Legal Profession Blog

The Ontology of FAS 5 - Thoughts Provoked by the E-Mail from RateMyProfessor.Com

Posted by Jeff Lipshaw

I confess to something of a recurring ontological crisis about the creation of business value, something that got aggravated this morning when I received notice from "optout@ratemyprofessor.com" that RateMyProfessor.com has been sold to MTV Networks, owners of among other things, VHI and Comedy Central, no doubt for an ungodly sum of money.  (Disclosure:  I have looked to see if any student has ever rated me on RMP out of what can be no more than a strange prurient interest.) 

Here is the question at the heart of the crisis.  Does the value of a business have "being" such that you can lie about it?  Is it real?  Can you touch or feel the value of RateMyProfessor.com?  I have started to read some of the vociferous debate between advocates of historical accounting methodology (no doubt employed by Mr. Cratchit, left), on one hand, and advocates of forward-looking finance theory, on the other, as to which best captures the inherent value of a business.  Historical financial statements purport to "fairly represent, in all material respects, the financial condition of the business according to generally accepted accounting principles consistently applied."  But we only need look at the gap between the book value of the net assets (or, more colloquially, the net worth) and the market capitalization of almost any company to know that net asset value does not equal market value.  (On Wednesday, my research assistants and I randomly picked Merck, which had a net asset value on its financial statements as of the end of 2005 - determined by accounting - of something like $17 billion, and an enterprise value - determined by the market - of something close to $100 billion.)

Since my impromptu talk at the AALS, I have been thinking about accounting (particularly when the word precedes "fraud"), and what precisely the lie in more complex cases might be.  It is one thing to have a case in which management gets a number in the roll-up of the quarterly financial reports, doesn't like it, erases it, and arbitrarily substitutes another.  But what about all the judgment calls along the way - rates of depreciation, capitalizing versus expenses, bill and hold, etc?

How lawyers factor into this metaphysical mess below the fold.

I want to focus on one microcosm of the issue here (cobbled in part from my article The Bewitchment of Intelligence, 78 Temp. L. Rev. 99 (2005)).  There is a dialogue that goes on between auditors and lawyers about when a contingent liability, like a claim in a lawsuit, moves into the footnotes, and then from the footnotes to an actual accounting charge as a liability.  And the words "probable," "reasonably possible," and "remote," as, in the lawyer's view, they apply to that contingent liability, are critical.

Under the Statement of Financial Accounting Standards No. 5 (“FAS 5”, issued by the Financial Accounting Standards Board), part of the definition of generally accepted accounting principles (“GAAP”), auditors use the word “probable” to indicate one of three different states of likelihood – the other two are “reasonably possible” and “remote” – that future events will confirm the incurrence of a liability. If an event is probable and the amount of the loss is reasonably estimable, FAS 5 requires that the obligation be booked as an accrual (an expense, and hence a charge to earnings) on the income statement and a liability on the balance sheet. “Probable” is defined as “[t]he future event or events are likely to occur.” Telling an auditor one has a better than even chance of losing a case in which the amount of the loss can be estimated is tantamount to incurring the expense.

Lawyers, on the other hand, use loose language of probability to convey a sense of the outcome to their clients on a regular basis. “Your odds of winning are 50-50, 60-40, one in ten, etc.” The ABA has attempted to cover these conflicting uses of language in its Statement of Policy Regarding Lawyers’ Responses to Auditors’ Requests for Information: 

Concepts of probability inherent in the usage of terms like “probable” or “reasonably possible” or “remote” mean different things in different contexts. Generally, the outcome of, or the loss which may result from, litigation cannot be assessed in any way that is comparable to a statistically or empirically determined concept of “probability”. . . . Lawyers do not generally quantify for clients the “odds” in numerical terms; if they do, the quantification is generally only undertaken in an effort to make meaningful, for limited purposes, a whole host of judgmental factors applicable at a particular time, with any intention to depict “probability” in any statistical, scientific or empirically-grounded sense.

So if the lawyers tell the accountants the likelihood of a loss is remote, the item never hits the financial statements at all.  If it is reasonably possible, it shows up in the footnotes.  And if it is probable, then GAAP requires that the lowest probable outcome be booked.

Financial statements are a mathematical model of some other independent reality (whatever it is).  By just a touch of lawyerly judgment, we can impact the model significantly (and who is to say whether that judgment is in good faith or not?) If we are not lying about what would generally be considered to be a piece of independent reality incorporated into the financial statements ("we shipped 10,000 widgets in the month of December"), but are manipulating the model (grossly or mildly), are we lying?

 

More on Lawyers as Leaders

Posted by Jeff Lipshaw

Several days ago, Alan invited me to comment on Ben Heineman's lecture on lawyers as leaders.  I think it's particularly appropriate to do so in view of Alan Murray's column in the Wall Street Journal this morning "When Firms Turn to Lawyers."

