception, however, more properly describes the Ibase caseG, since
it directly answers the !uestion using widely accepted social norms rather than using them as a source of
authority to implement courtdriven legal principles &the ob3ective 'reasonable search' standard).
110

7e advocates a more stringent disclosure re!uirement for sellers due to the following attributes
within the buyerseller relationship= An advantage in access to information relating to their product, which is
by and large adventitiously ac!uired5 a risk of foregone gains as opposed to losses when disclosure is
re!uired
111
5 and a preeHisting 'ade!uate'
112
incentive, regardless of disclosure policy, to research their
product and market C due perhaps, as 1edina and 'roskopf mention, to their competition via third parties.
11+
1arket information, however, is considered by @isenberg to be to be distinct from other information
revealed within the buyerseller conteHt, and thus possibly eHempt from seller disclosure. This is because he
characteri4es such data as e!ually accessible to both buyer and seller, using ;cheppele's criterion, and for
the most part deliberately obtained by the seller, using 8ronman's distinction.
110

@isenberg, nevertheless, refrains from clearly advocating nondisclosure of such data, citing siH
3ustifications for such a policy. .irst, he notes that market information has the potential to cause greater
harm to the buyer
112
and is commonly foreknowledge
116
. Third, he maintains that the seller possesses an
inherent incentive to obtain market information regarding hisFher product and that a disclosure re!uirement
would have little effect on ,law and practice,/ since it would not provide a significant disincentive to
perform such research.
11D
.inally, he adds that such data is psychologically more important to buyers than
sellers C since nondisclosure regards losses for the buyer and foregone gains for the seller.
11E

Thus, despite his two implied correct answers to the 'base case' described above, @isenberg
ultimately illuminates a fundamental reason why the information in the 'base case' should be disclosed. #f
the data has the potential to cause greater harm &both actual and psychological, as mentioned above) to the
buyer despite the symmetry of access between the two parties, then allocation of harm should be weighed
10B
(id#, p.06
110
(id, p.2E. The third condition @isenberg adds provides a disclosure eHemption in situations where buyers systematically take
advantage of seller mistakes and miscalculations made by sellers, highlighting the asymmetrical protection he gives to buyers.
111
As mentioned previously, due to the loss aversion effect, foregone gains are psychologically preferable to losses.
112
(id#, p.2E
11+
(id#, p.2E
110
(id#, p.2B
112
(id#, p.2B. 7e says that ,even market information held by a seller is information that will result in a loss to the unknowing
buyer, rather than a forgone gain./
116
(id#, p.2B. 7irshleifer, ;havell, $ooter and Jlen all advocate disclosure of foreknowledge in their theories.
11D
(id#, p.2B
11E
(id#, p.2B. 7is conclusion is derived from the lossaversion effect, part of 8annehmanGs and TverskyGs (rospect Theory.
1D
alongside e!ual access. This leads to a seller disclosure re!uirement in cases where this is a significant
disparity in harm, in spite of e!ual access. Although prima facie this may seem a significant amendment to
;cheppele's theory, considering the allocation of harm may in fact be similar to the eHceptions ;cheppele
provides for deep secrets. <n the other hand, unlike ;cheppele's eHceptions, the magnitude of potential harm
is directly related to the monetary scope of the contract C since a small harm asymmetry can translate in to a
significant difference if the transaction regards a large sum of money. This is precisely Trebilcock's
criticism of ;cheppele's theory, in that it does not differentiate between incredible and minute losses.
@isenberg also concludes that a disclosure re!uirement for market information would have little effect on
Ipractice,G implying that efficiency considerations may not be the driving force behind disclosure policy
regarding the 'base case.'
Jne!ually drawing on elements from the IproceduralG and Iconse!uentialG approaches, @isenberg
ultimately prefers the latter and its vision of productive efficiency. 7e critici4es 8ronmanGs and "arnett's
approaches, arguing that allocative efficiency will not be achieved in cases similar to !aidla" since the
market advantage afforded by use of such foreknowledge, a head start in reallocating resources, is usually
less than the time re!uired to reallocate the resources themselves.
11B
Accordingly, he determines that it is
unlikely that an allocational decision will be made during the span of time afforded by such information.
120
7e concludes that productive efficiency is a bettersuited goal of disclosure policy, since its basis in the
'substantive character' of the information &socially productive or not) is a better indicator of the positive
effects the data would have on the market. 7e prefers of 7irshleifer and ;havellGs distinction between
foreknowledge and socially valuable information over $ooter and JlenGs productiveFredistributive
distinction, pointing out that most cases are covered by both tests but the courts will find it easier to identify
foreknowledge as opposed to redistributive information.
121
G# 1on-Disclosure 3s# (reak-8p $ees
"roadening the spectrum of analysis, use of a disclosure eHemption may be viewed as an attempt to
prevent one type of contractual hold up, a situation in which a negotiating party is forced to accede to
disadvantageous demands by the other side due to a circumstance of substantial need.
122
This situation may
be one where a party making a substantial investment towards the enactment of a contract is left vulnerable
as a result, and is thus forced to agree to detrimental terms in order to prevent the breakdown of negotiations
and the total loss of the amount invested. Kegarding the disclosure debate, a party in possession of
information worthy of protection is similarly in danger of suffering a substantial loss at the hands of the
nonbearing party if his information remains unprotected. Although a disclosure eHemption is one legal
techni!ue that may prevent the informationbearing party from being :held up,: it may be lacking in
comparison to other preventative measures.
11B
(id#, p.+2
120
(id, p#77
121
(id#, p.++
122
;teven ;havell, Contracts, 4oldup, and !egal ntervention. 7arvard %aw and @conomics Discussion (aper >o. 20E. &2002),
p.1.
1E
;cholars "arak 1edina and <fer 'rosskopf argue that in situations similar to those that 8ronman
envisioned, where one party has deliberately invested in ac!uiring information, abstention from disclosure
may not successfully give the investing party enough of an upper hand in negotiations to protect his
investment, since by mere virtue of the asking price, the information may be revealed.
12+
They add that
alongside the inefficacy of a disclosure eHemption in these situations, using precontractual reliance as a
shield against hold up will be unsuccessful since the other party did not induce the investment costs.
120
$onse!uently, due to the need for a more effective alternative to a disclosure eHemption and the inability to
use the reliance doctrine, they propose the use of breakup fees in these situations, sums paid to a party for
their precontractual eHpenses if negotiations fail.
122

