Business Law Prof Blog

Liberty and the Inherent Tension Between Freedom and Power

This past week I received a wonderful gift from my 19-year-old son, Justin.  He remastered an old acoustic track I'd laid down over 10 years ago, of a song I'd written over 20 years ago.  The track is entitled "Tiananmen Square" and you can find it here.  I think he did an incredible job and I hope you find it worth a listen.  I believe the most relevant line is: "You were willing to die for what I take for granted."

What does this have to do with business law?  Well, business law is at its root (at least from one perspective) about the balance of power between government and business, and I do not believe it is an exaggeration to say that this balancing implicates our individual liberty.

I think many would agree that individual liberty both requires and is threatened by centralized power.  Some form of centralized power is arguably necessary to protect individuals, while those wielding that power will seemingly always be tempted to entrench and expand that power--often at the expense of individual liberty.

One of the ideological divides I see in business law is between: (1) those who view abuse of governmental power as the greatest threat to individual liberty, and business as a check on that power; and (2) those who view the the abuse of power generally to be the greatest threat to individual liberty, and see business as often wielding the most relevant power. The important point for me today, however, is that many on both sides share a genuine desire to avoid the abuse of power exemplified by the Tiananmnen Square massacre.

May you find something to be grateful for on this 4th of July Weekend.

SJP

Loza on Entrepreneurship

Emile Loza has posted An Empirical Analysis of U.S. Supreme Court Usages of 'Entrepreneur' Informed by Economics, Multidisciplinary Studies, and Innovation Practice: Meaning and Characterization Toward a Theory of Entrepreneurship Law on SSRN with the following abstract:

Although other academies have studied entrepreneurship for some thirty years, legal scholarship on the subject is zygotic. Few subjects, however, are more compellingly needed to illuminate domestic efforts directed toward economic recovery and growth, innovation acceleration, equal opportunities for women and minorities, and national security and toward international efforts to foster and sustain rule of law, security, gender equality, economic transition and recovery, and climate change-related innovation initiatives.

To-date, legal scholars have ignored entrepreneurship or treated it as a mere context for small business practice or skills training. No unified theory exists as to what or who an entrepreneur is, rendering comparative and empirical analyses impossible. Rather, uses of the term “entrepreneur” are everywhere subject to great variability. This definitional dissonance undermines the efficiency and effectiveness of economic initiatives, institutional innovation programs, and law and policy developments.

Toward a proposed theory of entrepreneurship law, the author presents an empirical study of U.S. Supreme Court’s usages of “entrepreneur” throughout its history. After applying a series of relevance filters, the study critically examines the Court’s ascription of neutral, favorable, and unfavorable values to the characteristics and activities of entrepreneurs.

French economist Jean-Baptiste Say coined the term “entrepreneur” in 1803, and the analyses incorporate resonant themes from Say’s famous TREATISE ON POLITICAL ECONOMY, from innovation and economics theory by Joseph Schumpeter, and from innovation and management writings of Peter Drucker. Understandings from an extensive innovation practice further enrich the analyses, as do multidisciplinary examinations of research in economics, entrepreneurship and business, education, psychology, sociology, communications, gender equality, and minority studies.

From this study, the author compiles a series of some twenty attributes of entrepreneurs and a range of activities in which they engage. Among these are risk-taking, market vision, competitiveness, innovation, passionate drive, opportunism, and other attributes, along with intellectual property, formation, employment, investment, and financing, along with activities to gain and leverage multiple forms of capital and other activities.

From this informed compilation, Loza advances a comprehensive definition of “entrepreneur.” With this step toward a theory of entrepreneurship law, the proposed definition will help to begin to resolve important problems of definitional dissonance. Upon arriving at a more unified understanding of entrepreneurs, a more informed focus on their roles and needs will benefit the innovation acceleration, economic development, and the law and policy initiatives needed to eliminate barriers to and to incentivize their successes and sustainability.

ECC

Trachtman on Financial Crisis

Joel P. Trachtman has posted The International Law of Financial Crisis: Spillovers, Subsidiarity, Fragmentation, and Cooperation on SSRN with the following abstract:

This article develops an analytical template for examining the future of international financial crisis avoidance and management, focusing on certain areas of prudential financial regulation. This template examines questions of national regulatory policy reform, reasons for international cooperation, and problems of cross-functional fragmentation. In order for each state to reduce risk through regulatory reform, states must work together to avoid cross-border harms that are not fully taken into account in national decision-making, and to avoid detrimental regulatory competition. They must work together to make rules, but they must recognize that our vision of the future is limited, and so they must establish institutions that will allow them to revise rules, and institutions, as necessitated by unfolding change.

