Saturday, March 4, 2017
This Saturday, I point you to a colorful long read: Sheelah Kolhatkar’s deep dive into William Ackman’s short bet against Herbalife. Unabashedly sympathetic to Ackman, the article describes how Herbalife was brought to his attention (there are analyst firms that just identify shorting opportunities? Who knew? Please don’t answer that everybody knew; that would be embarrassing) and ultimately ended up as something of a crusade to expose what Ackman believes is a pyramid scheme. (And the FTC believes is a scheme that is awfully like a pyramid scheme but without actually using those words.) According to Kolhatkar, Ackman and his people want to make money, sure, but they also want to expose a fraud that – like Trump’s universities (a comparison Kolhatkar explicitly makes) – robs desperate people of their savings.
The article describes the titanic battle between Herbalife and Ackman (Herbalife’s CEO is described as having an “air of PTSD”), including how Ackman even tried to enlist Latino civil rights groups to advocate on his behalf. It’s reminiscent of that time the NAACP involved itself in the epic battle over debit card swipe fees.
Ackman has held on to this bet for a while, combatting other investors and Herbalife’s own extensive public relations campaign. In a few months, however, the settlement that Herbalife reached with the FTC will take effect, and Herbalife will be forced to ensure that most of its sales are made to actual retail customers, and not distributors hoping to resell the product. One question mark raised by the piece is whether the settlement will finally allow Ackman’s bet to pay off, or whether Herbalife will manage to survive, perhaps by focusing its operations in other countries, where the settlement doesn’t apply.
Friday, March 3, 2017
With co-editor Joan Heminway (and Anne Tucker via Skype), I am at Notre Dame for a symposium on social enterprise law. I will be presenting on aforthcoming book chapter, which builds on my stakeholder advisory board idea. My article Adopting Stakeholder Advisory Boards article was recently published in the American Business Law Journal and I posted it to SSRN this week. The abstract is reproduced below.
Over the past decade, interest in socially responsible business has grown exponentially. The social business movement seeks to have firms focus on the interests of all corporate stakeholders, rather than solely the financial interests of shareholders. Coupled with the social business movement of the past decade has been the passage of social enterprise statutes by over thirty states. The social enterprise statutes provide legal frameworks for firms that seek profit alongside broader social and environmental ends. A plethora of social enterprise legal forms have been created in the United States since 2008, including benefit corporations, public benefit corporations, benefit LLCs, low-profit limited liability companies (L3Cs), general benefit corporations, specific benefit corporations, sustainable business corporations, and social purpose corporations.
Despite the interest in social business and the passage of numerous social enterprise laws, the basic corporate governance framework has stayed largely the same. In both socially-focused traditional companies and in newly formed social enterprises, the corporate governance system is one that empowers directors, officers, and shareholders, but largely ignores other stakeholders such as employees, customers, vendors, creditors, the environment, and the community at large.
This Article explores the shortcomings of the current corporate governance framework, reveals inadequacies in previous proposals to focus firms on all stakeholders, and proposes a stakeholder advisory board as a solution. As proposed, the stakeholder advisory board will give all major stakeholders a more direct voice in firm governance and will grant more stakeholders limited but significantly powers, without harmfully disrupting the efficiency of the board of directors. If adopted, the stakeholder advisory board will better align the corporate governance framework with the recent social business movement by including representatives of all stakeholder groups in decision-making. This proposal suggests mandating adoption of a stakeholder advisory board for large social enterprises, and encourages the voluntary adoption of a stakeholder advisory board by all firms that take their social commitments seriously.
Thursday, March 2, 2017
The majority of states have now passed laws prohibiting bad faith assertions of patent infringement. The laws are heralded as a new tool to protect small businesses and consumers from harassment by so-called patent trolls. But state “anti-patent laws” are not a new phenomenon. In the late nineteenth century, many states passed regulations to prevent rampant fraud by patent peddlers who aggressively marketed fake or low value patents to unwitting farmers. However, courts initially held the laws were unconstitutional. Congress, courts reasoned, had power under Article I, Section 8, Clause 8 to “secure” patent rights. If states could tax patents or alter the terms on which patents were sold and enforced, this risked destroying a federal property right and nullifying an Article I power. In the early twentieth century, the U.S. Supreme Court finally held that states retained some authority to regulate, and to tax, patent transactions. But the Court made clear that states could never impose an “oppressive or unreasonable” burden on federal rights. The Federal Circuit has completely ignored this preemption law. But it has never been overruled and must be consulted today in assessing the constitutionality of states’ current efforts to combat patent trolls.