There is little danger of contractual hold up in the 'base case,' since the information involved is not
likely to be ac!uired at a significant cost. 7owever, the principle of hold up itself provides insight into the
broad consensus regarding this case= #f the seller is forced to divulge competitor prices, this provides the
buyer with a degree of leverage which may be used against the seller. This may be the root of the broad
perception of unfairness leading to a disclosure eHemption in the 'base case.'
9: A $lipside to 5ronman 7 Pre3entin& 63er-In3estment:
1edina and 'roskopf also argue that nondisclosure of certain facts may lead to an overinvestment
in information by the uninformed party. .or eHample, when information about the likelihood of performance
is withheld by a party, such as in 4offman v# Red O"l
126
, the uninformed party may invest far more than
befits the eHpectation of performance. 1edina and 'roskopf stop short of mandating a disclosure
re!uirement in such situations, claiming that it would be too difficult to enforce, and instead propose
shifting the reliance costs to the informationbearing party.
Due to the relatively symmetrical access of information between buyer and seller regarding market
information, eHcessive investment is not a relevant danger to the Ibase case,G since any information withheld
from the buyer may be reasonably ac!uired.
Chapter 4:
Concludin& +emarks
(recontractual disclosure law suffers from a tension regarding the legal properties of the
information revealed. Data relevant to the negotiations process may be considered either the !uasiproperty
of its possessor, or material vital to the opposing party in deciding whether to consent to the eHchange of his
rights as part of his agreement with the former. #nstances in which disclosure policy is determinate may be
seen as a clear decision to define one of these properties as supreme over the other. .or eHample, when
12+
'rosskopf and 1edina, p. 11 supra 1E
120
(id#, p.11
122
;havell, p.1.
126
4offman v# Red O"l Stores, nc#, 26 -is.2d 6E+, 1++ >.-.2d 26D.
1B
"arnett mandates a disclosure eHemption for information contributing to allocative efficiency, he is
simultaneously granting a !uasiproperty right to the informationpossessor and denying the materiality of
that information to the consent of the opposing party. #n light of the allornothing, 4erosum balance
between these two weighty considerations, it is clear why development of a contiguously normative and
successfully positive framework for this duty has been elusive.
An additional tension characteri4ing this disclosure pu44le is that between opposing efficiency
considerations, that of informationsharing and informationproduction. 1ilton .riedman argues that an oft
overlooked precondition for efficient market interaction and contractual relations is that both parties are
fully informed
12D
&informationsharing), while in spite of the departure from the caveat emptor doctrine,
modern contract theorists opt to sacrifice full disclosure for the sake of informationproduction. <ne may
categori4e this tension as a subset of the nearomnipresent legal eHpostulation regarding distributive 3ustice
and productive efficiency.
12E
All of the economic theories discussed give some preference to information
production, although @isenberg's theory places distributive concerns more prominently, in his recognition of
and compensation for a number of power asymmetries between contracting parties.
12B
Despite the prima
facie perception that a 'fairness' theory would clearly lean towards informationsharing, it is unclear which
direction ;cheppele's theory favors, owing to the muddled boundary between deep and shallow secrets.
1+0

-ithin the realm of informationproduction lies another dispute, this time over the type of information
whose revelation should be encouraged, between that which aspires to allocative efficacy and that
encouraging productive efficiency. @isenberg, unifying both approaches while clearly leaning towards the
latter, ultimately forges a higher standard for nondisclosure.
@isenbergGs techni!ue of combining a number of different disclosure standards is supported by the
positive law. -hen combined together to form a higher standard, disclosure theories have had greater
success in predicting case outcomes, as seen in 8rawiec and 9eilerGs statistical study. #t found that while
8ronman's and ;cheppele's theories are separately insignificant indicators of case outcomes, when
synthesi4ed they become significant predictors of 3uridical decisions.
1+1

