PrawfsBlawg

The Corporate "Trolley" Problem

I'm amused by some of the reactions to a front page news story from the corporate world, the announcement a couple days ago by the Business Roundtable (signed by 200 CEOs) to the effect that it was amending its Principles of Corporate Governance to eliminate the statement that the "primary purpose" of a corporation was to serve its shareholders.  The CEOs want to reconcile the statement of principles to what they feel they actually do - namely, balance the interests of a number of corporate stakeholders, including customers, employees, suppliers, and communities.

This has stirred up some strong feeling, from Steve Bainbridge (aghast), the Council of Institutional Investors (also aghast), the Wall Street Journal (it's Elizabeth Warren's fault), and Andrew Ross Sorkin in the New York Times (it's about time).

I've spent a lot of time at the corporate C-level, and my amusement stems from the reality that any statement of principle like this one, like most mission statements, is so broad as to be meaningless when it comes down to the vast majority of real world decisions.  To fight about it, you need a zero-sum hypothetical, like the one Steve is marketing, posing the corporate equivalent of the decision to pull the lever and let either one person die or six people die from the onrushing trolley.  

Those are nice academic problems to ponder in an ethics class or in Corporation Law 101, but the reality is that the zero-sum choice between the shareholders and some other constituency rarely presents itself as in the hypothetical, just as people are rarely asked to choose between diverting the trolley or not.

To propose a metaphor here, a business that creates value is a goose.  If it's a really big capital intensive business, chances are it needed a lot of capital, and investors don't invest without the prospect of a competitive return - i.e. a piece of the goose.  But everybody wants a piece of the goose.  Customers want lower prices, and if the business has a unique value proposition, they won't get them.  Employees want higher wages.  Communities want taxes and support of local institutions.  Suppliers want higher prices.  Managing the business is the process of making the goose as big as you can so that there's something worth fighting over.

And here's the reality: management can rationalize almost any decision to favor any stakeholder in terms of the long-term return to the shareholders.  Nobody (except maybe old Chainsaw Al Dunlap, and he was disgraced) operates in the Bainbridge Hypothetical.  "Let's see here.  The Topeka Art Museum would like a $100,000 corporate contribution, but if we do that we can't use the cash to buy back shares or issue a dividend."

No, management looks at the dashboard with all dials measuring the value going out to customers, employees, communities, suppliers, and shareholders, and adjusts them. For example, we have that request from the museum. To return value to the shareholders, we need good employees.  Hence we might conclude, "It's hard to recruit to Topeka.  It will help if we have first-rate cultural institutions. To whom do we make out the check?"

I agree that the Business Roundtable release was good politics.  But it didn't change anything, except to lay bare the meaninglessness of principles like "primarily serving the shareholders." Anybody who has ever drafted an organizational mission statement knows that dynamic.  By the time you get past the short term tactics, long term strategies, and multiple goals of any dynamic organization, you end with pap like:  "XYZ Corporation will provide stellar returns to investors by focusing on innovative products, incomparable service to customers, and employees who are vested in the success of the organization."  Right.  WTF does that mean?

Since the original Business Roundtable governance principle was close to meaningless anyway (outside of the thought experiments that are the law professor's stock in trade), and this new statement doesn't change what was happening in the board room or the management suite, the CEOs who signed it really did offer up the sleeves from their collective vests.

Confusion of the Inverse??

At JOTWELL, Omri Ben-Shahar has a review of a forthcoming article in the Stanford Law Review claiming to have shown in a study that consumers are cowed by a consumer contract's fine print even if they believe they have been defrauded by the seller - i.e., have been expressed guaranteed A and learn later that (i) they aren't getting A, and (ii) the fine print says they have no legal right to A. (The reviewed piece is Meirav Furth-Matzin & Roseanna Sommers, Consumer Psychology and the Problem of Fine Print Fraud, 72 Stan. L. Rev ___ (2020)).

I've been blogging with outtakes from the not-quite-ready-for-prime time Unsure at Any Speed . Here the outtake intersects with another subject on which I have gotten involved recently: how to deal with the spread of detailed and unread consumer contract fine print, particularly given the ease by which it can appear to be made binding via internet click-throughs.

The question is not whether the conclusions Furth-Matzin and Sommers draw from their laboratory experiments are correct.  First, I don't know enough about qualitative research methods to assess their hypotheticals and questions to test subjects. Second, from what I can tell, they have given enough detail about the methodology to allow the tests to be repeated and therefore falsified. So I accept them for what they seem to say: people seem to take the fine print seriously even when they know they have gotten screwed.

My question is rather about empirical statements that underlie the study to begin with. Is it the case that widespread non-readership of fine print leaves consumers open to exploitation by unscrupulous firms? Is it true that sellers can outright lie about their products and services and then contradict the lie in the fine print?  The Stanford article takes the answer "yes" to those questions as a given, and then proceeds to assess the impact of fine print, given that there was fraud.  I cannot find, however, at least in the footnotes on the first six pages of the article anything other than a couple of anecdotes in support of the proposition that unscrupulous firms are a widespread problem.  I'm not saying they aren't; I just don't see any evidence one way or the other.

Is this an example of "confusion of the inverse," the subject of my outtake?

What I mean by "confusion of the inverse"

I cut from Unsure a detailed explanation of the "confusion of the inverse." It is, along with things like availability heuristic, the law of small numbers, hindsight bias, and confirmation bias, an example of the predictable divergences from actual probabilities to which Kahneman, Tversky, and others demonstrated humans are prone. My particular heuristic/bias peeve has to do with academic assumptions about the morality and competence of corporate oversight (Caremark doctrine for you governance nerds), exacerbated perhaps when, my having recently been been a corporate executive, a colleague blithely characterized corporate executives as "turnips" at a workshop shortly after I joined the faculty.

Here is the confusion of the inverse applied to my peeve.  Conditional probability is the quantification of the following question: given the probability that A is true (P(A)), what is the probability of B given A (P(B/A))?  The formula for deriving the answer is:

P(B/A) = [P(A/B) x P(A)]/P(B)

What we are trying to derive is the probability that we have a corrupt/incompetent board given that we have observed material corporate wrongdoing.

The probability of MW among the set of all corporations is P(A).

The probability of MW given CIB is P(A/B).

The probability of CIB is P(B).  Note that you can have a CIB even if you don't have MW, and you can have MW even if you don't have CIB.

Our formula now looks like this: P(CIB/MW) = [P(MW/CIB) x P(MW)]/P(CIB)

So...

Let's assume the following.  It turns out MW among all corporations is very rare.  Say P(MW) = .01 (one in a hundred).

The probability of material wrongdoing, however, is very high, IF you have a corrupt/incompetent board.  Say P(MW/CIB) = .95

The formula gives us the following numerator:  .95 (the probability of MW given that we have a CIB) x .10 (the probability we have MW).

But remember you can have a CIB even if you don't have MW, and you can have MW even if you don't have CIB.  So the denominator P (CIB) has to take all possibilities into account.

Hence, P(CIB) = [the probability that there is MW given CIB times the probability of MW] plus [the probability that there is MW with no CIB times the probability of no CIB].

So... P(CIB/MW) = (.95 x .01) /[(.95 x .01) + (.05 x .99)]

P(CIB/MW) = .16

So given that you observe material wrongdoing, the probability of also encountering a corrupt or incompetent board P(CIB/MW) is .16.  The confusion of the inverse is to believe P(CIB/MW) is .95.  It is not to say that you can't have corrupt or incompetent boards. It is to say instead that it is wrong to assume board members are turnips just because you observed material wrongdoing.

There are even more malignant examples of the confusion of the inverse.  When a police officer pulls over a car, what is the probability that there are drugs in the car, given that the driver is African-American?  When TSA does a search, what is the probability that the individual is a terrorist, given that he/she appears to be Middle Eastern?  When you are tested for a rare disease, what is the probability you have it, given that the test is positive?

Confusion of the inverse and contract fine print issues

As I said, I express no view on the study in the Stanford Law Review article.  I just don't see any evidence about the prevalence of out-and-out fraud. My intuition is there is probably less of it than the article seems to suggest.

That isn't to say there aren't real fairness issues with fine print. I have engaged with Rob Kar on his Harvard Law Review article with Margaret Radin, the thesis of which is to ground an attack on over-reaching boilerplate on a demarcation of the "true" agreement between the contract drafter and the consumer by way of Grice's "conversational maxims" and an actual shared meaning.  (Theirs is Pseudo-Contract and Shared Meaning Analysis; my response, just published in the Australasian Journal of Legal Philosophy (Vol. 43, pp. 90-105) is Conversation, Cooperation, or Convention? A Response to Kar and Radin.)

What I take from the Stanford Law Review study is that consumers aren't completely led down the primrose path by the fact of "fine print" - they expect there to be terms and conditions even if they don't read them.  The study seems to bear that out, even in the extreme where the consumer really does believe he/she/they got screwed. The real question is to what extent should the fine print be binding.  I agree with Omri that disclosure is not likely to be helpful - oy, more fine print disclaiming the fine print. Nor do I think trying to find the actual agreement or shared meaning is going to be fruitful.  Rather, there is a convention about what is and is not fair, and that probably ought to be reflected in regulation.

Interdisciplinary Projects

I have enjoyed my time here blogging, and many thanks again to Rick and Howard for having me.  In my last post, I thought I would discuss an interdisciplinary project I have been working on. 

Last year, I applied for a large, internal university grant to try out some interdisciplinary projects.  The goal was to spend a year investigating a significant corporate scandal with colleagues from around the university in an effort to come up with a “super solution.”  When I wrote the grant proposal, I used the General Motors ignition switch scandal as an example of what one might investigate.  The original grant proposal envisioned a three-year project, which would have allowed three areas of study. 

I was instead offered a more modest grant to test out the idea.  By the time the award was provided, the #MeToo movement was in full swing, so I changed the topic of inquiry to sexual harassment within organizations.  Ultimately, we had participants from law, management, economics, philosophy, and journalism.  Each participant wrote a small three to five page paper addressing the sexual harassment crisis within organizations from their scholarly discipline and expertise.  We then had a one-day conference where we presented our solutions, and we had two senior external scholars attend to comment and provide additional input.  Ultimately, we walked away with two potential theses, and a few of us are currently working on a paper. 

One of the proposed uses of the grant award in the original proposal was to provide research funding for contributors as an incentive to participate.  Every department at Notre Dame has its own publication expectations, so I worried that people might need an incentive to participate in interdisciplinary work.  When I received the more modest grant, however, I dropped the attempt to provide the incentive.  As it turned out, each person I approached agreed to participate except for one, and the one person who declined instead provided some additional funding for the project. 

For the those of us working on a writing project together, we have determined that we may be able to publish three articles—one each in a management, law, and economics journal—related to one of the theses we identified.  We would of course emphasize different points in each publication.  I think this is in actuality a better incentive than research funding would have been.  We identified a thesis that hasn’t been written about in our respective disciplines, and we have identified related projects that we can tackle for the purpose of publishing pieces in those disciplines.  This provides us each a publication opportunity that “counts” in our departments, but it also broadens the potential impact of our work.  This is still very much an experiment, but it does seem as if it is an experiment worth attempting as the potential upside is quite high. 

With that, I close my stint here at Prawfs.  I had some more half-written blog posts, but my 1Ls are happy, eager, and love sitting in my office.  Until next time! 

Pragmatism and Compliance

One of the reasons I enjoy working in the compliance area is its pragmatism, which I think is reflected in two important ways. 

First, compliance is a pragmatic area of study for students.  I have seen this with both my actual compliance students and my research assistants.  For example, one of my former students went on to apply for a position with the SEC Student Honors Program and was eventually placed with the Office of the Whistleblower.  She emailed me shortly after starting the program to explain how she felt prepared for the placement, because we had covered the SEC whistleblower program during class.  Similarly, my summer research assistants often email me after on-campus interviewing to explain how their summer working for me was helpful to them during the process.  Because much of the “law” I rely upon is not available on Westlaw/Lexis, I tend to conduct specialized training for my research assistants where we cover what an enforcement action is and different methods of identifying and analyzing information that is not available in case law databases.  For those students who end up in a regulatory or white collar practice for the summer or after graduation, they tend to have a bit of a leg up on their counterparts who may have little to no awareness of these sorts of enforcement documents.

Second, compliance is an area that has huge applicability and ramifications for practicing attorneys.  I love that each of my projects tackles a concrete problem confronting practitioners and leaders within industry and attempts to help them sort through potential solutions or considerations they should take into account.  When I send out my reprints, I probably send about 20% to people in practice at law firms, in-house at corporations, or senior government officials.  To my delight, I often get a response back, which allows me to have informal conversations that help me get a better understanding of the challenges and struggles faced by those within industry.  These conversations almost always help me to sharpen my ideas.  And I am hopeful that these interactions will aid me when I eventually transition to some qualitative projects, which I plan to start working on in a couple years.

There are, of course, other ways in which working in the compliance space is pragmatic; just as there are other scholarly areas with similarly pragmatic attributes.  But the pragmatism—for both my students and my scholarship—associated with compliance work is one of the things I enjoy about working in the area.

Something New, Something Old, and Something Borrowed

Writing in the compliance space has been extremely rewarding for many reasons, but today I will highlight the new, the old, and the borrowed. 

Something New

Compliance is still considered new within legal scholarship.  Its newness makes it an extremely fun area to write in, because it is often the case that you are one of the first, or one of very few, academics who have written on a particular topic.  For me this has been most true, I think, with my work on corporate monitors (here, here, and here). There were certainly excellent articles (e.g., here, here, and here) written prior to my own work, but because there weren’t a large number or articles on the topic, I have been able to carve out a scholarly niche for myself.  As a result, when it comes time to have an academic speak or write on the topic of monitors, I often get asked.  I can’t always take on the opportunity, but it is fun to have something you are known for, and there is still quite a bit of room for that in the compliance area.

Something Old

And yet, many of the issues important for compliance today aren’t at all new.  A great deal of compliance scholarship is rooted in more established areas, like corporate law, corporate governance, and corporate criminal law.  The iconic Caremark decision is a case about compliance (see this symposium).  Within industry, compliance is an established field with a variety of “professional” organizations with hundreds of members.  This is nice, because while compliance is “new” within legal scholarship, it is also “old” in a way that provides a strong foundation for the scholarly work being done.  In one of my forthcoming articles, I use classic BA cases to serve as the basis for a new argument related to identifying the root-cause of compliance failures within organizations.  All that to say, you aren’t starting from scratch when you identify a problem to write about.

Something Borrowed   

Finally, because compliance is inherently interdisciplinary, it lends itself well to borrowing concepts from other fields.  For example, many compliance scholars spend a fair amount of time drawing on behavioral ethics research (e.g. here and here), which is a literature primarily found within business schools.  Additionally, I often find that when I present a paper someone in the audience from another discipline will suggest I read something that I have not come across, which turns out to be completely applicable to what I am writing about.  A couple summers ago, for instance, someone made a relatively offhand remark about how I should look at interagency coordination literature, which is in the administrative law area, and that literature ended up serving as the theoretical basis for my paper.

* * *

All that to say, part of what I like about writing in the compliance space is that it is new, but not too new, while allowing the flexibility to learn about a number of topics from other areas of law. 

Teaching Compliance

During bar study, July 4th is a big “you don’t have much time left” marker, and that is how I feel about the academic summer.  As soon as the fireworks have died down, I start thinking about teaching.  I love teaching.  I love teaching Contracts to 1Ls, in part, because it is hard to imagine a greater privilege than being able to help introduce the law to a brand new set of students.  But I also love teaching my Compliance course, because it allows the students to confront legal issues that are still being debated and determined.

Developing my Corporate Compliance & Ethics Seminar was both exciting and challenging.  At the time I started teaching it there was one compliance casebook (it is excellent), but I wanted to use a different set of materials for a seminar.  As many of you know, coming up with a set of materials for a course from scratch is time intensive, but it is also very rewarding, particularly when it overlaps with your scholarly interests. 

I decided to break my course up into modules and to use case studies as a vehicle for learning each concept covered.  Module I covers introductory materials like the Organizational Sentencing Guidelines, the importance of self-policing, as well as some background reading in behavioral ethics.  In Module II, we go through different actors within compliance efforts, like regulators, gatekeepers, and whistleblowers.  In Module III, we cover substantive compliance areas.  I have traditionally covered the Foreign Corrupt Practices Act, Antitrust, the False Claims Act, and Title IX.  In Module IV, I merge the theoretical concepts we have learned in class with some more practical concerns.  This latter module has changed each year I’ve taught it, with last year focusing on conflicts of interest and sanctions for compliance officers.  Finally, I weave in coverage of applicable Model Rules of Professional Conduct throughout the course.  

