THE WRONG PLAINTIFF CONTRACT DAMAGES VERSUS NETWORK EXPULSION AND THE COLLAPSE OF DISTRIBUTED GOVERNANCE Seth C. Oranburg* Abstract Courts awarding standard contract remedies can destroy private network governance. In collectively governed trading networks, commercial cooperation o --- ten depends on the credible threat o --- ostracism. That threat is best understood as a club good: excludable because only members bene --- it --- rom the network’s ability to sanction rule-breakers, and nonrivalrous because one member’s bene --- it --- rom that en --- orcement capacity does not diminish another’s. Indeed, the threat o --- ten exhibits positive network e --- --- ects: the larger the network, the greater the cost o --- exclusion and the stronger the deterrent. Yet courts sometimes undermine a network’s power to ostracize by applying a doctrinal --- ramework that identi --- ies only the individual promisee as the injured party. When judicial intervention displaces the network’s authority to exclude violators, it converts collective exclusion --- rom a property rule into a liability rule and degrades the club good into a public good. Making one obligee whole through expectation damages can there --- ore produce a net wel --- are loss by weakening the credibility o --- exclusion. A court’s e --- --- ort to remedy a single breach may thus eliminate the incentive to maintain the network itsel --- . Courts must recognize this mechanism to avoid collapsing valuable transactional networks. * Pro --- essor o --- Law, University o --- New Hampshire Franklin Pierce School o --- Law; Director, Program on Organizations, Business and Markets at NYU Law’s Classical Liberal Institute; JD, University o --- Chicago; BA, University o --- Florida. Introduction Contract remedies doctrine assumes that breach harms only the promisee. When a seller --- ails to deliver goods, the buyer su --- --- ers. When a contractor abandons a project, the owner pays --- or completion. Expectation damages (the amount o --- money needed to put the promisee in the economic position per --- ormance would have achieved) compensate the individual who did not receive per --- ormance, and the matter closes.1 For most contracts, that assumption holds. A buyer and a seller transact once, part ways, and neither owes anything to anyone else. Identi --- ying the promisee as the injured party is obvious and correct. An important category o --- commercial arrangements does not --- it that assumption. Diamond dealers in New York and Antwerp conduct tens o --- thousands o --- dollars in transactions on oral credit, without written contracts, en --- orced not by courts but by the collective threat o --- expulsion --- rom the trading network.2 Medieval Maghribi merchants sent goods across the Mediterranean to agents they had never met, sustained by a coalition that punished cheaters by cutting them o --- --- --- rom all --- uture dealings.3 Cotton trade associations maintain arbitration systems backed by the power to expel noncompliant members.4 In each o --- these settings, breach harms more than the counterparty who did not receive per --- ormance. An injured party is also the network: every member whose willingness to extend credit, ship goods, or comply with arbitration depended on the credible threat that rule-breakers would be excluded. Contract doctrine has no --- ramework --- or recognizing that additional injured party. Remedies doctrine measures harm by re --- erence to what the individual promisee lost, compensates the promisee, and treats the matter as resolved.5 The assumption that only the promisee is harmed persists even a --- ter e --- --- icient breach theory’s own architects abandoned the theory. Scott, who with Goetz coined the term “e --- --- icient breach” in 1977, concluded in 2015 that the concept is “both a null set as well as an oxymoron.”6 Klass’s survey o --- the --- ield --- ound that “today no economic thinker de --- ends the simple theory.”7 Yet the structural premise underlying the theory, that only the individual promisee’s wel --- are is a --- --- ected by breach, remains embedded in how 1 Expectation damages are the standard remedy --- or breach o --- contract. They compensate the injured party by putting the party in the economic position per --- ormance would have achieved. See Restatement (Second) o --- Contracts § 347 (Am. L. Inst. 1981). 2 Lisa Bernstein, Opting Out o --- the Legal System: Extralegal Contractual Relations in the Diamond Industry, 21 J. LEGAL STUD. 115, 121-24 (1992) (describing mandatory arbitration and expulsion mechanisms in diamond bourses). 3 Avner Grei --- , Contract En --- orceability and Economic Institutions in Early Trade: The Maghribi Traders’ Coalition, 83 AM. ECON. REV. 525, 530-32 (1993) (documenting how Maghribi traders coordinated collective punishment o --- cheaters through a coalition that reported misconduct and organized re --- usal to deal). 4 Lisa Bernstein, Private Commercial Law in the Cotton Industry: Creating Cooperation Through Rules, Norms, and Institutions, 99 MICH. L. REV. 1724, 1745-60 (2001) (describing the cotton industry’s sel --- -governing trade associations, which maintain arbitration systems, en --- orce compliance through expulsion, and operate a bonding system that serves as a collective guarantee o --- member per --- ormance). 5 See Charles J. Goetz & Robert E. Scott, Liquidated Damages, Penalties and the Just Compensation Principle: Some Notes on an En --- orcement Model and a Theory o --- E --- --- icient Breach, 77 COLUM. L. REV. 554, 558-62 (1977) ( --- ormalizing the expectation damages --- ramework and proving that damages create e --- --- icient breach incentives only when the damages measure captures all costs the breach imposes). 6 Robert E. Scott, Contract Design and the Shading Problem, 99 MARQ. L. REV. 1, 11 (2015). 7 Gregory Klass, E --- --- icient Breach, in The Philosophical Foundations o --- Contract Law 362, 362 (Gregory Klass, George Letsas & Prince Saprai eds., 2014). 2026-03-17] 3 courts identi --- y injured parties and calculate damages. Every scholar in the e --- --- icient breach debate, regardless o --- whether they de --- end or attack the theory, shares that premise.8 Adjacent scholarship has noticed related problems without connecting them to the question o --- who is injured by breach. Macneil recognized that contract law’s assumption o --- one-time, sel --- - contained transactions --- ails to describe ongoing commercial relationships, and Williamson explained why parties choose in --- ormal governance over --- ormal contracts when transactions are --- requent, involve relationship-speci --- ic investments, and occur under uncertainty.9 Both insights are --- oundational. But both scholars keep the unit o --- analysis between two parties: Macneil’s relational norms run between a promisor and a promisee, and Williamson asks which governance structure minimizes transaction costs --- or a given transaction.10 Neither considers obligations owed to a group, and neither asks what happens when a court destroys the governance structure the parties chose.11 Ellickson demonstrated that in --- ormal norms can be more e --- --- icient than --- ormal law, but Ellickson’s Shasta County ranchers en --- orce norms between two people at a time; no collective governance body investigates de --- aults or coordinates sanctions across the community.12 Teubner came closest to diagnosing the structural mismatch. In Networks as Connected Contracts, Teubner argued that contract law’s assumption that only the contracting parties are a --- --- ected by breach misrepresents network relationships, and that applying remedies designed --- or transactions between two parties to networked obligations --- ragments the coordination that makes networks --- unction.13 What Teubner did not provide is the mechanism: the speci --- ic account o --- how and why remedies aimed at the individual promisee destroy network governance. This Article provides that mechanism by connecting two bodies o --- scholarship that have not previously been joined. Buchanan’s theory o --- club goods explains the economic structure o --- the shared bene --- it that network members enjoy: a good that is nonrivalrous among members and excludable --- rom rule-breakers through expulsion.14 Calabresi and Melamed’s distinction between property rules and liability rules explains what happens when a court intervenes: judicial action converts the network’s exclusion authority --- rom a property rule (only the network can revoke 8 See Daniel Friedmann, The E --- --- icient Breach Fallacy, 18 J. LEGAL STUD. 1 (1989); Richard Craswell, Contract Remedies, Renegotiation, and the Theory o --- E --- --- icient Breach, 61 S. CAL. L. REV. 629 (1988); Seana Valentine Shi --- --- rin, Could Breach o --- Contract Be Immoral?, 107 MICH. L. REV. 1551 (2009); Charles Fried, CONTRACT AS PROMISE: A THEORY OF CONTRACTUAL OBLIGATION (1981); Daniel Markovits & Alan Schwartz, The Myth o --- E --- --- icient Breach: New De --- enses o --- the Expectation Interest, 97 VA. L. REV. 1939 (2011); Steven Shavell, The Design o --- Contracts and Remedies --- or Breach, 99 Q.J. ECON. 121 (1984); Matthew A. Seligman, Moral Diversity and E --- --- icient Breach, 117 MICH. L. REV. 885 (2019). Every one o --- these scholars assumes the individual promisee is the injured party. None examines whether that identi --- ication is correct in network contexts. 