Business Law Prof Blog

A Possible Introduction Via the FCPA: Alcatel Meet Caremark

On December 27, the SEC charged Alcatel-Lucent, S.A., with several Foreign Corrupt Practices Act (FCPA) violations claiming the company was bribing foreign government officials to obtain business illegally. According to the press release:

The SEC alleges that Alcatel’s subsidiaries used consultants who performed little or no legitimate work to funnel more than $8 million in bribes to government officials in order to obtain or retain lucrative telecommunications contracts and other contracts. Alcatel agreed to pay more than $45 million to settle the SEC’s charges, and pay an additional $92 million to settle criminal charges announced today by the U.S. Department of Justice.

The SEC also stated that "the bribery scheme was the product of a lax corporate control environment at the company” and that the company "failed to detect or investigate numerous red flags." 

Jones Day has a nice list of "ten questions "Ten Questions Every Director Should Ask About FCPA Compliance" (available here) that I suspect Alcatel directors are wishing they had considered right about now.  Given that $133 million were need just to settle the various civil and criminal charges, I have to imagine that a shareholder derivative suit is already in the works, notwithstanding significant questions about the merit of most such cases.  Regardless of what you think about these types of claims (and the obvious difficulty of winning such claims), this kind of oversight failure just screams "Caremark!"

--JPF

A Few Thoughts on Holiday Sales, Gas Prices, and the Economy

Is the economy finally on the rebound?  According to reports of holiday retail sales (see, e.g., here), the answer seems to be yes.  Holiday sales are up 4% over last year, which was viewed as something of a stabilizing year after a fairly large downturn. 

In addition, as of early December, gas prices were up to a two-year high, which had some concerned that holiday sales would suffer as a result.  If sales did suffer because of the current $3+ per gallon prices, the economy may be in even better shape than the sales numbers indicate.  As someone who drove more than 2700 miles in the past week, I can assure you that it's pretty easy to notice gas prices are higher than they have been in a while when you are on a big road trip.

I think this shows that, at a minimum, people are more comfortable that the current state of the economy is stable, if not robust.  Not great news for those without jobs, but I think it does indicate that people are less apprehensive about continued and widespread job losses.  And that is a good thing.

--JPF

 

More Insider Trading: Caveat Emptor?

Stephen Bainbridge responds (here) to my last post, wherein I suggest that insider trading has a negative impact on investor confidence.  In what I view as classic Bainbridge fashion, he writes:

If you're an investor who thinks that the playing field is level today, with draconian insider trading penalties and massive enforcement efforts, you are too stupid to be allowed to go out in public let alone put money in the stock market. Look, any investor with the common sense God gave gravel knows that insider trading is rampant.

Whatever your view of insider trading, that's good stuff.  I'm not sure whether I laughed out loud more vigorously at those lines or an earlier Bainbridge rant about modern law faculty hiring:

Maybe 20 years ago law schools valued things like high grades, law review membership, and prestigious clerkships. Not any more, however. As far as I can tell, what is valued these days are:

• Ability to network with people you knew in graduate school that got hired last year
• Having a PhD
• Having multiple publications, even if they demonstrate the author's utter lack of doctrinal knowledge or inability to do basic legal research
• Knowing what Rawls (or Dworkin) would think of X
• Being able to run linear regressions
• Being able to run regressions about what Rawls would think about X

I probably laughed harder at the latter because I had previously sent a paper proposal to Bainbridge to get his feedback and the paper was entitled "How Would Rawls Teach Citizens United."  And lest there be any doubt, when I say this stuff makes me laugh out loud I mean it as a compliment.  Anyone that can more or less suggest you are an idiot and still get you to chuckle in the process is worth reading regularly.

But I digress.  On the insider trading point, I remain unconvinced that "a fool and his money are soon parted" makes for good regulatory policy.  There is a meaningful body of precedent for the SEC pursuing boiler room operators for bilking retirees out of their social security checks by promising annual returns of 1,000% and the like.  Obviously, no "reasonable" investor would believe such hype.  But is saying "good riddance" really the best we can do?