In other words, there is a whole lot of information crammed into a 14 week course, but it has generally been quite successful.  I use some classic exemplars for case studies—like Enron and Siemens—but I also use current events when I can.  For example, during last year’s whistleblowers class, I put together materials from the Wells Fargo scandal.  The mix of (i) case studies, (ii) theoretical background reading, and (iii) Model Rules has sparked intensive discussions about the role lawyers play within compliance efforts and where the boundaries should be when defining the scope of responsibility that lawyers should have for ensuring successful compliance programs are created and developed.  It is fun to teach, and the students seem to enjoy the concepts learned.  And because this is a class where the law is still quite dynamic, I’m looking forward to amending my antitrust and whistleblowers sections next week!

Compliance & Diversity

All of the Supreme Court speculation circulating this week took my mind to places that I suppose are pretty atypical.  When I was a law student, I really wanted to clerk, but the University of Chicago had guidelines requiring each student to limit their clerkship applications to fifty judges or less.  As a result, I poured over my list of judges meticulously and asked many people advice about who should be on the list.  One of the people who looked at my list said quite bluntly – “Most black clerks are hired by black judges; keep all of the black, appellate court judges on your list.”  So I basically did.  As it turns out, I had two judges (a white woman and a black man) call me for interviews, and I did ultimately clerk for a judge who is amazing, kind, smart, organized, generous, and also black.  When I went for the circuit-wide clerkship training, I did note that the only two black people in attendance were one of my co-clerks and me.  And a black classmate emailed me shortly after his circuit-wide clerkship training to comment on the fact that he was the only black clerk in attendance. 

Thus, while all the interests groups are lining up to make their pitches about what the important qualities are in a Supreme Court Justice, my mind has turned to the fact that the small number of black appellate court clerks leads to a paucity of black, Supreme Court clerks (how many black, appellate feeder judges are there?), which narrows the field of those persons of color who might one day be on one of these lists.  Clearly, I digress and in doing so have skipped some pertinent intellectual and factual steps in the interest of writing a short-ish post.

My digression, nonetheless, has some relevance in that it may help to connect my interest in diversity to my interest in compliance.  I think sometimes people read my work and feel like the articles I have written on diversity in the profession are unrelated to my compliance work.  They are not.  Individuals attempting to create diverse organizational cultures and those attempting to create compliant organizational cultures and those attempting to create ethical organizational cultures are all addressing the same basic question. One could state the question in a few ways, but here is one:  How does one create a culture that promotes a particular set of values—diversity, compliance, ethics—and actually get buy-in of the organizational members in an effort to achieve the culture one has set out to create?  The question has no easy or simple answer.  Instead, the question requires step by step consideration of the external and internal forces that contribute to the creation of organizational cultures.  When one considers the questions as related, it opens up a number of scholarly approaches.  For instance, in a forthcoming article discussing antidiscrimination efforts within the bar, I rely on literature about the damaging effects created when an employee feels like s/he must remain silent.  I could just as easily use that same literature when talking about sexual harassment at Fox News or internal whistleblowers at Wells Fargo. 

There are certainly very good reasons to think about diversity, compliance, and ethics on their own, but there are upsides to approaching the concepts as if they are one, although perhaps not in the same law review article.  Happy weekend! 

Compliance

Many thanks to Howard for arranging to have me contribute as a guest blogger this month!    

A few months before I began my tenure-track position in 2014, I was nervous that my seemingly diverse research interests were going to create problems for me down the line.  I had interests in professional responsibility, corporate governance, workplace law, and organizational misconduct, which meant I did not feel like I “fit” neatly within a field of legal research. I knew that my research was all connected, but I felt like conveying that connection to others was sometimes a bit difficult.  Thankfully, I had a wonderful conversation with a senior scholar who said something to the effect of:  “You just research compliance.  It is kind of new, so people may not realize it, but that is what you are doing.”  These words were instantly clarifying and gratifying.  I suppose I knew I was researching compliance issues, but not having met many scholars who defined themselves in that way at that time, I did not realize it was legitimate to actually use the compliance title to describe my work. 

Today, compliance has developed into its own, albeit some might still say new, field.  There are several law schools with centers, programs, or areas of study in compliance.  The ALI is working on a set of Principles of the Law in Compliance, Enforcement, and Risk Management.  And there are a variety of compliance-specific conferences that I can attend.  Compliance is, however, an interdisciplinary field.  Some people writing in the space describe themselves as corporate law scholars, some as criminal law scholars, and there is quite a bit of very good work being done by business school professors.  Personally, while I self-identify as a compliance scholar, I do so with the caveat that I draw on research from several areas within legal scholarship and organizational behavior.  More specifically, the underlying research question that motivates my scholarship asks how one might address dysfunctions within organizations in an effort to create more productive, healthy, and ethical environments within firms.     

This month I’ll be blogging a bit about my compliance research, but also about the experience of working within a field that is (i) still emerging and (ii) interdisciplinary in scope.  For me this has been a really exciting endeavor, but it does have its own set of challenges to work through.  But for now, I will just wish you all an early Happy July 4th. 

Email, The Gift That Keeps on Giving

U.S. District Judge John D. Bates spilled a considerable amount of ink in yesterday's Memorandum Opinion enjoining the Aetna-Humana health insurance merger.  Even though antitrust opinions are not known for their brevity, the roughly thirteen pages devoted to discussing whether Aetna's announced  withdrawal from the complaint counties about three weeks after the date of the filing of the government complaint was  motivated by a desire to  improve its litigation position or as part of ordinary business decision making is pretty detailed.  Because the announcement of withdrawal implicated actions that might be interpreted as consistent with business interest (leaving the exchange market in Missouri, for example, where Aetna was  distressed over years of non-profitability) or might be interpreted as inconsistent with business interest (leaving the exchange market in Florida, for example,  where Aetna was apparently profitable).

Yes, it was the  internal documents of Aetna management discussing motivation for withdrawal from the profitable Florida exchange market or, even, in refusing to discuss the Florida decision while laying out the business case analysis behind withdrawal from the exchange markets in other locales that animated Judge Bates' opinion.  It is interesting to find internal Aetna management correspondence (from Steven Kelmar, Aetna's Executive VP and Chief of Government Affairs)  memorializing "Most of this is a business decision except where DOJ has been explicit about the exchange markets. There we have no choice." 

Still, my favorite part involved hints at what was sometimes unsaid in emails.  When Aetna's Florida Market President, Christopher Ciano, received word of the decision to exit the Florida exchange market (he was not part of the decision making group), his serial emails lamenting the decision, pointing out that Florida's exchange market was profitable for Aetna, and stating that he just couldn't make sense of the decision are powerful because of his apparent ignorance or because of what wasn't said.   Christopher Ciano was, eventually,  directed to stop discussing this matter in emails and to take the conversation to the telephone.

That's the thing about email correspondents -- they often know, on some level, that the messages may be brought to light in some way but they can't always seem to stop.  I wonder if, because email can be so conversational in tone, they forget that they are creating a written record.

Housing Bubble (Toil & Trouble)

The 2008 Foreclosure Crisis seems like only yesterday.  Surely we must still remember the lessons learned from the crash and will not again allow real estate prices to inflate above a sustainable level... right?  But here's a little chart that sort of scares me - note that we're at the top of the second peak in this roller coaster ride called the housing market:

Yesterday the FHFA announced an increase to the loan limit for prime loans, with the new maximum home mortgage loan for one-unit properties set at $424,100 for 2017 (more in higher-priced markets). This is the first maximum loan dollar increase since 2006. Unless you follow real estate or are in the market for a large mortgage loan, you may not have recognized the significance of this increase. The Housing and Economic Recovery Act of 2008 prohibited any increase in the loan limit above $417,000 unless and until the average U.S. home price returned to its pre-decline level.  That hasn't happened until this year.  The FHFA just announced that "that average home prices are now above their level in the third quarter of 2007."  I guess we're back, baby.

In a way, it isn't that surprising that housing prices have been growing back toward their record peak levels, particularly in some parts of the country.  The government has done its utmost to help us "recover" from the market meltdown.  For one thing, the Federal Reserve has aggressively pushed down interest rates for the past several decades - and they keep setting a new record for "how low can you go?"   Such extremely low interest rates means very low cost of capital, and cheap capital makes it smart to borrow and stupid to save.  Is it any wonder that rational consumers borrow and borrow and borrow, and hardly ever save? (this chart shows interest rates over time - better version of it is here).

Now, some types of borrowing are more available than other types. There were times when anyone with a pulse could get a credit card, and for several years in the run-up to 2008, anyone who owned or wished to own a home could obtain a mortgage loan for nearly the entire sticker price or appraised value of the home. A little not-so-long-ago-history primer: easy mortgage credit fueled a buying and re-fi frenzy for homes that drove up prices, all premised on the idea that real estate values always go up. It couldn't last. It didn't last. 

While it has been popular during the past 8 years to blame lack of regulation for the Housing Crisis, I concluded back in 2010 that the low interest rates played a very key role (along with imaginary underwriting) in the out-of-control mortgage lending. Other analysts have agreed (see also here and here). The Economist is similarly skeptical that high housing prices indicate a booming economy, pointing out that "despite efforts to fix the plumbing of the American mortgage market, housing in the United States remains a dangerous menace to the world economy" and explaining that soaring property prices in America are "underpinned by low interest rates."

The "bubble" that we now find ourselves in is different. For one thing, mortgage credit has become more difficult to obtain, due in part to the (somewhat) more attentive FHFA underwriting approaches, the (slightly) more stringent requirements for loans to qualify as prime, and the (marginally helpful) disclosure obligations mandated by the CFPB.  But if you can get a home loan, it's cost is still very low because of low interest rates. Cheap capital enables rising prices.  Another thing that is arguably different this time around is that the supply of homes has not increased as quickly as previously, and in some parts of the country, shortage of supply may be helping to prop up property sale prices (see CNBC story here). 

The Trump win, analysts believe, will lead to multiple increases in these record-low interest rates, policy makers have indicated that this could happen in December 2016, and bank stocks have brightened at this news (after initially falling, Wall Street rallied after Trump's unexpected victory - see story here). Of course, the Fed had previously promised to raise interest rates this year, but that has not really happened (see NY Times story here).  If interest rates really do increase (and I tend to think they finally will, see Wall St. J article here), will this cause housing prices to drop in 2017? Would that necessarily be a bad thing?

For more stories re: Housing bubble 2.0, the 2016-17 edition, see here, here, here, here and here.  Some of these are major news outlets, others more fringe-y, but they raise issues that those of us who watch the housing market with baited breath should not ignore.

Whitman on Transferring Negotiable Notes

Property Scholar Dale Whitman has just published an article, entitled "Transferring Nonnegotiable Notes", explaining where the law is and where it needs to go with respect to the transfer of the right to enforce mortgage loans.  This issue has been one of the most confused and contested questions of legal interpretation in the aftermath of the Foreclosure Crisis.  When the whole housing finance system began to unravel upon the unexpectedly high volume of mortgage defaults, un-tested and unorthodox industry practices regarding loan transfer ran smack into legal uncertainty regarding who held what rights to which loans subject to what defenses.  This legal uncertainty stuck like a rod in the gears of the foreclosure system, causing massive delays and, in some cases, loss of the right to enforce the loan.  

The question of mortgage negotiability and transfer adequacy has caused a "vast amount of litigation" (as Whitman puts it), and this litigation has "greatly expanded our understanding" regarding how negotiable notes are transferred. But there remains a gap in legal comprehension related to the transfer of nonnegotiable notes.  In addition, open questions regarding defenses can destabilize the market and incentivize market player misbehavior. Professor Whitman attempts to bring clarity to the murky legal questions regarding who has (and should have) the right to enforce the loan and what defenses a borrower can (and should be able to) assert against an assignee of a mortgage note. 

Professor Whitman is perhaps the most recognized the national expert on the subject of note negotiability and transfer adequacy.  His most recent article adds an important piece to the secondary mortgage market puzzle, in terms of understanding what went wrong, what rights parties have with respect to defaulted mortgage loans, and how the law should evolve to create a fairer, more stable mortgage capital market.

Here's the abstract:

This article reviews what we know about transferring ownership and the right of enforcement of nonnegotiable notes. The focus will be on notes secured by mortgages, since this is likely the context in which most modern nonnegotiable notes are created. There has been a vast amount of litigation about the transfer of negotiable mortgage notes in the past half decade, greatly expanding our understanding, but there has been little development involving nonnegotiable notes. Hence, it is helpful to compare negotiable and nonnegotiable notes, with particular emphasis on how each is transferred. Perhaps ironically, this means that the bulk of this article discusses negotiable notes as a point of reference, despite the fact that its ultimate focus is nonnegotiable notes. Part I of this article reviews the history of the definition of negotiability, and shows how our current understanding of negotiability came to be. Part II demonstrates how to tell the difference between negotiable and nonnegotiable notes, and why that difference is important. Part III discusses the meaning of “transfer” of a promissory note. Part IV examines specifically how the right to enforce nonnegotiable notes can be transferred under present law, and considers whether changes are needed. Finally, this article concludes with a brief description of a proposed national mortgage registry that has the potential to make transfers of both negotiable and nonnegotiable mortgage notes far more efficient without disrupting the current legal regime.

This article is a good resource not only with respect to the legal requirements for transferring nonnegotiable notes, but also for:

1. The history and background of the Holder in Due Course doctrine.
2. How to identify whether a note is negotiable (including Fannie/Freddie forms and notes secured by FHA and VA mortgages)
3. How negotiable notes (and the mortgages securing them) must be transferred
4. The impact of UCC Article 9 on transfers of both negotiable and nonnegotiable notes.

To me,  a very interesting and important part of the piece,  particularly the part that deals with the current applicability of the Holder In Due Course doctrine to mortgage loan transferees.  Professor Whitman articulates why this doctrine should not apply to mortgage notes, and I wholeheartedly agree.  For one thing, in a typical mortgage transaction, loan buyers are expected to conduct due diligence with respect to the quality of the credit and collateral behind the mortgage loan.  The secondary market players, of course, want the holder-in-due-course doctrine to apply, because it allows for incompetent underwriting by their industry and insulates them to some extent from illegal practices of mortgage originators.  Professor Whitman makes the compelling economic and political argument that the Holder In Due Course doctrine should not continue to apply to mortgage notes. He writes:

If the holder in due course doctrine was abrogated, and secondary market investors were forced to bear the risk of fraudulent conduct by their originators, their costs would doubtlessly rise, either to screen out the “bad apples,” or to suffer the financial losses engendered by the originators’ bad behavior.  If the private securitization industry, which has been virtually shut down since mid-2007, manages to arise again, its economics could be significantly affected by loss of the protection it has hither-to received from the holder in due course doctrine.

Nonetheless, sound economic policy strongly favors repeal or drastic modification of holder in due course. The reason hinges on the relative availability of information about the propensity of particular loan originators to engage in bad conduct. Consumer borrowers, who enter the mortgage market only at infrequent intervals and who typically have only a limited and unsophisticated understanding of its operations, have virtually no factual basis for identifying and avoiding originators who are apt to engage in fraud, and they cannot gain this sort of information at any reasonable cost. Secondary market investors (including securitizers), on the other hand, participate in the market on an ongoing or regular basis, and commonly buy loans by the thousands. Their costs in identifying and policing bad actors, when spread over a large number of loans, are likely to be quite modest. As a matter of sound economics, it is obviously more efficient to impose these risks on the parties who can best identify and avoid them. As a lawyer and an economist from the Federal Reserve Bank of Cleveland put it, if the holder in due course rule were abandoned, we could expect the following result: "By forcing the market to internalize the cost of consumer compliance and spread it across all consumers, the market’s ability to adjust costs [would be] aligned with the incentive to minimize costs that result from a competitive marketplace.” In the absence of assignee liability, these incentives are not aligned. The holder in due course rule artificially lowers the cost of consumer compliance to the market, eliminating the incentive to minimize those costs through competition. Consumers, then, bear the risk of unlawful origination practices, but lack the ability to price them into credit.

These problems arise in the context of residential mortgage loans because of the assumption by courts that mortgage notes on Fannie and Freddie forms (and FHA and VA insured notes) are negotiable.  Although standard form use does not negotiability make, Professor Whitman admits that it is likely that the Fannie/Freddie forms will continue to be seen as negotiable by courts.  The same need not be true, says Whitman, for commercial mortgage notes.

Enforcement rights with respect to negotiable notes generally requires possession of the note, but transfer of nonnegotiable notes is subject to different rules.  There is a concept under UCC Article 3 of a non-owner of the note who can enforce it - the PETE (person entitled to enforce the note).  UCC 3's PETE status is applicable only to negotiable instruments, however.  Therefore, if a note is not negotiable, enforceability by a non-owner turns on principles of the common law as well as UCC Article 9.  Note ownership is based on the principle of "follow the money and see where it goes."  And although that is an interesting question in some contexts, it is irrelevant to the question of who is entitled to collect payments, enforce the obligation, and negotiate a modification with a borrower.  In modern loan securitization parlance, the servicer should be entitled to enforce the note, even though the servicer is not the owner (the owner, of course, is the beneficiary - the entity that owns the securitized pool of mortgages).   

