Contract rules policing contractual modification are another response to the heightened risk of extortion in specialized environments. For example, the common-law preexisting duty rule can be usefully contrasted with the more permissive regulation of contractual modification under the Uniform Commercial Code. The preexisting duty rule denies enforcement of a renegotiation or contractual modification where an obligor agrees merely to do that which he is already contractually obligated to do. The rule is primarily designed to reduce the incidence of extortionate modification in construction, employment, and other specialized contractual relationships. …

The preexisting duty rule, however, often fails accurately to mirror the underlying bad faith behavior. First, the rule discourages cost reducing negotiations in addition to threats. Moreover, the obligor satisfies the rule by assuming any additional obligations whether or not the “additional” duties are themselves part of the strategic maneuver. The Code [U.C.C. 2–209(1)] abandoned this ill-fitting rule of thumb and instead applies a general good faith standard. … Because this standard is substantially more difficult to enforce, however, the Code may not deter extortionate renegotiation as effectively as did the common law. Nonetheless, if parties generally execute contracts for the sale of goods in the context of a well-developed market for substitutes, the costs saved through legitimate renegotiations will exceed the increased enforcement costs of policing bad faith modification.

Most contract rules are permissive, applying only if the parties do not otherwise agree. By providing standardized and widely suitable risk allocations in advance, the law enables most parties to select a preformulated legal norm “off-the-rack,” thus eliminating the cost of negotiating every detail of the proposed arrangement. Atypical parties remain free to bargain for customized provisions, much as a person with an unusual physique may purchase custom-tailored garments for a premium rather than accept a standard size and cut available at a lower price.

Ideally, the preformulated rules supplied by the state should mimic the agreements contracting parties would reach were they costlessly to bargain out each detail of the transaction. Using this benchmark raises two separable issues: First, what arrangements would most bargainers prefer? And second, what atypical arrangements should be supported as benign alternatives?

The model developed in this article will show that the contractual obligee and obligor would agree in advance to minimize the joint costs of adjusting to prospective contingencies, assigning the responsibility of mitigating to whoever is better able to adjust to the changed conditions. The occurrence of contingencies requiring adjustment, however, may encourage strategic behavior by both parties: The obligor may attempt to evade his performance responsibilities while the obligee may bargain opportunistically whenever his cooperation is requested. Any effort legally to regulate one manifestation of this strategic behavior almost inevitably exacerbates the other. But where a developed market for substitute performances exists, the potential for opportunism is negligible; parties can therefore focus on eliminating evasion of contractual obligations without losing the benefits of cooperation.

This chapter evaluates the FTC's proceeding against Xerox Corporation, the firm that revolutionized the copying industry and continues as its most important member. We focus on charges that Xerox, through various means, accumulated patents covering the technology for office copying (or at least its plain-paper submarket) that were so extensive, complex, and obscure in their overall scope that effective competition in the industry was eliminated. The proceeding was terminated by a consent order imposing extensive requirements on Xerox, including a mandate to license any three patents without charge and all patents on terms specified in the order.

Although the FTC's complaint does contain other allegations about the marketing practices of Xerox and its territorial divisions with foreign affiliates, the contention that lends unique importance to this proceeding is that of domination of the industry by control of the essential patented technology. The desirability of the FTC's leveling this charge and resolving it through this consent order can be assessed only by making difficult and far-reaching judgments concerning the proper reconciliation of the ends underlying the patent laws with those served by the antitrust laws.

The basic conflict between these laws has long been well understood. To encourage invention, the patent laws confer a monopoly and therefore the power to choose a price–quantity combination as any monopolist would, with the attendant undesirable allocative and distributional consequences. The central aim of the antitrust laws is to avoid these very consequences.