The subject is the recent succession of two lawyers, both of whom happen to have been Ben Heineman proteges from GE, who have ascended to the top job in major corporations in recent weeks:  Frank Blake (right) replacing Bob Nardelli at The Home Depot, and Jeff Kindler replacing Hank McKinnell at Pfizer.  I think something has gotten buried or conflated by the circumstance that both of these lawyers have replaced CEOs whose severance packages have inflamed shareholder activists and business journalists.

Murray's thesis is that these companies have turned to lawyers because they are in trouble:  "Lawyers are trained to foresee risk, making them well-suited for times of trouble.  Perhaps more important, they understand what it means to be a fiduciary, acting in trust on someone else's behalf.  Messrs. Nardelli and McKinnell clearly failed to grasp that basic tenet of leadership."

I think the comment is, in some ways, a cheap shot, but not at Nardelli and McKinnell. (I am less outraged than many by the severance packages, but that is another subject for another time.)

It's something of an insult to Blake and Kindler to suggest they would take the reins of two huge corporations with their primary skills being their ability to bail water out of the sinking corporate canoe.  Indeed, the boards of the respective companies must have thought so much of their abilities that it would counteract the natural presumption, embodied in Murray's piece, that something is sorely amiss for a LAWYER to attain a position of leadership.  A personal note:  back in 1994 or so, when we were looking to institute major six sigma productivity changes within AlliedSignal Automotive, a senior executive was to be the "champion" (that's corporate lingo for a person who doesn't really do the work, but who acts as visionary, spokesperson, cheerleader and barrier-remover).  I volunteered, and was told by our division president, who had previously been the corporation's chief financial officer, that the business would think it odd and troubling that a non-operational type like him had appointed not only a non-operational type like me, but a LAWYER no less, to this critical position.  But he did appreciate my cojones.

More below the fold.

Here's where I endorse Ben Heineman's lecture.  His was the vision of the modern in-house law department; before Ben Heineman got to GE, in-house lawyers were, generally, a disrespected and uninspired crew. There is something of a lineage between Heineman and me.  Jack Welch hired Ben Heineman.  When Larry Bossidy, Jack Welch's best friend and the Vice-Chairman of GE left in 1991 to take over AlliedSignal, he replicated what Welch had done:  he hired a great lawyer with varied experience like Heineman, about whom I have blogged here before:  Peter Kreindler.  In 1992, Peter hired me.  So, as a matter of expectation or possibility for what lawyers can do as leaders, this is, to me, like reading the hymnal. 

But what Heineman gets, and Murray does not, are the additional following attributes, nay, professional skills, that a lawyer just might bring to the table:

- An ability to cut to the core of arguments, particularly those being made to the CEO by the leaders of the various business units, that are pleas for the allocation of the corporation's investment capital (my characterization of annual strategic planning sessions).

- An ability to communicate and persuade

- A hands-on style of leadership

Having said all that, there is often some kernel of truth at the core of a stereotype.  The image of lawyers as backward-looking, ass-covering, word-smithing, risk-averse, non-value generating, fine-distinction-drawing deal killers, who spend most of their time trying to separate the pepper from the fly poop, and the rest of the time saying "no you can't do that" to their clients, probably has some empirical  basis.  That's why we don't naturally think of lawyers as entrepreneurs, something I have begun to think and write about more recently.

Under No Circumstance Should a Beginning Law Professor Read This Post

Posted by Jeff Lipshaw

Let me start this off with the obvious disclaimer.  I am a "beginning" law professor (personally, I like to think of myself in the same vein as my hero Horace Rumpole who, having never "taken silk," i.e. become a Q.C., is consigned to the category of aging "junior" barrister).  But I think I may be in a very select group of "beginning law professors" who spent as long as I did in practice before being called to the academic bar.

So while I took with substantial gratitude the advice offered last Friday morning at the AALS New Law Professors section, I also listened to it with the perspective of starting what is at least my third career, the first two of which resulted in the equivalent of tenure.  And one piece of advice, in the midst of all the other good advice, buried in the middle, and perhaps not, and offered up by that wisest and kindest of academic mentors, Larry Solum, stood out among all the other combined wisdom.   (Note:  this picture captures the real Larry far better than the taxidermic one Paul Caron used at the session!)

I strongly urge all take to heart his message to concentrate on the intrinsic value of the work.  I am too much of a Kantian to be able to assure anyone that if you do all the right things, the real world results will come.  As they say, shit happens.  But I am positive, to a moral certainty, that there is no other alternative.   The paradox in every meaningful achievement is that you focus on the independent variables to the function y=f(x), because you simply cannot force y into being.

Let me try to be more concrete about this in a different way.  In my function, y is about ME.  It's the result I want for myself.  In Humean terms, it's the passion for something to which my reason is slave.  It is the inward focus on me, my needs, my desires, my career, my life that in my other careers I have seen (in myself and others) transferred into an organizational inward focus - where what this all means for me (a partner or an executive) or us (the law firm or the company) far outweighs any consideration of what this all means for others (our clients or customers or employees).  But, ironically or paradoxically, it's the outward focus that lets us achieve our inward goals.