Among the many prior articles that Professor Whitman has written on the broader subject of mortgage loan transfer and enforcement, see:

• Dale A. Whitman, How Negotiability Has Fouled up the Secondary Mortgage Market, and What To Do About It, 37 PEPP. L. REV. 737 (2010).

• Dale Whitman, “THE PERSON ENTITLED TO ENFORCE:” LESSONS LEARNED FROM BAC HOME LOANS SERVICING V. KOLENICH, ABA REAL PROP. NEWS, Dec. 2012.   

• Dale A. Whitman & Drew Milner, Foreclosing on Nothing: The Curious Problem of the Deed of Trust Foreclosure Without Entitlement to Enforce the Note, .66 ARK. L. REV. 21 (2013).

• Dale A. Whitman, What We Have Learned from the Mortgage Crisis About Transferring Mortgage Loans, 49 REAL PROP. TR. & EST. L.J. 1 (2014). 

 

IP for Characters & Symbols: IPSC 2016

IPSC 2016 Breakout Session I: IP for Characters and Symbols

I summarize the following presentations, and the discussions about them, below the fold. If I didn't know an audience participant, I didn't include a name, but if you are an anonymous commenter,  tell us who you are in the comments.

Is Copyright an Author’s Right? An Authorship Perspective on Copyright Law – Mira Sundara Rajan

Works of Fiction: The Misconception of Literary Characters as Copyright Works – Jani McCutcheon

Zombie Cinderella and the Undead Public Domain – Rebecca Curtin

Trademarks, Core Values and Cultural Leadership – Deborah Gerhardt

Intellectual Property in Internet Folklore – Cathay Smith

Mira Sundara Rajan, Is Copyright an Author's Right? An Authorship Perspective on Copyright Law

Copyright is arguably the only regime designed to promote culture, and that should mean providing income to creators. But many authors struggle to make a legitimate income. Mira is concerned that copyright isn't correctly calibrated to that end. At a minimum, authors need more voice.

Lisa Ramsey asks whether Mira plans to frame this as a human right or some other way.

Mira: International law mentions a moral right of authors as a form of human rights. But the Berne treaty may effectively embody human rights in automatic protection at creation.

LRamsey: But then might the human right to copyright conflict with a human right to free speech? And if corporations hold copyright, is it proper to think about copyright as a human right?

Shyam Balganesh: There are two ways to look at copyright - looking at authors rights, and looking at the acts that authors take. You propose that the net income of authors is low, but it's not clear that copyright is the right mechanism to enhance their welfare. Perhaps authorship is the better focus than authors.

Mira: Japan grants to corporations something that looks like a human right in authorship functions, and Japan is an outlier here.

 

Jani McCutcheon, Works of Fiction: The Misconception of Literary Characters as Copyright Works

Fictional characters qualify as protectable copyright works in large part because of a problematic Learned Hand opinion, Nichols v. Universal Pictures Corp.  But to protect characters as works, they must be identifiable. But where is the character perceived? You can't excise the character from the text, and characters are more abstraction than expression. If we are separating characters out as works, is there a right and a wrong way to read or construct the character. If not, it may be impossible to define the character as a protectable work. Characters traverse different media, which further complicates the question.

Deborah Gerhardt: Copyright has so many tests for the same thing. I love clear rules, I love the Feist opinion because it is clear. I'm resistant to your analysis because it gives us an entirely different originality test for characters than anything else.

Jani: I'm not sure we should be looking for a way to define the character, and I wouldn't apply the test to characters at all.

Betsy Rosenblatt: I'm quite sympathetic to the project, but I'll ask a question I've been asked. Why isn't this a problem for all of copyright? Reader response theory suggests all interaction with copyrighted works is dialogic. If so, this is a universal problem for copyrighted works. Perhaps this is similar to [Guy Rub and Margot Kaminski's] zoom-in, zoom-0ut problem.

Jani: This may be a broader phenomenon.

Lisa Ramsey: This reminds me of Betsy's work on Sherlock Holmes. But I'm conflicted. Some characters are well-delineated. If I add Harry Potter to my law school novel, is there any infringement? Of what?

Jami: What do we mean by take Harry Potter? Under my analysis, if little of the expression has been taken, and there is little / no substantial similarity between the works, there is no infringement. Admittedly, the name is potent, but because of trademark significance. 

Inayat Chaudhry: What if there are characters like Calvin & Hobbes, and the whole work is based on the characters?

Jami: This is a hybrid work, with visual and literary components, which complicates the analysis. 

Seagull Haiyan Song: I agree the current test doesn't work. But if copyright protection isn't the right solution, should there be something else? Protection of character rights as such?

 

Rebecca Curtin, Zombie Cinderella and the Undead Public Domain

[Is this the best title of the conference?]

Someone tried to register "Zombie Cinderella" as a mark for a doll. There was an initial refusal grounded in confusion with Disney's Cinderella. The Trademark Trial & Appeal Board reversed the refusal, holding the "Cinderella" part of Disney's mark was a conceptually weak indicator, in part b/c of third party dolls on the market, and in part b/c of long history of the Cinderella story.

The danger here is that the signal sent is that Disney should have worked harder to protect the mark. And we see protectable marks for Cinderella soap, cosmetics, etc., and that doesn't seem problematic in the same way. Is Cinderella generic for dolls? That doesn't seem quite right, and genericism doesn't fully animate what the public domain story lends to the underlying good.

Instead, I'm thinking in terms of extending the aesthetic functionality doctrine to cultural elements. Trademark needs a doctrine to deal with the use of fairy tale princesses as trademarks or brands.

Betsy: Aesthetic functionality is what Tyler Ochoa suggested to me instead of genericism as the solution to the Sherlock Holmes problem. I want to make a push for genericism (I'm glad you didn't go to descriptive). You are right - it's not descriptive for dolls, but it is the generic descriptor for the character. You can't call Sherlock anything other than Sherlock, and you can't call Cinderella anything other than Cinderella. We use nominative fair use to deal with it on the infringement side, but we should have to. Here, the term Cinderella is generic for what the product represents. AF is a poor fit: oxymoronic, and it seems to ask whether we buy something because it is pretty / attractive.

Deborah Gerhardt: Perhaps we need a public domain for characters like these.

Ann Bartow: Is this like copyright title, where you don't get protection in titles? [Jake: trademark handles title differently, for books - no protection for a single book, but protection for a series of books (Harry Potter & ___) or magazines.

Ed Lee: I would prefer a more full-throated defense of the public domain created by the copyrighted work aspect. You could try to recapture a trademark public domain - what's the proper boundary of a copyrighted [cultural?] character in the public domain. [JL: Is this then a Dastar problem - no trademark protection because the character as cultural artifact in doll context belongs in the copyright bucket, and protection has expired?]

Laura Heymann: You may benefit from disaggregating the individual aspects of Cinderella and her characteristics. United used Rhapsody in Blue - the fact that it's in the public domain doesn't necessarily mean it cannot have some trademark function, so more careful pulling apart may be valuable.

 

Deborah Gerhardt, Trademarks, Core Values and Cultural Leadership

A trademark may represent core values around which a community can coalesce. When you look at a brand community, what values does it have? Is the communal identity potential harmed by dilution, for example?

For example, brands are now pressured to make a stand on cultural issues. Target, for example, acted to restrict open gun carry in its stores. Here the brand is used as a tool for political reform. PayPal refused to bring in a business center in direct response to North Carolina's HB 2.

To have a mark strong enough to support a dilution claim, perhaps some identifiable core value is the minimum. If so, dilution harm is a disruption between the core value and the ostensibly diluting use. Goldfish crackers with marijuana - there may be disruption between core values and the brand. Louis Vuitton parody toy handbags? No disruption of the core value, merely playing with the core value. [JL: If that's right, is this anything more than a parody non-parody analysis? Not clear to me.]

Andrew Gilden: Does your "core values" require a popular political stance, or cultural buy in? If the majority turns in favor of equality, is this really a "core" value.

Deborah: Imagine that someone else had interfered with Ashley Madison's ability to signal its core value of secrecy and discretion. That might be a core value that the majority of Americans doesn't "value," but it at the core of Ashley Madison's brand identity.

Andrew: What if Christian Mingle tried to adopt an abandoned Ashley Madison brand.

Deborah: Sometimes core values are forged in crisis.

Seagull: Core values, under your definition, seem like they must be shifting.

Laura Heymann: Do you need to distinguish between value and core attribute?

 

Cathay Smith - Intellectual Property in Internet Folklore

Are there protectable rights in internet folklore? My project looks at the evolution of Slenderman, his propertization, and the coming movie, to investigate this question, and ask who is benefitted and harmed.

The character first showed up on the Something Awful website, in an image posted by Victor Surge.  At first, people posted their own "sightings" of Slenderman without claiming any ownership of the character. But as the character has become more popular, parties have begun claiming ownership rights. At least two short films posted online were taken down after receiving a takedown notice. But the provenance of the ownership is uncertain. The claims lead to a chilling effect.

Is there ownership in Slenderman? Cathay argues no - Slenderman as we understand him wasn't fully developed with the first Victor Surge posts, but collectively as he became popular. She also argues factual estoppel - if the author(s) claim Slenderman is a real person and posted sightings are factual, then copyright claims might be estopped. Rights in the name of the title / name are also weak, under Rogers v. Grimaldi.

Normatively, property rights seem unjust. The Hollywood blockbuster isn't giving back to the community. This is also a nice example of chilling effects. In addition, propertization runs counter to community norms and ethos.

Ed Lee: Copyright might be a bad fit. Perhaps attribution, as a sui generis right, should be respected.

Cathay: Do you mean giving rights to the community, or preventing propertization of something created by the community.

Ed Lee: There are a range of options. I mean something more unleashed / free than standard property rights.

Lisa Ramsey: This reminds me of the orphan works problem - who is the owner? There are also joint works problems. So under current copyright doctrine, if people are fixing individual images, those seem independently protectable. Are the derivative works, derived from what version of the character, and if so, can you get protection in them? 

Q: Is this character just a standard bogeyman? How much of this is really new? [Lisa Ramsey: Scenes-a-faire]

Seagull: Might we get something from creative commons analysis.

Q: Other commons uses of musical communities might also be valuable to consider.

A Failure in the Market for Altruism

Earlier this month it came out that Whole Foods had been systematically overcharging for pre-packaged food, at least in New York. And that wasn’t the first time. Back in 2012, an investigation led by city attorneys in California also uncovered overcharging and Whole Foods ended up paying $800,000 in penalties in addition to starting a new internal compliance program to ensure it didn’t happen again. The company’s recent issues also rekindled criticism (originally raised back in 2014) that some of its fancy cheeses are the product of prison labor, though that fact is not disclosed to consumers.

At least in response to the pricing issue, the CEOs issued a video “apology,” stating that “straight up they made some mistakes” but those mistakes were unintentional, evinced by the fact that, “the mistakes are both in the customers’ favor and sometimes not in the customer’s favor.” And they were going to fix it first and foremost by giving workers more training and hiring a third-party auditor to make sure their practices are improving.

At first I found all this frustrating. The New York Department of Consumer Affairs did not find just pricing mistakes, where about half were under-charged and the other over. No, it found, as best as I can tell, systematic overcharging. So the CEOs reasoning for why customers should believe it wasn’t intentional is, at least without some actual evidence, misleading. And moreover, given that, the chances that the pricing issue was a result of employees lacking proper training strikes me as improbable. The stores seem to have had a policy of not weighing their pre-packaged products. That’s not a training issue at all. So in short, the whole thing smelled bad.

But there’s another question here. Whole Foods isn’t just any company. Its CEO, John Mackey, literally wrote the book “Conscious Capitalism.” (For those with shorter attention spans, he also wrote a HBR article on the same). The whole idea is that Whole Foods and others like it are “galvanized by higher purposes that serve, align and integrate the interests of all their major stakeholders … They endeavor to create financial, intellectual, social, cultural, emotional, spiritual, physical and ecological wealth for all their stakeholders” where the ultimate goal is to “create lasting value as the world evolves to even greater levels of prosperity, helping billions of people flourish and lead lives infused with passion, purpose, love and creativity – a world of freedom, harmony, prosperity, and compassion.”

Given all these moral platitudes (platitudes, to be clear, at least some customers buy into), shouldn’t Whole Foods be held to a higher standard? And if they are not – if between the prison labor and pricing issues not a single customer changed their purchasing habits, what are we to think about the possibility of consumer activism (seen through buying things that are fair trade or union made or sustainably sourced or green or from a “clean” supply chain, etc.) as a means to making the world better in any real sense?

In short: what are people who are trying to buy not just a product but a product made in conformity with other moral commitments doing? Are they paying more money simply so they feel the warm glow of being a do-gooder, irrespective of whether they actually are doing good? Or are they attempting to manifest in their purchasing decisions a commitment to substantive moral ends?

Consumer activism has unquestionably been a part of American history for quite some time. Quaker abolitionists promoted the buying of slavery-free cotton. I’m reading a great book right now about consumer organizing during the Seattle labor movement of 1919. This stuff can be real. But is it today? And if it’s not, how might we correct that market failure? Should we?  

The Art of Lawyering and Beyond

Praveen Kosuri (left), the director of Penn Law School's entrepreneurship clinic, has a neat new piece, Beyond Gilson: The Art of Business Lawyering.  Here's the abstract:

Thirty years ago, Ronald Gilson asked the question, “what do business lawyers really do?” Since that time legal scholars have continued to grapple with that question and the implicit question of how business lawyers add value to their clients. This article revisits the question again but with a more expansive perspective on the role of business lawyer and what constitutes value to clients. Gilson put forth the theory of business lawyers as transaction cost engineers. Years later, Karl Okamoto introduced the concept of deal lawyer as reputational intermediary. Steven Schwarcz attempted to isolate the role of business lawyer from other advisors and concluded the only value lawyers added was as regulatory cost managers. All of these conceptions of business lawyering focused too narrowly on the technical skills employed, and none captured the skill set or essence of the truly great business lawyer. In this article, I put forth a more fully developed conception of business lawyer that highlights skills that differentiate great business lawyers from the merely average. I then discuss whether these skills can be taught in law schools and how a tiered curriculum might be designed to better educate future business lawyers.

What Professor Kosuri captures is that it’s a complex world out there, and trying to distill the essence of business lawyering through one particular science (rather than art) is going to be radically incomplete.

Nevertheless, his approach continues in an analytic tradition of identifying characteristics from the outside, and suggesting essentially that others, for want of a better word, mimic those characteristics. My view ups the stakes even more, because I think being a great business lawyer is not only beyond the acquisition of technical skills, it’s also beyond the acquisition of art. Stated more plainly, to learn the art, to acquire the characteristics Professor Kosuri describes, you have to want them first.

Which raises the question of teachability. I’m pretty sure we instill this affect, this emotional predisposition, more through our modeling of behavior than we do by way of teaching through our words.  There's been a lot of discussion of Atticus Finch in the last few weeks, and who knows how many people Harper Lee inspired to be lawyers through To Kill a Mockingbird (and, hence, the downer of finding out that he may not have been as godlike as previously thought). I confess that I have never read To Kill a Mockingbird, and have only seen parts of the movie. My lawyer hero was Henry Drummond from Inherit the Wind, the fictionalized Clarence Darrow, and his cross-examination (taken in large part from the Scopes trial transcripts) of Matthew Brady, the fictionalized William Jennings Bryan, was the apotheosis of lawyering.

Well, you grow up and it turns out that making a living as a litigator in, say, 1979 or 1985 isn't (for most of us) like trying the Scopes case. But that doesn't diminish the impact of "be like" as the source of one's desire to learn a particular way of practicing one's craft.

And isn't the hardest place either to teach or model "be like" from behind a podium in a lecture hall?

A Human Right to Intellectual Property?

The merger between trade and intellectual property, referred to as “strange bedfellows” in the 1990’s, has become the norm as a result of the WTO Agreement on Trade-related Intellectual Property Rights, and subsequent agreements. Intellectual property and human rights may seem like strange bedfellows as well. However, there is a greater connection between these two areas of law than one might imagine.

Article 27(2) of the Universal Declaration of Human Rights (UDHR) provides that “everyone has the right to the protection of the moral and material interests resulting from any scientific, literary or artistic production of which he is the author.” The International Covenant on Economic, Social, and Cultural Rights contains similar language. A number of scholars have considered the relationship between human rights instruments and intellectual property rights (i.e. Helfer, Yu, Shaver, Land, Chapman, Carpenter, and others). Some (Chapman, for instance) have suggested that this UDHR provision provides a basis for a human right to copyright or patent protection.

Writing on corporations and the possible human right to intellectual property, I found myself reluctant to accept the notion of a right to intellectual property as a human right. I like the idea of considering the impact of intellectual property rights on human rights, as has been done in the access to medicines debate, for instance. However, I am generally uncomfortable with the notion of a human right to intellectual property. Equating the UDHR human right to a right to copyright or patent protection raises a number of issues, and I doubt that it is ultimately a good idea. However, I am willing to be convinced otherwise. 

