Wednesday, October 05, 2016

Solicitation Fraud: The Important Difference Between “Not Intending to” and “Intending Not to”

Ian Ayres

Ian Ayres and Greg Klass

Touro law professor, Dan Subotnik, has published an extended email exchange that helps to teach an important legal and moral differences between “never intending” and “intending never.” The email exchange purports to be a dialogue between himself and an unnamed student law review editor (identified only as “Jim”) concerning an article that Professor Subotnik submitted to an unnamed journal.  After a follow-up inquiry from Professor Subotnik, the journal offered to publish the article, but after requesting more time Professor Subotnik rejected offer. The following email exchange ensued:

Jim: We are deeply disappointed. If you change your mind for any reason, please let us know. In the meantime, can you please tell us who is publishing the article? We are trying to figure out who we are losing articles to in the hope of competing better. * * *

Professor Subotnik:        After consultation with my dean, I have determined not to accept publication this go-round and to rework and then re-submit the article next semester.

Jim:       Oh my God. You are withdrawing your article after all that?

Professor Subotnik:        I’m afraid so.

Jim:     We are so beyond—below—the pale that nothing is better than our journal?

Professor Subotnik:        Please don’t put words in my mouth. I didn’t say that.

Jim:     How else should I interpret your message other than that everything you have said to us is a lie?

Professor Subotnik:        I just saw that my article had flaws that needed attention. Nothing more.

Jim:     Students at lower-tier law schools are not as dim-witted as you think. Let’s get real here for a change. The flaws seemed to have revealed themselves only after you failed to get the offer you had hoped for. The delays were for the purpose of leveraging our offer with higher ranking law reviews. Your dean then told you that we were not respectably enough ranked for our imprimatur to do your school any good.
Professor Subotnik:        You obviously know all about the ranking system. So what’s your gripe?

Jim:     Simple. Why did you not look into that matter before you submitted and began toying with us? What did we do to you? We spent hours on your article and could not give other submissions the attention that they deserved.

Professor Subotnik:        You are making an issue over that? You have nothing else to do?

Jim:       Is exploring the coverage of the Golden Rule too trite a project for a professor of ethics?

Professor Subotnik:        OK, I did not think much about my submissions at the time. But in any event, you were playing me the same way by not making me an offer, hoping that a higher-placed author than I would fall into your lap. My point is that there is a marketplace for law review articles and that marketplace has rules. I was playing by those rules. This is what we professors call a teaching moment. As a seasoned contracts person, I can assure you that there is no implied promise in a submission that the author will accept one of the offers received.

The exchange is compelling for several reasons – including the surfaced emotions as the participants “get real.” But it can also teach us something about promissory fraud.

All we know about the transaction is via the above email exchange.  Based on that, it might be that Professor Subotnik has done nothing wrong.  And we agree with him that there was no “implied promise in a submission that the author will accept one of the offers received.”  That said, if a solicitation does not include an implied promise to accept an offer, it might still include an implied representation about one’s intentions.  Specifically, we worry that Professor Subotnik might have engaged in what might be termed “solicitation fraud.” 

Jim appears to be concerned that in submitting his article for consideration, Professor Subotnik misrepresented his true purpose or intent so as to induce the journal to review the piece and possibly make an offer of publication.  Jim suspects that rather than submitting because he was interested in publishing in the journal, Professor Subotnik wanted an offer so that he could use it as leverage with other journals.  Contract law presumes that by promising, a promissor implicitly represents that she intends to perform her promise.  But does someone who solicits an offer make any implicit representations about his or her intent regarding subsequent acceptance?

We think yes.  Professor Subotnik would be legally and morally culpable if, in soliciting, he intended never to accept an offer from that journal.  Professor Subotnik at least implicitly represented that he did not intend not to accept an offer that he himself solicited.

There is an important difference between not intending to do something and intending not to do it.  Professor Subotnik might be in the clear if he merely did not intend to accept an offer from this review.  One can imagine that a soliciting professor would want to wait until learning more from other journals before forming an intent whether or not to accept an offer from a particular journal.  This is perhaps consistent with Professor Subotnik’s subsequent statement that he “did not think much about my submissions at the time.”  Merely lacking an intent (not intending) to accept an offer that one has solicited is not necessarily wrong.