Bainbridge also  notes that the stock market has continued to thrive in the face of repeated insider trading scandals and that "[i]f any investors believe that the SEC’s enforcement actions drove insider trading out of the markets, they are beyond mere legal help."  For me this raises the question of how much we actually know about investor behavior and beliefs.  I wouldn't be surprised at all if a meaningful number of retail investors responded to the scandals by breathing a sigh of relief knowing the regulators were on the job.  That may be stupid, but I think we need more evidence before we decide it is good policy to disabuse these types of investors of their beliefs.  Bainbridge's point about the efficacy of other markets that don't prize the prosecution of insider trading as much as we do is muted somewhat for me by the question: As compared to what?

What I'd like to see more of in this area is the type of work done by Andrew Torrance in the area of intellectual property, specifically as regards traditional notions of the tragedy of the commmons.  Maybe we'll get some more of this as a result of Dodd-Frank's encouragement of the SEC to do more investor testing.

Ultimately, this is all just convincing me that my next paper needs to be on insider trading.  And who knows, after delving into the relevant materials more deeply I may find that a number of my questions have already been answered in a way I would find counterintuitive.  If that turns out to be the case, I won't hesitate to change my tune.

SJP

Wisdom From A Different Yogi...

My Regulation of International Markets class engaged in a lively discussion today.  The topic was insider trading - not the frequency, the prohibitions, or the penalties, but the cause.  The varied theories shared by the 2Ls and 3Ls served as testament to how little of which we can be sure concerning the crime that perpetually tops the business regulator's public enemy list.

Is the cause simple greed?  From Martha Stewart to the notorious "Yuppie Five", numerous cases belie the notion that the violation is triggered by the desire for more or easier money.

Thus, is the desire to become a "player" as strong as Oliver Stone would have us believe?  It's truly frightening to think that, after 50+ years of criminalization, market cheating is so readily mistaken for status or competitive advantage.

Separately, is insider trading motivated simply by custom or practice?  Those of us who have spent time on stock exchanges Floors are consistently impressed by how much is dictated by simple routine.  And as the Specialist cases revealed, the young trader may blindly adopt the tendencies of the more experienced around him.

Ultimately, is the violation unavoidable?  Years ago, a student summed up the SEC's "abstain or disclose" rule as effectively requiring someone to stand on a track while the train arrives.  The students polled today noted that in so many areas of life, knowledge is power, and secrets cannot be kept.

Personally, I found my thoughts returning to the various SEC officials I've heard over the years who remind that, although the crime shall always be with us, that's no reason to lessen its punishment.  Parallels are inevitably drawn to prostitution and drug dealing, both of which continue unabated despite a society's best intentions to combat them.

This may be so, but with scant SEC resources, a globalized market with non-harmonized rules, and yet another anti-insider trading crusade underway, I sure wish we'd see more research as to what primarily motivates an educated professional to risk career, fortune, and/or liberty.  Methinks it's all too often the desire to prove one's self smarter than the average bear (or bear's self).

---JSC, 12/28/10     

     

AALS Hot Topics Panel: The BP Blowout Oil Spill and Its Implications

I have the pleasure of joining a Hot Topics panel for AALS 2011 in San Francisco.  The panel will occur, Friday, January 7th from 10:30 a.m. to 12:15 p.m.  Here's the panel description: 

The well-publicized BP oil spill in the Gulf of Mexico, which began in April, 2010 and continued for 86 consecutive days, was an environmental and human disaster of the first order. This panel will focus on a number of the broad policy implications of the spill. Topics to be discussed will include the implications of the BP spill for the conceptual framework used in planning for environmentally important places, regulatory privatization, regulatory capture, the systemic lessons to be learned from both the BP and Exxon Valdez oil spills, the extent to which environmental law is adequate to prevent future oil spills, the implications of the spill for implementation of the National Environmental Policy Act, environmental justice issues raised by the spill, and approaches to teaching law students about the spill. The panelists have promised to keep their remarks relatively brief in order to allow ample time for comments and questions from the audience.

Speakers
Speaker: Rebecca M. Bratspies, City University of New York CUNY School of Law 
Speaker: David A. Dana, Northwestern University School of Law 
Speaker: Professor Joshua P. Fershee, University of North Dakota School of Law 
Speaker: Victor B. Flatt, University of North Carolina School of Law 
Moderator: Joel A. Mintz, Nova Southeastern University Shepard Broad Law Center 
Speaker: Hari Michele Osofsky, University of Minnesota Law School 
Speaker: Cymie Payne
Speaker: Zygmunt J. Plater, Boston College Law School 
Speaker: William Snape, American University Washington College of Law 

If this is of interest, I hope you can join us. 