Unfortunately, the impact of the normal or standard curve doesn't end when we get onto the tenure track, any more than it did when we were accepted at elite undergraduate schools or or elite law schools.  Everybody we hired in our law firm had already experienced several levels of stardom, but some people didn't make it to partnership.  In every one of these circumstances, we hope to hell it's not us.  But I'm fifty-two years old, I'm not going to be the President, or even a Senator, or on the Yale faculty, and there are very few things as to which I can say I'm in the top ten in world.  We walk a fine line between ambition and despair.

We will get lots of instrumental advice: how best to game the law review system; what kind of publications work best for tenure committees; how best to dress when teaching classes.  But the advice that resonates with me is the kind given by Larry:  look outward because, paradoxically, the result of the inward look is instrumental to our passions and ultimately unsatisfying.  Write because you have something to offer the world; teach because you have something to offer your students; serve because you have something to offer your institution.  We didn't make this choice of career for an instrumental end, and we shouldn't conduct it that way either.

Sort of a Symposium Issue: Fraud or Co-optation in the Practice of Smoothing Earnings?

Posted by Jeff Lipshaw

June Carbone (left) and Bill Black (right), both of UMKC, and I were trading e-mails two days ago, and to make a long story short, on pretty short notice, I filled in (to substitute for a cancellation) on a panel in the Section on Socio-Economics workshop here at the AALS meeting on Wednesday afternoon, moderated by June, and on which Bill was presenting.

The general theme of the panel was "norm-creation."  Bill's talk centered on a 2005 presentation by Michael Jensen, of SSRN and all sorts of other fame, about what Jensen now sees as "low-integrity relations" between firms and analysts on the subject of earnings smoothing.  I have written and posted on the relationship between law and business ethics, so I also was interested in the Jensen piece.

Since my quickly prepared presentation consists presently of what I scrawled at lunch on some LexisNexis note paper, I thought this would be a good place to preserve this somewhat impromptu "symposium" offering.

Jensen's observations are thought-provoking, particularly if you have been on the inside of a corporation making decisions about how you report your earnings.  Bill is a criminologist, and his piece was about what the criminologists call "neutralization" and what I would call "co-optation, in this instance into the creation of norms under which the manipulation of accounting numbers was acceptable.

My limited goal was to take a deeper dive into how we decide something is manipulation worthy of the name "lie" or "fraud."  Regular readers of this blog are, I believe, familiar with my long history as a GC at the corporate and divisional level in companies that aspired (because of the career history of the managers) to something resembling GE management style.  At AlliedSignal under Larry Bossidy, the mantra every year was "Make the Numbers," a shorthand (I came to believe poorly worded) for the values of "fulfill your commitments, do what you promise, and do that for customers, employees, shareholders."  So if that was one end of the continuum driving the development of internal norms of behavior, the unacceptable other end of the continuum would have been "Make Up the Numbers."

There is an epistemological element to all of this, I'm sorry to say.  Accounting, in many respects, is about buckets of time, quarters and years, most of which are arbitrary (or at least as arbitrary as the fact of the Gregorian calendar and its divisions).  A goal of accounting (and I'm pretty sure I could pull up a basic accounting text on this) is to match revenues and costs properly in each bucket.  Smoothing is the phenomenon by which companies deliberately manipulate the revenues and costs in the various buckets so as to conform to earlier predictions, either from management or analysts, about the result in the time periods represented by the buckets.

More on this below the fold.

In the pre-Enron period, there is no question that analysts demanded, and companies delivered, if they could, no surprises from what the companies issued as their own earnings expectations for future periods.*  That was the point of smoothing.  Bill had an interesting thesis about those days:  if the company's stock was punished because it missed an estimate by a penny (out of saying several dollars per share of earnings), it was because the market perceived that the company had exhausted every possible "fraud and manipulation" and still couldn't get to the number.  I disagree, on further reflection, with that causal explanation.  I think the market expected you could always manipulate another penny, so that if you missed by a penny, it was a deliberate bearish signal by management on the future prospects.

But the present question is what it means to put the terms "lie" or "fraud" as descriptors on that manipulation.  I want to put aside the straw man of straight cooking the books in the manner by which I now confess I did my freshman chemistry lab reports:  if you don't like the number, erase it and put in a new one.  Booking sales you never made is out and out fraud.  Simply changing entries you don't like is out and out fraud.  Writing an earlier date on an option agreement and pretending it was signed then is a lie.  Those cases, it seems to me, are too easy to be interesting.