9 Ian R. Macneil, Relational Contracts: What We Do and Do Not Know, 1985 WIS. L. REV. 483, 483-93. 10 Id. at 485-90 (introducing the spectrum --- rom discrete to relational transactions and arguing that classical contract law distorts the analysis when applied to relational contracts). 11 Id. at 487-93. 12 Robert C. Ellickson, ORDER WITHOUT LAW: HOW NEIGHBORS SETTLE DISPUTES 167-201 (1991) (demonstrating that Shasta County ranchers resolve disputes through in --- ormal norms en --- orced by community reputation, with virtually no resort to courts). 13 Gunther Teubner, NETWORKS AS CONNECTED CONTRACTS 47-65 (Hugh Collins ed., 2011) (arguing that contract law’s assumption that only the contracting parties are a --- --- ected by breach produces systematic doctrinal errors when courts resolve disputes arising within networks). 14 James M. Buchanan, An Economic Theory o --- Clubs, 32 ECONOMICA 1, 1-14 (1965). 4 The Wrong Plainti --- --- membership) into a liability rule (a court determines the price o --- continued membership).15 Connecting Buchanan to Calabresi and Melamed through the empirical work o --- Bernstein, Grei --- , and Ostrom reveals the mechanism: judicial intervention degrades a club good into a public good, triggering --- ree-riding and governance deterioration. Trading Networks Sustain Cooperation Through Exclusion The mechanism begins with an empirical puzzle. Standard contract theory predicts that unsecured credit between strangers will be routinely exploited, yet --- our independent bodies o --- research document near-zero de --- ault rates in trading networks that operate without courts. Understanding what keeps these traders honest is a prerequisite to understanding what judicial intervention destroys. Bernstein, Grei --- , Landa, and Ostrom Documented Cooperation Without Courts Standard contract theory predicts that unsecured credit in one-time deals will be routinely exploited. When a dealer buys goods on credit and the only consequence o --- de --- ault is a court judgment payable to the seller, a rational dealer will skip payment whenever the savings exceed the probability-weighted cost o --- the judgment.16 Bernstein --- ound that prediction wrong. Diamond dealers routinely buy and sell rough stones worth tens to hundreds o --- thousands o --- dollars on --- orty- --- ive-day oral credit with no written contract beyond a handshake.17 Among her in --- ormants, Bernstein --- ound a single case o --- a missed payment over decades o --- trading.18 Grei --- documented the same pattern in a di --- --- erent century and commodity: Maghribi traders in the eleventh century sent goods on consignment across the Mediterranean to agents they had never met, relying on a coalition that reported cheaters and coordinated collective re --- usal to deal.19 Landa --- ound a parallel institution among ethnically Chinese Hokkien merchants in the Malaysian rubber markets o --- the 1960s, where kinship ties and codes o --- Con --- ucian ethics sustained exchange without --- ormal legal in --- rastructure.20 Milgrom, North, and Weingast documented a centralized record-keeper at the medieval Champagne Fairs who tracked compliance histories, enabling punishment by traders who had never dealt with the cheater 15 Guido Calabresi & A. Douglas Melamed, Property Rules, Liability Rules, and Inalienability: One View o --- the Cathedral, 85 HARV. L. REV. 1089, 1092 (1972). 16 Goetz & Scott, supra note 5, at 558-62 (showing that the incentive to breach depends on the ratio o --- private gain to expected penalty). 17 Bernstein, supra note 2, at 120-35 (documenting the widespread use o --- oral agreements, handshake deals, and unsecured credit in the diamond industry, and describing transactions in which dealers routinely extend credit o --- $25,000 to $100,000 or more on no security beyond the counterparty’s word). 18 Id. at 127 (“Among my in --- ormants, I --- ound only one case o --- breach o --- payment obligation in many decades o --- trading.”). 19 Grei --- , supra note 3, at 525-30 (documenting how Maghribi traders in the eleventh century sent goods on consignment across the Mediterranean to agents they had never met in person, relying on the coalition’s collective en --- orcement mechanism rather than courts or individual contractual remedies). 20 Janet T. Landa, A Theory o --- the Ethnically Homogeneous Middleman Group: An Institutional Alternative to Contract Law, 10 J. LEGAL STUD. 349, 349-62 (1981). 2026-03-17] 5 personally.21 Ostrom showed the same structure in common-pool resource communities: --- isheries, irrigation systems, and grazing lands maintained compliance with shared rules --- or centuries, without courts or police.22 Bernstein’s later study o --- the cotton industry --- ound yet another instance: trade associations maintain arbitration systems, and members who re --- use to comply --- ace expulsion.23 The pattern appears across industries, centuries, and continents.24 Diamond handshakes involve sums that would justi --- y --- raud under the standard model. Maghribi shipments crossed the Mediterranean over weeks to agents the sender would never meet. What these networks share is not a cultural disposition toward honesty but a governance structure that makes cheating irrational. Network Governance Replaced Trust as the Analytical Framework Scholars long described these networks using the word “trust.” Williamson challenged that --- raming in 1993, arguing that “calculative trust is a contradiction in terms”: commercial actors extend credit not because they believe in a counterparty’s moral character but because the institutional structure makes de --- ault more costly than compliance.25 Bernstein sharpened Williamson’s insight in her 2015 article Beyond Relational Contracts, introducing “network governance” as the analytical concept that replaces trust in the legal literature.26 Network governance, as Bernstein de --- ines the term, is the collective --- orce o --- reputation-based, non-legal sanctions --- lowing --- rom a --- irm’s position within a network o --- interconnected --- irms.27 Bernstein showed that trust is an output o --- governance mechanisms, not an input: networks generate trust by sustaining the conditions under which cooperation is rational.28 Bernstein and Peterson’s 2022 study o --- OEM-supplier relationships con --- irmed this in a modern industrial context: 21 Paul R. Milgrom, Douglass C. North & Barry R. Weingast, The Role o --- Institutions in the Revival o --- Trade: The Law Merchant, Private Judges, and the Champagne Fairs, 2 ECON. & POL. 1, 4-18 (1990) (modeling the Law Merchant system as an institution that solved the in --- ormation problem inherent in multilateral punishment by providing a centralized record o --- traders’ compliance, enabling collective sanctions against cheaters by merchants who had no personal experience with the cheater). 22 Elinor Ostrom, GOVERNING THE COMMONS: THE EVOLUTION OF INSTITUTIONS FOR COLLECTIVE ACTION 58-102 (1990). C --- . Garrett Hardin, The Tragedy o --- the Commons, 162 Science 1243, 1244-45 (1968) (predicting that shared resources are inevitably overexploited). Ostrom’s central achievement was demonstrating that Hardin’s prediction is wrong: communities regularly solve the shared-resource problem through sel --- -governance. 23 Bernstein, supra note 4, at 1745-60. 24 See generally Landa, supra note 20, at 352 tbl.1 (presenting the “calculus o --- relations” as a system o --- concentric circles o --- trader reliability, --- rom near kinsmen at the center to non-Chinese strangers at the periphery); Grei --- , supra note 3, at 860-68 (providing granular evidence o --- the Maghribi coalition’s coordination mechanism). 25 Oliver E. Williamson, Calculativeness, Trust, and Economic Organization, 36 J.L. & ECON. 453, 463-68 (1993). 26 Lisa Bernstein, Beyond Relational Contracts: Social Capital and Network Governance in Procurement Contracts, 7 J. LEGAL ANALYSIS 561, 561-65 (2015). 27 Id. at 565 (de --- ining network governance as “the collective --- orce o --- reputation-based, non-legal sanctions --- lowing --- rom a --- irm’s position within a network o --- interconnected --- irms”). 28 Id. at 576-80. 