--JPF

Insider Trading is Illegal

Would you invest in the stock of publicly traded companies if you knew that every time insiders became aware of market-moving information they would first trade on it themselves, then share it with their quid-pro-quo "friends" who would then also proceed to trade on it, and only then release the information publicly?  Sure, by the time you sold (assuming it's bad news) your stock could well be very accurately priced--but how much consolation is that?  And even if a bunch of really smart people could present you with some nifty arguments about how you're actually not hurt (heck, you're actually better off) by allowing this sort of activity--are you really rushing off to pay to play this sort of game?  How much of a discount is sufficient to make this sort of playing field level for you?

Let's assume that insider trading remains illegal despite all the protestations to the contrary because a great bulk of investors don't like it and the regulators have this silly thing about maintaining confidence in the stock market.  Lynn Stout suggests that there may be something about hedge funds that uniquely sets them up to cultivate criminals in this area.  Specifically, she notes: (1) the top-down emphasis on returns uber alles; (2) the influence of the "weeded garden" that remains after all those who can't keep up with the cheaters' returns are let go; and, (3) full digestion of the enabling message that insider trading doesn't hurt anyone.  Geoffrey Manne responds by opining that this all adds up to nothing more than generic agency costs and human behavior.  But I think Stout may be on to something because "size matters"--that is to say, while the levers at work may be generic the force with which they are being manipulated may well be unusual in the hedge fund context.

None of which is to say that I don't remain open to being convinced that holding insider trading to be illegal results in a net loss to society--I just haven't been convinced yet.

SJP

BLPB Named One of 50 Best Business Professor Blogs

BSchool.com provides its list here.  We made the list as one of only six business law blogs.  Thanks to all our readers for your support.

Merry Christmas and Happy Holidays!

SJP

Mixed Results in Government Energy Policy

The EPA announced that it is "going green" with new greenhouse gas regulations proposals (see here), while the military is being touted by Thomas Friedman in the New York Times as the new movers and shakers in green energy.   Unfortunately, it appears that the military has had some troubles with their wartime fuel contracts.  None of this is easy, though, and some progress is good progress.  At least, that's my holiday outlook.

--JPF

 

Just in Case You're Stressed

First, the BLPB tie-in: (1) Business law is practiced by business lawyers; (2) business lawyers get stressed; and (3) Zen meditation can be an effective form of stress management. Second, the shameless self-promotion: I've collaborated with the photographer Tim Averre to publish a photobook setting forth some of the wisdom of my Zen instructor, Craig Horton of the Cleveland Buddhist Temple. You can preview the first 15 pages below. If you want to purchase a copy, we are making them available at cost. Third, breathe.

Untitled | Make Your Own Book

SJP

Is Google Too Big?

The Dealbook presents round 2 on the question of whether Google is a monopoly here. I'm convinced Google is enormous, but I'm not convinced that is inherently a problem.  

There are some good arguments on both sides, but reading some of the arguments against Google's practices, bring to mind Mel Brooks' version of King Louis XVI: "It's good to be the king."

--JPF

First Things First

Yesterday, I started teaching a new course I designed called "Regulation of International Markets."  One of the more provocative student observations during the first class queried, "Where does the money come from when somebody buys low and sells high?"

That's always a good question, but, in these trying times, it's particularly poignant.  New Yorker magazine recently ran a piece asking why we need Wall Street.  After years of a single regulator's rule, Britain is pondering a decentralized structure.  Some foreign markets have simply transferred disciplinary authority from stock exchanges to the government.

Which reminds me again of how bland were the US regulatory reforms of 2010.  Perhaps it's time for a broader mindset?

--JSC, 12/21/10  

SEC's Announces First Non-Prosecution Agreement for Cooperative Company

The SEC today announced that it was pursuing charges against Carter's former Executive Vice President Joseph M. Elles "for engaging in financial fraud and insider trading," which the SEC claims "caused an understatement of Carter's expenses and a material overstatement of its net income in several financial reporting periods."  The SEC decided not to prosecute the company because of

the relatively isolated nature of the unlawful conduct, Carter's prompt and complete self-reporting of the misconduct to the SEC, its exemplary and extensive cooperation in the investigation, including undertaking a thorough and comprehensive internal investigation, and Carter's extensive and substantial remedial actions. 