Here's the epistemology.  If a lie is a sentence uttered deliberately not to reflect reality, and with the intention of deceiving in the process, what does it means to lie about your accounting when you are talking about manipulation that is not out and out falsification of a piece of data?  A financial statement is itself a model seeking to represent another reality - the state of a business.  That reality is so complex that we need to reflect it in several ways, with a snap shot view at a moment in time (the balance sheet), and in flow over periods (income and cash flow statements). Lots of aspects of accounting conventions are precisely that: conventions that are proxies and do not themselves reflect reality.  If you use a depreciation method, you are not really reflect the extent to which the asset is used up; you are reflecting a model of that use. And sometimes, the accounting or tax rules sanction what seems like a lie:  accelerated depreciation.  So what are truth statements in the context of accounting?

Moreover, the accounting conventions are subject to interpretation and judgment.  For example, is the cost fairly attributable to one bucket or more than one bucket (i.e., do you expense or capitalize the cost?)

So there is something of a gray area on that continuum, between "Make the Numbers" and "Make Up the Numbers," in which we have to struggle with questions of the very essence of truth.

Here are some very cursory hypotheses:

1.  Certainly pre-Enron, the rules of the manager-analyst game rewarded present period "making the numbers" over long-term value, or at least that's how companies perceived it.  Woe betide the R&D department in the fourth quarter of a company having a bad year.  Even without manipulation of the accounting, as Jensen observes, there was a double-think rationalization (in my view) of perfectly legal, but economically nonsensical trading of long-term value for short-term gain.  See Larry Ribstein for why this supports the thesis that firms are turning to the private capital markets.

2.  There is more transparency now than there used to be.  That is partly related to attitudinal shifts, and partly due to the Sarbanes-Oxley rules (Regulation G) requiring there to be a reconciliation in publicly released financial statements between GAAP numbers and "as adjusted for continuing operations" numbers.

3.  The integrity issues related to smoothing were not restricted to the relationship between the firm, on one hand, and securities markets, on the other.  In large and complex organizations there is gaming up and down the business:  business unit controllers game the division, and divisional controllers game the corporation.  Jensen has another paper (only downloaded about 7,500 times) entitled Paying People to Lie:  The Truth About the Budgeting System.  Here is the abstract:

This paper analyzes the counterproductive effects associated with using budgets or targets in an organization's performance measurement and compensation systems. Paying people on the basis of how their performance relates to a budget or target causes people to game the system and in doing so to destroy value in two main ways: 1. both superiors and subordinates lie in the formulation of budgets and therefore gut the budgeting process of the critical unbiased information that is required to coordinate the activities of disparate parts of an organization, and 2. they game the realization of the budgets or targets and in doing so destroy value for their organizations. Although most managers and analysts understand that budget gaming is widespread, few understand the huge costs it imposes on organizations and how to lower them.

My purpose in this paper is to explain exactly how this happens and how managers and firms can stop this counterproductive cycle. The key lies not in destroying the budgeting systems, but in changing the way organizations pay people. In particular to stop this highly counterproductive behavior we must stop using budgets or targets in the compensation formulas and promotion systems for employees and managers. This means taking all kinks, discontinuities and non-linearities out of the pay-for-performance profile of each employee and manager. Such purely linear compensation formulas provide no incentives to lie, or to withhold and distort information, or to game the system.

While the evidence on the costs of these systems is not extensive, I believe that solving the problems could easily result in large productivity and value increases - sometimes as much as 50 to 100% improvements in productivity. I believe the less intensive reliance on such budget/target systems is an important cause of the increased productivity of entrepreneurial and LBO firms. Moreover, eliminating budget/target-induced gaming from the management system will eliminate one of the major forces leading to the general loss of integrity in organizations. People are taught to lie in these pervasive budgeting systems because if they tell the truth they often get punished and if they lie they get rewarded. Once taught to lie in this system people generally cannot help but extend that behavior to all sorts of other relationships in the organization.

For what it's worth, I watched this happen.  I am not convinced that people respond so directly to compensation that changing the pay system would solve the problem, but I have no doubt that Jensen correctly identifies a corrupting influence from a "top-down" imposed budgeting system.  I have this intuition that the gaming is more complex than merely economic.  Once you set the rules of the game for success-oriented people, success-oriented people want to win.  Or they want to get an A and not a C.  Period.

* * *

This is about norms and integrity.  My guess is the number of people who walk into these situations with the preconceived notion they are knowingly going to scheme is fairly small.  That is, the set of true evil actors is relatively small.  The set of banal evil, of cooptation, or neutralization, as Bill Black put, seems to me is not only bigger, but more interesting and important.  And I've written about the dangers of the instrumental reasoning process by which we can delude or deceive ourselves into justifying the abuse, all of which can be exacerbated by a lawyer's professional gloss (if not imprimatur) on the justification.

I don't think the solutions are algorithmic.  I am suspicious of instrumental reason (or instrumental reason masquerading as pure practical reason).  I am aware of the mushiness of relying on intuition.  So it's a mystery to me still how we resolve the intersection of legal rationalization with a moral and ethical sense.