Wednesday, March 1, 2017
Businesses from small farmers to cruise lines are anxiously awaiting President Trump's policy on Cuba and how/if he will rescind President Obama's Executive Orders relaxing restrictions on doing business with the island.
If you're in the South Florida area next Friday March 10th, please consider attending the timely conference on Doing Business in Cuba: Legal, Ethical, and Compliance Challenges from 8:00 am-4:30 pm at the Andreas School of Business, Barry University. The Florida Bar has granted 6.5 CLE credits, including for ethics and for certifications in Business Litigation and International Law. The Miami-Dade Commission on Ethics and Public Trust is organizing the event.
As a member of the Commission and an academic who has just completed my third article on Cuba, I'm excited to provide the opening address for the event. I'm even more excited about our speakers John Kavulich, President, U.S. Cuba Trade and Economic Council Inc; the general counsel of Carnival Cruise Lines; mayors of Miami Beach, Coral Gables, and Doral; director of the Miami International Airport; a number of academic experts from local universities; Commissioners Nelson Bellido and Judge Lawrence Schwartz; and outside counsel from MDO Partners, Akerman LLP, Holland & Knight, Greenberg Traurig, Squire Patton Boggs, and Gray Robinson.
It promises to be a lively and substantive discussion.
Registration closes on Monday, March 6th. The $50 admission fee includes breakfast, lunch, and all materials. Go to ethics.miamidade.gov or call 305-579-2594 to register or for more information. You can also leave comments below or email me at email@example.com.
Tuesday, February 28, 2017
I don't know if it's the time of year or if I am just a little off, but I am generally grumpy today. So, I am going to vent a bit.
First, a regular irritation that is no shock to regular readers is the "limited liability corporation." I probably should have stopped the Westlaw alert for that terms, which comes through nearly every single day with multiple cases and news items. A new case from the U.S. District Court in Kansas, Pipeline Prods., Inc. v. Horsepower Entm't, No. CV 15-4890-KHV, 2017 WL 698504, at *1 (D. Kan. Feb. 22, 2017), is typical. The court states:
Pipeline Productions, Inc. is a Kansas corporation with its principal place of business in Lawrence, Kansas. Backwood Enterprises, LLC is an Arkansas limited liability corporation with its principal place of business in Lawrence, Kansas. . . .The Madison Companies, LLC is a Delaware limited liability company with its principal place of business in Greenwood Village, Colorado. Horsepower Entertainment, a Delaware limited liability company, is a wholly-owned subsidiary of Madison with its principal place of business in Greenwood Village, Colorado.
Irritation 1: Arkansas does not have an entity called a "limited liability corporation." Arkansas, as is typical, has a corporation entity and a limited liability company entity. They are different. The fact that the court gets the entity right for the two Delaware LLCs suggests to me that the filings from Backwood Enterprises, LLC, is the likely source of the language. Still, courts should be getting this right. (It won't shock me if my obsession with this is irritating more than one reader. C'est la vie.)
Irritation 2: The case also references a "wholly-owned subsidiary." This is a common reference, but "wholly owned" does not need a hyphen when used a compound adjective. This source cites the one I tend to follow, from my public relations days:
When a compound modifier–two or more words that express a single concept–precedes a noun, use hyphens to link all the words in the compound except the adverb very and all adverbs that end in -ly. —AP Stylebook, 2013 edition. Boldface added.
Spot on. The site also provides a good hint:
*Warning: Not every word that ends in -ly is an adverb. Watch out for nouns like family and supply, and adjectives like only. For example, “family-oriented websites”; supply-side economics”; “only-begotten son.”
Since Americans (in particular) love threes, I will follow the Rule of 3s, and add one more.
Irritation 3: The word "articulate." Yeah, this is kind of random, but I am done with that word. I cannot come up with a time when another word won't serve as a good substitute, and the loaded way in which the term has evolved means it should be skipped. See, e.g., here. This article provides more good background and quotes Condoleezza Rice's former communications counselor, Anna Perez:
The word perfectly conveys, to quote George Bush, the soft bigotry of low expectations. It literally comes down to that. When people say it, what they are really saying is that someone is articulate ... for a black person.
Before anyone wants to get mad at me for being too "PC," calm down. I am not saying you can't say it. I am saying you will irritate me if you do. And if you say it to or about an African-American person, you probably are showing the bias Ms. Perez described. And, yeah, I have heard it said about and to African-Americans in my presence, and it's usually pretty clear the bias is there. It's an irritation to me, and it's demeaning, even though I think it is, from time to time, well intentioned, if ignorant. Time to move forward. What was once "progressive thinking" is not anymore. Try to catch up if you're really trying to be nice.