ECC

Delaware Courts Reaffirm Old Axiom: Read the Settlement

In June, Vice Chancellor Strine wrote an opinion in Cambridge North Point LLC v. Boston and Maine Corporation, which reaffirmed what I hope most lawyers still remember: you need to read each draft of your documents.

The gist of the case is that Cambridge and B&M worked together on a high-end real estate deal in Boston. Over time, the "relationship deteriorated" leading Cambridge to sue B&M for breach of contract. The parties settled that dispute, but B&M did not follow through on their obligations and ended up in court again. And, again, they reached a new settlement agreement. B&M breached again and Cambridge sued.

Rather than arguing they did not breach the second agreement, B&M claimed that the agreement was unenforceable and should be rewritten "because B&M was supposedly duped into agreeing to commitments it did not know it was making." B&M argued that Cambridge “quietly” added what the court called "plain language" to the draft settlement that required B&M to pay $3.5 million. B&M argued that the way the clause was added to the contract "led B&M to overlook it, and B&M signed that agreement without noticing the new commitment." Thus, B&M requested the court to re-write the contract to omit the $3.5 million payment.

Vice Chancellor Strine was not impressed:

Because this court’s job is not to refashion contracts into the form that parties with the benefit of hindsight wished they had scrivened, or to reward counsel for their own lack of diligence, I reject B&M’s argument. B&M is a sophisticated commercial party that was represented by lawyers. Those lawyers read the various iterations of the draft settlement agreement, noticed that extensive revisions were made, and proposed revisions of their own. They should have noticed the new $3.5 million provision — especially given that the settlement agreement was only six pages in length, and the opening language of the key paragraph in the agreement clearly signaled the importance of the subject matter that it addressed. Indeed, use of comparison software, which is common within the legal industry, would have immediately revealed the changes Cambridge North Point made to the drafts. Or, B&M and its lawyers could have simply lined up successive drafts and performed a manual review of the drafts’ half-dozen pages. But, the B&M witnesses testified they did none of those things. Nor did they do the most obvious thing: read the entire agreement and outline what B&M’s obligations were under it.

This is a huge error, and it is one that can be rather easily avoided. Not that it happened here, but I hate the idea of someone adding a clause to see if it will be caught by the opposite party. Nonetheless, in these kinds of negotiations, one must be on the look out for such things. Plus, it was SIX PAGES. This is not a two-hundred page settlement in which the clause could have been buried.  (Incidentally, even if it is two-hundred pages or more, that "comparison software" Vice Chancellor Strine mentioned is essential.) 

Too bad for B&M, but I think I have just found a new negotiation exercise that will help teach law, negotiation, and last, but certainly not least, ethics.

--Josh Fershee

SCOTUS: "a good friend to business"

Larry Ribstein commends the Supreme Court for standing behind business while the rest of the country seemingly tears its hair out over the abuses of corporate power and its consequences.  Of course, it's not like no one saw this coming.

SJP

MoveOn.org's "Top 10 Corporate Outrages"

MoveOn.org sent me their list of the Top 10 Corporate Outrages.  I thought the list might be of interest to our readers, so here it is:

1. Exxon Mobil made millions in profits, and yet paid not one dime in federal income taxes in 2009.

2. The 2005 energy bill had a little known provision, commonly called the Halliburton Loophole, which exempted natural gas drilling from the Clean Water Act. The result? Water so contaminated that you can light it on fire.

3. Massey Energy was cited more than 2400 times for safety violations in its mines, but chose not to fix potentially lethal problems because low penalties meant it was cheaper to simply keep paying the fines. This spring, 29 miners were killed in an underground explosion at a Massey mine in West Virginia.

4. Michael Taylor was the FDA official who approved the use of Monsanto's Bovine Growth Hormone in dairy cows (even though it's banned in most countries and linked to cancer). After approving it, he left the FDA—to work for Monsanto. Until last year, when he moved back to the government—as President Obama's "Food Safety Czar."   No joke.