*(The practice of issuing "guidance," as it is called, has substantially curtailed since then, I think.  I saw some data just a few days ago that securities class action filings are down - that would be consistent with less earnings guidance - the core of a archetypal suit consists of company guidance and then a subsequent event that proves the guidance incorrect.)

Lipshaw on Why the Law of Entrepreneurship Barely Matters (with apologies to the guy at Tony Lacey's party)

The first thing I need to do is apologize to the guy at Tony Lacey's L.A. party in Annie Hall for lifting his line:  "Right now it's only a notion, but I think I can get money to make it into a concept ... and later turn it into an idea."

Like many of us, every once in a while I am kick-started into activity by an article that is thoughtful and interesting yet counter to my intuition (based on some experience) how the world works.  That was my reaction to the article by Gordon Smith and Masako Ueda entitled Law & Entrepreneurship:  Why Courts Matter.  Gordon has previously posted on it over at Conglomerate, and I had some meandering blog thoughts about the thesis, namely, that I wasn't sure that law as such really mattered to entrepreneurs (as opposed to their lawyers, when they could afford to have lawyers).  Certainly there is some law of entrepreneurship, but like most Anglo-American law, it is case law (about which Gordon has written) dealing with divvying up a smaller pie when things don't go swimmingly. 

Since then, like the unnamed character, I took the blog notion and have tried to develop it into a concept, and perhaps some day, it will even be an idea.  Here's the abstract of Why the Law of Entrepreneurship Barely Matters:  Rules, Cognition, and the Antinomies of Transactional Practice, posted on SSRN, which, as it stands now, is a heavily annotated introduction to what will ultimately be a longer piece:

Despite valiant (if nascent) efforts to show that law, or at least courts and doctrine, matters in the broader study of entrepreneurship, I am skeptical that it really does. The reason goes to the fundamental orientation to rules and their application of law and lawyers, on one hand, and entrepreneurs, on the other. As much as law students like rules, and social scientists like theories capable of prediction and algorithms and models, there are inherent philosophical (and perhaps psychological) problems with the interaction of the lawyer and the entrepreneur. In the same way that the relationship of law to moral intuition is perennially debated and no less frequently unresolved as between empiricists and rationalists, foundationalists and anti-foundationalists, the social context of rule-following for legal ordering is at odds with the entrepreneur's orientation to rules. 

In this Essay (which serves as an introduction to a longer work), I want to explore several themes. First, as the philosophers have shown, there is no rule for the application of a rule, and what we perceive as a given result is a matter of social congruence rather than a result inherent in the rule itself. The social and psychological orientation of those who create law, and those who create innovation, are at odds. Second, the predominant approaches to the science of law fail to account for the inherent paradox (or antinomy) of judgment. Third, the very nature of a legal or regulatory solution, by and large, is cognitive, and fails to address the non-cognitive aspects of entrepreneurship. Finally, there is a fundamental distinction between the definition of one's presently ascertainable rights in property, and private ordering to deal with future contingency. In the former, the law comes as close as it ever does to being constitutive; in the latter, what we say now is merely ammunition for instrumental use later.

It's apropos, as I am at the AALS meeting, to say that, just like another character at the Tony Lacey party, I'm just hoping all the good meetings aren't taken.

[Jeff Lipshaw]

On Ethics, Economics, Advocacy, and Charlevoix Ice Cream

Posted by Jeff Lipshaw

There's an interesting set of comments to a blog post over at Conglomerate (full disclosure:  I was responsible for one moderately inane contribution).  Gordon Smith posted a snippet from an article by Benedict Sheehy, (University of Newcastle - Australia), entitled "Corporations and Social Costs:   The Wal-Mart Case Study."  Professor Sheehy argues Wal-Mart is responsible for social waste by causing its suppliers to put too much in the packages, thereby underpricing the goods,and causing lots of stuff (in this case, pickles) to be thrown away. 

I have to admit I was scratching my head over this one even before neo-classical economists and empirical scholars far more qualified than I jumped in to point out the holes in the thesis (most of which are testable, like:  does Wal-Mart really have the market power to control the size and pricing of pickle packages?)  My own experience with oversizing was in our little lake resort town of Charlevoix, Michigan (above and right),* which, during the summer does a thriving trade in fudge (a Northern Michigan specialty) and ice cream cones.  I realized at some point that the store owners had figured out that you could double your business by increasing the size of a cone and charging more for it.  So, effectively, single scoop cones went by the wayside, and you had to spend four bucks on this huge glob of ice cream.  Now the locals (and the quasi-locals like me) know how to deal with this (and we leave the Bridge Street shops to the "fudgies" and "coneheads," as summer tourists are known).  You troop a half-mile down the main drag to the Dairy Queen, or stop in Oleson's market and buy a half-gallon of Edy's and take it home.