I know, everyone has things that irritate them. It's good to vent now and again. No person attacks or freak outs. Just a good, old-fashioned vent. Happy Mardi Gras.
Monday, February 27, 2017
Later this week, I will head to Indiana to present at and attend a social enterprise law conference at The Law School at the University of Notre Dame. The conference includes presentations by participating authors in the forthcoming Cambridge Handbook of Social Enterprise Law, edited by Ben Means and Joe Yockey. The range of presentations/chapters is impressive. Fellow BLPB editors Haskell Murray and Anne Tucker also are conference presenters and book contributors.
Interestingly (at least for me), my chapter relates to Haskell's post from last Friday. The title of my chapter is "Financing Social Enterprise: Is the Crowd the Answer?" Set forth below is the précis I submitted for distribution to the conference participants.
Crowdfunding is an open call for financial backing: the solicitation of funding from, and the provision of funding by, an undifferentiated, unrestricted mass of individuals (the “crowd”), commonly over the Internet. Crowdfunding in its various forms (e.g., donative, reward, presale, and securities crowdfunding) may implicate many different areas of law and intersects in the business setting with choice of entity as well as business finance (comprising funding, restructuring, and investment exit considerations, including mergers and acquisitions). In operation, crowdfunding uses technology to transform traditional fundraising processes by, among other things, increasing the base of potential funders for a business or project. The crowdfunding movement—if we can label it as such—has principally been a populist adventure in which the public at large has clamored for participation rights in markets from which they had been largely excluded.
Similarly, the current popularity of social enterprise, including the movement toward benefit corporations and the legislative adoption of other social enterprise business entities, also stems from populist roots. By focusing on a double or triple bottom line—serving social or environmental objectives as well as shareholder financial wealth—social enterprises represent a distinct approach to organizing and conducting business operations. Reacting to a perceived gap in the markets for business forms, charters, and tax benefits, social enterprise (and, in particular, benefit corporations) offer venturers business formation and operation alternatives not available in a market environment oriented narrowly around the maximization or absence of the private inurement of financial value to business owners, principals, or employees.
Perhaps it is unsurprising then, that social enterprise has been relatively quick to engage crowdfunding as a means of financing new and ongoing ventures. In addition, early data in the United States for offerings conducted under Regulation CF (promulgated under the CROWDFUND Act, Title III of the JOBS Act) indicates a relatively high incidence of securities crowdfunding by social enterprise firms. The common account of crowdfunding and social enterprise as grassroots movements striking out against structures deemed to be elitist or exclusive may underlie the use of crowdfunding by social enterprise firms in funding their operations.
Yet, social enterprise’s early-adopter status and general significance in the crowdfunding realm is understudied and undertheorized to date. This chapter offers information that aims to address in part that deficit in the literature by illuminating and commenting on the history, present experience, and future prospects of financing social enterprise through crowdfunding—especially securities crowdfunding. The chapter has a modest objective: to make salient observations about crowdfunding social enterprise initiatives the based on doctrine, policy, theory, and practice.
Specifically, to achieve this objective, the chapter begins by briefly tracing the populist-oriented foundations of the current manifestations of crowdfunding and social enterprise. Next, the chapter addresses the financing of social enterprise through crowdfunding, focusing on the relatively recent advent of securities crowdfunding (including specifically the May 2016 introduction of offerings under Regulation CF in the United States). The remainder of the chapter reflects on these foundational matters by contextualizing crowdfunded social enterprise as a part of the overall market for social enterprise finance and making related observations about litigation risk and possible impacts of securities crowdfunding on social enterprise (and vice versa).
Please let me know if you have thoughts on any of the matters I am covering in my chapter or resources to recommend in finishing writing the chapter that I may not have found. I seem to find new articles that touch on the subject of the chapter every week. I will have more to say on my chapter and the other chapters of the Handbook after the conference and as the book proceeds toward publication.
Sunday, February 26, 2017
I have updated my business law professor jobs list here.
While many of the schools on this list, which was originally posted this past summer, have likely now filled those positions, there are a few new postions posted in the last month or so.
Those new position postings include two in law schools: NYU (a law & social enterprise fellowship) and Victoria University (New Zealand). And five new postings are legal studies positions in business schools: Appalachian State University, Minnesota State University, Morgan State University, St. Peter's University, and Warner University.
Saturday, February 25, 2017
It's Mardi Gras season here in NOLA, so I'm afraid I've been a little distracted. It's hard to concentrate when this is what's going on a block away ....