6 The Wrong Plainti --- --- contract governance regimes sca --- --- old the emergence o --- inter- --- irm trust even among --- irms with no pre-existing social ties.29 Network Structure, Not Ethnicity, Determines Governance Capacity Bernstein’s 2019 reanalysis o --- the Maghribi traders challenged a second assumption in the private ordering literature. Grei --- had modeled the Maghribi as a coalition: a centralized institutional structure that collected in --- ormation about misconduct, disseminated --- indings to members, and coordinated multilateral punishment.30 Historians challenged Grei --- ’s coalition model, citing lack o --- evidence --- or market-wide boycotts and noting non-Maghribi participation in the trade.31 Bernstein reanalyzed the same historical evidence and proposed a di --- --- erent mechanism. Drawing on network topology research, Bernstein argued that the Maghribi traders operated within a small-world network: dense local clusters o --- traders who transacted --- requently with one another, connected by sparse long-distance ties through key intermediary --- igures she called “merchant’s representatives.”32 These representatives served as bridge nodes connecting geographically dispersed trading clusters and aggregating reputational in --- ormation.33 Reputational in --- ormation traveled e --- --- iciently not because a central body disseminated it but because the network’s structure (high local clustering combined with short average path lengths) allowed news o --- cheating to propagate rapidly across the Mediterranean. Market-wide boycotts were unnecessary. In --- ormation about an agent’s misdeeds needed to reach only that agent’s personal trading network to create su --- --- iciently strong reputational consequences.34 Bernstein’s reanalysis carries an important implication --- or the scope o --- network governance. I --- network structure rather than ethnic homogeneity drives governance capacity, then network governance is not limited to close-knit ethnic enclaves. Blanchard con --- irmed this in her 2022 study o --- heterogeneous business networks, showing that networks without ethnic or social ties can sustain high-stakes trade when the network’s structural properties (density o --- connections, speed o --- in --- ormation transmission, credibility o --- exclusion) are present.35 Jennejohn’s 2022 study added a cautionary note: networks can impose costs as well as provide governance bene --- its, particularly in innovation-intensive settings where in --- ormation leakage through network ties is a 29 Lisa Bernstein & Brad Peterson, Managerial Contracting: A Preliminary Study, 14 J. LEGAL ANALYSIS 176 (2022) (examining how contract governance regimes in OEM-supplier relationships sca --- --- old the emergence o --- inter- --- irm trust and strengthen network governance). 30 Grei --- , supra note 3, at 530-32. 31 See Jeremy Edwards & Sheilagh Ogilvie, Contract En --- orcement, Institutions, and Social Capital: The Maghribi Traders Reappraised, 65 Econ. Hist. Rev. 421, 421-22 (2012) (challenging Grei --- ’s coalition model and citing lack o --- evidence --- or market-wide boycotts). 32 Lisa Bernstein, Contract Governance in Small-World Networks: The Case o --- the Maghribi Traders, 113 NW. U. L. REV. 1009, 1013-25 (2019). 33 Id. at 1030-38 (describing the merchant’s representative as a bridge node connecting geographically dispersed trading clusters and aggregating reputational in --- ormation). 34 Id. at 1042-50 (arguing that market-wide boycotts were unnecessary because the bridge-and-cluster structure economized on in --- ormation costs, allowing reputational in --- ormation to reach the cheater’s personal trading network without requiring dissemination to the entire group). 35 Sadie Blanchard, Contracts Without Courts or Clans: How Business Networks Govern Exchange, 57 GA. L. REV. 233 (2022). 2026-03-17] 7 concern.36 Bernstein’s own reinterpretation o --- the Landa-Grei --- -Bernstein trilogy reached the conclusion that the canonical case studies o --- ethnically based trade “are just special cases o --- a more general phenomenon, network governance, that can a --- --- ect the security o --- exchange in a wide variety o --- markets.”37 Exclusion Makes Cooperation Rational Across all documented networks, one en --- orcement mechanism is consistent: exclusion. A diamond dealer who de --- aults on a payment loses access to the entire bourse: every --- uture purchase, every --- uture sale, every --- uture line o --- credit.38 A Maghribi merchant who cheats one trader --- aces collective re --- usal to deal --- rom every Maghribi trader across the Mediterranean.39 A --- isher who overharvests loses access to the --- ishing ground the whole community manages.40 A cotton merchant who re --- uses to comply with an arbitration award --- aces expulsion --- rom the trade association and loss o --- the association’s bonding system.41 One-on-one reputation, where a trader avoids cheating because cheating would damage the trader’s reputation with one particular counterparty, is too weak to explain this pattern. In a large network, any particular pair o --- traders transact in --- requently or only once. I --- the only consequence o --- cheating is losing one relationship, the cheater --- aces a low cost: one lost counterparty among hundreds. Hirschman distinguished between “exit” (leaving an organization voluntarily) and “voice” (complaining --- rom within); in a collectively governed network, the group wields a third option: --- orced exit.42 A dealer deciding whether to skip a $100,000 payment weighs the savings against the loss o --- every --- uture business relationship in the industry. That loss is worth millions o --- dollars over a career. Expulsion, not one-on-one reputation, is what makes the calculus overwhelmingly --- avor compliance. Richman has documented that even this governance structure is not invulnerable. In the diamond industry, network governance is eroding not because o --- court intervention but because o --- exogenous shocks: De Beers’s strategic shi --- t --- rom buyer o --- last resort to aggressive competitor, rising rough diamond prices that squeezed midstream margins, entry o --- Indian merchants who --- ragmented community en --- orcement, and intergenerational exit as members’ children chose other careers.43 Richman’s evidence is important --- or two reasons. First, it con --- irms that the governance system depends on the credible threat o --- exclusion, because the system weakens precisely when exogenous --- orces dilute that threat. Second, it means that judicial 36 Matthew Jennejohn, Do Networks Govern Contracts?, 48 J. CORP. L. 1 (2022) (showing that networks can impose costs as well as provide governance, particularly in innovation-intensive settings where in --- ormation leakage through network ties is a concern). 37 Bernstein, Remarks at the 2020 Coase Lecture, University o --- Chicago (unpublished). 38 Bernstein, supra note 2, at 120-35. 39 Grei --- , supra note 3, at 525-30. 40 Ostrom, supra note 22, at 58-102. 41 Bernstein, supra note 4, at 1745-60. 42 Albert O. Hirschman, EXIT, VOICE, AND LOYALTY: RESPONSES TO DECLINE IN FIRMS, ORGANIZATIONS, AND STATES 21-43 (1970). 43 Barak D. Richman, STATELESS COMMERCE: THE DIAMOND NETWORK AND THE PERSISTENCE OF RELATIONAL EXCHANGE (2017) (documenting how the diamond industry’s network governance is eroding due to exogenous market pressures including De Beers’s strategic shi --- t, rising rough diamond prices, entry o --- Indian merchants, and intergenerational exit). 8 The Wrong Plainti --- --- intervention that --- urther weakens the exclusion mechanism is particularly harm --- ul to networks already under strain. A robust network might weather a court decision that reverses an expulsion. A --- ragile network cannot. Removing the last remaining governance pillar at the moment when external pressures are already eroding the system accelerates the collapse. The Credible Threat o --- Exclusion Is a Club Good Exclusion sustains cooperation across every network the literature has documented. The next question is what kind o --- shared bene --- it exclusion creates and why that bene --- it is vulnerable to judicial intervention. Buchanan’s theory o --- club goods provides the --- ramework: the credible threat o --- exclusion produces a good that every member shares, that no member’s use diminishes, and that rule-breakers can be denied. Mapping the empirical evidence onto Buchanan’s --- ramework reveals the speci --- ic vulnerability that courts exploit when they intervene. Buchanan De --- ined Club Goods as Shared and Excludable Buchanan identi --- ied a category o --- goods that occupy a position between private goods and public goods.44 A private good is rivalrous (one person’s consumption diminishes what remains --- or others) and excludable (owners can prevent others --- rom using it). A public good is nonrivalrous (one person’s enjoyment does not reduce anyone else’s) and nonexcludable (no one can be denied access). Clean air and national de --- ense are standard examples: everyone bene --- its, no one’s bene --- it reduces another’s, and no one can be kept --- rom bene --- iting. Public goods are chronically undersupplied because o --- what Olson called the --- ree-rider problem: rational actors will not voluntarily bear the costs o --- maintaining a good they can enjoy --- or --- ree.45 The larger the group, the less likely any individual will contribute, because each individual’s share o --- the bene --- it is small relative to the cost o --- contributing. Taxes exist because voluntary contributions will not pay --- or national de --- ense. Buchanan’s club good sits between these poles. A club good is nonrivalrous among members (one member’s use does not diminish another’s) but excludable (nonmembers and rule-breakers can be denied access).46 A gol --- club illustrates the concept: every member uses the course without diminishing another member’s enjoyment, yet the club can deny access to nonmembers and revoke membership --- rom members who violate the rules. The ability to exclude is not incidental to the club good. Excludability is the --- eature that distinguishes a club good --- rom a public good and prevents the --- ree-rider problem --- rom destroying the good’s provision. Remove the exclusion mechanism and a club good degrades into a public good, subject to exactly the --- ree-rider dynamics Olson described.47 Exclusion Authority Maps onto Buchanan’s De --- inition 44 Buchanan, supra note 14, at 1-14. 