What stopped me in my [Edy's fudge] tracks was this from Professor Sheehy:

While Wal-Mart is not the creator of consumerism, its dominance creates a large responsibility to inform consumers about the real costs. By under-pricing, Wal-Mart is misinforming the consumer encouraging over-consumption, and to do so in the planet's current state is nothing less than perverse. Because of its market dominance, a strong argument can be made for its bearing considerable corporate responsibility to inform consumers about costs by pricing correctly.

Perhaps this is the nature of the legal academic beast, but David Hume's observation about the conflation of the "is" and "ought" seemed apropos (or, as Professor Childress would say, aproposner): "[T]he author proceeds for some time in the ordinary ways of reasoning, and establishes the being of a God, or makes observations concerning human affairs; when of a sudden I am surpriz'd to find, that instead of the usual copulations of propositions, is, and is not, I meet with no proposition that is not connected with an ought, or an ought not."  I have often suggested that the economic approach to law and policy (and everything else) fails to make clear its implicit consequentialist morality, but despite my occasional jibing of law-and-economics on this point, there is also a fundamental epistemology of freedom that goes with market economics, and on that point I too take a neo-classical position.

Wal-Mart puts it on the shelf and compels NOBODY to buy it.  Murdick's Ice Cream scoops it and compels NOBODY to buy it.  As the commenters over at Conglomerate point out, the argument that Wal-Mart has market power in the grocery business is attenuated; if so, I suppose Murdick's and Kilwin's (below), the two ice cream shops on Bridge Street, have the power to force chocoholics to fork over four bucks for the oversized ice cream cones.  (Wal-Mart is big and Murdick's is small, but mere size has no relationship to market power - ask KMart or Sears.)  It seems to me that consumers have some responsibility to decide what makes sense and what does not.  But I acknowledge that is my "ought" and I don't conflate it with an "is."

One final note on advocacy tactics (or the dangers of the discovered half-truth - see my article somewhat related to this subject).  Mr. Sheehy appeared in one of the later comments to defend his work by noting that it was "sufficiently rigorous to be published by Northwestern."  Most would, I think, decry publication in any student-edited journal as an indication of scholarly rigor, but as Gordon noted in a later comment, "the Northwestern Journal of International Law & Business is quite a different thing from the Northwestern University Law Review, which is what your reference would imply to an American legal academic."  Ouch.

* In the spirit of unbridled capitalism, I should note this lovely house is available for weekly rentals.

Reality TV and the MPRE - Episode 4 - Buying a House

Posted by Jeff Lipshaw

We have what in Massachusetts nee Freedonia is called an "accepted offer" on a house.  I was going to post something on the classic libertarian-caveat emptor-full employment for lawyers-1700s vintage way it seemed to me residential real estate deals were closed in Massachusetts (at least if I believe my real estate agent, Max Remax).  But then I thought, who am I to judge?  To quote from Richard Ford's recent great addition to the Frank Bascombe trilogy, The Lay of the Land (no joke, this is at page 122 of the hardcover, and I think it is the answer to every dilemma in my life):  "Perhaps you had to go to Harvard to understand this.  I went to Michigan."  (I should note this may also be the answer to my relationship with my wife who did go to Harvard.)

Instead it seemed to me an opportunity for a little MPRE training, on the Law of the Land (note the multi-leveled entendres here). (Disclaimer:  the author is merely an MPRE trainee himself, as noted previously.  He makes no representation or warranty that the following made-up examples do in fact represent how the NCBE would interpret the sample questions, although he has undertaken the exercise both in a serious and humorous vein.)

So here we go:

1.  Jeff Lipshaw, a member in good standing of the bar in the states of Michigan and Indiana (also the 6th and 10th Circuit Courts of Appeal, the Eastern District of Michigan, and the United States Supreme Court), plans to take a job in Massachusetts, and goes about making an offer to purchase a home.  His real estate agent, Max Remax, tells him that he will be getting a quitclaim deed, and that he, the buyer, is responsible for insuring the title.  This is contrary to Lipshaw's experience in his home states, where seller is responsible for delivering a warranty deed, as well as a title policy under which the buyer is the beneficiary.  Lipshaw is confused.  Should he hire a Massachusetts lawyer?

(a)  No, because he will likely be joining Max's synagogue and so he can trust Max.

(b)  Yes, because he will likely be joining Max's synagogue and so he can't trust Max.

(c)  Yes, because a lawyer who represents himself has a fool for a client.

(d)  Yes, because he has recognized the limits of his competence.

