Business Law Prof Blog

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