45 Mancur Olson, THE LOGIC OF COLLECTIVE ACTION: PUBLIC GOODS AND THE THEORY OF GROUPS 53-65 (1965). 46 Buchanan, supra note 14, at 1-5. 47 Id. at 5-12 (showing that excludability is the mechanism that prevents --- ree-riding and sustains provision o --- the club good). 2026-03-17] 9 The credible threat o --- exclusion in a collectively governed trading network maps precisely onto Buchanan’s de --- inition. The threat is nonrivalrous among members: when dealer A relies on the knowledge that cheaters will --- ace expulsion, dealer A’s reliance does not diminish dealer B’s ability to rely on the same knowledge. Indeed, each act o --- en --- orcement strengthens every member’s con --- idence in the threat, because each act con --- irms that the network will --- ollow through. The threat is excludable: expelled members lose the bene --- it. A dealer who has been removed --- rom the bourse cannot rely on the expulsion threat to make counterparties extend credit, because the expelled dealer is no longer part o --- the community that en --- orces the norm. This is the bridge between Buchanan and Bernstein. Buchanan provided the economic --- ramework --- or understanding goods that are shared and excludable. Bernstein, Grei --- , Landa, and Ostrom provided the empirical evidence that collectively governed networks sustain cooperation through exclusion. Neither side made the connection. Buchanan did not write about trading networks. Bernstein, Grei --- , and their colleagues documented the governance structure without characterizing it in club-goods terms. Connecting the two reveals something that neither body o --- scholarship on its own makes visible: the credible threat o --- exclusion is a club good, and anything that undermines excludability degrades the good into a public good subject to --- ree- riding. Buchanan’s --- ramework also explains what sustains the good. Members invest in governance: monitoring counterparties, reporting de --- aults, participating in arbitration, bearing the costs o --- expulsion proceedings. Each member invests because each member bene --- its --- rom the credible threat that investment maintains. Iannaccone’s research on high-demand groups explains why the membership requirements that networks impose (mandatory arbitration, bond requirements, ongoing participation in governance activities) --- unction not as incidental barriers but as mechanisms that screen --- or members willing to submit to collective governance and that deter --- ree-riders who would enjoy the bene --- it without bearing the cost.48 Ali and Miller Showed That Calibration Authority Strengthens Exclusion Ali and Miller’s --- ormal analysis o --- ostracism adds a re --- inement that matters --- or how courts interact with exclusion authority. Ali and Miller proved that permanent ostracism, where a guilty member is expelled --- orever with no possibility o --- readmission, is sel --- -de --- eating when communication among members is strategic.49 Once a member learns that a cheater will be permanently expelled, that member’s “social collateral” with the cheater vanishes. The member has no reason to report the cheating truth --- ully, because the member no longer anticipates --- uture dealings with the expelled cheater. Concealing guilt and exploiting remaining partners becomes individually rational. Temporary ostracism with the possibility o --- --- orgiveness solves this problem. When guilty members --- ace eventual readmission, innocent members retain a --- orward-looking incentive to report cheating truth --- ully, because they anticipate cooperating with the punished member again.50 Ali and Miller proved that with su --- --- icient patience or community size, temporary 48 Laurence R. Iannaccone, Why Strict Churches Are Strong, 99 AM. J. SOCIO. 1180, 1180-211 (1994) (explaining how costly membership requirements screen out --- ree-riders and select --- or members willing to invest in collective governance). 49 S. Nageeb Ali & David A. Miller, Ostracism and Forgiveness, 106 AM. ECON. REV. 2329, 2329-48 (2016). 50 Id. at 2340-48. 10 The Wrong Plainti --- --- ostracism strictly dominates both permanent ostracism and en --- orcement limited to the two parties in a given transaction. Forgiveness, as Ali and Miller put it, “tempers the threat players --- ace on the equilibrium path but maintains the threat o --- third-party punishment o --- --- the equilibrium path.”51 Ali and Miller’s companion paper extended the --- ramework to market settings speci --- ically. Ali and Miller showed that truth --- ul communication about cheaters is incentive-compatible in trading communities when at least one side o --- the transaction has its cooperation guaranteed by external en --- orcement or structural commitment.52 The result implies that networks --- unction best when the network retains control over the calibration o --- sanctions, including the decision o --- when, whether, and on what conditions to readmit expelled members. Calibration authority also includes distinguishing inadvertent --- rom deliberate breach. A bourse arbitrator who knows a dealer missed payment because o --- a --- amily medical emergency treats that de --- ault di --- --- erently --- rom a dealer who missed payment to test limits. A cotton association that learns a member shipped noncon --- orming goods because o --- a supplier’s error treats that breach di --- --- erently --- rom a member who knowingly shipped in --- erior product. The network’s contextual knowledge, its --- amiliarity with the members’ histories and circumstances, is what makes graduated sanctions possible. A court applying general contract principles sees two identical breaches: nonper --- ormance is nonper --- ormance. Judicial intervention destroys precisely the calibration that distinguishes accidental --- rom strategic de --- ault, replacing a system that can --- orgive with a system that cannot tell whether --- orgiveness is warranted.53 Ali and Miller’s result has a direct implication --- or judicial intervention. The network’s governance power depends not on the --- inality o --- exclusion but on the network’s unilateral authority over the exclusion decision, including the decision o --- when and whether to readmit. A network that can calibrate sanctions ( --- orgiving minor --- irst o --- --- enses, imposing temporary exclusion --- or moderate violations, permanently expelling repeat o --- --- enders) governs more e --- --- ectively than a network limited to a single sanction. When a court displaces that calibration authority, whether by ordering reinstatement, imposing procedural requirements, or awarding damages that allow the cheater to buy continued membership, the court does not simply override one expulsion decision. The court eliminates the network’s ability to calibrate. That loss is worse than the loss o --- any single expulsion, because calibration is what Ali and Miller showed makes the exclusion system e --- --- ective. Judicial Intervention Degrades the Club Good into a Public Good The credible threat o --- exclusion is a club good sustained by the network’s unilateral authority over membership. Calabresi and Melamed’s distinction between property rules and liability rules 51 Id. at 2335. 52 S. Nageeb Ali & David A. Miller, Communication and Cooperation in Markets, 14 Am. Econ. J.: Microeconomics 1, 1-25 (2022) (modeling trading communities and showing that truth --- ul communication about cheaters is incentive-compatible when at least one side has cooperation guaranteed by external en --- orcement or sequential commitment). 53 Bernstein, supra note 2, at 129-31 (describing the deliberate vagueness o --- diamond network rules, which allows the community to distinguish between innocent delays caused by cash- --- low problems and strategic de --- aults intended to test limits). 