So, for this Saturday, I offer you a game: The Unicorn Startup Simulator. The goal is to reach a billion dollar valuation while keeping your employees happy - it took me a few tries, but I managed it. Good luck!
Friday, February 24, 2017
The following comes to us from Professor Stephen Diamond, Santa Clara University School of Law.
The Santa Clara University School of Law, the Leavey School of Business at Santa Clara University, the University of Washington School of Law, the NYU Stern Center for Business and Human Rights, the Rutgers Center for Corporate Law and Governance and the Business and Human Rights Journal announce the Third Business and Human Rights Scholars Conference, to be held September 15-16, 2017 at Santa Clara University in Santa Clara, California. Conference participants will present and discuss scholarship at the intersection of business and human rights issues. Upon request, participants’ papers may be considered for publication in the Business and Human Rights Journal (BHRJ), published by Cambridge University Press.
The Conference is interdisciplinary: scholars from all disciplines are invited to apply, including law, business, human rights, and global affairs. The papers must be unpublished at the time of presentation. Each participant will present his/her own paper and be asked to comment on at least one other paper during the workshop. Participants will be expected to have read other papers and to participate actively in discussion and analysis of the various works in progress.
To apply, please submit an abstract of no more than 250 words to firstname.lastname@example.org with the subject line “Business & Human Rights Conference Proposal.” Please include your name, affiliation, contact information, and curriculum vitae. The deadline for submission is March 15, 2017. We will begin reviewing submissions on a rolling basis on March 1, 2017. Scholars whose submissions are selected for the symposium will be notified no later than April 15, 2017. Final papers will be due August 25, 2017.
One of the many questions surrounding benefit corporations is whether their choice of legal entity form will scare away investors.
As previously reported, we now have our first publicly traded benefit corporation. And in this week's news certified B corp and benefit corporation Data.world announced a 18.7 million dollar raise. This raise ranks in the top-ten largest raises by a benefit corporation, according to the information I have seen on benefit corporations. I compiled the publicly available information I was able to uncover on social enterprise raises (including by benefit corporations) in a forthcoming symposium article for the Seattle University Law Review. It is quite possible that there are raises that have been kept quiet and that I have not seen. This Data.world news was announced days after final edits and will not be in my article.
As is often the case in social enterprise news, this news could be seen as encouraging or discouraging for supporters of the benefit corporation form.
On one hand, this is a fairly sizeable raise and a bit of evidence that not all serious investors are scared away by a legal form that mandates a general public benefit purpose.
On the other hand, the mere fact that a raise of under $20 million dollars is big news in the benefit corporation world (commanding its own announcement e-mail from benefit corporation proponent organization B Lab) shows that the benefit corporation form has yet to go mainstream. A raise under $20 million dollars hardly qualifies as news in the traditional financial world. And, as mentioned, to date, there have only been a handful of raises of this size for companies using the social enterprise forms.
Still, I think it is fair to say that benefit corporations have already come further than harsh critics originally thought was possible. The benefit corporation form still needs to evolve significantly, in my opinion, but the form is still growing and the positive news for the form has not yet stopped.
A few weeks ago I blogged about the spate of boycotts and buycotts responding to President Trump’s travel ban. Since that time, the #grabyourwallet campaign has taken credit for a number of stores dropping Ivanka Trump’s merchandise. In response, celebrities and others flocked to Nordstrom after criticism by the President’s surrogates about the retailer’s decision to drop the products, even though Nordstrom cited falling sales. Within days, news outlets reported that her perfume was a top seller on Amazon, and that many reviewers indicated that they had bought the product to show support for the President.
Yesterday, NPR reported that the United Auto Workers will revive its 1980s Buy American campaign, which will not only promote American-made products but will also encourage the boycott of cars made by American companies overseas. I’ve argued in the past that boycotts don’t work, and the NPR story provided some support from a professor who noted, “these campaigns, even with catchy song lyrics, almost never work. For instance, garment work essentially left the U.S. almost completely a few years after [the look for the union label ad] ran, and after the last UAW campaign, the American car companies continued to lose market share.” The New York Times has also examined whether these boycotts have long term effect.
The back and forth between boycotts and buycotts related to the President’s family may prove conventional wisdom wrong. It may be time for an empirical study (not by me) of when and how the boycott/boycott movement can sustain itself.