Diversifying Startup Funding Sources

As someone interested in the growth of new ideas and innovation, I'm very interested in the financial infrastructure required to undertake creative activity. Although there is a high level of disagreement about the appropriate legal incentives needed to create new medicines, new technologies, new films and works of art, at a certain point there can be little dispute that time, resources, and dollars are required to create and ultimately bring products to market. Indeed, some work in the economics field has considered that the U.S.'s venture capital funding system has been a major factor to this country's ability to develop groundbreaking solutions. All puns aside about Snoop Dogg's recent decision to provide seed funding for weed startups (sorry! someone had to say it), there appears to be no limit to the types of funding sources.

For example, there has been a spate of recent press about mutual funds who are quietly beginning to provide startup funding in exchange for private stock. According to The New York Times, the growth potential of startups has attracted funding from more conservative sectors who are attracted by success of companies with high valuations including Uber, Airbnb, and Pintrest. Of course, there are limitations on the level of risk that these funds will tolerate. Balance is everything--according to the piece, "Fidelity’s Uber stock, for example, represents less than 1 percent of each fund’s total holdings."

I cannot help but wonder at the role that these funds will play to the overall management and direction of startups. Innovation isn't all about the money. Some of the value that many venture capitalists provide includes making introductions, advising, pointing out potential pitfalls and professionalizing operations. It isn't clear from the press whether mutual funds are providing these same benefits, although it may exist. Moreover, it may be that the mutual funds'  decision to invest in more mature startups will alleviate this issue. 

Nonetheless, in my view it is a very positive development to see more dollars moving toward the creation of new businesses. I am hopeful that some of this work will result in more invention, research, innovation and all of the benefits that those things can provide.

The Sweet Briar Legal Challenge

The alumnae group Saving Sweet Briar has hired the law firm of Troutman Sanders LLP to represent the group in its attempt to oust the current board and prevent the school's closure. The law firm sent a letter to the board's counsel outlining its legal position. Its first argument makes a breach-of-fiduciary-duty claim, asserting that "[a]s directors of a non-stock corporation, your clients [that is, the board members] are required to promote the College’s best interests, and your clients have good faith duties of care, loyalty, and obedience toward the College."

As I said before, however, I don't know that the Board's fiduciary duty in fact runs to the institution--I think the duty runs more broadly to the institution's mission. In good times, those duties would be congruent; in less good times, however, the two may conflict. What if, as some have posited, Sweet Briar could be saved by going co-ed? Or by lowering academic credentials? I'm not sure how well the school's mission is defined; it was explicitly founded to educate women, and perhaps less explicitly, founded to educate women from a relatively elite social class. (Perhaps not so much less explicitly--social class seems to come up often in discussions of the college's past and present, and a recent New York Times article points out that "both Mr. Jones [the interim president] and Paul Rice, the board chairman, said Sweet Briar’s rich-girl days were long gone").

Changing that mission might be a good idea, but the challenge raised by the letter isn't a question of what policy would be best--it was explicitly stated as a legal question, and I think it is an interesting one. Brad, a commenter to my prior post, pointed out that the March of Dimes changed its mission from polio eradication to the prevention of birth defects once polio was eradicated. From a legal perspective, I think that such mission changes probably fit within a reasonable cy pres distribution of charitable assets. The Sweet Briar board, like the March of Dimes, would likely have been on strong legal footing if it had modified its mission to become sustainable. But, as Brad points out, the harder question is does it have to?

It appears to me that Saving Sweet Briar is arguing that the board in fact had a duty to sustain the organization--even if doing so meant modifying the school's mission. To be fair, this is not stated explicitly in the letter, and the letter also raises other issues of financial secrecy and lack of decision-making transparency. But some of the language, I think, hints that the group thinks the Board should have considered mission-changing options like going co-ed; it mentions a failure to "consider other methods of meeting the College’s needs" and a "failure to explore all possible options." The group's FAQ page is explicit that its focus is keeping the college open:  (Q: "What are your plans to turn the college around?" A: "At this time, we are focused on halting the school’s closure and keeping the college open."). 

I'm interested to see how these arguments develop. I do fear, though, that the cost of litigating those arguments might very well consume so much of the remaining resources that there is not enough money left either to soften the transition of closure or to restore the school to sustainability.

Sutter Health vs. Blue Shield: War of the Gargantuas

When I think about calls for increased consumer activation in  health insurance selection, I think about how much I like the ideas of increased health insurance literacy, price transparency, and the promotion of competition in health care markets. 

But when I see consumers whipsawed as with the current War of the Gargantuas taking place in Northern California, I wonder if consumer activation alone will save us.

In order to have been a savvy purchaser of health insurance  through California's Exchange (or, even, outside the exchange through this fall's most recent open enrollment period for commercial insurance), you would also have to have known something about the the health insurance and health care services contracting world. Can we reasonably expect consumers to master this, to ferret out what they really need to know?

Most Northern California employers have a fall open enrollment period. Covered California's open enrollment for 2015 runs from November 15, 2014 to February 15, 2015.

Here's what your employer (or exchange) surely didn't tell health insurance shoppers  in Northern California this past fall:

1. Blue Shield of California is a huge insurance company, with about three million covered lives in Califonria. 

2. Sutter Health is a huge health care provider with, for example, over 4300 licensed acute care beds in California. 

3. They bargain fiercely right through and past the open enrollment deadline over the next year's contract rates. 

4. Even a behemoth such as Blue Shield of California has, historically, been unable to bring Sutter to heel. Sutter's tremendous market power in Sacramento and the Bay Area is one of the drivers of high health care costs in those areas.  

4. Decisions that are made after the close of your open enrollment period -- such as their contractual terms or, as announced this year, their decision  to maybe not  contract at all, may be  announced once  open enrollment is closed or very near to its closure.

5. The decision by a major provider to exit an established health plan after the close of the open enrollment period is apparently not deemed a qualifying life event allowing for special enrollment under Covered California.  California's largest employers have been conspicuously silent on whether such an announcment is a qualifying event for out of open enrollment insurance plan change.

So the chat boards are lighting up.  Can it be that a change in a health plan's coverage options in a highly concentrated market  such as Sacramento or the East Bay is not a a trigger for special enrollment rights ?   You mean you didn't know all this already?

Watch out where Gargantua steps.

SEALS

Think about proposing programming for the annual meeting, or participating in a junior scholars workshop. And if you are ever interested in serving on a committee, let Russ Weaver (the executive director) know. The appointments usually happen in the summer, but he keeps track of volunteers all year long.

The Washington Redskins, the Lanham Act, and Article III

As the Associated Press reported yesterday, the five Native Americans who prevailed earlier this year before the U.S. Trademark Trial and Appeal Board (TTAB) in their effort to have the Washington Redskins' trademarks cancelled have now moved to dismiss the lawsuit that the Redskins ("Pro-Football, Inc.") filed against them in the U.S. District Court for the Eastern District of Virginia under the Lanham Act, 15 U.S.C. § 1071(b)(4). As I endeavor to explain in the post that follows, it certainly appears that their motion should be granted--and the Redskins' lawsuit dismissed either because the Lanham Act doesn't actually authorize such a suit, or, insofar as it does, it trascends Article III's case-or-controversy requirement in this case.

I.  The Lanham Act's Cause of Action for "Adverse" Parties

In their Complaint in Pro-Football, Inc. v. Blackhorse, the Redskins explained that they were seeking:

an Order of this Court: (1) reversing the TTAB Order scheduling the cancellation ofthe Redskins Marks; (2) declaring that the word "Redskins" or derivations thereof contained in the Redskins Marks, as identifiers ofthe Washington, D.C. professional football team, do not consist of or comprise matter that may disparage Native Americans; (3) declaring that Section 2(a) of the Lanham Act, 15 U.S.C. § 1052(a),is unconstitutional, both on its face and as applied to Pro-Football by the TTAB, under the First Amendment of the U.S. Constitution, and is void for vagueness; (4) declaring that the TTAB Order violates Pro-Football's rights under the Fifth Amendment of the U.S. Constitution; and (5) declaring that Defendants' petition for cancellation in the TTAB challenging the Redskins Marks under Section 2(a) was barred at the time it was brought by the doctrine of laches.

But whereas the Redskins' Complaint routinely describes their lawsuit as an "appeal" of the decision by the TTAB (where it wouldn't be that weird to have the complaining party before the TTAB--the Blackhorse defendants--as the putative appellees), the Lanham Act actually authorizes something else altogether--a standalone, new civil action against an "adverse party" so long as that party was "the party in interest as shown by the records of the United States Patent and Trademark Office at the time of the decision complained of." The problem with application of that provision here, as the motion to dismiss quite persuasively explains, is that it's not at all clear how the defendants here are "the party in interest," at least in light of the specific nature of the Redskins' challenge:

Ordinarily, the adverse parties in an opposition or cancellation proceeding before the TTAB are two businesses claiming rights to the same or similar trademarks. Thus, when a party dissatisfied with a decision of the TTAB brings actions under 15 U.S.C. § 1071(b)(4), it is usually involved in a dispute with a business that uses a similar trademark, with the parties often joining claims for trademark infringement, unfair competition and other causes of action.

Here in contrast, there's no such relationship, and "PFI does not allege any wrongdoing on the part of the Blackhorse Defendants. PFI does not allege that they breached a contract, committed a tort, or violated any law. Instead, PFI’s allegations are directed solely against the USPTO and PFI seeks relief only against the USPTO." In effect, the Redskins' claim is that the TTAB wrongly cancelled their trademarks--which, for better or worse, has rather little to do at this point with the complainants who initiated the cancellation proceedings in the first place. Thus, it certainly appears as if 15 U.S.C. § 1071(b)(4) does not in fact provide the Redskins with a cause of action against the Blackhorse defendants--and that the suit should be dismissed for failure to state a claim upon which relief can be granted.

II.  The Case-or-Controversy Requirement

But imagine, for a moment, that the Lanham Act does so provide--and that § 1071(b)(4) actually authorizes this suit. The motion to dismiss argues that, so construed, the Lanham Act would violate Article III's case-or-controversy requirement, and that seems right to me--albeit for slightly different reasons than those offered by the Blackhorse defendants.

The motion argues that "The Blackhorse Defendants’ legal and economic interests are not affected by the registration cancellations and they will not be affected by this litigation." But I think the case-or-controversy defect here goes to the Redskins' Article III standing. After all, it's black-letter law that a plaintiff must allege (1) a personal injury [“injury in fact”]; (2) that is fairly traceable to the defendant’s allegedly wrongful conduct [“causation”]; and (3) that is likely to be redressed by the requested relief [“redressability”]. Although the Redskins were clearly injured, it's not at all clear to me how the Redskins satisfy either the causation or redressability prongs.

On causation, as should be clear from the above recitation of the Redskins' claims, none of them even as alleged in the Complaint run against the Blackhorse defendants--who were the complaining parties before the TTAB. After all, even though they initiated the proceeding that produced the TTAB order the Redskins seek to challenge, they did not themselves issue that order, nor are they a competing business somehow reaping financial or noneconomic advantage from the deregistration of the Redskins' trademark.

As for redressability, neither the TTAB nor the Director of the U.S. Patent & Trademark Office are parties to the Redskins' suit, and so it is impossible to see how the relief the Redskins are seeking could be provided by the Blackhorse defendants. Again, one can imagine a different set of facts where the adverse party before the TTAB could have both (1) caused the plaintiff's injuries; and (2) be in a position to redress them, but I just don't see how either is true, here. It's certainly odd to think that the defect in this suit goes to the Redskins' standing--after all, if nothing else is clear, the Redskins are certainly injured by the TTAB's cancellation decision. But standing isn't just about the plaintiff being injured by a party nominally connected to the injury...

III.  The Equities

Finally, although the motion to dismiss doesn't make this point, there's an equitable point here that I think deserves mention. Whatever the merits of the TTAB's underlying ruling, I have to think that the Lanham Act was not designed to disincentive individuals like the Blackhorse defendants from bringing non-frivolous claims seeking the cancellation of registered trademarks on the ground that they are disparaging. But if the Redskins are right, here, then any party that pursues such a proceeding before the TTAB is necessarily opening itself up to the (rather substantial) costs of a new federal civil action if it prevails, even when the subject-matter of the suit is simply an effort to relitigate the TTAB's underlying cancellation decision. (All the more so because the standard of review in the new lawsuit is de novo, with full discovery.)

Such a result strikes me not only as unwise, but as not possibly being what Congress could have intended when it enacted § 1071(b)(4). Indeed, in many ways, the Redskins' claims sure seem analogous to a SLAPP suit--all the more so when you consider that the Redskins could have, but did not, directly appeal the TTAB ruling to the Federal Circuit.

Call for Papers: AALS Program of the Business Associations Section

You may have seen this elsewhere on the web, or on the listserv, but if not -- you have until Friday!  You can submit a paper or an abstract.

 

CFP: AALS Program of the Business Associations Section

AALS Program of the Business Associations Section

The Future of the Corporate Board

AALS Annual Meeting, January 4, 2015

 

The AALS Section on Business Associations is pleased to announce that it is sponsoring a Call for Papers for its program on Sunday, January 4^th at the AALS 2015 Annual Meeting in Washington, DC. 

The topic of the program and call for papers is “The Future of the Corporate Board.” 

How will boards adapt to recent changes and challenges in the business, legal, and social environment in which corporations operate?  The recent global financial crisis and the continuing need for many corporations to compete internationally mean that today’s boards face economic pressures that their predecessors did not.  This pressure is heightened by the rise of activist investors, many of whom aggressively push for changes to corporate management and governance. On the legal front, new regulations, such as Dodd-Frank, impose heightened compliance and other burdens on many companies and boards.  And on the social front, pressures for socially responsible corporate behavior and greater racial and gender diversity on boards continues.  Our program seeks to examine the ways in which boards have, and will in the future, respond to these challenges.    

Form and length of submission

Eligible law faculty are invited to submit manuscripts or abstracts that address any of the foregoing topics. Abstracts should be comprehensive enough to allow the review committee to meaningfully evaluate the aims and likely content of papers they propose. Papers may be accepted for publication but must not be published prior to the Annual Meeting.  Untenured faculty members are particularly encouraged to submit manuscripts or abstracts.  

The initial review of the papers will be blind.  Accordingly the author should submit a cover letter with the paper.  However, the paper itself, including the title page and footnotes must not contain any references identifying the author or the author’s school.  The submitting author is responsible for taking any steps necessary to redact self-identifying text or footnotes. 

Deadline and submission method

To be considered, papers must be submitted electronically to Kim Krawiec at [email protected].  The deadline for submission is SEPTEMBER 12, 2014. 

Papers will be selected after review by members of the section’s Executive Committee.  The authors of the selected papers will be notified by September 28, 2014. 

The Call for Paper participants will be responsible for paying their annual meeting registration fee and travel expenses.

Eligibility

Full-time faculty members of AALS member law schools are eligible to submit papers.  The following are ineligible to submit: foreign, visiting (without a full-time position at an AALS member law school) and adjunct faculty members, graduate students, fellows, non-law school faculty, and faculty at fee-paid non-member schools. Papers co-authored with a person ineligible to submit on their own may be submitted by the eligible co-author.

Please forward this Call for Papers to any eligible faculty who might be interested.

Two (more) op-eds on Hobby Lobby

Ann Lipton has nicely captured the zeitgeist with the notion that "there is something of an obligation for all corporate law bloggers to weigh in on Hobby Lobby."  Today, for example, the Conglomerate is starting up on its second Hobby Lobby symposium.  So it is with some trepidation that I highlight for you two additional pieces on that speak to this case once again.  First, Brett McDonnell defends the decision from a progressive perspective in "Ideological Blind Spots: The Left on Hobby Lobby," appearing in the Minneapolis Star-Tribune.  Brett argues that the decision provides space for corporations to have goals outside of shareholder wealth maximization -- something that liberals have promoted in the corporate social responsibility context.  The op-ed also recounts the history of RFRA, which overturned Justice Scalia's Smith opinion, and points out that progressives have traditionally been defenders of religious liberty and toleration.  The op-ed has (at this point in time) 716 comments, which kind of puts us blawgs to shame.

Second, Grant Hayden and I have penned "Who Controls Corporate Culture?", which appears this morning in the St. Louis Post-Dispatch.  Although not written with this intention, it is actually a nice complement/rejoinder to Brett's piece.  It argues that folks are riled up about Hobby Lobby in part because the company's 13,000 employees had no role in making the decision.  If corporations are going to be according political and religious rights, we argue, the employees need a voice in choosing how to exercise them, particularly when the primary impact is on employees.

Halliburton and the State of the Efficient Capital Markets Hypothesis

Very interesting set of opinions in Halliburton v. Erica P. John Fund, Inc.  The continuing vitality of the efficient capital markets hypothesis is one of the big issues in the case, and there are numerous cites to law profs, including the law professors' amicus brief and articles by Lynn Stout, Don Langevoort, and James Cox, among others.  Both big opinions cite to Lev and de Villiers.  A very interesting example of when theory has a big role to play in doctrine. 