The PDF of the non-prosecution agreement can be found here.

The SEC announced its new policy to encourage company cooperation in January 2010 (release here). The anticipated gains from the new policy were "expected to result in invaluable and early assistance in identifying the scope, participants, victims and ill-gotten gains associated with fraudulent schemes."  

It's taken almost a year for the first non-prosecution agreement, so it's not clear to me that the policy was a "game-changer" as the SEC had hoped. It still seems like a good way to encourage companies to help in the process, although it is my impression that a similar informal policy was already in place. Perhaps that's why not much seems to have changed.    

--JPF

Schwarcz on Marginalizing Risk

Steven L. Schwarcz has posted a paper on SSRN entitled "Marginalizing Risk."  Here's the abstract:

A major focus of finance is reducing risk on investments, in order to reduce a borrower’s costs of funds. From any given investor’s standpoint, risk dispersion appears as an important way to reduce investment risk; but sometimes risk dispersion can cause investors and other market participants to underestimate and under-protect against risk. Risk can even be so widely dispersed that rational market participants individually lack the incentive to monitor it. This article examines the market failures resulting from risk dispersion that can cause market participants to under-protect against risk. The article also analyzes the extent to which government regulation may be necessary or appropriate to limit these market failures. Finally, the article examines how such regulation should be designed, including the extent to which it should limit risk dispersion in the first instance.

SJP

FCC v. AT&T: Is There a Justice Scalia Wildcard?

I've been working on a summary of FCC v. AT&T for the ABA's Supreme Court Preview.  The question presented is whether corporations have cognizable "personal privacy" rights under Exemption 7(C) of the Freedom of Information Act that they can assert to limit disclosure of documents.  The Third Circuit's analysis of the question consisted of a straight-forward textual analysis: (1) "personal" is the adjectival form of "person" and (2) "person" is expressly defined to include corporations under FOIA--thus corporations may claim protection from invasion of their "personal privacy" under the statute.

Generally, one would assume Justice Scalia could be counted on to support such an analysis.  The FCC's brief, however, notes the following at p. 39:

Then-Professor Scalia … testified in 1981 that “[p]erhaps the most significant feature” of the 1974 FOIA amendments to Exemption 7 was that they did not protect “what might be called associational or institutional privacy” from requests under FOIA for disclosure of investigatory records about “corporations, unions,” and other “independent institutions.”

As one might expect, AT&T argues at p. 53 of its brief that this testimony in no way binds Justice Scalia's hands when it comes to ruling on the case:

True, Professor Scalia criticized FOIA as insufficiently protective of “institutional privacy” interests … [b]ut the testimony nowhere mentions Exemption 7(C) ….

Whether Justice Scalia feels bound by his prior testimony in a way that precludes him from voting to uphold the Third Circuit's decision remains to be seen.  Regardless, I'd be surprised if SCOTUS did not uphold the Third Circuit's ruling.  While some may view this case as another dangerous opportunity for SCOTUS to expand corporate rights along the lines of Citizens United, there is a key distinction that makes the case less controversial in my view.  In Citizens United the Court not only followed a straight-forward "corporations are persons for purposes of the First Amendment" approach, but also went on to conclude that there was nothing inherent in corporate status to warrant imposing unique speech restrictions.  In FCC v. AT&T, however, a ruling that corporations have personal privacy rights under FOIA would leave to the FCC (at least for the time being) the task of determining the scope of those rights in this case. As AT&T itself acknowledges at p. 45 of it's brief:

[T]hat corporations are not categorically excluded from claiming the protections of Exemption 7(C) does not mean that they must be treated the same as individuals. AT&T has acknowledged that point in both this Court and the court of appeals, see supra p. 23, and nothing in the Third Circuit’s decision mandates that the privacy interests of corporations be given the same weight as the privacy interests of individuals in applying Exemption 7(C).

Now, some might argue that what would raise this case to the level of Citizens United in terms of controversy would be if SCOTUS ruled that no limitations on corporate privacy rights were permissible solely on the basis of corporate status.