Thursday, February 23, 2017
Christopher Bruner has posted Center-Left Politics and Corporate Governance: What Is the 'Progressive' Agenda? on SSRN. You can download the paper here. Here is the abstract:
For as long as corporations have existed, debates have persisted among scholars, judges, and policymakers regarding how best to describe their form and function as a positive matter, and how best to organize relations among their various stakeholders as a normative matter. This is hardly surprising given the economic and political stakes involved with control over vast and growing "corporate" resources, and it has become commonplace to speak of various approaches to corporate law in decidedly political terms. In particular, on the fundamental normative issue of the aims to which corporate decision-making ought to be directed, shareholder-centric conceptions of the corporation have long been described as politically right-leaning while stakeholder-oriented conceptions have conversely been described as politically left-leaning. When the frame of reference for this normative debate shifts away from state corporate law, however, a curious reversal occurs. Notably, when the debate shifts to federal political and judicial contexts, one often finds actors associated with the political left championing expansion of shareholders' corporate governance powers, and those associated with the political right advancing more stakeholder-centric conceptions of the corporation.
The aim of this article is to explain this disconnect and explore its implications for the development of U.S. corporate governance, with particular reference to the varied and evolving corporate governance views of the political left - the side of the spectrum where, I argue, the more dramatic and illuminating shifts have occurred over recent decades, and where the state/federal divide is more difficult to explain. A widespread and fundamental reorientation of the Democratic Party toward decidedly centrist national politics fundamentally altered the role of corporate governance and related issues in the project of assembling a competitive coalition capable of appealing to working- and middle-class voters. Grappling with the legal, regulatory, and institutional frameworks - as well as the economic and cultural trends - that conditioned and incentivized this shift will prove critical to understanding the state/federal divide regarding what the "progressive" corporate governance agenda ought to be and how the situation might change as the Democratic Party formulates responses to the November 2016 election.
I begin with a brief terminological discussion, examining how various labels associated with the political left tend to be employed in relevant contexts, as well as varying ways of defining the field of "corporate governance" itself. I then provide an overview of "progressive" thinking about corporate governance in the context of state corporate law, contrasting those views with the very different perspectives associated with center-left political actors at the federal level.
Based on this descriptive account, I then examine various legal, regulatory, and institutional frameworks, as well as important economic and cultural trends, that have played consequential roles in prompting and/or exacerbating the state/federal divide. These include fundamental distinctions between state corporate law and federal securities regulation; the differing postures of lawmakers in Delaware and Washington, DC; the rise of institutional investors; the evolution of organized labor interests; certain unintended consequences of extra-corporate regulation; and the Democratic Party's sharp rightward shift since the late 1980s. The article closes with a brief discussion of the prospects for state/federal convergence, concluding that the U.S. corporate governance system will likely remain theoretically incoherent for the foreseeable future due to the extraordinary range of relevant actors and the fundamentally divergent forces at work in the very different legal and political settings they inhabit.
Wednesday, February 22, 2017
Here is a rundown of recent business news headlines:
The Snapchat parent company, SNAP, scheduled blockbuster IPO ($20-23B) is plagued with news that it lost $514.6 million in 2016, there are questions about the sustainability of its user base, and, for the governance folks out there, there is NO VOTING STOCK being offered.
In what is being called a "whopper" of a deal, Restaurant Brands, the owner of Burger King and Tim Hortons, announced earlier this week a deal to acquire Popeye's Louisiana Kitchen, the fried chicken restaurant chain, for $1.8 billion in cash.
Kraft withdrew its $143B takeover offer for Unilever less than 48 hours after the announcement amid political concerns over the merger. While Unilever evaluates its next steps, Kraft is perhaps feeling the effects of its controversial takeover of Britain's beloved Cadbury.
A final item to note, for me personally, is that today is my last regular contribution to the Business Law Professor Blog. I will remain as a contributing editor, but will miss the ritual of a weekly post--a habit now nearly 4 years in the making. Thanks to all of the readers and other editors who gave me great incentive to learn new information each week, think critically, connect with teaching, and generally feel a part of a vibrant and smart community of folks with similar interests.
Tuesday, February 21, 2017
Later this week, I will be on the road to Los Angeles to take one of our teams to a LawMeet Transactional competition. The competition is described as follows:
The National Transactional LawMeet is the premier “moot court” experience for students interested in a transactional practice. The National Transactional LawMeet is a part of the LawMeet family of live, interactive, educational competitions designed to give law students a hands-on experience in developing and honing transactional lawyering skills.
I worked with a team last year that made it to the finals in New York City (their work and talent got them there, to be clear), and it was a great experience. They did the regional on their own last year, so I am hoping I don't get in their way this time around.