If, however, Professor Subotnik solicited an offer from Jim’s review with, at the time of solicitation, an affirmative intention not to accept any such offer, Jim has a right to feel ill-used. Soliciting an offer does not represent an intent to accept it. But we think it at least represents that one will be open to an offer—that the soliciting party does not presently intend to not accept such an offer.

The possibility of solicitation fraud is an example of how someone who procures an option can, somewhat surprisingly, commit fraud on the option writer.  An offer, after all gives, the offeree an option to accept or not.  In our 2005 book, Insincere Promises: The Law of Misrepresented Intent, we provide a hypothetical example using two hypothetical New York property magnates, Leona and Donald, as our dramatis personae:
While the purchase of an option does not represent an intent to exercise it, it typically suggests that the purchaser does not intend not to do so.  Suppose Leona acquires from Donald an option to purchase a piece of land suitable for a shopping mall not because she is thinking of building on the site, but because she intends to build a mall two blocks away and wants to prevent Bruce, her competitor, from purchasing and developing Donald’s site.  There is a strong intuition that in purchasing the option with an affirmative intent not to exercise it, Leona has committed promissory fraud.  Donald has sold the option based on the assumption that Leona is at least considering purchasing the property, a fact that is reflected in the option price.  Now we could allow Leona to opt-out of the default representation that she is at least considering buying the property.  * * * But if Donald knows that Leona may well intend not to exercise the option, he will raise the option price so that he profits even if she doesn’t purchase. 
If Leona intends not to exercise the option, she should forthrightly contract with Donald not to sell his land next year.  Pursing the cheaper option is a species of fraud.  Even though Leona doesn’t represent that she intends to exercise her option, her option contract seems to imply that she does not intend not to exercise it. 

Professor Subotnik position is analogous to Leona’s.  By soliciting an offer from Jim’s journal, he was trying to obtain an option to accept it.  If—and we emphasize that we do not know all the facts here—Professor Subotnik intended not to exercise the option, but planned to use it to leverage offers from higher ranked journal, he would have defrauded Jim’s journal.  Of course he might have forthrightly revealed that he sought an offer that intended not to accept. But then the law review knowing that it was merely being used as a stalking horse likely would have refused to consider his submission, or would have sought to be compensated for their effort. 

An analogous dynamic is described in the famous Delaware Chancery case, Smith v. Van Gorkom, 488 A.2d 858 (1985) in which Jay Pritzker initiated a taker-over discussion with Trans-Union’s CEO, Jerome Van Gorkom.  During the negotiation:
Van Gorkom stated that to be sure that [Pritzker’s] $55 [price per share offer] was the best price obtainable, Trans Union should be free to accept any better offer. Pritzker demurred, stating that his organization would serve as a "stalking horse" for an "auction contest" only if Trans Union would permit Pritzker to buy 1,750,000 shares of Trans Union stock at market price which Pritzker could then sell to any higher bidder. 
Similarly, if Professor Subotnik made clear that the law review’s offer was being used a stalking horse to secure other law review offers, Jim’s law review might have sought something akin to a break-up fee. 

So far all of our examples have involved call options. But there can also be instances misrepresented intention with regard to put options.  As we suggested in Insincere Promises:
Imagine the promisor who buys formal wear (with a satisfaction guaranteed return policy) with the intent of returning the garment after wearing it to the prom.  While the call option fraud concerned a promisor who intended not to exercise, the put option fraud concerns a purchaser with a put who never intends not to exercise.
We can imagine a prom dress buyer, who at the time of buying intends not to keep it after the ball.  It is not sufficient for this temporary buyer to say “there is a marketplace for [prom dress] and that marketplace has rules [and] I was playing by those rules.”  We doubt that Professor Subotnik would countenance the prom-dress purchase with an ex ante intention to return, although it is analytically analogous to a submission solicitation with an ex ante intention not to accept.