SJP

 

SEC Case Makes Alternative Energy Look Like 1990s Internet Start-Ups

The SEC yesterday announced charges against Alternate Energy Holdings Inc. (AEHI), alleging the the company raised millions of dollars from investors "while fraudulently manipulating its stock price through misleading public statements that conceal the [executives'] secret profits."  The complaint is available in PDF here. According to the complaint, AEHI "has no realistic possibility of building a multi-billion dollar nuclear reactor. AEHI has never had any revenue or product."  This seems be especially concerning to the SEC.  Note, for example, the press release headline: "SEC Brings Fraud Charges Against Self-Described Idaho Nuclear Power Company."

A quick look at the complaint and the company website raises a couple of interesting (to me anyway) issues.  On the one hand, the complaint that the company "has no realistic possibility" of building a nuclear reactor could be made of any company seeking to build a new nuclear plant.  A Scientific American article last year noted that since 2003, applications have been filed for 26 new reactors, but none have started completion.  As of June of this year, the Nuclear Regulatory Commission (NRC) reports that 31 new reactors have been proposed, but none had been proposed as of June 2010 and only two in 2009 (pdf here).  According to one source, the only plant in the United States under construction is the Watts Bar Unit 2 reactor, which was started in 1973. There are 65 total units under construction world wide.  

On the other hand, the NRC projected locations of new nuclear plants doesn't have anything anywhere near Idaho, as AEHI plans.  Beyond that, the AEHI website does seem awfully optimistic.  For one thing, the company site states that,for their proposed nuclear project site, "The Final phase will be the actual execution of the formal rezoning of the property, which will permit construction to commence."   Well, from the county perspective I suppose that's true, but I don't imagine the NRC would agree.  In fairness, the same site indicated an anticipated fourth quarter 2011 NRC application and construction commencing in 2014 with completion in late 2018.  Conceivable, I suppose, but highly optimistic given the experience of the other applications already filed with the NRC.  

The SEC also takes issue with the CEO's statements, both in content and amount.  The complaint notes that the company has issued 166 press releases since going public in 2006, including 87 in 2010.  Further, the compliant says, "Despite AEHI's weak financial condition, [CEO] Gillispie stated in a November 12,2010 interview that, in the long term, AEHI "could rival Exxon Mobil in profitability."  Again, the CEO is right, I suppose, but that's at least theoretically possible for any company.  

I'll be curious to see where this goes.  Just because a company doesn't have any products yet or a revenue stream doesn't make it a scam, although it probably raises the odds some.  And questions about the value of a company in an emerging market is always hard.  (See, e.g., Twitter's valuation of $3.7 billion based on revenue of roughly $50 million.)  

I'm interested to see how this turns out.  I am sure there are a lot of people trying to get in on the "next big thing."  And that, in fact, is how we find the next big thing. People risk capital, and lots of them lose it.  By the same token, it's one thing to lose your money when you picked the wrong technology or business model with your investment; it's quite another if there wasn't ever a plan at all.  We need to be careful not to punish companies falling into the first category for failing, while ensuring those in the latter group are held accountable.  No easy task, to be sure.

-JPF

John Coates on Corporate Governance and Corporate Political Activity

John C. Coates, IV, has posted a paper on SSRN entitled:  “Corporate Governance and Corporate Political Activity: What Effect Will Citizens United Have on Shareholder Wealth?”  Here’s the abstract:

In Citizens United, the Supreme Court relaxed the ability of corporations to spend money on elections, rejecting a shareholder-protection rationale for restrictions on spending. Little research has focused on the relationship between corporate governance – shareholder rights and power – and corporate political activity. This paper explores that relationship in the S&P 500 to predict the effect of Citizens United on shareholder wealth. The paper finds that in the period 1998-2004 shareholder-friendly governance was consistently and strongly negatively related to observable political activity before and after controlling for established correlates of that activity, even in a firm fixed effects model. Political activity, in turn, is strongly negatively correlated with firm value. These findings – together with the likelihood that unobservable political activity is even more harmful to shareholder interests – imply that laws that replace the shareholder protections removed by Citizens United would be valuable to shareholders.

SJP



Judges' Facebook Dilemma: To Friend or Not to Friend?

Now that Facebook is such a hot commodity (just check out Time Magazine's Person of the Year), there are concerns everywhere about what can happen when you have a Facebook page. (The same is true, of course, for Twitter, Myspace and other social networking sites.)  