From Chief Justice Roberts's majority opinion:

Even though the efficient capital markets hypothesis may have“garnered substantial criticism since Basic,” post, at 6 (THOMAS, J., concurring in judgment), Halliburton has not identified the kind of fundamental shift in economic theory that could justify overruling a precedent on the ground that it misunderstood, or has since been overtaken by, economic realities.

From Justice Thomas's concurrence in judgment:

The Court’s first assumption was that “most publicly available information”—including public misstatements—“is reflected in [the] market price” of a security.  [Basic, 485 U.S.] at 247. The Court grounded that assumption in “empirical studies” testing a then-nascent economic theory known as the efficient capital markets hypothesis. Id., at 246–247. Specifically, the Court relied upon the “semi-strong” version of that theory, which posits that the average investor cannot earn above-market returns (i.e., “beat the market”) in an efficient market by trading on the basis of publicly available information. See, e.g., Stout, The Mechanisms of Market Inefficiency: An Introduction to the New Finance, 28 J. Corp. L. 635, 640, and n. 24 (2003) (citing Fama, Efficient Capital Markets: A Review of Theory and Empirical Work, 25 J. Finance 383, 388 (1970)). The upshot of the hypothesis is that “the market price of shares traded on well-developed markets [will] reflec[t] all publicly available information, and, hence, any material misrepresentations.” Basic, supra, at 246. At the time of Basic, this version of the efficient capital markets hypothesis was “widely accepted.” See Dunbar & Heller, [Fraud on the Market Meets Behavioral Finance, 31 Del. J. Corporate L. 455, 463–464 (2006)].

This view of market efficiency has since lost its luster. See, e.g., Langevoort, Basic at Twenty: Rethinking Fraud on the Market, 2009 Wis. L. Rev. 151, 175 (“Doubts about the strength and pervasiveness of market efficiency are much greater today than they were in the mid-1980s”). . . .  

For further reading: interested folks might want to check out our book club for Justin Fox's The Myth of the Rational Market, which included the author, Lynn Stout, David Zaring, & Benjamin Means. 

Book club on "Making the Modern American Fiscal State"

Just wanted to provide a heads-up that on Tuesday, June 10, we'll be hosting a book club on Ajay Mehrotra's new book, "Making the Modern American Fiscal State: Law, Politics, and the Rise of Progressive Taxation, 1877-1929."  Joining us for the club will be:

• Reuven Avi-Yonah, University of Michigan Law School
• Steven Bank, UCLA School of Law
• Matthew Lindsay, University of Baltimore School of Law
• Susan Morse, University of Texas School of Law
• Julia Ott, The New School
• Nicholas Parrillo, Yale Law School

Hope you can join us.

Wrap-Up for Book Club on "Corporate Governance in the Common-Law World"

Many thanks to all our clubbers, particularly Christopher Bruner, for a terrific discussion on "Corporate Governance in the Common-Law World: The Political Foundations of Shareholder Power."  Here are the posts from the club:

• Introductory Post
• Sokol: Common Law Corporate Governance
• McDonnell: Corporate Governance and Shareholder Dispersion
• Gold: Common Law Corporate Governance and Legal Ambivalence
• Heminway: Uncommon Law: Social Welfare and Corporate Governance in the Common-Law World
• Bruner: Is the UK really more shareholder-centric than the US?
• McDonnell: The Timing of Corporate Law Developments: Two Questions
• Cioffi: Chris Bruner on Corporate Governance in the Common Law World-Is There a New Grand Bargain Underlying the Varieties of Liberalism? 
• Bruner: Corporate governance and social welfare policy -- what's the mechanism?
• Bodie: Bruner Book Club: The Relationship between the Corporation, Employees, and Social Welfare
• Bruner: Corporate governance and social welfare -- mapping the explanatory domain
• Bruner: Corporate governance and social welfare -- stability and change
• Cioffi: Bruner Book Club, continued: Mechanisms, Institutions, & (In)coherence

Many thanks to everyone for a great club.

Bruner Book Club: The Relationship between the Corporation, Employees, and Social Welfare

Many thanks to the participants in the club for a great set of responses.  I'm coming in late, and given my location here on the employment side of the corporate governance/social welfare axis, I'm going to focus on the social welfare variable in Christopher's equation.

Corporate Governance in a Common-Law World does a great service in expanding and deepening the debate over the nature of corporate governance.  Employees have been pretty much left out of the corporate-governance models in legal academia, going back at least to Easterbrook and Fischel, and perhaps as far as Berle and Means.  That has changed somewhat, recently: for example, Bruner aptly provides some nice attention to the Gourevitch and Shinn book, which (among others, including John Cioffi) brings employees into the traditional manager/shareholder corporate-governance duality.  But Bruner himself has gone a step further: he argues that corporate goverance policies are inextricably intertwined with employee-related social policies -- characterized in his book as "social welfare."  By drawing a connection between corporate law and labor and employment law, Bruner has expanded the scope of "the law of the firm," for lack of a better term, to include not just shareholders, boards, and top-level executives, but rather all the participants in the firm, especially employees.

However, there are three issues I would like to raise in this post for further consideration.  First, I want to question the definition of "social welfare" within Bruner's model.  There has been a lot of focus on the scope of the "corporate governance" variable in his analysis, and I think Brett rightly brings up the roles of shareholder suits and executive compensation.  But how about the social welfare side of the equation? I would have appreciated a greater effort by Bruner to develop his social welfare variable more rigorously, by explaining exactly what factors into it.  The book does this for corporate governance, using a series of charts to compare differences between the common-law countries as to specific policies.  However, his approach to social welfare is more anecdotal, and lumps in a rather large and somewhat amorphous set of policies.

To some extent, Bruner arguably simplifies "corporate governance" into takeover policy, and "social welfare" into unemployment protections.  The easy correlation is that the risk of job loss from mergers and acquisitions would be balanced by national health insurance, unemployment insurance, and job retraining programs. But while his work is clearly not limited to that dynamic, it is unclear how far out it expands, particularly with respect to social welfare.  He also relies on the work of the late, great David Charny, who set out a list of policies related to what he termed "the employee welfare state."  But Bruner does not extensively develop Charny's list.  He also focuses on the health care programs in the various countries, comparing the NHS in Britain (and similar systems in Australia and Canada) with the U.S.'s patchwork system of insurance and care.  But social welfare policy cannot be limited to health insurance, can it?  It would be interesting to see Bruner develop a sharper definition of this category in future work, with a more nuanced approach to subcategories.  Is all of "social welfare" correlated with corporate governance, or can we narrow it down to specific subcategories of employee protections?

I bring up the underdeveloped concept of social welfare especially since Bruner makes some very nice observations about the lack of nuance in existing comparative corporate governance models.  His criticisms of LLSV, for example, for failing to account for differences between common-law countries make a nice point about the importance of going beyond rather chunky categorizations.  But his social welfare category risks making the same mistake.  Just as a very particularized example, Sam Estreicher and Jeff Hirsch have recently challenged the notion that U.S. unjust dismissal law is much less employee-friendly than that of other developed countries.  And this challenge is on a particular aspect of social welfare policy that most commentators would have thought to be well-settled.  So I think we need a sharper definition of the social welfare category, and more nuanced comparisons within that definition, if social welfare is to be a meaningful variable in Bruner's equation.

Second, and perhaps a more interesting question from my perspective, is: what forces drove the societal balancing act into these two sets of policy spheres?  Why, in particular, did employees not demand more ownership of the enterprise, rather than simply pushing for beefed-up social welfare programs?  Social welfare policy seems like a second-best set of ameliorative efforts to address the lack of power that employees have within their own firms.  Labor law is the most direct "social welfare" effort to address that internal power imbalance.  However, that set of laws has been very careful calibrated to avoid any infringement upon the so-called "core of entrepreneurial control."  Labor law carves out a space for employee power, but that power falls outside the decision-making center of the firm.  It's not inevitable that employees must look to generate power outside of the firm, is it?  And if not, then why did employees and other members of society choose the social welfare policies at issue as their means of balancing out pro-shareholder corporate governance policies?  Bruner mentions two minor aspects of British company law that protect employees: statutory authority to consider shareholder interests and a statutory mechanism for providing payments to employees in the face of bankruptcy or closure.  But such protections are, in Bruner's words, still "fundamentally quite shareholder-centric" in their orientation (p. 158).  Why didn't or haven't employees pressed for more within corporate law?

Third, Bruner's model implicitly assumes that a pro-shareholder approach is necessarily an anti-stakeholder, particularly anti-employee, approach, at least to the extent that it needs to be balanced out by pro-employee social welfare policies.  However, some of the recent battles between shareholders and managers do not seem to fit this rubric.  Lucian Bebchuk, for example, is perhaps the scholar most associated with shareholder primacy, but he has been excoriated by business groups for being a tool of not only activist shareholders but also public-employee pension funds.  The late Larry Ribstein was deeply suspicious of pro-shareholder reforms such as proxy access and say-on-pay, as he believed they allowed unions to have an undue influence over corporate policy.  Bruner is careful in places to acknowledge that pro-shareholder is not necessarily conservative or liberal, but I think his model implicitly assumes that pro-shareholder is anti-employee.  To some extent, the efforts of union pension funds to increase shareholder rights seems to belie this notion.  Australia's superannuation program, discussed by Bruner, is another interesting example of how this contrast is breaking down in some places and spaces.

I have all these questions because Christopher has written such a provocative, original, and thoughtful study of the relationship between corporations, shareholders, employees, and society.  His contribution has significantly added to the extensive literature on these issues, and I'm sure that this book is just the beginning.

Uncommon Law: Social Welfare and Corporate Governance in the Common-Law World

 

Reports of the uniformity of corporate governance among common law jurisdictions are greatly exaggerated (at least when it comes to shareholder rights and security, anyway).  This is an essential descriptive thesis of Chris Bruner's Corporate Governance in the Common-Law World: The Political Foundations of Shareholder Power.  It also is undoubtedly an engaging topic for a book--one that demanded my attention and resonated with me almost immediately.  In research I did a few years ago for what ultimately became a draft paper and book chapter, I had explored the validity of claims of international convergence in insider trading regulation and found much the same thing that Bruner finds in this book: facial similarities in legal structures and doctrine may mask more interesting and telling differences.

The descriptive account is important, but it is not the heart and soul of the book.  Rather, the core value of the book is that it strikes out beyond culture, history, and economics to politics--specifically, social welfare politics--to explain the differences among the corporate governance systems in the four jurisdictions studied--the United States, the United Kingdom, Australia, and Canada.  By demonstrating that changes in shareholder power and protections vary with social welfare dynamics, the book begs a far more significant conclusion: that corporate governance oppresses and empowers the populace in much the same way that state government does and that the corporation therefore may be an arm of or a substitute for state government in promoting or effectuating policy.  This take-away is unsurprising to me; it is intuitive and sometimes obvious in other contexts.  Nevertheless, the weight of proof is hard to come by, and I am grateful for Bruner's work in providing it.

Many elements of the story are compelling.

 In light of debates here in the United States about the role of shareholders in the corporate form, it was of particular interest to me that the U.K. Companies Act (which I have not independently studied to an significant degree) casts shareholders in the role of principals that can dictate the activities of corporate directors.  I had seen evidence of shareholder centrism in takeover regulation in the U.K. (which I teach in Comparative Mergers & Acquisitions, when I get the chance to teach that course), but the revelation that this shareholder-friendliness extends to the broader management function of the firm helped to explain and normalize the pro-shareholder mergers and acquisitions doctrine.  

This observation about the doctrine also demonstrates a fundamental difference between the doctrine in the United States and the United Kingdom:  in the United Kingdom, the board is an agent of the shareholders.  While folks try to make that argument under U.S. law, the agency is not complete given, among other things, the inability of shareholders to direct the board (in most cases).  In this aspect, the book's account of U.S. corporate governance offers support, at least from a comparative perspective, for the descriptive accuracy of Steve Bainbridge's evolving director primacy theory.  At the very least, as Bruner notes, it is "explicable as a rejection of strict shareholder primacy."  See p. 44.  On that note, for those who haven't watched the videos of the recent UCLA Lowell Milken Institute event, A Conference and Micro-Symposium on Competing Theories of Corporate Governance, I highly recommend them.

I wonder (and I do not mean for this to be a mere rhetorical question) what, in light of Bruner's observations on U.S. corporate law, he might have to say about the introduction of social enterprise entities into state corporate law in the United States.  In the past few years, we have seen in the United States the rise of benefit corporations, flexible purpose corporations, and the like (following on the introduction of  B Corp certification and low-profit limited liability companies--L3Cs).  This social enterprise entity movement (if you will) is in part a response to the lack of shareholder power under U.S. law to manage the business and affairs of the corporation--specifically, to ensure that the directors take into account social and environmental concerns in addition to traditional, financial shareholder wealth maximization.  Yet, that account differs from Bruner's assessment in the book on other-constituency statutes like those in Indiana and Connecticut, see p. 44, which he characterizes as a "marginalization of shareholders."  See also pp. 171-73.  (I see Andrew also picks up on this thread.)  The cultural, historical, economic, and political aspects of the emergence of social enterprise entities raise interesting questions that I would find to be a fruitful subject for further commentary.  To the extent they may affect public companies (who may become and are acquiring social enterprise entities), the matter deserves thoughtful consideration.  I can see how a treatment of this issue could both substantiate and challenge Bruner's observations about shareholder power under U.S. corporate law.

On a lighter note, as a securities law teacher and researcher, I also enjoyed the brief part of the book that explained the allocation of securities regulation authority in the various federal systems represented by the United States, Australia, and Canada.  See p. 78.  The issue of where authority in securities regulation resides in state governments outside the United States is always troublesome for those of us who desire to teach foreign law but have spent our time in the thickets of U.S. securities law.  In other words, it's always difficult to find securities law in a new jurisdiction when searching for it from an ethnocentric perspective . . . .  Here, I was admittedly a bit chagrined that U.S. securities law was classified as national law both as a default and in practice.  Although the book only purports to address public companies (which admittedly are largely regulated under federal securities law in the United States), I would argue that a lawyer for a public company who forgets to check on the applicability of state securities law for a particular transaction is committing malpractice.  This is true notwithstanding the breadth of constitutional power under the Commerce Clause and the resulting strong preemption provisions in the National Securities Markets Improvement Act of 1996.  But I may be misunderstanding Bruner's analysis here.

No matter.  The book is a good read (well written and provocative) and promises to generate much conversation here at Prawfs and elsewhere.  It conveys a lot of information in a relatable and accessible way.  I recommend it for your summer reading list.

Eich and the Politicization of the Corporation

Just a brief word on the (forced) resignation of Mozilla CEO Brendan Eich because of his Prop 8 donations: welcome to the continuing politicization of the corporation.  If corporations have speech protections and can play an active role in ideological debates of all stripes, then it matters if the CEO takes a different political position than the majority of stakeholders in the enterprise.  The CEO controls the company and speaks for the company.  So it is not suprising that stakeholders would be concerned about a CEO that did not reflect their values.

I think we're entering interesting and perhaps dangerous territory here as corporations take on First Amendment roles beyond their core business.  Corporations will always be associated with "core concern" speech directly related to the company's products and services.  But there is no need for "symbolic" speech that is unrelated to the business.  As I discussed at the Glom with regard to the Chick-fil-A controversy, gay marriage has little to do with delicious chicken sandwiches.  It is needlessly entangling of commerce and politics to make the purchase of a sandwich into a political act, especially when many participants in the enterprise have no interest in fomenting such a debate.  But those lines are blurring.  So Chick-fil-A begat the Eich resignation, because Mozilla customers and employees did not want their association with the company to end up labeled as support for limitations on gay marriage.

And that's the concern with Hobby Lobby, too -- if the court upholds First Amendment religion clause rights for a private, for-profit corporation, those who control the corporation will control its religion, too.  That means whatever ideologically-charged positions the controllers choose to take, the rest of the participants will be dragged along as well.  And that will make the corporation even more of an ideological battlefield.

Happy to be here!

Hi there Prawf readers,

As always, it is nice to return to the Prawfs fold.  As some of you may know, my interests lie in the intersection of criminal and corporate law.  I teach Criminal Law, Criminal Procedure, Corporations, and a White Collar Crime seminar.  I write about corporate compliance and what might generally be referred to as criminal law and economics.   Recently, I have become interested in the connection between fraud and two overlapping topics, "temporal inconsistency" and the study of "willpower lapses."  Over the years, several scholars, most notably Dan's colleague at FSU, Manuel Utset, have asked: what implications does temporal inconsistency have for criminal law enforcement and punishment?  How should our understanding of temporal inconsistency alter the mix of criminal and civil statutes, regulation and enforcement activity that we rely upon to reduce socially undesirable conduct? Recently, I along with several other scholars had the great opportunity to offer some thoughts on this topic in comments that the Virginia Journal of Criminal Law solicited for a volume featuring Utset's work.  After completing my own contribution, I decided to write a separate article exploring temporal inconsistency's implications for the corporation's internal compliance function. That paper, Confronting the Two Faces of Corporate Fraud, will appear in the Florida Law Review in early 2014.  I'll post and talk about the paper later this month. 