#n an attempt to seek out the degree to which modern disclosure theories correspond with the
positive law, the trivial Ibase caseG was identified based on the assumption that the clarity of a theoryGs
assessment of a case should be a significant factor, due to the ambiguous nature of legal distinctions.
Accordingly, in order to measure this criterion, it is desirable to measure potentially une!uivocal theories
against a more trivial body of cases, in which the resounding clarity of the theoryGs assessment should be
eHpected, since the answer is wellestablished within the positive law. -hen choosing the Ibase case,G it was
important that the case appear fre!uently, so as not to discount any theory failing to account for a rare yet
overt case.
12D
@isenberg, p.D
12E
#n other words, making the pie larger vs. dividing it more e!ually.
12B
@isenberg, p. 2E. 7e identifies psychological asymmetries &loss aversion), asymmetry of potential harm, in addition to
asymmetry of access as 3ustifications for re!uiring disclosure.
1+0
As eHplained in $hapter ##, ;cheppele's theory is almost forced to walk the line between these two interests, since any leanings
towards one of the interests may compromise the theoretical basis of her argument.
1+1
8rawiec and 9eiler, p.6+
20
#n analy4ing each theoryGs evaluation of the Ibase case,G only ;cheppeleGs theory provides a entirely
lucid answer. The information in the Ibase caseG is patently a ,shallow secret,/ since no potential buyer
would ever assume without some substantiation that a particular sellerGs price was the lowest. -hile
@isenberg, using 8ronman's criterion, considered market information to be usually deliberately ac!uired,
8ronmanGs answer to the Ibase caseG seems unclear when viewed under scrutiny. #nformation regarding a
competitorGs prices may be achieved adventitiously simply by virtue of a sellerGs presence within the
marketplace. .urthermore, his theory does not withstand the IclarityG criterion, as the Ibase caseG does
epitomi4e deliberately ac!uired information.
"arnettGs assessment too fails to provide a clear answer to the Ibase case,G as the data involved does
not clearly contribute to allocative efficiency. #nformation regarding a competitorGs prices may not affect the
market since the competitor himself has likely already conducted transactions utili4ing this information, thus
already affecting, if at all, the allocation of resources. The Iconse!uentialG approaches utterly flounder in
their assessment of the Ibase case,G as information about a competitorGs prices does not bear social value
according to their criterion. (osnerGs approach leads to conflicting answers. #f analy4ed according to the
buyerGs cost of ac!uisition, it is unclear whether the data in the Ibase caseG should be disclosed, since it is
dubious whether a seller could ac!uire the information at a significantly lower cost than a potential buyer. #f
analy4ed according to the related criterion (osner cites, allocation of risk, the consensus regarding the Ibase
caseG may evidence the buyerGs assumption of the risk regarding the information involved.
Almost paradoHically, the highly comprehensive economic approach developed by (rof. @isenberg
seems to reach the Iwrong answerG after clearly and correctly assessing the Ibase caseG using three different
criteria in his theory. Jsing the broad consensus for a disclosure eHemption as evidence of a Icommon trade
practiceG or Icontractual provision,G and highlighting the symmetry between buyer and seller regarding
market information, he reaches the desired assessment in a resounding fashion. 7owever, he later adds two
harm criterions which potentially 3ustify the wrong answer, and claims that nondisclosure of market
information will have no significant effect on the market. #n order to interpret his theory in a consistent
manner, it follows that his final commentary on the substantive asymmetry between buyer and seller
regarding market information and the negligible effects of such a disclosure policy may be purely normative
commentary, and not a prediction of the positive law. #n this case, his assessment clearly arrives at the right
answer, but is not normatively based. 7e essentially uses the broad consensus regarding the Ibase caseG as
an eHplanation as to why it eHists.
To conclude, as an IeasyG case, the Ibase caseG is fundamentally limited in the scope of its
eHplanatory power. #t cannot reveal the answers to difficult disclosure cases, the central theoretical emphasis
of modern disclosure theories. 7owever, it does serve as a sieve regarding the fundamental conclusions of
these theories, sifting out those theories who fail to uni!uely account for the positive lawGs answer to this
common disclosure !uestion.
;ince all theories eHcept for ;cheppeleGs fail to accurately assess the Ibase caseG using its own
normative terms, it may imply that the Ie!ual accessG criterion is a better candidate than an efficiencybased
21
distinction for characteri4ing a general rule of disclosure. This implication would, however, in no way deny
efficiency considerations a place within a comprehensive disclosure theory, but it would make them the
eHception, used for solving hard cases, rather than the general rule.
1+2

1+2
A number of essential disclosure issues unfortunately do not relate to the 'base case' and were accordingly omitted from this
paper. They include= &1) The nature of the relationship between the two contracting parties5 &2) The status of the information in
!uestion as being ob3ective or sub3ective5 &+) The degree to which the nondisclosure is active, i.e. whether the nondisclosure
may be considered misrepresentation or fraud.
22
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20