2026-03-17] 11 identi --- ies what happens when a court displaces that authority: the entitlement structure changes, and the club good degrades. Calabresi and Melamed Distinguished Property Rules --- rom Liability Rules Calabresi and Melamed drew a distinction in 1972 between two ways the law can protect an entitlement.54 Under a property rule, no one can take the entitlement without the holder’s consent. A homeowner’s right to keep a house is protected by a property rule: no private party can --- orce a sale. Under a liability rule, someone can take the entitlement by paying a court- determined price. When the government needs land --- or a highway, eminent domain converts the homeowner’s protection --- rom a property rule to a liability rule: the government takes the house and pays what a court determines the house is worth.55 The choice between property rules and liability rules depends, in Calabresi and Melamed’s account, on transaction costs and in --- ormation costs.56 When bargaining between parties is --- easible and inexpensive, a property rule is appropriate because the parties can negotiate a voluntary exchange at a price that re --- lects the entitlement’s true value to both sides. When bargaining is too costly or impossible (because the parties are too numerous, too dispersed, or unable to identi --- y one another), a liability rule allows the trans --- er to occur at a court-determined price rather than not at all. Kaplow and Shavell extended this analysis, proving that even imprecise liability rules o --- ten outper --- orm property rules because property rules produce binary, all-or-nothing outcomes that ampli --- y the costs o --- adjudication error.57 Kaplow and Shavell’s argument, however, assumes that a court can produce a rough estimate o --- the entitlement’s value. In the network context, as the next subsection shows, that assumption --- ails because the value o --- the club good depends on the credibility o --- the exclusion threat, which is precisely what judicial intervention undermines. Henry Smith’s work on the Calabresi-Melamed --- ramework adds an institutional dimension. Smith argues that converting a property rule into a liability rule does not merely reassign an entitlement; the conversion can destabilize the institutional structure that the property rule supported.58 The systemic e --- --- ects that --- ollow when legal rules interact with existing governance arrangements extend beyond the parties to the immediate dispute. Applied to network governance, Smith’s insight explains why substituting damages --- or expulsion produces consequences that the court cannot see when it looks only at the parties be --- ore it. Judicial Intervention Converts Exclusion --- rom a Property Rule into a Liability Rule 54 Calabresi & Melamed, supra note 15, at 1089-93. 55 Id. at 1092 (using eminent domain as the paradigmatic example o --- a liability rule). 56 Id. at 1106-10. 57 Louis Kaplow & Steven Shavell, Property Rules Versus Liability Rules: An Economic Analysis, 109 HARV. L. REV. 713 (1996) (proving that even imprecise liability rules o --- ten outper --- orm property rules because property rules produce binary, all-or-nothing outcomes that ampli --- y the costs o --- adjudication error). 58 Henry E. Smith, Complexity and the Cathedral: Making Law and Economics More Calabresian, 48 Eur. J.L. & Econ. 43 (2019) (arguing that the Calabresi-Melamed --- ramework must account --- or complex systems e --- --- ects, including the destabilization o --- institutional structures when property rules are converted to liability rules). 12 The Wrong Plainti --- --- When courts do not intervene in network governance, the network’s exclusion authority operates as a property rule. Only the network, through its own governance processes, can revoke membership. No outside party can buy a cheater’s way back in. The network decides who to expel, when to expel, and whether to readmit, without judicial permission or review. Judicial intervention converts that property rule into a liability rule. The conversion takes three --- orms, each with the same structural consequence. First, a court may award expectation damages to the promisee, compensating the counterparty --- or the breach but leaving the breacher inside the network or insulated --- rom the --- ull consequences o --- exclusion. The breacher pays a judicially determined price and retains access to the network’s governance bene --- its. Second, a court may impose procedural requirements on the network’s expulsion process. Requiring notice, hearing, and proportionality review be --- ore expulsion converts the network’s governance authority into something that operates only when a court is satis --- ied with the procedures. Expulsion becomes slower, more expensive, and less certain. Third, a court may stay an expulsion pending judicial review. During the pendency o --- review, the expelled member retains access to the network, and every other member observes that expulsion is not immediate or --- inal. Each --- orm o --- intervention has the same structural consequence: exclusion authority is no longer absolute. Exclusion is subject to external review, procedural conditions, or damages liability. A property rule has been converted into a liability rule. Calabresi and Melamed identi --- ied the conditions under which a liability rule is pre --- erable to a property rule: when bargaining between the parties is too costly and when a court can measure the value o --- what was taken with reasonable accuracy.59 Neither condition holds in the network context. Bargaining within the network is not costly. The network’s own governance system is the low-cost mechanism --- or resolving disputes, calibrated over decades or centuries o --- practice. And the value o --- the club good cannot be reduced to a dollar --- igure, because that value depends on the credibility o --- the exclusion threat, which is precisely what the damages remedy undermines. Awarding damages does not trans --- er a right --- rom one party who values it less to another who values it more (the standard justi --- ication --- or a liability rule). Awarding damages degrades the right. No subsequent transaction can restore a governance system whose credibility depended on the certainty o --- exclusion. Once exclusion authority becomes a liability rule, the club good that the credible threat o --- exclusion sustained begins to lose its de --- ining --- eature: excludability. I --- an expelled member can obtain judicial reinstatement, or i --- expulsion is delayed by procedural requirements, or i --- the breacher can pay damages and continue operating within the network, then rule-breakers are no longer reliably excluded. As excludability erodes, the club good degrades toward a public good. Olson’s logic applies: when the bene --- it is available to everyone regardless o --- contribution, rational actors stop contributing.60 59 Calabresi & Melamed, supra note 15, at 1106-10 (arguing that liability rules are pre --- erable when transaction costs make bargaining impractical and when courts can assess the value o --- the entitlement with reasonable accuracy). 60 Olson, supra note 45, at 53-65. 2026-03-17] 13 Bohnet, Frey, and Huck demonstrated the crowding-out dynamic experimentally.61 Medium- level contract en --- orcement, precisely the kind courts provide when they review network decisions one at a time, crowds out cooperative behavior more e --- --- ectively than either no en --- orcement or total en --- orcement. At medium levels o --- en --- orcement, participants cannot tell whether cooperation or en --- orcement is sustaining the relationship, and the uncertainty itsel --- erodes voluntary compliance. Partial judicial intervention sends a signal that the network’s own governance is insu --- --- icient and that external authority is substituting --- or it. Members who were cooperating voluntarily begin treating compliance as someone else’s problem. Frey documented the behavioral parallel: external regulation that replaces sel --- -governance crowds out the intrinsic motivation to cooperate, producing less compliance than the sel --- -governance the regulation displaced.62 Ostrom documented the outcome directly: when government regulators imposed --- ormal rules on communities that had been governing shared resources through in --- ormal institutions, the communities stopped sel --- -governing, and the --- ormal rules proved less e --- --- ective than the in --- ormal ones they replaced.63 Pildes identi --- ied this dynamic in a broader context: law can destroy social capital by displacing the institutions through which communities govern themselves.64 When external legal authority substitutes --- or sel --- -governance, it crowds out the cooperative norms that made sel --- - governance e --- --- ective. DeCaro, Schlager, and Ruhl’s “state-rein --- orced sel --- -governance” --- ramework identi --- ies the design conditions under which government intervention supports rather than destroys sel --- -governance. The key condition is that the intervention must recognize and preserve the community’s autonomous authority to devise its own rules.65 Court intervention that substitutes judicial judgment --- or network judgment --- ails this condition. Ostrom’s Design Principle 7 (“minimal recognition o --- rights to organize”) captures the same insight: sel --- -governing communities require external recognition o --- their right to govern without inter --- erence, and withdrawal o --- that recognition triggers governance collapse.66 An objection presses at this point: court en --- orcement is more transparent and harder to abuse than network governance. Courts --- ollow rules o --- procedure, publish opinions, and answer to appellate courts. Network governance is opaque, discretionary, and vulnerable to capture by insiders. The objection has --- orce, but it compares the wrong things. Courts are superior at transparent, rule-based en --- orcement in disputes between a buyer and a seller who transacted 61 Iris Bohnet, Bruno S. Frey & Ste --- --- en Huck, More Order With Less Law: On Contract En --- orcement, Trust, and Crowding, 95 AM. POL. SCI. REV. 131, 131-44 (2001) (providing experimental evidence that medium levels o --- en --- orcement crowd out cooperative behavior more e --- --- ectively than either no en --- orcement or total en --- orcement, because at medium levels participants cannot distinguish whether cooperation or en --- orcement sustains the relationship). Bohnet, Frey, and Huck tested crowding-out between pairs o --- contracting parties, not at the network level. The mechanism they identi --- y (partial external authority crowds out voluntary compliance) is the same mechanism at work when courts partially displace network governance, but the experimental setting does not replicate the collective-governance dimension directly. 