I have worked with moot court teams for years, including taking teams to the Evans Moot Court Competition at the University of Wisconsin Law School and the Mardi Gras Moot Court Competition at Tulane Law School, and they were good experiences, I think, for the students. And I have helped with our West Virginia University College of LawNational Energy & Sustainability Moot Court Competition, which I think is both unique and well done (I am not unbiased, I admit, but I am confident I am right.)
Still, it was great to go to a transactional competition. The LawMeet competition was impressive. It's hard to isolate a deal simulation, but the organizers did well. And after their negotiation sessions, the students got reviewed by some incredibly talented people. One of the reviewers was a very big deal M&A partner at a very big deal New York firm. And he was kind, thoughtful, while providing an incisive critique. I disagreed with him on one tactic (I kept my mouth shut), because I was exposed to a different viewpoint for a very big deal partner at a very big deal New York firm some years ago. It wasn't a big point, but it was actually great opportunity to talk about philosophy and tactics with my students (later) using a deal setting as the basis for discussion.
Anyway, I am happy this opportunity is out there for students aren't seeking to litigate, but want to go live (or close to it). Go Business Law!
Monday, February 20, 2017
Two weeks ago, I posted on the POTUS's "one in, two out" executive order on executive branch agency regulations. In that post, I used critiques of a clothing maintenance/closet cleaning system working off the same principle. Interestingly, a CATO report was released January 31, unbeknownst to me at the time I wrote and published my post, that makes some of the same points. Since that time, I have wondered whether there is a more wise, effective way to simply address bloated federal agency regulations. Here is an idea that currently holds my interest.
In a leadership training program a few years ago, I remember hearing about a technique used in institutional budgeting processes. A unit leader who is required to submit a proposed budget to a superior or to a central budgeting office is asked to submit with the budget a proposal on what the unit would cut if the budget was cut by 5% (or another desired number) and what the unit would spend on if its budget was increased by 5% (or another desired number). It struck me that a similar system could be employed to true up federal agency regulations.
Specifically, each agency could be required to establish reasonable, evidence-based objectives for its operations for the forthcoming fiscal year, consistent with the agency's overall mandate. Then, the agency could be compelled to report to the President (or a designee) on the ways in which the agency's current body of regulations succeeds or fails to achieve those objectives and that mandate. Finally, as part of its budget submission, the agency could be asked to (1) suggest which regulations it would eliminate if it had to cut a specific percentage of its existing body of regulations and (2) identify and recommend new regulations for adoption if it had the opportunity to introduce new regulation, in each case with the goal of better achieving the agency's objectives and mandate.
Could a system like this work in curing over-regulation? Is it too simplistic? Leave your responses and comments below.
Sunday, February 19, 2017
"each ontological understanding of the corporation bears..insights about..[corporate] religious freedom" 14 First Amend. L.Rev. 375 #corpgov— Stefan Padfield (@ProfPadfield) February 19, 2017
"the feudal understanding of corporations as quasi-sovereigns entitled to something like comity" 2017 U. Ill. L. Rev. 163 #corpgov— Stefan Padfield (@ProfPadfield) February 19, 2017
Saturday, February 18, 2017
In 1995, the Private Securities Litigation Reform Act revamped the procedures applicable to class action lawsuits alleging claims under the federal securities laws.
Concerned about frivolous, attorney-driven litigation, Congress mandated that once a class action complaint is filed, the court must appoint a “lead plaintiff” to take control of the case. This, it was believed, would be preferable to the old tradition of simply giving control of the case to the first plaintiff to file a complaint. The lead plaintiff would be selected based on factors similar, but not quite identical, to those involved in selecting a class representative, using a more preliminary, less searching inquiry than might be expected for class certification. See 15 U.S.C. §78u-4; Topping v. Deloitte Touche Tohmatsu CPA, 95 F. Supp. 3d 607 (S.D.N.Y. 2015).
In enacting the scheme, Congress left a number of questions unanswered. Like, what is the relationship between the lead plaintiff and the class rep? Does the lead plaintiff position disappear once class reps are appointed? It’s not an issue that comes up often, since most lead plaintiffs seek class rep status, and those that don’t tend to cooperate with any class reps who are eventually appointed.
Another unanswered question was, what if there’s no suitable lead? See In re Cavanaugh, 306 F.3d 726, 731 n.7 (9th Cir. 2002) (raising the possibility). You might say, then the case can’t proceed as a class action, but class certification is supposed to be a different process; it’s one thing to use the lead plaintiff selection process to find – as the statute puts it – the “most adequate plaintiff”; it’s quite another to use the process to deny class certification without so much as a Rule 23 hearing.