Meanwhile, in addition to writing my exam, winding down my classes (last week of teaching) and grading, I plan to blog this month on major developments in the white collar crime world.  To that end, it is impossible not to be fascinated by Michael Steinberg's insider trading trial, which seems to be moving along smoothly (at least from the prosecution's perspective) for now.  More on that tomorrow - I've got to head home now and light some candles.  Happy holidays! 

Reform, Not Rankings?

Should Princeton Review be alarmed?  The federal government is getting into the college ratings business.  The President yesterday announced a proposed system for rating colleges’ cost-effectiveness, and tying federal loan subsidies to the resulting rankings.  If you think the problem is that colleges have no incentive to cut costs, it makes some sense.  But the implementation has serious question marks, not the least of which is that someone in the government will have to decide how much more expensive it ought to be to train, say, engineers vs. poets.

What about nonprofit governance reform instead, or maybe also?  In my last few posts, I’ve sketched our findings that university dependence on donations tends to restrain executive compensation.  We also find a strong correlation between pay and tuition.  By itself, that correlation doesn’t really tell us anything about causation.  But in combination with our detailed findings about donor influence, it begins to seem more likely that presidents may prefer to emphasize tuition in order to reduce their dependence on donors.      

That isn’t exactly iron-clad proof.  But it’s at least suggestive.  Reforming executive compensation might not give colleges incentives to hold down student costs, but it at least could diminish their executives’ interest in letting costs rise.     

Could we tell the same story about law schools?  It’s possible---we don’t have much data about private law school deans---but keep in mind the environment is different.  Only a handful of law schools get any significant fraction of their operating budget from donations.  So I don’t think the story we tell quite translates.  That’s not to say there aren’t agency problems in law schools, just that they probably take a different form.   

University Presidents: Pay for Performance or Agency Problem?

Our story so far: nonprofit managers have reason & opportunity to manage their firm in a way that increases their personal rewards.  Even if the dollar amounts are small, the managerial consequences could be significant.  For instance, we saw last time evidence that university CEO pay, tuition, and expenditures rose sharply for most of the last decade while returns for faculty and for-profit CEOs were relatively flat on average.  One can at least tell stories about why a president who wanted to be paid more would increase tuition or overall spending.  How can we test those stories?  It’s tricky.  Universities are complicated places, and lots of factors could be at work.  Maybe presidents were just doing a great job, and invested their extra resources wisely, making college a better deal and earning higher pay for themselves. 

Our paper therefore tries to look at the extent to which CEO pay is correlated with measures of “agency costs.”  That is, is pay lower at schools where presidents are monitored by other stakeholders more closely?  If so, that would be evidence at least that presidents’ opportunism contributes to pay levels, though of course it wouldn’t rule out the “pay for performance” alternative I just mentioned--both could be contributing factors.

Long story short, we used a school’s dependence on donations to measure how closely its president was watched.  Few donors really take much role in details of school governance; they are rationally ignorant and hope to free ride on watchdog efforts by others.  But it turns out that if you make someone angry (or give them a really good feeling from participating) they don’t free ride as much -- their emotions motivate them to be more actively involved.  We hypothesize that donors don’t like excessive pay, and that the threat of donor “outrage” would constrain pay levels.

And that’s what we find.

First, we find that donors don’t like learning about high president pay.  In one set of regressions, we find that each dollar of reported pay reduces giving in subsequent years (controlling for all the other important observable facts about the university we could measure) by about $30.  For instance, if Harvard could have been Harvard while paying its president zero dollars, our results imply it could have pulled in another $30-$40 million in donations.

In another (not on ssrn yet), we look at the effect of being singled out by the Chronicle of Higher Education’s list of the “Top 10 Most Highly Compensated” presidents.  Presidents who make the list see about $6 million less in donations, even relative to presidents who just missed making it.

We then find that being more dependent on donations (i.e., getting a bigger fraction of revenue from gifts) does reduce presidents’ pay.  Presidents who are more than one standard deviation above average (the top 1/6 or so) in dependence on donations get paid an average of about $110,000 less, all else equal.  We also find that showing up in the Top 10 list one year tends to slow the rate of growth of a president’s pay, though obviously there are people like Gordon Gee who just show up every year.             

It’s admittedly not immediately obvious how this relates back to the tuition story, and you are already bored, so I’ll fill in what we think the implications of our findings are next time.

Data on Presidents: A First Look

Last time, I promised to show you some evidence about CEO pay at colleges and universities.  Well, a picture is worth a thousand, yada yada, so let's start things off with a chart.

 

What you're looking at are data from about 370 U.S. colleges and universities, drawn from tax returns and school filings with the department of education, and adjusted for inflation.  The bars represent total increases over the ten-year period, so the leftmost bar is telling you that mean CEO reported pay went up by 50% over that period in real terms (from $300 to $450K in 2007 dollars).

Many of our readers, of course, will enjoy as we do the relative sizes of the two leftmost bars (but we note that the faculty average salary appears to include full-time instructor averages, not just full-time tenure-track faculty).  The other item that is striking, given the theoretical relationship I sketched last time about the relationship between pay and tenure, is the similarity of those two bars.  (We report gross tuition here, but "net" tuition, or tuition minus financial aid, grew similarly over this period.)  By the way, CEO pay at Fortune 500 firms grew at a fairly small fraction of the rate of university presidents in this period. 

At this point, things are looking intriguing enough to want to look at these relationships more rigorously.  Is there anything else that might make us think it is "slack" or loose monitoring that drives the tenure/compensation run-ups?  Yes, yes there is.  Next time:  more pictures.

What's "Obvious" About Corporate Free Exercise?

Rick Garnett suggested recently in this space that it is “obvious” (Rick’s word) that legal entities have Free Exercise rights, and Will Baude has written a bit more cautiously that churches “or the real parties in interest behind them” probably can assert their own first amendment claims.    Now, I’m just an unfrozen caveman tax lawyer, but I did once flip through a copy of “First Amendment Institutions” (and write two articles about nonprofit organizations in politics).  And I think the “obvious” examples are just intuition pumps.  Will argues churches very likely have their own sets of rights, while Rick says that anti-kosher laws would violate the rights of firms selling kosher products. 

[UPDATE: Rick points out (see the comments) that his post doesn't quite claim that entities have FE rights qua entities, though his phrasing of that distinction may be too subtle for duller readers (ahem).  So substitute for "Rick," with some modest amendment, "Adler," or "Bainbridge" or others, such as this piece by Scott Gaylord of Elon.]

I would say it’s obvious that regulation of churches or religious practices can interfere with individual rights to free exercise.  If my religious beliefs include shared worship with a community of likeminded believers, certainly direct restrictions on church (or other religious community) activity can interfere with my exercise of those beliefs.  But why does the organization itself need to be able to assert its own claims?  Corporations (including nonprofit corporations, such as most churches) can only sue by virtue of state laws giving them that power.  Are Will & Rick claiming it is “obvious” that states are constitutionally obligated to give legal personhood to abstract entities?

This may seem a fine distinction, but asserting that law is concerned with the rights of entities, not just the people in them, elides an important element of individual choice.   Believers who choose to invest their money in a highly regulated industry can reasonably be presumed to go in with their eyes open to the possibility that regulation will impose a variety of burdens.  If they don’t like that, they should take their money elsewhere.  That’s a very different thing than a total prohibition on some key religious practice, as in Rick’s kosher example.  The degree of imposition is just much smaller in my example, because the government leaves open many alternative avenues for religious expression.  Is it zero burden?  Of course not, but this is a balancing test, isn’t it?

Of course, SCOTUS also makes this same overly-easy substitution in Citizens United.  Why is the right of political expression a right of the entity, not its members?  Can’t the members express their political views individually (at least absent some special meaning to speaking together as a legally-recognized group)?  Maybe forming a collective facilitates speech.  But then the issue is to what extent it is permissible for government to reduce its prior commitments to facilitating expression.  That field is treacherous, to be sure.  But by simply assuming that the entity embodies its members’ rights, we dodge what ought to be at the center of the debate.

Should we care about college administrator pay & perks?

University presidents do not get paid like Fortune 500 CEO’s.  If your alma mater’s president threw herself a birthday party featuring a replica of a Michelangelo, it’s probably just because she held it at the campus library.  It’s true, a decent number of presidents these days are taking home more than $1 million, and that’s just the pay that’s reported -- it probably doesn’t include perks like “medically necessary” business-class airfare.  But as a fraction of university revenues, we’re talking about chicken feed -- on the order of $100-$200 per student; that’s less than the transcript fee at some places.

Lots of smart people think university executive compensation, and CEO pay in the nonprofit sector generally, is not worth worrying about.  Most people who run a large nonprofit organization are talented go-getters who could pull down big bucks somewhere else.  They’re taking a pay cut to work at a mission that matters to them.  And, since there is little close supervision by any stakeholders, they run the show.  Why would they steal from their own piggy bank?  And so why invest, say, the board of directors’ time and resources monitoring their pay?

I am not one of those smart people.

But, happily, I live a T ride from an executive pay guru, BU Law’s David Walker.  When David explains to me why *he* cares about for-profit CEO pay, he says something like, “it’s not the money, it’s the management.”  That is, the raw amount of cash a crafty CEO can pay herself in backdated options or wild parties isn’t a big deal for a large-cap firm.  The problem is that the money is a big deal for her.  And that means she has incentives to run things in a way that pays her more, or that at least gives her opportunities to pay herself more. 

In our paper, we argue that this may also be true at nonprofit firms.  Suppose---and for now let’s just assume for the sake of argument that this could be true---that it’s easier to raise your own pay out of tuition dollars than it is to grant yourself a raise with money some donor just handed you in a sack.  And suppose presidents know that. 

The implication would be that presidents have incentives to raise tuition, in order to facilitate their own rewards.  Or, at least, to emphasize tuition over other, more constraining, sources of revenue. 

That would be a worry, except that….presidents are giving up big bucks to carry out their mission, aren’t they?  Does it make sense that they would give up monetary rewards, and then run their nonprofit in a way that lets them get more monetary rewards? 

Maybe.  But this being prawfsblawg, there is a good chance that you, reader, made a similar tradeoff.  Suppose someone leaves a brown paper bag full of cash on your front doorstep.  I can’t say that I would turn it upside down and cast Benjamin Franklin to wherever the winds take him.  Not without thinking long and hard, anyway.  You?            

Next time: some evidence.

Sleep No More: Sleep Deprivation, Doctors, and Error or Is Sleep the Next Frontier for Public Health?

How often do you hear your students or friends or colleagues talk about operating on very little sleep for work or family reasons? In my case it is often, and depending on the setting it is sometimes stated as a complaint and sometimes as a brag (the latter especially among my friends who work for large law firms or consulting firms). To sleep 7-8 hours is becoming a “luxury” or perhaps in some eyes a waste – here I think of the adage “I will sleep when I am dead” expresses that those who need sleep are “missing out” or “wusses.” My impression, anecdotal to be sure, is that our sleep patterns are getting worse not better and that many of these bad habits (among lawyers) are learned during law school.

One profession that has dealt with these issues at the regulatory level is medicine. In July 2011, the Accreditation Council for Graduate Medical Education (ACGME) – the entity Responsible for the accreditation of post-MD medical training programs within the United States – implemented new rules that limit interns to 16 hours of work in a row, but continue to allow 2nd-year and higher resident physicians to work for up to 28 consecutive hours. In a new article with sleep medicine expert doctors Charles A. Czeisler and Christopher P. Landrigan that just came out in the Journal of Law, Medicine, and Ethics, we examine how to make these work hour rules actually work.

As we discuss in the introduction to the article 

Over the past decade, a series of studies have found that physicians-in-training who work extended shifts (>16 hours) are at increased risk of experiencing motor vehicle crashes, needlestick injuries, and medical errors. In response to public concerns and a request from Congress, the Institute of Medicine (IOM) conducted an inquiry into the issue and concluded in 2009 that resident physicians should not work for more than 16 consecutive hours without sleep. They further recommended that the Centers for Medicare & Medicaid Services (CMS) and the Joint Commission work with the Accreditation Council for Graduate Medical Education (ACGME) to ensure effective enforcement of new work hour standards. The IOM’s concerns with enforcement stem from well-documented non-compliance with the ACGME’s 2003 work hour rules, and the ACGME’s history of non-enforcement. In a nationwide cohort study, 84% of interns were found to violate the ACGME’s 2003 standards in the year following their introduction.

Whether the ACGME's 2011 work hour limits went too far or did not go far enough has been hotly debated. In this article, we do not seek to re-open the debate about whether these standards get matters exactly right. Instead, we wish to address the issue of effective enforcement. That is, now that new work hour limits have been established, and given that the ACGME has been unable to enforce work hour limits effectively on its own, what is the best way to make sure the new limits are followed in order to reduce harm to residents, patients, and others due to sleep-deprived residents? We focus on three possible national approaches to the problem, one rooted in funding, one rooted in disclosure, and one rooted in tort law. I would love reactions to our proposals in the paper, but wanted to float the more general idea in this space.

 Obesity is a good example of something that through concerted action moved from the periphery to safely within the confines of public health thinking and even public health law. Is it time to do the same for sleep? Should we stop valorizing sleeping very little in our society? Should we be thinking about corporate and public policies directed to improving sleep pattern? What might that look like? One thought I have is about encouraging telecommuting to reduce commuting time, sleep rooms in offices? Of course, on the parenting sleeplessness sides many of the solutions are social support.  What about what we tell and model for our students? I try to impart to my students that extra hours spent studying well into the night will have diminishing marginal returns, but who knows if that message is imparted. I also worry that with the number of journals, moot courts, clubs, etc, we encourage our students to join at law school that we are enablers of sleeping too little and perpetuating the “superman” myth (and I do wonder about the gendered component here)... Real men don’t sleep. And then they perform badly at their jobs and get into car crashes….

- I. Glenn Cohen

The Religious Freedom Rights of Corporations and Shareholders

A late and grateful hat tip to Charlotte Garden, who posted last week about the Seventh Circuit's decision in Korte v. Sebelius.  The court granted a preliminary injunction against the enforcement of provisions of the Patient Protection and Affordable Care Act (“ACA”) and related regulations requiring that K & L Contractors purchase health care coverage for employees that included abortifacient, contraception, and sterilization coverage.  Accourding to the majority, the plaintiffs had some likelihood of success on their Religious Freedom Restoration Act (RFRA) claim that the required health care coverage put a substantial burden on their free exercise of religion.

Although the case raises a number of interesting issues, I want to focus on the religious freedom rights of corporations and shareholders.  It is the corporation that has the obligations to provide health care coverage with certain coverages.  However, the court seems to find that the corporation's obligations infringe on the religious liberties of the shareholders.  As the court states:

[T]he government’s primary argument is that because K & L Contractors is a secular, for‐profit enterprise, no rights under RFRA are implicated at all. This ignores that Cyril and Jane Korte are also plaintiffs. Together they own nearly 88% of K & L Contractors. It is a family‐run business, and they manage the company in accordance with their religious beliefs. This includes the health plan that the company sponsors and funds for the benefit of its nonunion workforce. That the Kortes operate their business in the corporate form is not dispositive of their claim. See generally Citizens United v. Fed. Election Comm’n, 130 S. Ct. 876 (2010). The contraception mandate applies to K & L Contractors as an employer of more than 50 employees, and the Kortes would have to violate their religious beliefs to operate their company in compliance with it.

In dissent, Judge Rovner took issue with this, but in a somewhat indirect fashion:

Although the Kortes contend that complying with the Patient Protection and Affordable Care Act’s insurance mandate violates their religious liberties, they are removed by multiple steps from the contraceptive services to which they object. First, it is the corporation rather than the Kortes individually which will pay for the insurance coverage. The corporate form may not be dispositive of the claims raised in this litigation, but neither is it meaningless: it does separate the Kortes, in some real measure, from the actions of their company.

Charlotte Garden takes on the issue of whose religious freedom rights are at issue in her post:

This analysis raises an interesting question about the interplay among the rights of majority shareholders, managers, and corporations after Citizens United. The Seventh Circuit seems to treat them as essentially overlapping, so that government regulation of corporations would be unlawful if it violates the rights of one, two, or all three of the above.  But it seems to me that Citizens United could also support the contrary result. For example, if the funds of dissenting shareholders can be used for political speech without violating the First Amendment, then why can’t the Kortes’ funds be used for K&L’s contraception coverage without violating their RFRA rights? The Seventh Circuit doesn’t answer this question, though it seems its answer would have to turn on whether or not the shareholders in question were in the majority—a result that seems both counterintuitive and at odds with the Supreme Court’s approach to dissenters’ rights in other context, including the union dues context.