62 Bruno S. Frey, Crowding Out and Crowding In o --- Intrinsic Motivation, 1 Re --- lexive Governance --- or Global Public Goods 75 (2012). 63 Ostrom, supra note 22, at 95-102 (showing that external regulation can “crowd out” voluntary compliance by signaling to participants that their sel --- -governance is no longer trusted or valued). 64 Richard H. Pildes, Democracy, Anti-Democracy, and the Canon, 17 CONST. COMMENT. 295, 295-319 (2000). 65 Denise D. DeCaro, Steven E. Schlager & J.B. Ruhl, Integrating Institutional and Behavioural Approaches to Governance, 16 Ecology & Soc’y 8 (2011). 66 Ostrom, supra note 22, at 178-84 (Design Principle 7: sel --- -governing communities require external recognition o --- their right to govern without inter --- erence). 14 The Wrong Plainti --- --- once. Network governance is superior at one speci --- ic task: maintaining the shared con --- idence that makes cooperation rational across a community o --- repeat players. Courts lack what the network has: relationship-speci --- ic in --- ormation, reputational knowledge, and contextual --- lexibility. Each institution is better at a di --- --- erent task. The relevant question is which institution handles this particular task with --- ewer destructive side e --- --- ects. Hirschman’s --- ramework explains the disciplinary mechanism that keeps network governance accountable: i --- a bourse’s arbitration system becomes corrupt or incompetent, members exit.67 When enough members exit, the bourse loses its value. That disciplinary mechanism is unavailable when a court handles en --- orcement, because litigants do not choose their court the way members choose their bourse. A Diamond Dealer De --- aults A concrete example makes the mechanism visible --- rom both the individual and the network perspective. Dealer A buys $100,000 in rough diamonds --- rom Supplier B on oral credit and does not pay. Under contract doctrine’s standard --- ramework: who was harmed: Supplier B, who was promised $100,000. How much harm: $100,000. Making whole: a court awards Supplier B $100,000 in expectation damages. Case closed. From the network’s perspective: who was harmed: every member o --- the bourse who relied on the threat o --- expulsion to make handshake credit possible. How much harm: not $100,000 but the aggregate value o --- the shared con --- idence that made unsecured credit possible across the entire network. Making whole: paying Supplier B does not restore the con --- idence every other dealer relied on, because every other dealer has just watched a cheater pay a judicially determined --- ee and retain membership. Case closed: the matter is just beginning, because every dealer who extended credit on a handshake must now recalculate whether the handshake is still worth anything. No amount o --- money paid to Supplier B addresses the harm to the network. A court could double or triple the damages. The governance system would still deteriorate, because the problem is not the amount but the category o --- remedy. Expulsion removes the cheater --- rom the network. Damages leave the cheater inside the network at a judicially determined price. Every other member who observes that outcome receives a concrete demonstration that de --- ault does not lead to exclusion. That demonstration cannot be undone by adjusting the price. Scott, Gulati, and Choi demonstrated a parallel problem in sovereign debt: the standard model o --- debt en --- orcement, which looks only at the relationship between debtor and creditor, systematically mispredicts creditor behavior because en --- orcement depends on collective action among creditors rather than individual litigation.68 When a single creditor holds out --- rom a restructuring and demands --- ull payment through litigation, the holdout undermines the collective restructuring that would have bene --- ited every creditor. In network governance, a court remedy 67 Hirschman, supra note 42, at 30-39 (arguing that organizations --- unction best when members can exit in response to declining quality, because the threat o --- exit disciplines the organization’s governance). 68 Stephen J. Choi, Robert E. Scott & G. Mitu Gulati, Contractual Landmines, 41 Yale J. on Regul. 307 (2024) (analyzing how individual en --- orcement o --- collective contractual rights in sovereign debt undermines the collective mechanisms that the contracts were designed to sustain); see also Stephen J. Choi, G. Mitu Gulati & Robert E. Scott, Anticipating Venezuela’s Debt Crisis: Hidden Holdouts and the Problem o --- Pricing Collective Action Clauses, 100 B.U. L. Rev. 253 (2020). 2026-03-17] 15 that looks only at the parties to a deal destroys the collective en --- orcement that kept every member honest. Both contexts reveal the same structural de --- iciency: a --- ramework that accounts only --- or the parties to the contract correctly describes the --- ormal legal relationship but incorrectly describes the institutional reality. Courts Encounter This Problem Across Four Doctrinal Contexts The property-rule-to-liability-rule conversion is not hypothetical. Courts encounter it in --- our doctrinal contexts involving live litigation and current regulatory --- rameworks: trade usage under the Uni --- orm Commercial Code, judicial review o --- expulsion --- rom exchanges and cooperatives, antitrust treatment o --- network exclusion, and plat --- orm governance. In each context, courts identi --- y the expelled or aggrieved individual as the injured party and --- ashion remedies accordingly, without recognizing that the network’s governance system is also harmed. Codi --- ying Trade Usage Severs Norms --- rom En --- orcement Section 1-303(c) o --- the Uni --- orm Commercial Code allows courts to supplement the written terms o --- a contract with trade usages: customs so widely --- ollowed in an industry that parties are assumed to have incorporated them into their deal.69 When a trade usage is actually a network governance rule, a standard en --- orced through communal expulsion rather than individual lawsuits, treating that rule as a contractual term between two parties severs the rule --- rom the collective en --- orcement that gave it power. Bernstein’s empirical --- indings illuminate the gap. In the diamond industry, customs governing payment terms, inspection procedures, and dispute resolution operate within a sel --- - contained governance system backed by mandatory arbitration and expulsion, not as implied terms en --- orceable in court.70 In the cotton industry, Bernstein --- ound that the norms governing actual behavior within the network di --- --- er materially --- rom the norms courts would recognize as trade usages.71 Bernstein’s distinction between “relationship-preserving norms” and “endgame norms” captures the problem precisely.72 Diamond dealers --- ollow relationship-preserving norms in day-to-day trading: pay on a handshake, resolve disputes through the bourse, accept the arbitrator’s judgment. Those norms work because dealers expect to keep trading and because expulsion makes compliance rational. When a court picks up those norms and treats them as implied contract terms, the court applies the norms as endgame norms: the relationship is over, the parties are in litigation, and the court uses the norms to measure damages. The norms were not designed --- or that purpose. 69 U.C.C. § 1-303(c) (AM. L. INST. & Uni --- . L. Comm’n 2014). 70 Bernstein, supra note 2, at 121-28 (documenting that diamond industry customs operate within a sel --- - contained governance system backed by mandatory arbitration and expulsion, not as implied terms en --- orceable in court). 71 Bernstein, supra note 4, at 1745-60 ( --- inding that the norms governing actual behavior within the cotton industry di --- --- er materially --- rom the norms courts would recognize as trade usages). 72 Id. at 1750-60 (distinguishing relationship-preserving norms, which govern ongoing dealings and depend on the expectation o --- --- uture transactions, --- rom endgame norms, which govern when the relationship is over and the parties are in litigation). 