Much has been made about whether judges should "friend" lawyers, especially those who do or may appear before them.  (See, e.g., The Columbus Dispatch on this subject here.) In Florida, judges are not to be "Facebook friends" with other lawyers.  In Kentucky, such connections are permitted, but the state ethics committee (pdf opinion here) provided only "qualified" approval, noting that Facebook connections are "fraught with peril" and that some site content "otherwise acceptable for members of the general public, may be inappropriate for judge." 

I very much agree that judges should be careful and work to avoid the appearance of impropriety, but I do find it funny how excited people are about Facebook.  It's not as though this medium is the first time judges ever connected in a friendly way with other members of the bar.  Maybe I just missed it, but there never seemed to be too much of a concern about judges being members of country clubs with other lawyers and playing golf with other lawyers.  My sense is that prudent judges avoided such interactions during cases in which a lawyer was appearing before them, but the connection itself was not often called into question.  (If it was a very close friendship, presumably a party would seek disqualification or the judge would recuse him or herself.)

As compared to country club rosters, more people can (depending upon settings and one's technical abilities) more readily access Facebook sites and see the people with whom a judge is friends, so the relationship is more apparent.  However, it's not necessarily a deep relationship.  As the Dispatch notes as an example, Ohio Supreme Court Chief Justice Eric Brown has more than 4,500 Facebook friends. One can hardly use that connection alone to demonstrate closeness.  

So, it's not likely the connection itself that's the problem. I think it's more of a social value thing.  That is, a large number of people don't see the value of Facebook, and thus think it's an especially bad idea for judges to have pages at all, much less ones that connect to other lawyers.  Maybe they are right, but it seems to miss the point.  Country clubs, on the other hand, are often (or were often) deemed necessary to "do business" and thus seemed somehow more appropriate.  This is kind of funny, because "doing business" with other lawyers is precisely what many are worried about when judges and lawyers are Facebook friends.

At the end of the day, it's the type of relationship and how judges interact with other lawyers who appear before them that matters, not where they do it.  For me, the open Facebook page is among the least of my concerns. After all, if it's on Facebook, at least we have a chance to know what's going on. Now that I think about it, maybe we should require judges to get on Facebook.

--JPF

Agency Law & (No) Tipping Policies Under Massachusetts Law

The National Law Journal reports that the Court of Appeals for the First Circuit heard oral arguments in DiFiore v. American Airlines Inc., 688 F. Supp. 2d 15 (D. Mass. 2009) (case available here).  The case is postured as a preemption case, asking whether the Airline Deregulation Act preempts a claim under Massachusetts's tip law with regard to how airlines deal with curbside baggage.  In 2005, American Airlines put a $2 fee in place for bags checked in at curbside.  Previously, people usually tipped the skycap for the service, but there was no fee.  After the fee was put in place, the fee could only be collected in cash, and customers gave the cash to the skycap.  However, every $2-per-bag fee was then given to the airline (or the airline's contractor); the skycap retained nothing unless a passenger tipped more than the $2 per bag.  

At issue, if not preempted, was the Massachusetts "tips law," which provides:

(b) No employer or other person shall demand, request or accept from any wait staff employee, service employee, or service bartender any payment or deduction from a tip or service charge given to such wait staff employee, service employee, or service bartender by a patron. No such employer or other person shall retain or distribute in a manner inconsistent with this section any tip or service charge given directly to the employer or person.

. . . .

(g) No employer or person shall by a special contract with an employee or by any other means exempt itself from this section.

Mass. Gen. Laws 149 § 152A. 

The court determined that the tips law was not preempted, and thus the skycaps were entitled to the fees collected.  An employer can impose such as fee, as long as long as the employer makes it clear to the customer that the fee is not a tip.  In this case, the court explained, "American's curbside check-in fee looked exactly like a tip both to skycaps and to customers ($2 dollars, cash only, paid directly to skycaps)." 

This case reminded me of the discussion we have every year during the agency portion of my class, where we discuss the Restatement (Second) of Agency § 388, Duty to Account for Profits Arising Out of Employment: "Unless otherwise agreed, an agent who makes a profit in connection with transactions conducted by him on behalf of the principal is under a duty to give such profit to the principal." Students are often surprised that accepting tips or other gifts is not permitted for agents/employees without an agreement.  

 The comments to that Restatement section provide:

b. Gratuities to agent. An agent can properly retain gratuities received on account of the principal's business if, because of custom or otherwise, an agreement to this effect is found. Except in such a case, the receipt and retention of a gratuity by an agent from a party with interests adverse to those of the principal is evidence that the agent is committing a breach of duty to the principal by not acting in his interests. 