I agree with Charlotte's thinking here.  It is the corporation that is being forced to provide a certain level of health insurance to employees.  When does a corporation have rights of religious freedom?  The court characterizes the company as "secular," and it is clearly not a religious organization. And if it is the Kortes, rather than the corporation, whose rights are being infringed, when do actions taken with respect to a business entity impinge upon the rights of stakeholders?  The court mentions that the Kortes are 88% shareholders and that the business is run by the family according to their religious beliefs.  Are these material facts?  What if they owned 51% of the company, but it was run by someone else?  What if they owned 33% but had de facto control?  What if they owned a single share?

This case reminds me in part of Thinket Ink Information Systems v. Sun Microsoft, 368 F.3d 1053 (9th Cir. 2004).  In that case, the court held that a corporation had a right to bring suit under 42 U.S.C. Sec. 1981 for discrimination based on race.  Although noting that a corporation generally does not have a racial identity, the court found that in the particular case, Thinket had "acquired an imputed racial identity" sufficient to bring a claim.  The court stated that: "[t]o receive certain governmental benefits, Thinket was required to be certified as a corporation with a racial identity; further, it alleges that it suffered discrimination because all of its shareholders were African–American."  This was enough to give the corporation itself standing under Sec. 1981.

At the time, Stephen Bainbridge characterized the Thinket decision as "just nuts" because the corporation was just a legal fiction and instead represented a nexus of contracts.  However, he did allow that "[i]t may be useful to invoke that fiction here, so as to promote administrative convenience by allowing the entity rather than its individual constituents to sue, but it doesn't  change the basic theory."  A similar problem may be presented here.  But at the least, a court should establish whether it is the corporation or the shareholders who have standing to sue for actions required of the corporation.  And if it's the shareholders who have standing to sue, it seems unclear when they would be sufficiently entwined with the corporation to get that standing.

The Collection Gap

Along with Ezra Ross (now of UCI), I have started a new blog, The Collection Gap, which deals with regulatory enforcement failure.  The blog was inspired by our article, The Collection Gap: Underenforcement of Corporate and White Collar Fines and Penalties, 29 Yale L. & Pol'y Rev. 453 (2011), which found that agencies are leaving billions of dollars in criminal, civil and administrative fines and penalties uncollected, even where offenders have the ability to pay.

One of the things that drove us to pursue this topic was the fact that, while there was much debate about whether or how much to fine corporations, there was little if any discussion about whether the fines that were imposed were ever actually collected--which obviously impacts deterrence and institutional legitimacy, among other things.  Agencies like the EPA get the benefit of announcing big headlines ("Biggest fine ever against polluter X..."), but are not held accountable for failing to follow through.  Part of the problem is simply resources, but we believe that to a large extent it has to do with insufficient incentives at the institutional and individual levels.

I would welcome thoughts or suggestions about other situations in which problems with policy implementation threaten to undermine the policies themselves.  It's the type of thing that often doesn't get much attention, but could have a lot of practical impact regarding how government actually operates and affects people's lives.

Two Resources on Corporate Law

In advertising, repetition is often critical to success.*  That's why I'll repeat what Stephen Bainbridge and Gordon Smith have already told you -- check out the new Research Handbook on the Law and Economics of Corporate Law, edited by Claire Hill and Brett McDonnell.  You can find an introduction from the editors here.  Interestingly, the Amazon price is $10 more than the publisher's price, so this is one instance where buying directly from the publisher pays off.

If you're looking for some nice free downloads, consider Seattle University Law Review's symposium issue for the Berle III conference.  (The image above is from the first Berle conference, which can be found here; Berle II is here.  Berle IV was held in London last month.)  Chuck O'Kelley has organized the ongoing set of Berle conferences, and Berle III centered around the theory of the firm in the corporate law context.  There are sixteen papers to choose from, and I very much enjoyed hearing from the terrific group of folks that Chuck had on hand.

* Note: apparently, repetition is useful in the "wearin" phase, but actually becomes harmful to the message when the "wearout" phase is reached.  See Campbell & Keller (2003), Brand Familiarity and Advertising Repetition Effects.  I'm hopeful that we're still in the "wearin" phase.

Political Spending = Business Spending (by Unions as well as Corporations)

Earlier this week, the WSJ touted a new Manhattan Institute study showing that political contributions by corporations have a positive effect on the bottom line.  The study found that "most firms, like most individuals, behave rationally and strategically in their spending decisions on campaigns and lobbying, devoting resources in ways that, they have reason to expect, will benefit the corporations themselves and their shareholders."  And benefits do come, in the form of lower taxes, more favorable regulation, and earmarks that help the business. The authors calculate that these political benefits improve returns for shareholders by 2% to 5% a year.

It should not be a surprise that corporate political spending helps corporations.  This recent study follows upon research by Jill Fisch on FedEx's political spending, which found that "FedEx has successfully used its political influence to shape legislation, and FedEx's political success has, in turn, shaped its overall business strategy."  The WSJ uses the Manhattan Institute report to beat back critics of Citizens United who are looking to get corporations out of politics.  The Journal opines:

Liberals have been trying to persuade CEOs and corporate boards to stop spending money on politics by claiming that it doesn't pay. But according to a new study by the cofounder of the Democratic-leaning Progressive Policy Institute, corporate participation in politics works for the companies and their shareholders. * * * 

In a better world, corporations wouldn't have to devote money and time to politics. . . . But politicians have created a gargantuan state that is so intrusive that businesses have no alternative than to spend money to defend themselves and their shareholders from such arbitrary looting as the medical device tax in ObamaCare. Liberals want business to disarm unilaterally.

Oddly, neither the Journal nor the Supreme Court seem to understand these principles when it comes to unions.

In today's Knox v. SEIU, the Court again privileges the rights of represented employees to opt out--or rather, not to have to opt-out in the first place--from union political spending.  The Court clings to the trope that the union's political spending is somehow extraneous to the core services provided by the union to the represented employees.  But political spending is perhaps even more important to unions than it is to corporations.  I have posted before about SEIU's electoral activity, but it bears repeating--SEIU spent an estimated $85 million to help elect Barack Obama in 2008.  Although the Obama administration failed to get the Employee Free Choice Act passed, it did pass healthcare reform -- which was arguably more of a SEIU priority.  (See Chapter 9 of this book by Steve Early, entitled "How EFCA Died for Obamacare").  Former SEIU President Andy Stern had the highest number of oval office visits of any outsider--22--during the president's first six months in office.  Stern was not in there based on his individual perspicacity about the nation's various problems.  He was in there as president of the fastest-growing union in the U.S. -- one whose members largely worked in the health care field and would benefit from an expansion of health care benefits.

Knox v. SEIU concerns a "Political Fight-Back Fund" levied against represented employees, including nonmembers, to fund political activities in California. Two propositions were on the California ballot: Proposition 75, which would have required an opt-in system for charging members fees to be used for political purposes, and Proposition 76, which would have given the Governor the ability to reduce state appropriations for public-employee compensation.  In response to the petitioner's objection to the special assessment, an SEIU employee said, "we are in the fight of our lives," and it's easy to see the urgency.  If you accede to the principles that (1) employees can choose as a majority whether to have union representation, and (2) all represented employees need to pay for their representation, then political spending should not be excluded.  In an era where state governments are reconsidering collective bargaining rights for public sector unions, political spending is critical to the unions' very existence as businesses.  Unions need to have collective bargaining rights in order to bargain collectively on behalf of represented employees.

The majority's opinion in Knox v. SEIU assumes the distinction between collective bargaining expenses and political expenses without much discussion, other than an interesting block-quote from a Clyde Summers's book review.  (I would argue that all of Summers' examples don't really prove his or the Court's point.)  And at this point, not even the dissent questions the Hudson framework.  But it makes no sense.  Unions and academics should start fighting the framework: unions are businesses, and political spending is business spending.

I did see one glimmer in the Court's opinion, in the following passage:

Public-sector unions have the right under the First Amendment to express their views on political and social issues without government interference.  See, e.g., Citizens United  v. Federal Election Comm’n, 558 U. S. ___ (2010). But employees who choose not to join a union have the same rights.

The Manhattan Institute report, like the Wall Street Journal, recognizes that corporations are not merely "express[ing] their views on political and social issues" when they make political contributions.  They are fighting for their businesses.  The Court should not continue to disarm unions unilaterally in a post-Citizens United world.

Rupert Murdoch and the FCPA

The Foreign Corrupt Practices Act is a controversial federal statute that was enacted in 1977 and was intended to deter and reduce bribery of foreign officials for US business. It has contributed substantially to the number of deferred prosecution agreements (DPA's) that the federal government signs (usually) with large, publicly held corporations.  Ordinarily, the corporation gets into trouble when one or more of its employees pays money to a foreign official in connection with the corporation's business transactions.  

On those occasions when the government prosecutes the individuals responsible for violating the FCPA, the results can be mixed.  For an example of a recent loss, you can see this juror's discussion at Mike Koehler's FCPA Professor Blog, which discusses how and why the government failed to secure convictions in a case that involved an undercover sting and ruse to bribe the defense minister of Gabon.  The case had been considered pathbreaking because it involved an undercover sting; now, it may be pathbreaking because it involves a massive loss and the government is considering dropping its remaining prosecutions. 

According to the conventional wisdom, FCPA convictions (at least conviction of those individuals willing to take the cases to trial) are difficult to secure because the underyling transactions are often complex and difficult to understand.  Reasonable doubt abounds. 

But that might not be such a problem if the government decides to go after Rupert Murdoch's News Corp.  The company, which is headquartered in New York, is currently the subject of a number of investigations, here and overseas.  Senators and Congressmen began calling for investigations back in July, and the FBI's FCPA investigation seems to be moving forward, as reported by Reuters today.  The FCPA investigation relates to News Corp employees' payment of money to (British) police officials.  Unlike most FCPA cases, I can't imagine jurors will have too much difficulty understanding the underlying transactions.  Perhaps this is why News Corp hired Mark Mendelson back in July 2011.  

Name-Calling in Corporate Law Academia

Roberta Romano, Stephen Bainbridge, and Larry Ribstein all seem outraged at an unpublished, non-SSRN'ed paper by Jack Coffee that Romano (at least) has gotten her hands on.  Although I don't have a copy of the paper, they seem to be objecting that Coffee referred to them as "the 'Tea Party Caucus' of corporate and securities law professors."  Romano also says that they are referred to as "conservative critics of securities regulation," and that Ribstein and Bainbridge are Romano's "loyal adherents."  Romano calls this "serial name calling," Bainbridge complains that this is "insulting" and a "series of ad hominem attacks," and Ribstein says, "It’s sad a scholar of Coffee’s stature sees a need to resort to such rhetoric, though almost understandable since Romano’s devastating critique doesn’t leave him much of a ledge to sit on."

Somehow, I can't gin up much sympathy.  

Only one of those things in the "series of attacks" is really all that remarkable.  Being called a "conservative critic[] of securities regulation" is insulting?  Romano claims that the "conservative" adjective is erroneous, but c'mon -- you all are conservative!  Maybe not on all issues, maybe not in your heart of hearts.  And look, I've written before about how political labels in the context of corporate law can be misleading.  But I still don't think being called "conservative" is an ad hominem, especially if used in reference to the issue being debated.  On Sarbanes-Oxley, on Dodd-Frank -- you all are conservative!  As to the "adherents" thing, I suppose it makes Bainbridge and Ribstein into followers.  But Steve, you did use the whole "quack" meme after Roberta!

That still leaves the "Tea Party" remark, and sure, depending on what you think of the Tea Party, it could be pejorative.  (Not everyone would agree!)  But it seems pretty mild to me.  Plus, it's making a rhetorical point: these three are to corporate law what the Tea Party is to American politics.  I don't agree with the rhetorical claim, but it seems like a point one could make legitimately without being too offensive.

And this brings me to my real point.  There's the whole "Really?" thing that Seth Myers has going.  I find it kind of annoying.  But if you like it, then just insert "Really?" after each of these bullet points. 

So folks, you're upset about name calling when you've:

• Called a major piece of federal legislation "quack corporate governance."  A quack is a fraud; someone who intentionally subjects others to harm and even death in order to make a quick buck selling bad advice.   So you're saying that the bill is equivalent to this?
• Called a second major piece of federal legislation "quack corporate governance."  Did you not think that calling it "quack" might be offensive?
• Referred to Gretchen Morgenson as "Morgenscreed."  And referred to the columns by said Morgenscreed as "lining Wall Street's birdcages."  Called one of her columns "the latest extreme idiocy." Called her a "clown[]."  And called her reporting "muck" and "fairy tales."  Not resorting to rhetoric, eh?
• Called the Occupy Wall Street folks "a bunch of childish narcissists" and referred to the "moronic" campaign against corporate personhood. Called on state government to "kill" a nearby law school.
• Said this about someone else: "I've spent the better part of my career crossing swords with these folks and I find them a remarkably thin skinned bunch. Call them 'self-appointed' or 'gad flies' or 'water carriers for left liberal organizations like unions' and they get all offended."

I feel like Jon Stewart here -- I could roll clips for twenty minutes.  The point is, these three are some of the most elbows-out academics that I know of.  And yet here they are, complaining about pretty soft stuff.  C'mon, people -- you're looking a little like Scut Farkus. 

UPDATE: Stephen Bainbridge responds.  He mentions that Coffee apparently compared him to Sergeant Schultz of Hogan's Heroes at AALS a few years back, which I left out because (1) it's not in Coffee's paper and (2) Romano & Ribstein didn't mention it.  Surely, that seems insulting, and I wouldn't blame Bainbridge for being upset by it.  And I also agree with him that blogging is less serious, more shoot-from-the-hip than scholarship, and different standards apply.  But even so, blogging is not a personal diary.  People do read it.  So perhaps it's less gauche to insult someone on a blog than at a conference.  But wherever you dish it out, you should be able to take it, too.

More importantly, I think Steve is wrong when he justifies his "quack" title with: "BFD. There's a huge difference between uncivil towards a person and being uncivil about a piece of legislation."  Saying a piece of legislation is "quack" legislation, in the title of your paper, is basically saying that only idiots or frauds could support that legislation.  So it's being uncivil to a large swath of people, rather than just one.  And it's not an aside at a conference -- it's the whole point of the paper.  If we're talking about civility in the context of scholarship, that is NOT civil.  Sorry!  When you call someone a "quack," you are not "avoiding insulting, demeaning or derisive language" or "genuinely listening to (and trying to make good sense of) what the other person says."  You're name-calling.  And that ain't civil!

Breaking the Net

Mark Lemley, David Post, and Dave Levine have an excellent article in the Stanford Law Review Online, Don't Break the Internet. It explains why proposed legislation, such as SOPA and PROTECT IP, is so badly-designed and pernicious. It's not quite clear what is happening with SOPA, but it appears to be scheduled for mark-up this week. SOPA has, ironically, generated some highly thoughtful writing and commentary - I recently read pieces by Marvin Ammori, Zach Carter, Rebecca MacKinnon / Ivan Sigal, and Rob Fischer.

There are two additional, disturbing developments. First, the public choice problems that Jessica Litman identifies with copyright legislation more generally are manifestly evident in SOPA: Rep. Lamar Smith, the SOPA sponsor, gets more campaign donations from the TV / movie / music industries than any other source. He's not the only one. These bills are rent-seeking by politically powerful industries; those campaign donations are hardly altruistic. The 99% - the people who use the Internet - don't get a seat at the bargaining table when these bills are drafted, negotiated, and pushed forward. 

Second, representatives such as Mel Watt and Maxine Waters have not only admitted to ignorance about how the Internet works, but have been proud of that fact. They've been dismissive of technical experts such as Vint Cerf - he's only the father of TCP/IP - and folks such as Steve King of Iowa can't even be bothered to pay attention to debate over the bill. I don't mind that our Congresspeople are not knowledgeable about every subject they must consider - there are simply too many - but I am both concerned and offended that legislators like Watt and Waters are proud of being fools. This is what breeds inattention to serious cybersecurity problems while lawmakers freak out over terrorists on Twitter. (If I could have one wish for Christmas, it would be that every terrorist would use Twitter. The number of Navy SEALs following them would be... sizeable.) It is worrisome when our lawmakers not only don't know how their proposals will affect the most important communications platform in human history, but overtly don't care. Ignorance is not bliss, it is embarrassment.

Cross-posted at Info/Law.

Copyright and Your Face

The Federal Trade Commission recently held a workshop on facial recognition technology, such as Facebook's much-hated system, and its privacy implications. The FTC has promised to come down hard on companies who abuse these capabilities, but privacy advocates are seeking even stronger protections. One proposal raised was to provide people with copyright in their faceprints or facial features. This idea has two demerits: it is unconstitutional, and it is insane. Otherwise, it seems fine.