16 The Wrong Plainti --- --- A court asked to identi --- y the trade usage governing diamond payment terms will state the rule precisely enough to generate a damages calculation, something like “payment is due within --- orty- --- ive days o --- delivery.” But the actual norm is --- ar more contextual: payment is expected promptly, but the timing is --- lexible; the network tolerates short delays --- or good reasons but not --- or bad ones; and the community, not a --- ixed rule, determines what counts as a good reason.73 Judicial restatement will be accurate in sur --- ace content but wrong in operative --- unction, because it strips the norm o --- the --- lexibility and the collective en --- orcement that made the norm e --- --- ective. In Barrow-Shaver Resources Co. v. Carrizo Oil & Gas, Inc., the Texas Supreme Court let a jury decide whether oil and gas industry trade usage incorporated a reasonableness standard into an express consent clause, with --- ive amici --- iling brie --- s asserting competing versions o --- industry norms.74 The case illustrates how courts juridi --- y --- lexible industry customs: what was a contextual community judgment becomes a question --- or twelve strangers to resolve based on competing expert testimony. Reviewing Expulsion Ignores the Governance Function Courts reviewing expulsions --- rom exchanges, cooperatives, and trade associations apply a standard drawn --- rom the common law o --- voluntary associations: the expulsion must comply with the organization’s own rules, must not be arbitrary, and must a --- --- ord the expelled member procedural --- airness.75 Did the member receive notice? Was there a hearing? Was the punishment proportionate? In Silver v. New York Stock Exchange, the Supreme Court required “adequate procedural sa --- eguards” be --- ore allowing the exchange to regulate membership.76 Silver’s requirement amounts to telling the network that sel --- -governance is permitted only i --- the network governs the way a court would. Whether those procedural sa --- eguards might weaken the governance --- unction by making expulsion slower, more expensive, and less certain did not enter the analysis. In Northwest Wholesale Stationers, Inc. v. Paci --- ic Stationery & Printing Co., a cooperative buying association expelled a member, and the expelled member sued under the Sherman Act claiming the expulsion was a group boycott.77 The Court acknowledged that “[w]holesale purchasing cooperatives must establish and en --- orce reasonable rules in order to --- unction e --- --- ectively,” but treated that acknowledgment as a reason to evaluate the practice under the rule o --- reason rather than per se condemnation.78 The Court did not treat it as a reason to ask whether the en --- orcement mechanism itsel --- is the governance asset every other cooperative member depends on. Consider what happened --- rom the remaining members’ perspective. The cooperative was a group o --- independent retailers who pooled purchasing power to buy inventory at lower prices. Each member paid dues, submitted to rules, and accepted the cooperative’s authority over membership. The cooperative’s ability to expel a member who violated the rules gave every 73 Bernstein, supra note 2, at 129-31 (describing the deliberate vagueness o --- diamond network rules, which allows the community to distinguish between innocent and strategic de --- aults). 74 Barrow-Shaver Res. Co. v. Carrizo Oil & Gas, Inc., 590 S.W.3d 471 (Tex. 2019). 75 See Silver v. New York Stock Exch., 373 U.S. 341 (1963); Nw. Wholesale Stationers, Inc. v. Pac. Stationery & Printing Co., 472 U.S. 284 (1985). 76 Silver, 373 U.S. at 364. 77 Nw. Wholesale Stationers, Inc. v. Pac. Stationery & Printing Co., 472 U.S. 284 (1985). 78 Id. at 296-97. 2026-03-17] 17 other member con --- idence that the cooperative would --- unction honestly. The Court asked only whether Paci --- ic Stationery lost access to something Paci --- ic needed to compete. The Court never asked what remaining members lost when the cooperative’s expulsion authority became subject to judicial review.79 In MFS Securities Corp. v. SEC, the Second Circuit reviewed the New York Stock Exchange’s termination o --- an independent --- loor broker’s membership.80 The case illustrates the institutional cost o --- judicial review: even where the court ultimately upheld the exchange’s disciplinary action, the review process itsel --- introduced years o --- uncertainty during which the expelled member continued to contest the termination and every other exchange member observed that expulsion was not immediate or --- inal. In Alpine Securities Corp. v. FINRA, decided in 2024, the D.C. Circuit reviewed FINRA’s disciplinary procedures while the expelled member sought continued operation.81 Alpine Securities illustrates how the property-rule-to-liability-rule conversion proceeds incrementally: FINRA retains authority to discipline and expel members, but that authority is now quali --- ied by the possibility that a court will stay the expulsion, review the procedures, and reverse the decision. Every other FINRA member observes this quali --- ication. Courts have gone --- urther than review. In Higgins v. American Society o --- Clinical Pathologists, the New Jersey Supreme Court ordered reinstatement o --- a member who had been expelled --- rom a national pro --- essional society, distinguishing between compelling initial admission (which courts generally will not do) and compelling reinstatement o --- a wrong --- ully expelled member (which courts will).82 Higgins illustrates the displacement o --- calibration authority that Ali and Miller’s analysis predicts: the pro --- essional society expelled a member based on its assessment o --- the member’s conduct; the court substituted its own judgment about the propriety o --- the expulsion and ordered the society to take the member back. The society lost not only its expulsion decision but its readmission decision. Every other member observed that the society’s governance authority extended only as --- ar as a court would allow. In all o --- these cases, courts asked whether the expelled member received --- air treatment. In none o --- them did a court ask what the remaining members lose when exclusion authority becomes subject to external review. Antitrust Frames Exclusion as Restraint Rather Than Governance Antitrust law treats network exclusion as a potential restraint o --- trade. When a network expels a member, the expelled party may claim that the expulsion is a concerted re --- usal to deal.83 The Northwest Wholesale Stationers --- ramework asks whether the network has market power and whether the expelled member lost access to something essential --- or competition. The --- ramework 79 Id. at 295-300 (analyzing expulsion solely in terms o --- its competitive e --- --- ect on the expelled member, without considering whether the power to expel was the mechanism that made the cooperative’s purchasing arrangement valuable to every other member). 80 MFS Sec. Corp. v. SEC, 380 F.3d 611 (2d Cir. 2004). 81 Alpine Sec. Corp. v. FINRA, 121 F.4th 1314 (D.C. Cir. 2024). 82 Higgins v. Am. Soc’y o --- Clinical Pathologists, 51 N.J. 191, 238 A.2d 665 (1968) (ordering reinstatement o --- expelled member and holding that courts will intervene to restore pre-existing membership when the expulsion procedures were inadequate). 83 See Nw. Wholesale, 472 U.S. at 295-98. 18 The Wrong Plainti --- --- has the analysis backwards: it asks whether the excluded party su --- --- ered competitive harm, not whether exclusion serves a governance --- unction that every other member depends on. Network exclusion is not without risk o --- abuse. The Associated Press used membership exclusion to suppress competition --- rom rival news services.84 The Fashion Originators’ Guild used group boycotts to punish retailers who sold competing designs.85 The Maghribi coalition’s ethnic boundaries, whatever their governance --- unction, also excluded non-Maghribi traders --- rom pro --- itable routes.86 Any --- ramework that recognizes network governance must account --- or the risk that governance-serving rhetoric will mask anticompetitive behavior. An expulsion triggered by a member’s --- ailure to pay debts, comply with arbitration awards, or submit to the network’s dispute resolution procedures serves the governance --- unction: these are the obligations that maintain shared con --- idence across the network. An expulsion triggered by a member’s decision to cut prices, sell to nonmembers, or re --- use to participate in a coordinated pricing arrangement does not serve the governance --- unction. It serves cartel maintenance. Antitrust’s own rule-o --- -reason analysis already provides the doctrinal --- ramework --- or drawing this line. The Supreme Court’s treatment o --- cooperative arrangements in BMI v. Columbia Broadcasting System provides the --- oundation. The BMI Court recognized that some collective arrangements among competitors produce shared bene --- its that no individual member could create alone, and that condemning such arrangements outright destroys those shared bene --- its without advancing competition.87 Network governance produces a shared bene --- it o --- the same kind: the collective en --- orcement mechanism creates governance in --- rastructure that no individual member could build or maintain independently. Easterbrook argued that antitrust courts must consider the --- ull range o --- e --- --- ects when evaluating restraints in cooperative ventures, because the same restraint that limits one dimension o --- competition may be necessary to produce the cooperative bene --- it that enables another.88 Areeda and Hovenkamp’s treatise identi --- ies membership exclusion --- rom a joint venture as a practice that courts evaluate by asking whether the exclusion is “reasonably necessary” to the venture’s legitimate purposes, not by asking only whether the excluded member su --- --- ered competitive harm.89 Plat --- orm Deactivation Raises the Same Wrong-Plainti --- --- Problem Online marketplaces (Amazon Marketplace, Uber, Airbnb) operate governance systems with structural parallels to the diamond network. A buyer on Amazon has never met the seller, has no contract with the seller beyond the plat --- orm’s terms o --- service, and has no realistic ability to investigate the seller’s reliability. What makes the buyer willing to transact is the plat --- orm’s governance system: ratings, reviews, and the threat o --- deactivation --- unction as reputational 84 Associated Press v. United States, 326 U.S. 1, 13-18 (1945) ( --- inding that the AP’s membership exclusion practices --- unctioned as an anticompetitive restraint). 