Answer:  d.  Rule 1.1 of the MPRE states "A lawyer shall provide competent representation to a client. Competent representation requires the legal knowledge, skill, thoroughness and preparation reasonably necessary for the representation."  The comment states: "In determining whether a lawyer employs the requisite knowledge and skill in a particular matter, relevant factors include the relative complexity and specialized nature of the matter, the lawyer's general experience, the lawyer's training and experience in the field in question, the preparation and study the lawyer is able to give the matter and whether it is feasible to refer the matter to, or associate or consult with, a lawyer of established competence in the field in question."  Lipshaw recalls that, even in his licensed jurisdictions, he probably hacked up his own purchase agreements.  Plus, it is obvious that the local customs are designed to ensure that one always refers the matter to a Massachusetts lawyer with established competence.  Many MPRE examinees are fooled by (a) or (b).  The main problem here is not professional responsibility, but the fact that a fellow temple member will know how much you paid for your house, for purposes of "fair share" dues and your Campaign contribution.

More sample MPRE questions after the fold.

 

2.  Assume in the previous question that Lipshaw decides to go it alone and not to retain a Massachusetts lawyer.  May he do so?

(a)  Yes, because his wife would kill him if he screwed it up.

(b) No, because all of the lawyers in Massachusetts are tapped out from making political contributions to either Ted Kennedy or Mitt Romney.

(c) Yes, because he has not opened an office in Massachusetts or otherwise held himself out as licensed to practice in Massachusetts.

(d)  No, because he is not licensed to practice in Massachusetts, and there is no exception for a pro hac vice appearance merely to mess up your own home purchase.

Answer:  (c).  This is an example of the bar examiners messing with your head.  Even though (c) is not a perfect answer, it is the best of this sorry lot.  Rule 5.5(b) of the MPRE states:

A lawyer who is not admitted to practice in this jurisdiction shall not:

(1) except as authorized by these Rules or other law, establish an office or other systematic and continuous presence in this jurisdiction for the practice of law; or

(2) hold out to the public or otherwise represent that the lawyer is admitted to practice law in this jurisdiction.

The trick here is that Lipshaw is acting pro se, and none of the exceptions for multi-jurisdictional practice really apply, because this does not relate to another matter pending in a jurisdiction in which Lipshaw is licensed, nor does there appear to be a rule on acting pro se.  Certainly a non-lawyer could do her own deal without a lawyer, even if that is ill-advised.  Nevertheless, (c) is the best answer because the rule does not create a blanket prohibition against any unlicensed practice of law in the jurisdiction.  Subpart (a) of Rule 5.5 says that a lawyer may not practice law in another jurisdiction in violation of the rules of that jurisdiction (or assist another in doing so).  So we must still look for a rule that applies or does not apply.  Because Lipshaw is not establishing an office or systematic and continuous presence in Massachusetts for the practice of law, nor is he holding himself out to the public, he will not be in violation of the rule.  Nevertheless, he has been thoroughly freaked out by what Max Remax told him, and has called in his law school roommate who is a big cheese partner at a big time Boston law firm to help out, which would also cure any unauthorized practice issues under subpart (c).

EXAM TIP: Note this question gets at the heart of the oft-debated question whether one can pass the exam merely by answering the "second-most ethical" question (Wendel's book says no; Childress told me yes, but he may have been messing with me because he thinks I am an anal Type-A crazy person.)  Answer (d) would likely snag the unprepared person who answers with the most ethical-sounding response.

3.  Lipshaw sent his lovely and talented wife out to Boston, and for the fourth time in their marriage, she made a decision on a house without his seeing it live before they signed the offer document.  When Lipshaw's law school roommate decides to help in the transaction, is there anything he should consider?

(a)  No, because this is an example of a '90s kind of guy swallowing his testosterone-induced control mania in the interest of marital harmony.

(b)  No, because big time Boston law firms can do small time residential real estate transactions in their sleep, with one hand tied behind their back.

(c)  Yes, because Lipshaw snored back in the squalid room in Crothers Hall at Stanford.

(d)  Yes, because it may be that Lipshaw is a client with diminished capacity.

Answer:  (d).  This is another question in which the examinee needs to use the process of elimination to reach the best, not the perfect, answer.  Answer (a) can be eliminated because empirical legal scholars have demonstrated that there is no correlation between testosterone levels and marital harmony.  Answer (c) can be eliminated because Lipshaw denies having snored.  Answer (b) is tempting because most partners in big time Boston law firms could have been law professors if they had wanted.

But the correct answer is (d).  Rule 1.14(a) states: "When a client's capacity to make adequately considered decisions in connection with a representation is diminished, whether because of minority, mental impairment or for some other reason, the lawyer shall, as far as reasonably possible, maintain a normal client-lawyer relationship with the client."  Lipshaw's actions may indicate diminished capacity, but not presumptively so.  Accordingly, law school roomie may continue with a normal lawyer-client relationship.  If, however, Lipshaw is at risk of substantial physical, financial or other harm unless action is taken and cannot adequately act in his own interest, roomie is authorized under subpart (b) to "take reasonably necessary protective action, including consulting with individuals or entities that have the ability to take action to protect the client and, in appropriate cases, seeking the appointment of a guardian ad litem, conservator or guardian."