Which brings me to the curious case of Finocchiaro et al v. NQ Mobile, Inc. et al, Docket No. 1:15-cv-06385 (S.D.N.Y.). The original class action complaint identified several named plaintiffs – all individuals, rather than institutional investors – but only one person sought lead plaintiff status. That applicant was rejected by the court, on the grounds that he had previously sent obscene and threatening letters to the defendants. The same attorneys sought, and received, an extension of time to find a second lead plaintiff, and recently filed a new motion seeking lead plaintiff status for another one of the individuals named in the complaint. That motion is (unsurprisingly) opposed by the defendants, who argue that the substitute lead is also unsuitable.
I have no idea how the court will come out on that argument; possibly the court will accept the new lead and all awkward questions will be averted. But it does beg the question: if no suitable lead plaintiff can be found, what happens to the case?
Friday, February 17, 2017
Last week Runner’s World reported:
Mariya Savinova-Farnosova, a Russian middle distance runner, was given a four-year ban for doping by the Court of Arbitration for Sport on Friday. She will also be stripped of two gold medals she won at the 2011 world outdoor championships and 2012 London Olympics, as well as a 2013 world silver medal, all in the 800 meters.
As a result, U.S. athlete Brenda Martinez will likely soon be upgraded to a silver medal for her performance in the 800 meters at the 2013 world championships and American Alysia Montaño will receive bronze medals for her races at the 2011 and 2013 world championships. Officials will first need to verify the new results.
In this post, I’ll examine how the presumably clean athletes—like Brenda Martinez and Alysia Montaño in this case—should be treated with regards to their endorsement contracts. The main question is:
- Should the clean athletes be awarded their endorsement contract performance bonuses based on world rankings than have been revised to exclude doping athletes?
Respected law firm Reed Smith has some helpful contract interpretation materials available here, which is relevant to the discussion. All of the following is merely an academic exercise and not legal advice.
Contract Drafting and the Text of the Contract.
As with any contractual issue, we should start with the text of the contracts. Since few of these endorsement contracts are publicly available, I will use the language in Nike’s endorsement contract that was filed in the Nike v. Berian case last year.
A great many contract disputes could be avoided with clear drafting. If an endorsement contract stated that performance bonuses would be paid based on any revised rankings that remove doping athletes, then I imagine that language would control and the clean athletes would promptly get paid the difference between their old and new ranking. Doping has been uncovered frequently enough in sports like cycling and track & field (aka “athletics”) that such a contractual clarification might be helpful to include on the front end of the drafting process.
The proposed Nike contract in the Berian case does contain promised performance bonuses, based on world rankings, with additional bonuses for Olympic and World Championship Medals (pg. 14), but I did not see any guidance regarding world rankings that are revised due to doping. The potential bonuses in the Berian case were fairly significant, with the top bonus of $150,000 exceeding the proposed annual base pay of $125,000. The contract does allow Nike to terminate the contract due to any sponsored athlete’s doping offense (pg. 9), but, again, I don’t see anything about doping by the athlete’s competitors.
As the Reed Smith contract interpretation flowchart correctly states, judges attempt to construe contracts in accordance with the parties’ intent. We first look at the text of the contract, and can only look at the contract language if the wording in unambiguous. If the contract language is ambiguous (reasonably susceptible to more than one interpretation) then the court may be able to look beyond the contract (parol evidence) to determine the intent of the parties.
Here, I think the parties' intent might be interpreted either way. On one hand, the athlete could argue that the intent was to award bonuses based on the fair world rankings, which would exclude drug cheats. On the other hand, the sponsor could argue that they were paying for publicity, and that the revised rankings publicity is typically significantly less than the publicity surrounding achievement during the actual Olympics or World Championships.
As a practical matter, like most legal disputes, it probably makes sense for the athlete and the sponsoring company to settle the matter outside of court. An example of a principled negotiation could involve the sponsor paying the difference in the performance bonuses, and the athlete promising to do an anti-doping ad for the sponsor or a few extra appearances related to the new rankings.
It future posts, I may write about the appropriate punishment for athletes who use performance enhancing drugs. For example, is jail time appropriate? I may also post on ways to further compensate the clean athletes for their lost earnings, publicity, and recognition.
Thursday, February 16, 2017
This post does not concern President Trump’s own business empire. Rather, this post will be the first of a few to look at how the President retains, repeals, or replaces some of the work that President Obama put in place in December 2016 as part of the National Action Plan on Responsible Business Conduct. Many EU nations established their NAPS year ago, but the U.S. government engaged in two years of stakeholder consultations and coordinated with several federal agencies before releasing its NAP.