5. Internal Toyota documents outline how the company was successful in limiting regulators actions in the recalls last year—saving hundreds of millions while the death toll continued to climb.

6. GE and it's lobbyists—including 33 former government employees—have successfully lobbied Congress to override Defense Department requests to cancel a GE contract to work on a new engine for the strike fighter jet. GE will need $2.9 billion to finish the project.

7. Top executives at 9 top banks including Citibank, Bank of America, Goldman Sachs, and Morgan Stanley paid themselves over $20 billion dollars in bonuses just weeks after tax payers bailed them out to the tune of 700 billion dollars.

8. During the waning days of the Bush administration officials responded to a long-term lobbying campain by pre-empting product liability lawsuits for dozens of whole industries. They bypassed congress entirely and rewrote rules ranging from seatbelt manufacturing regulations to prescription drug safety.

9. Sunscreen manufacturers including Johnson & Johnson and Schering-Plough, in the interest of profits, are opposing an FDA proposal requiring full reporting on sunscreen labels. The New York Times just confirmed that current SPF ratings don't even measure sun rays that cause cancer.

10. BP—a company with a record of 760 drilling safety and environmental violations—was granted safety waivers in order to operate the deepwater drilling rig that ultimately created the worst environmental disaster in US history.

SJP

Rose on Risk Regulation

Paul Rose has posted Regulating Risk by 'Strengthening Corporate Governance' on SSRN with the following abstract:

This paper, presented at the “Regulating Risk” symposium at the University of Connecticut School of Law, April 16, 2010, briefly reviews the connection between risk and corporate governance, then examines the “strengthening corporate governance” provisions of Subtitle G of the Restoring American Financial Stability Act of 2010 (also known as the “Dodd Bill”). The corporate governance provisions, covering majority voting for director elections, proxy access, and the separation of the roles of CEO and chairman of the board, seem likely to have one of two possible effects. On the one hand, the provisions may be pernicious, in that they further enhance shareholder power without a clear justification for increased shareholder power, and more particularly without a justification for shareholder power as a risk management device. Indeed, the Dodd Bill’s corporate governance provisions may work at cross-purposes to the risk management intent of the remainder of the Dodd Bill: the corporate governance provisions operate under the assumption that enhanced shareholder power will result in better monitoring of managerial behavior, which presumably will help to prevent future crisis, but both theory and evidence suggests that diversified shareholders generally prefer companies to take risks that other constituencies (including taxpayers) would not prefer.

On the other hand, the Dodd Bill may have very little effect on investor behavior or risk management. Increases in shareholder power over the past years (fundamentally the result of increased federal regulation) have made management more responsive to - and in some cases probably overly responsive to - shareholder concerns over agency costs. Indeed, some of the proposed reforms already have been or were likely to have been put in place at most public companies. If private ordering is already working, what is the point of imposing strict governance constructs across the market as a whole, especially when most of the affected firms are victims of, rather than contributors to, the Financial Crisis?

ECC

Loza on Entrepreneurship

Emile Loza has posted The Entrepreneurship Crisis: The Urgent Need for a Comprehensive Innovation Policy on SSRN with the following abstract:

More than small business ownership, entrepreneurship means innovation. The world’s leading corporations endlessly hunger for innovation to sustain and grow their businesses in global competitive markets. Much of that innovation originates in clever new businesses and tech start-ups. In the United States, we have a poor track record of sustaining those start-ups, keeping them alive and growing and their innovations protected. As a result, major innovation consumers like Hewlett-Packard Company, Proctor & Gamble, and many more lose out on opportunities to bring start-up innovations on board and commercialize them. Technology start-ups fail at an alarming rate, wasting their intellectual assets wasted and bankrupting their so desperately needed innovators. As a result, American business suffers the loss of innovations vital to its competiveness and the American economy and employment suffers. Policymakers need to wake up to the devastating wastage of innovation and develop a cohesive, comprehensive plan to fuel innovation, support technology start-ups, and facilitate the transfer of these innovations to the major corporations that can commercialize them and bring home high-paying American jobs in the innovation industry.