Let's start with the idea's constitutional flaws. There are relatively few constitutional limits on Congressional power to regulate copyright: you cannot, for example, have perpetual copyright. And yet, this proposal runs afoul of two of them. First, imagine that I take a photo of you, and upload it to Facebook. Congress is free to establish a copyright system that protects that photo, with one key limitation: I am the only person who can obtain copyright initially. That's because the IP Clause of the Constitution says that Congress may "secur[e] for limited Times to Authors... the exclusive Right to their respective Writings." I'm the author: I took the photograph (copyright nerds would say that I "fixed" it in my camera's memory). The drafters of the Constitution had good reason to limit grants of copyright to authors: England spent almost 150 years operating under a copyright-like monopoly system that awarded entitlements to a distributor, the Stationer's Company. The British crown had an excellent reason for giving the Company a monopoly - the Stationer's Company implemented censorship. Having a single distributor with exclusive rights gives a government but one choke point to control. This is all to say that Congress can only give copyright to the author of a work, and the author is the person who creates / fixes it (here, the photographer). It's unconstitutional to award it to anyone else.

Second, Congress cannot permit facts to be copyrighted. That's partly for policy reasons - we don't want one person locking up facts for life plus seventy years (the duration of copyright) - and partly for definitional ones. Copyright applies only to works of creative expression, and facts don't qualify. They aren't created - they're already extant. Your face is a fact: it's naturally occurring, and you haven't created it. (A fun question, though, is whether a good plastic surgeon might be able to copyright the appearance of your surgically altered nose. Scholars disagree on this one.) So, attempting to work around the author problem by giving you copyright protection over the configuration of your face is also out. So, the proposal is unconstitutional.

It's also stupid: fixing privacy with copyright is like fixing alcoholism with heroin. Copyright infringement is ubiquitous in a world of digital networked computers. Similarly, if we get copyright in our facial features, every bystander who inadvertently snaps our picture with her iPhone becomes an infringer - subject to statutory damages of between $750 and $30,000. Even if few people sue, those who do have a powerful weapon on their side. Courts would inevitably try to mitigate the harsh effects of this regime, probably by finding most such incidents to be fair use. But that imposes high administrative costs, and fair use is an equitable doctrine - it invites courts to inject their normative views into the analysis. It also creates extraordinarily high administrative costs. It's already expensive for filmmakers, for example, to clear all trademarked and copyrighted items from the zones they film (which is why they have errors and omissions insurance). Now, multiply that permissions problem by every single person captured in a film or photograph. It becomes costly even to do the right thing - and leads to strategic behavior by people who see a potential defendant with deep pockets.

Finally, we already have an IP doctrine that covers this area: the right of publicity (which is based in state tort law). The right of publicity at least has some built-in doctrinal elements that deal with the problems outlined above, such as exceptions when one's likeness is used in a newsworthy fashion. It's not as absolute as copyright, and it lacks the hammer of statutory damages, which is probably why advocates aren't turning to it. But those are features, not bugs.

Privacy problems on social networks are real. But we need to address them with thoughtful, tailored solutions, not by slapping copyright on the problem and calling it done.

Cross-posted at Info/Law.

How Not To Secure the Net

In the wake of credible allegations of hacking of a water utility, including physical damage, attention has turned to software security weaknesses. One might think that we'd want independent experts - call them whistleblowers, busticati, or hackers - out there testing, and reporting, important software bugs. But it turns out that overblown cease-and-desist letters still rule the day for software companies. Fortunately, when software vendor Carrier IQ attempted to misstate IP law to silence security researcher Trevor Eckhart, the EFF took up his cause. But this brings to mind three problems.

First, unfortunately, EFF doesn't scale. We need a larger-scale effort to represent threatened researchers. I've been thinking about how we might accomplish this, and would invite comments on the topic.

Second, IP law's strict liability, significant penalties, and increasing criminalization can create significant chilling effects for valuable security research. This is why Oliver Day and I propose a shield against IP claims for researchers who follow the responsible disclosure model.

Finally, vendors really need to have their general counsel run these efforts past outside counsel who know IP. Carrier IQ's C&D reads like a high school student did some basic Wikipedia research on copyright law and then ran the resulting letter through Google Translate (English to Lawyer). If this is the aptitude that Carrier IQ brings to IP, they'd better not be counting on their IP portfolio for their market cap.

When IP law suppresses valuable research, it demonstrates, in Oliver's words, that lawyers have hacked East Coast Code in a way it was not designed for. Props to EFF for hacking back.

Cross-posted at Info/Law.

Choosing Censorship

Yesterday, the House of Representatives held hearings on the Stop Online Piracy Act (it's being called SOPA, but I like E-PARASITE tons better). There's been a lot of good coverage in the media and on the blogs. Jason Mazzone had a great piece in TorrentFreak about SOPA, and see also stories about how the bill would re-write the DMCA, about Google's perspective, and about the Global Network Initiative's perspective.

My interest is in the public choice aspect of the hearings, and indeed the legislation. The tech sector dwarfs the movie and music industries economically - heck, the video game industry is bigger. Why, then, do we propose to censor the Internet to protect Hollywood's business model? I think there are two answers. First, these particular content industries are politically astute. They've effectively lobbied Congress for decades; Larry Lessig and Bill Patry among others have documented Jack Valenti's persuasive powers. They have more lobbyists and donate more money than companies like Google, Yahoo, and Facebook, which are neophytes at this game. 

Second, they have a simpler story: property rights good, theft bad. The AFL-CIO representative who testified said that "the First Amendment does not protect stealing goods off trucks." That is perfectly true, and of course perfectly irrelevant. (More accurately: it is idiotic, but the AFL-CIO is a useful idiot for pro-SOPA forces.) The anti-SOPA forces can wheel to a simple argument themselves - censorship is bad - but that's somewhat misleading, too. The more complicated, and accurate, arguments are that SOPA lacks sufficient procedural safeguards; that it will break DNSSEC, one of the most important cybersecurity moves in a decade; that it fatally undermines our ability to advocate credibly for Internet freedom in countries like China and Burma; and that IP infringement is not always harmful and not always undesirable. But those arguments don't fit on a bumper sticker or the lede in a news story.

I am interested in how we decide on censorship because I'm not an absolutist: I believe that censorship - prior restraint - can have a legitimate role in a democracy. But everything depends on the processes by which we arrive at decisions about what to censor, and how. Jessica Litman powerfully documents the tilted table of IP legislation in Digital Copyright. Her story is being replayed now with the debates over SOPA and PROTECT IP: we're rushing into decisions about censoring the most important and innovative medium in history to protect a few small, politically powerful interest groups. That's unwise. And the irony is that a completely undemocratic move - Ron Wyden's hold, and threatened filibuster, in the Senate - is the only thing that may force us into more fulsome consideration of this measure. I am having to think hard about my confidence in process as legitimating censorship.

Cross-posted at Info/Law.

Shopping for Settlement

Judge Rakoff of the Southern District of New York has hit the papers again as a critic of the SEC's settlement processes, now in the SEC v. Citigroup Global Markets case.  (One report here.) 

One function of the review process is to publicize SEC settlement practices.  The publicity pressure seems aimed at a few SEC practices, including the practice of allowing settlement with the SEC without admitting or denying the allegations.  Judge Rakoff's opinions also highlight some fundamental and possibly intractable problems with entity-level punishment.  Namely, who pays when a corporation pays a penalty?  (probably current shareholders) Does the channeling of fines to injured investors through Fair Funds change anything (my article about this here)? And to what extent should the SEC pursue individuals? 

These settlement reviews in high profile cases also force out information about the facts of the particular case.   For instance, one result of Judge Rakoff's initial resistence to the settlement in Bank of America was that the Bank ultimately stipulated to certain facts.

So maybe the chance of public judicial criticism constrains agencies.  But both of the options currently on the table seem unappealing: judicial rubber stamping on the one hand or unpredictable judicial intervention on the other.  The first is unappealing not only because the agency can come back to the court to enforce compliance (which it seems never to do), but also because these agreements implicate regulatory policy, and the agency is officially acting on the public’s behalf. 

On the other hand, I'm not sure the extent of scrutiny should depend on a figurative spin of the judicial assignment wheel.  (If it does, a useful question for Rakoff-watchers is how his recent change to senior status as a judge affects the case assignment process.)  To the extent particular judges are more willing to scrutinize settlements or develop a reputation for rejecting settlements, agencies may forum shop to avoid this scrutiny.  In other words, they may shop for settlement.  Finally, it may push agencies to select remedies that avoid judicial review.

 The backstory: This is not the first time Judge Rakoff has scrutinized, initially rejected, and tweaked a settlement, as well as calling the SEC to task in colorful, widely reported language. When Judge Rakoff reviewed the SEC's 2009 settlement with Bank of America, he said agency claims of victory created a “façade of enforcement.”   His initial rejection of the Worldcom settlement in 2003 raised the same sort of questions: Who benefits?  What changes in corporate governance?  How did the SEC come up with this settlement? (rejection here)

The standard of review: These disputes arise in the context of settlement review by judges.  Courts review settlements with the SEC to make sure they are “fair, reasonable, adequate, and in the public interest."  The caselaw on how to review settlements reflects the hybrid nature of the settlements: they are both court order and contract.  Courts that have emphasized the contractual aspect of these agreements have examined primarily whether the contract was made voluntarily; if so, the court declined to redefine the agreed-upon terms.  Others have taken a closer look based on the court's continuing monitoring role, although courts often defer to the agency's view of the public interest.   

Policing Copyright Infringement on the Net

Mark Lemley has a smart editorial up at Law.com on the hearings at the Second Circuit Court of Appeals in Viacom v. YouTube. The question is, formally, one of interpreting Title II of the Digital Millennium Copyright Act (17 U.S.C. 512), and determining whether YouTube meets the statutory requirements for immunity from liability. But this is really a fight about how much on-line service providers must do to police, or protect against, copyright infringement. Mark, and the district court in the case, think that Congress answered this question rather clearly: services such as YouTube need to respond promptly to notifications of claimed infringement, and to avoid business models where they profit directly from infringement. The fact that a site attracts infringing content (which YouTube indubitably does) can't wipe out the safe harbor, because then the DMCA would be a nullity. It may be that the burden of policing copyrights should fall more heavily on services such as YouTube than it currently does. But, if that's the case, Viacom should be lobbying Congress, not the Second Circuit. I predict a clean win for YouTube.

Backdating and a culture of endemic corruption

Larry Ribstein continues his campaign against the campaign against backdating by referring to said campaign as an "overblown" "so-called scandal" that essentially led to the Madoff fraud and the 2008 financial crisis.  How, you ask?  By sucking up enforcement and journalistic resources that would otherwise have ferreted out these more nefarious deeds.  In support, he cites a recent paper by Stephen Choi, Adam Pritchard, and Anat Carmy Wiechman that claims the SEC spent more time on backdating that was justified by the subsequent results.  It's an interesting theory.  But I wanted to point out a few things quickly, just in response to Ribstein's post.

Backdating violates the law, by definition.  It is a misrepresentation about the date on which the stock option was granted.  Ribstein has done his best to play down, mitigate, justify, rationalize, brush off, scoff at, and ridicule this basic reality, but it's inescapable.  Executives lied about when their options were granted in order to get more money than they were legally entitled to.  It's a fact -- discovered by a business school professor -- and there's no getting around it.  And it happened at many companies, likely hundreds.

Luckily, there proved to be a quick fix to this problem -- change the required time of reporting the option grant.  So the problem no longer exists; it is essentially impossible to backdate anymore without being obviously in violation of the law.  So in terms of punishing the crime, deterrence, of at least that particular crime, is no longer an issue.  That may counsel for civil sanctions rather than criminal prosecutions.  To that extent, I agree with Larry -- it seems whimsical and capricious to single out some of the backdaters for jail time when the problem was much more widespread.  (Although the Comverse case seems particularly egregious.)

But if anything, I think the backdating scandal has been underappreciated, at least from a corporate governance perspective. Here you had hundreds of executives blatantly lying to their shareholders, federal agencies, and in some cases even the board about their compensation.  That to me indicates a culture of corruption -- a culture of "I will get as much as I can, even if I have to lie about it."  Sandwiched as it was between Enron and WorldCom before and the financial crisis after, it is yet another indication of the rapaciousness of some significant segment of the corporate and financial communities.  It is further indication that executive compensation has deep flaws within its structure, and we need to keep thinking about ways to change the structure and the culture.  Even though it has been "solved," with regard to the particular problem, it is a symptom of a much deeper condition.  To that extent, the corporate law community should not dismiss backdating as simply an overblown footnote in the annals of finance.  Perhaps the criminal prosecutions were overly zealous, in some instances.  But that does not mean there wasn't corruption.

NFL Agreement? Don't Count Your Chickens

The theme of my NFL blogging, which you can see here (post-Eighth Circuit hearing) and here (post-Eighth Circuit decision) is that the players' antitrust litigation strategy was really much more effective than the owners anticipated.  It totally reversed the usual roles you see in a lockout.  Generally, when an employer locks out its employees, it has time on its side.  The company closes its gates and waits for the workers to start missing paychecks.  (That's what's happening in the NBA.)  Ever since the district court enjoined the lockout, however, it's been the NFL owners who can't wait to get an agreement.  Check out this remarkable paragraph from ESPN's "Owners approve proposed lockout deal":

In their proposal, the owners told players that they must re-establish their union quickly for the proposed CBA to stand. The NFL also said it wanted evidence by Tuesday that a majority of players have signed union authorization cards.

In the history of labor relations, I don't think I've ever seen employers so eager for employees to (re) join a union.  In fact, the point of a lockout is generally to break a union -- or at least, a hoped-for side effect.  But the NFL owners can't wait to get the union back in place and, in effect, put back together the Humpty Dumpty CBA they foolishly pushed off the wall.

But wait -- maybe the players aren't all that eager to agree!  There's this ominous paragraph:

However, Smith wrote in an email to the 32 player representatives shortly after the owners' decision: "Issues that need to be collectively bargained remain open; other issues, such as workers' compensation, economic issues and end of deal terms, remain unresolved. There is no agreement between the NFL and the players at this time."

So what's going on?  The players' representatives are still working things through, but the NFL is using its vote to pressure the players into agreeing to the proposed CBA.  Otherwise, why would the lead owner in the negotiations say this?

"That's baffling to me," Panthers owner Jerry Richardson told ESPN's Sal Paolantonio [in response to Smith's email]. "We believe we have handshake agreement with the players."

Although details are somewhat spotty, the deal looks like a decent one for the players.  At the very least, it's a much better deal than the owners were talking about when they first went to the negotiating table.  It's also a ten-year deal -- much longer than the standard 3 to 5 year agreement.  Why?  So the players can't bring another antitrust challenge for ten years.

But I think the players have smelled the owners' fear.  That's what this is about:

A high-ranking NFLPA executive committee member told Mortensen that the owners' approval "puts the onus on players to make a decision to agree -- paints us into a corner with fans. We'll discuss tonight but the idea of reconstituting as a union has never been a slam dunk as the owners have already assumed."

Said another high-ranking NFLPA official: "We are not happy here. We had to honor to not vote on an agreement that was not final (Wednesday). This is not over. This actually takes away incentives from players to vote yes tonight."

We'll see what happens with the eventual CBA details.  But the players have already won.

Injunction Ruling Against NFL Lockout Overturned

The opinion is here.  The Eighth Circuit rescinded the district court's lockout based solely on the Norris-LaGuardia Act.  As to the other arguments, the majority said:

Given our conclusion that the preliminary injunction did not conform to the provisions of the Norris-LaGuardia Act, we need not reach the other points raised by the League on appeal. In particular, we express no view on whether the League’s nonstatutory labor exemption from the antitrust laws continues after the union’s disclaimer. The parties agree that the Act’s restrictions on equitable relief are not necessarily coextensive with the substantive rules of antitrust law, and we reach our decision on that understanding. 

I think this narrow holding preserves the players' longer-term arguments, as I discussed in this earlier post.  This decision only dissolves the injunction.  As I said at the time:

Let's say the court holds that Norris-LaGuardia prohibits the injunction.  Well, that only removes the injunction against the lockout; it does not mean that the NFL won't ultimately be liable for antitrust violations.  In fact, Judge Benton seemed to indicate that antitrust damages would continue to accrue even if the lockout could not be enjoined under the NLA. 

Perhaps these still-open possibilities are pushing the parties to settle.  The named players in the suit may want to blow up the existing system, but it's not clear to me that the lower-paid players want that.  And it would likely take at least a year, and likely two or three, for the antitrust case to render the league crippled from a massive antitrust award.  So the two sides seem to be stepping away from the precipice. 

The fact that the NFL is negotiating at all, however, indicates to me that its lockout strategy was not as effective as predicted.  The typical lockout strategy is to lock out and then wait until workers to come crawling back, after they've missed a big chunk of their salaries.  I don't know how things will end up, but a deal should come soon.  And I expect that the final deal will be much more favorable to the players than most folks would have predicted six months ago.

One final question: why isn't the NBPA pursuing this strategy as well?