Secretary of State Tillerson will play a large role in enforcing or revising many of the provisions of the NAP because the State Department promotes the Plan on its page addressing corporate social responsibility. Unlike many federal government pages, this page has not changed (yet) with the new administration. As the State Department explained in December, “the NAP reflects the government's commitment to promoting human rights and fighting corruption through partnerships with domestic and international stakeholders. An important part of this commitment includes encouraging companies to embrace high standards for responsible business conduct.” Over a dozen federal agencies worked to develop the NAP.
We now have a new Treasury Secretary and will soon have a new Secretary of Labor, presumably FIU Law Dean and former US Attorney Alex Acosta, a new SEC Chair, presumably Jay Clayton, and a new Secretary of Commerce, presumably Wilbur Ross. These men, along with Attorney General Jeff Sessions and Secretary of State Tillerson will lead the key agencies enforcing or perhaps revising the country’s commitment to responsible business conduct.
The following list of priorities and initiatives comes directly from the Fact Sheet:
Strengthening laws preventing the import of goods produced by forced labor to ensure products made under exploitative conditions do not gain U.S. market access.
Updating social and environmental standards criteria for financing through the Overseas Private Investment Corporation, to promote high standards through U.S.-supported private investment.
Creating guidance on social safeguards for USAID’s development programs.
Funding efforts to promote awareness and implementation of the United Nations Guiding Principles on Business and Human Rights.
Publishing, for the first time, an annual report by the U.S. National Contact Point for the OECD Guidelines.
Identifying means through trade agreements to encourage companies to engage in RBC.
Enhancing information sharing with sub-national governments on public procurement best practices, to ensure that governments at all levels promote RBC through purchasing.
Collaboration with Stakeholders
In order to achieve shared RBC goals, it is essential for governments to work with the private sector, as well as with civil society, labor, and other stakeholders, to leverage each other’s resources and strengths. The USG’s measures to collaborate with such stakeholders include:
Establishing a formal mechanism for increased government participation in “multi-stakeholder initiatives” that promote RBC in various sectors and regions.
Convening stakeholders to develop and promote effective metrics for measuring and managing labor rights impacts in supply chains.
Facilitating a dialogue with stakeholders on implementation of the Sustainable Development Goals.
Promoting worker voice and empowerment in global supply chains via new tools that allow workers in national supply chains to directly report potential labor abuses and workplace safety violations, as well as leveraging public-private partnerships to more fully incorporate the perspectives of workers.
Facilitating RBC by Companies
The USG encourages companies to follow the best domestic and international practices and is supportive of company efforts to voluntarily report on certain aspects of their operations. The USG produces a number of reports that can be useful for companies as they seek to uphold high standards, sometimes in challenging environments. The NAP sets forth an illustrative list of USG initiatives to further that work, including the following commitments:
Creating an online database containing government reports on issues such as human rights, human trafficking including forced labor, child labor, and investment climates so that companies can more effectively make investment decisions and mitigate risk.
Providing new and increased training for USG officers and officials, including those who serve abroad, on RBC issues so that government officials are well-equipped to advise companies on considerations such as the status of labor rights, human rights and transparency, in a particular operating environment.
Training for USG officials on the Foreign Corrupt Practices Act and related issues.
Updating country-level public land governance profiles that explain land laws, land use patterns, gender concerns, land administration, and land markets within a given country. These profiles are an important tool for businesses making responsible land-based investments in a given country.
Recognizing Positive Performance
U.S. companies make tremendous contributions to communities around the world by generating economic growth, creating jobs, spurring innovation, and providing solutions to pressing challenges such as access to clean energy, healthcare, and technology. The USG recognizes and highlights when companies achieve high standards with meaningful results for workers and communities. Such items include...
Developing an online mechanism to identify, document, and publicize lessons learned and best practices related to corporate actions that promote and respect human rights.
Providing Access to Remedy
Even when governments and companies seek to act responsibly, challenges can arise. Both governments and companies should have mechanisms in place by which affected parties can raise concerns, report problems, and seek remedies, as appropriate. Through the NAP, the USG is furthering its commitment to this objective by:
Improving the performance of the U.S. National Contact Point for the OECD Guidelines for Multinational Enterprises, including by announcing a fall 2017 peer review, organizing workshops to promote RBC, and publishing an outreach plan.
Hosting a forum for dialogue with stakeholders on opportunities and challenges regarding issues of remedy, as well as how the USG can best support effective remedy processes.
I will continue to follow up on this issue as well as how corporate compliance and governance may change under the Trump Administration.