ECC

Suarez on Bilski

Roberto Manuel Suarez has posted Business Methods and Patent-Eligible Subject Matter in Light of Bilski v. Kappos on SSRN with the following abstract:

The legal, business, and scientific communities eagerly await the Supreme Court’s ruling in Bilski v. Kappos and many scholars, business leaders, and legal professionals try their best to anticipate how the Court will rule. Many patent attorneys and patent agents are drafting two sets of claims for their clients and the one they file will depend on how the Supreme Court rules.

For all of the opinions, articles, and conjecture, all one need do is study the law and look at the precedents to know that anticipating how the Supreme Court will rule in a case is akin to trying to gaze into a crystal ball. So, what will be the future of business methods as patent-eligible subject matter? Will the machine-or-transformation test stand? What will be the fate of the Bilski patent? An educated guess is the best that one can hope for in this situation.

ECC

A "New" Risk to Markets: Inebriated Exuberance

A British financial regulator recently revealed that a U.K. oil trader pushed oil prices up $1.65 per barrel in a little over two hours of trading while he was drunk.  He also apparently lost his firm $10 million.  

This story provides a couple good reminders.  First, there are lots of things that are a really bad idea when drinking.  Driving tops this list, and trading and texting (the new dialing) are some others to clearly avoid. Second, markets are subject to all sorts of influences, even those of market participants under the influence.  In the case, it wasn't irrational exuberance, it was inebriated exuberance. 

--Josh Fershee

The (Slightly) Flawed PCAOB

Yesterday, the Supreme Court handed down a provocative 5-4 decision in Free Enterprise Fund v. Public Company Accounting Oversight Bd.  Writing for the majority, Chief Justice Roberts found unconstitutional the vesting of authority in the PCAOB because of the structure's "more than one level of good cause tenure" (i.e., executive power was conferred upon a Board beyond the President's control).

While the opinion simultaneously clarified that the rest of Sarbanes-Oxley remains intact, the decision will undoubtedly shape the consumer protection agency expected to be created this week.  Heck, the opinion's worth a skimming if just for the detailed dissent (Justice Breyer uses charts to list the varied examples of federal officers removable only for cause).  The Free Enterprise Fund decision can be found at http://www.supremecourt.gov/opinions/09pdf/08-861.pdf.

--JSC, 6/29/10

The Real Costs of Traffic Jams, Big and Small

Despite several years growing up knowing Detroit traffic, living in Washington, DC, Los Angeles, New Orleans, and New York City, and regularly visiting Chicago, now that I live in a smaller city in a low population state, I apparently forgot easily what real traffic is like.  As I was moving three miles over forty minutes on 696 approaching Evergreen Rd (Detroit Area), I was reminded of a blog post about a paper a while back related to the externalities of traffic jams.  

I also was reminded of another externality as my five-year-old son did the potty dance in the back seat as we crawled toward the next exit.  Thankfully, the only externality was a little stress for both us, as he handled himself brilliantly until we reached the Kroger.

--Josh Fershee   

Of World Cup Commentary and Financial Reform...

I have been most impressed by the consistent cordiality of the BBC broadcasters who are bringing the World Cup games to America.  A defender who has been behind the rush all day is said to be "suspect on crosses."  North Korea's 7-0 loss to Portugal evidenced "a lackluster performance."  And, of course, the British and American efforts were "found wanting" in upset losses over the weekend.    

In the spirit of such dignified euphemism and old world gentility, I hereby summarize three of the main compromises about to be signed into law as domestic financial reform:

"Lackluster"

Remember when hedge funds and private equity firms were thought to be unregulated beasts populating the dangerous and new "shadow banking system"?  Well, not so much anymore.  Wall Street titans will still be able to invest up to 3% of equity in such entities. 

"Found Wanting"

Although cited as the primary folly in the economic crisis, derivatives ultimately were characterized as just too much darn fun to place squarely on the regulator's hit list.  Thus, the "common and relatively safe derivatives" (NYT, 6/25/2010) will still be permitted (funny, I thought credit default swaps were thought to be common and relatively safe, at least until 2007?).   

"Suspect"

Net capital requirements, of course, are the chief means of limiting suicidal risk.  But, as Congress has edified, one man's suicidal speculation is another's entrepreneurial nature.  Thus, the largest entities will be given 60 months to comply with the new limits on their coffers (which of course provides much time for repeal/modification of these limits).

Overall, let's hope these Congressional games need not take place every four years.

---JSC, 6/28/10