85 Fashion Originators’ Guild o --- Am., Inc. v. FTC, 312 U.S. 457, 463-68 (1941) ( --- inding that a trade association used exclusionary practices to en --- orce a group boycott against competitors). 86 Grei --- , supra note 3, at 525-30. 87 BMI v. Columbia Broad. Sys., Inc., 441 U.S. 1 (1979). 88 Frank H. Easterbrook, The Limits o --- Antitrust, 63 TEX. L. REV. 1, 1-40 (1984). 89 Phillip E. Areeda & Herbert Hovenkamp, Antitrust Law: An Analysis o --- Antitrust Principles and Their Application 1 (4th ed. 2013). 2026-03-17] 19 sanctions backed by expulsion. Tadelis drew the parallel explicitly, noting that plat --- orm --- eedback systems per --- orm the same in --- ormation-dissemination --- unction as Milgrom, North, and Weingast’s centralized record-keeper at the Champagne Fairs.90 When courts review plat --- orm deactivation decisions one user at a time, asking whether a particular seller or driver received adequate process, the analysis replicates the same wrong- plainti --- --- problem. The deactivated user is visible and sympathetic. The harm to the plat --- orm’s governance system, sustained by the credible threat o --- deactivation, is invisible to the court. In NetChoice, LLC v. Paxton, the court recognized plat --- orm editorial discretion as constitutionally protected, e --- --- ectively preserving one --- orm o --- exclusion authority.91 Van Loo has proposed “Federal Rules o --- Plat --- orm Procedure” that would require plat --- orms to provide notice, hearing, and appeal be --- ore deactivating users, analogous to the procedural requirements Silver imposed on stock exchanges.92 Cohen argued that plat --- orms do not merely enter or expand existing markets; plat --- orms replace and rematerialize them, creating governance structures that are --- unctionally new even when they resemble historical predecessors.93 The regulatory trend is already visible. The EU’s Digital Services Act requires plat --- orms to provide reasons --- or moderation decisions, to o --- --- er internal complaint mechanisms, and to submit to external dispute resolution.94 These procedural sa --- eguards, like those the Silver Court required o --- the NYSE, may weaken the governance --- unction by constraining the plat --- orm’s ability to act quickly on pattern-recognition be --- ore misconduct has been --- ully documented. Plat --- orm governance di --- --- ers --- rom collective network governance in one important respect: a plat --- orm operator makes deactivation decisions unilaterally, whereas a diamond bourse or cotton association acts through collective governance processes in which members participate. The plat --- orm’s incentives are pro --- it-driven, not governance-driven. A bourse expels a cheater because the bourse’s members collectively bene --- it --- rom the en --- orcement. A plat --- orm deactivates a seller because the plat --- orm’s revenue depends on buyer con --- idence. The structural parallel holds where the mechanism is the same (the credible threat o --- deactivation sustains buyer willingness to transact, just as the credible threat o --- expulsion sustains dealer willingness to extend credit) and breaks down where the decision-making authority di --- --- ers (unilateral corporate decision versus collective governance process). Where the parallel holds, one-at-a-time judicial review o --- deactivation decisions threatens plat --- orm governance in the same way judicial review o --- expulsion decisions threatens network governance. Where the parallel breaks down, a separate analysis is needed, one that accounts --- or the plat --- orm operator’s dual role as both governor and pro --- it-maximizer. Conclusion 90 Ste --- ano Tadelis, The Economics o --- Reputation and Feedback Systems in Online Markets, 25 J. ECON. PERSPECTIVES 193, 193-215 (2011). 91 NetChoice, LLC v. Paxton, 573 F. Supp. 3d 1092 (W.D. Tex. 2021). 92 Rory Van Loo, Federal Rules o --- Plat --- orm Procedure, 88 U. CHI. L. REV. 829 (2021). 93 Julie E. Cohen, CONFIGURING THE NETWORKED SELF: LAW, CODE, AND THE PLAY OF EVERYDAY PRACTICE (2012). 94 European Union Digital Services Act, Arts. 17, 20-21 (2022) (requiring plat --- orms to provide reasons --- or content moderation decisions and to o --- --- er internal complaint mechanisms). 20 The Wrong Plainti --- --- This Article makes a diagnostic claim. Contract remedies doctrine identi --- ies the individual promisee as the injured party when breach occurs within a collectively governed trading network. That identi --- ication is incomplete. An injured party is also the network: every member whose willingness to cooperate depended on the credible threat o --- exclusion. Judicial intervention that displaces the network’s exclusion authority, whether by awarding damages, imposing procedural requirements, or staying an expulsion pending review, converts that authority --- rom a property rule into a liability rule. The conversion degrades the club good that the credible threat o --- exclusion sustained into a public good subject to --- ree-riding. Governance deteriorates. Identi --- ying the network as an injured party is a necessary --- irst step toward understanding the --- ull consequences o --- judicial intervention. That step is analytically prior to choosing a remedy. The di --- --- iculty o --- --- ashioning a damages award --- or network harm does not de --- eat the diagnostic claim. It con --- irms it. I --- the harm to the network could be captured in a dollar --- igure, a liability rule might su --- --- ice. Because the harm consists in the degradation o --- a governance system whose value depends on the credibility o --- exclusion, no dollar --- igure can capture it. The di --- --- iculty o --- measurement is not a reason to compensate the wrong party --- or the wrong harm. Awarding damages to the wrong person --- or the wrong harm is what courts do now. The di --- --- iculty o --- measuring network harm is a reason --- or caution be --- ore intervening in governance systems that the parties deliberately chose over --- ormal law. Several remedial possibilities deserve --- urther exploration, though this Article leaves the remedial question open. Courts might en --- orce network arbitration agreements under a --- ramework analogous to the Federal Arbitration Act’s presumption in --- avor o --- arbitrability, protecting the network’s dispute resolution system --- rom judicial displacement.95 A standing doctrine might give network members a voice in litigation involving the network’s expulsion authority, so that the interests o --- remaining members are represented when an expelled member challenges the expulsion.96 Or courts might decline to incorporate network customs as trade usages under UCC section 1-303 when those customs serve a governance --- unction rather than a price-setting --- unction. Each possibility raises its own di --- --- iculties, and the remedial analysis lies beyond this Article’s scope. Trading networks that govern through collective exclusion support billions o --- dollars in unsecured credit annually. Common-pool resource communities manage --- isheries, --- orests, and irrigation systems that millions o --- people depend on. Digital plat --- orms mediate trillions o --- dollars in annual transactions. In each setting, when a court identi --- ies only the individual promisee as the injured party, the remedy does not merely --- ail to compensate the right party. The remedy converts exclusion --- rom a property rule into a liability rule. That conversion degrades the credible threat o --- exclusion --- rom a club good into a public good. And because network governance has no external mechanism to sustain it once excludability is gone, the governance system that members built, maintained, and relied on begins to unravel. 95 See 9 U.S.C. §§ 1-16 (establishing the Federal Arbitration Act’s presumption that arbitration agreements are valid and en --- orceable). 96 C --- . Fed. R. Civ. P. 24 (permitting intervention by parties with an interest in the subject matter o --- litigation who may be impaired by the disposition).