The Massachusetts tips law modifies this rule and limits freedom of contract between employer and employee on this issue.  I can't help but wonder how far this goes.  Certainly this means that an employer cannot propose to take from (or share) tips or service charges with employees.  But does it take the next step and say that an employer cannot restrict an employee from accepting tips?  

On the one hand, § 388 implies that an employer can restrict employees from taking tips, because an agent only "properly" keeps tips where there is an agreement via "custom or otherwise."  For skycaps, it would seem that custom would be on the side of the skycaps, but an employer could expressly state that no tips could be accepted, thus eliminating the necessary "agreement" allowing the accepting of tips. The Massachusetts tips law says that the airline can't take any tips given to the skycaps. But does the law also say an employer cannot impose a blanket "no-tipping" policy?  

It's my understanding that there are at least a few "no tipping" hotels in Boston, but those hotels often frame their stance as a "service inclusive" policy and exempt themselves specifically from the tips law (or at least try to).  For example, The Seaport Boston Hotel website explains in the "rate terms":  

The hotel employs a “service inclusive” policy.  There is no need to “tip” any of our staff members.* 

*The Hotel Inclusive Charge is 100% distributed among all Seaport hourly employees, a group that extends beyond “wait staff employees, service employees, and service bartenders” as defined by Massachusetts State Law.  The Hotel Inclusive Charge is not a “tip or service charge” as defined by the Massachusetts service charge and tip statute.

But what happens if someone does tip?  Under the law, it is clear the hotel cannot take the tip from the employee, thus modifying the traditional agency rule.  Can a hotel fire or otherwise penalize the employee, though, for taking the tip?  Under the tips law, at least arguably yes, because the employer would not "demand, request or accept . . . a tip or service charge."   The employer would instead simply limit the employee's ability to accept the tip.  (One could always argue that the tips law is designed to stop employers from limiting employees' ability to earn tips. While this may be the goal, that's not what the law says, at least not by my read.)

Oddly enough, this doesn't seem to be the end of the analysis.  Some courts have entertained the idea that skycaps could pursue an additional claim under a "theory of interference, that passengers are unlikely to tip in addition to the bag fee."  Mitchell v. U.S. Airways, Inc., Slip Copy, Civ. Action No. 08cv10629-NG (D. Mass. Sept. 08, 2010); see also DiFiore v. American Airlines Inc., 483 F.Supp.2d 121 (D. Mass. 2007) ("With respect to the claim for tortious interference with advantageous relations, the skycaps may be able to establish that American intentionally and maliciously interfered with their enjoyment of an expectancy of tips from passengers.").  

I'm willing to buy this argument to the extent there was a contract that allowed the skycaps to accept tips, if the airline then improperly modified the agreement.  However, and I admit I could be wrong here, I suspect that the skycaps would be at-will employees, meaning that the airlines could probably change the terms of their employment prospectively if they wished.  Otherwise, there would be a straight breach of contact claim here already.  

Maybe there simply aren't any employers who have taken a true no-tip policy this far, so this question hasn't been asked in court (or maybe I missed it in my very quick look).  But until the airlines cases are ultimately decided, there are likely some businesses with no-tip policies watching very closely. At least, I think they should be. 

--JPF

Akron Wins!

Financial Crisis 2008: Are the Only Two Options (1) Crimes Were Committed or (2) Markets Weren't Efficient?

Jesse Eisinger asks: "Where Are the Financial Crisis Prosecutions?"  Noting that the answer is effectively "nowhere to be seen" (my words, not his), Eisinger is incredulous and goes on to ask: "The world was almost brought low by the American banking system and we are supposed to think that no one did anything wrong?"

Larry Ribstein responds by noting that he is fine with the lack of prosecutions because he buys the explanation that no one saw the crisis coming and the key players were at worst dumb--not venal.  Maybe that's correct, but what does that say about market efficiency?

I guess if you typically find yourself arguing for less regulation an answer might be something along the lines of: (1) market efficiency is not the same thing as market perfection--in order to prefer markets to regulatory solutions you only need to conclude that markets work "less worse" and (2) the markets were distorted by government intervention.  That doesn't sound bad, but I don't think Bill Black would be convinced.

SJP