A simple test provides a guide in all of these contexts:  If the potential defrauder had revealed her true intent, would the other side have relied?  If the answer is no, then there is a colorable promissory fraud.  If the solicitor revealed that she intended not to accept any forthcoming offer, then no uncompensated offer would be forthcoming.  If Leona, the call option purchaser, revealed she intended not to exercise her option, the option writer would have charged a different option price.  If the prom dress buyer revealed her intention not to keep the dress, the seller would have charged a different (rental) price. Professor Subotnik speaks of “what we professors call a teaching moment.” But among contractual equals, the appropriate time for teaching the other side of your true intention is at the time of the original solicitation.

Again, we want to be clear here. The email exchange does not establish that Professor Subotnik (implicitly) misrepresented his intention.  He might have merely not intended to accept an offer from this review. Or he might have intended to accept and then changed his mind after consulting with his dean and discovering “flaws that needed attention.”  But the exchange does suggest that Professor Subotnik was not well attuned to how implicit representations of intent can give rise to legal and moral concerns.  And for our purposes, this submission kerfuffle nicely illuminates the possibility of “solicitation fraud.”  People who solicit offers can defraud by implicitly misrepresenting their intention with regard to whether or not they will accept the offer.  Not intending to accept—being uncertain—is presumptively okay; intending not to exercise, without making that intention clear in advance, is presumptively wrong. 

There is a larger point here.  Oliver Wendell Holmes observed, “If you want to know the law and nothing else, you must look at it as a bad man, who cares only for the material consequences which such knowledge enables him to predict, not as a good one, who finds his reasons for conduct, whether inside the law or outside of it, in the vaguer sanctions of conscience.”  It is therefore sometimes important for lawyers to sometimes take the perspective of the bad man. It does not follow, however, that this is the correct attitude for legal actors to take.  Parties bargain for more than legal rights, privileges, powers and immunities.  They bargain against common understanding of each other’s attitudes and intentions.  Contract law takes note of that fact in doctrines like the general duty of good faith and the tort of promissory fraud.  Although we should teach students to sometimes take the perspective of Holmes’s bad man, we should not teach the to act like him.

Two final observations. First, to put all of our cards on the table, under our proposed standard one of us has engaged in the presumptive wrong.  In the empirical work that went into his Fair Driving article, Ayres trained testers to solicit offer from dozens of Chicagoland car dealerships.  These testers intended not to accept any such offers.  Had the testers disclosed their true intention, the dealerships would have likely refused to hondle.  In Ayres’s defense, one might argue that the presumption of wrong-doing is overcome by the purpose of the study.  Deceitful (which also might be characterized aka fraudulent) testing is countenanced in limited contexts both by human subjects committees and by the law as a means of testing for race and gender discrimination.  That said, reasonable people can differ, on whether the (marginal) benefits of such testing exceeded their cost, and whether Ayres did enough to mitigate those costs that came from defrauding sellers’ of their time.

Second, we wonder about the final outcome here. After exchanging dozens of emails with Jim, Professor Subotnik finally endeavored to end the exchange:

Professor Subotnik:        I cannot continue this colloquy. My time is valuable, and I have to get back to work. All I can say is that I am sorry. I will not do it again. * * * My apology is sincere, I can assure you.

Jim:     Let’s test that and try to take advantage of another teaching moment. I have been organizing our email exchange for the law review and have even spoken to the Managing Editor and EIC. We want your OK to publish it. * * *

Professor Subotnik:        You want me to indulge you now, after all the guff you have given me? I can write my own article on the subject.

Jim:       But you won’t. * * *

The very publication of the exchange seems to an attempt at self-vindication. Professor Subotnik, like Alexander Hamilton in publishing a response regarding his interactions with Maria Reynolds, must not have anything to hide.  But even in the act of publication, Jim may come out the better.  Jim expressly sought Professor Subotnik’s permission before publishing his copyrighted emails.  It is not clear, however, that Professor Subotnik obtained Jim’s permission before publishing Jim’s emails.  Although Professor Subotnik is free publish his own emails, or write his own article on the subject, it less obvious that he is free to copy and publish Jim’s email in their entirety.  Nor does Jim’s implicit willingness to have them published in his own journal signal his willingness to have them published in another law school’s journal.  Whereas publication of the exchange metaphorically gives Professor Subotnik the last word, it might signal another failure of legal issue-spotting.  Owning a copy of Jim’s email does not, without more, give Professor a copy right.

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