Disclaimer:  if you haven't already figured it out, the citations to the MPRE are accurate, and the answers may even be instructive as a learning device, but this is PARODY.

 

Lipshaw on Business Acquisition Half-Truths

Posted by Jeff Lipshaw

Some time earlier this year I posted a short essay, developed from a blog conversation among Gordon Smith, Frank Snyder, and me, about contractual disclaimers of truth-telling and reliance.  Larry Ribstein was kind enough to comment on it over at Ideoblog.  Since then I have given several talks about it (as has been noted, I am about to move on to my next gig, and as has further been noted elsewhere, you can't get move on to your next gig without giving a job talk).  As job talks are really just faculty colloquia on training wheels, it turns out I have gotten immeasurably valuable comments, corrections, brickbats, Bronx cheers, well-aimed tomatoes (you say tomahtoes), and other affects of opprobrium and praise. 

I have now substantially redrafted and converted the essay into an article, now renamed (slightly) Of Fine Lines, Blunt Instruments and Half-Truths:  Business Acquisition Agreements and the Right to Lie, which is available on SSRN.  While it still discusses (in even more gory detail) the Abry case that was the source of the original blog discussion, I had the good fortune of the new book by Ian Ayres & Gregory Klass, Insincere Promises, being published in the interim, and that provides a nice complement and, I think, support to my thesis.  Here is the abstract:

In this article, I expand upon a happy coincidence (for scholars) in reconciling the overlap between contract and fraud. Both the recent book by Ian Ayres and Gregory Klass and the Delaware Court of Chancery in Abry Partners Acquisition V, L.P. v. F& W Acquisition, LLC addressed the issue of promissory fraud – the making of a contract as to which the promisor had no intention of performing. Each treatment, however, in focusing on fraudulent affirmative representations, falls short of (a) recognizing the fundamental aspect of deceptive promising in a complex deal, namely the half-truth, (b) articulating an appropriate doctrinal principle to address it, or (c) capturing the social and linguistic context that makes the deceptive half-truth so insidious. 

The archetypal facts in Abry frame the issue. When the parties to a business acquisition agreement purport to limit the buyer's reliance to those representations and warranties set forth in the agreement, just what obligations of truth-telling have the parties contractually released? We need to grapple with the inter-relationship of law, language, mutual understanding, and trust. The language of the law (and the contract) is a blunt instrument by which to map to track the subtle fine lines of a complex agreement. I will contend that there is a kind of special arrogance in the illusion onto which lawyers hold – that the uncertainties and contingencies of the world are in their power to be controlled, and to the winner of the battle of words go the spoils. The correct doctrinal result is to presume in the transactional speech acts (including the contract), as we do in everyday life, a default of truth-telling, to permit the parties freely to contract around the rule, but to require narrow construction of the exceptions and disclaimers.

I know it's not that time of the year just yet, but if you happen to be a law review editor reading this and want to save me some trouble (and forking over the ExpressO fees), feel free to give me a shout.

* The picture is of a book of cartoons entitled Treasures of Half-Truth, by Pat Bagley, the editorial cartoonist for the Salt Lake Tribune.  You can see the original the book at SignatureBooks.com.

Reality TV & the MPRE - Episode 3 - Freedonia Revealed; Lipshaw Going to Suffolk

For those of you who had so little to do that you played Alan's parlor game, the answer is Freedonia is Massachusetts.

I have accepted an offer to join the Suffolk Law School faculty beginning with the 2007-08 school year.  Alene and I will be moving to the Boston area this summer.

One of the great benefits, among others, is that I will join friend and fellow blogger Andy Perlman of Legal Ethics Forum.  Dueling blogs under the same flag, as it were!

[Jeff Lipshaw]

Starting in December for the March Madness (i.e., the MPRE)

As I read Jeff's posts, he went into the bookstore to buy either a three-ring binder or an out-of-print jurisprudence text, and left the store with what I depict in the right margin, all in anticipation of a multiple choice exam he will take in March. 

Can you tell he was destined to be a professor?  Go for it, Jeff, and thanks for reminding the rest of us how wonderful it feels knowing we may never take another bar exam again.  Looking forward to Part III of the Biggest Loser.  Joe Thousandaire.  Fear Factor Freedonia.  Cannon.  your MPRE reality TV show.  [Alan Childress]

Law School Branding and the Internal Focus

Posted by Jeff Lipshaw

I'm moving to a new apartment in New Orleans, and my Wall Street Journal subscription has not caught up with me.  So I am indebted to Fearless Leader Caron (Cincinnati, pictured left*) for his picking up the article yesterday on the efforts of business schools to define their "brand."

Let's note a couple things here.  First, the focus of the article was not the Podunk Business & Bible College.  It was the Haas School of Business at California-Berkeley, and the Kelley School of Business at Indiana University.  Second, why is it that business schools seem to worry up front about things like leadership, creativity, value propositions, and having students who are NOT arrogant?  Here's an additional squibbet from the Wall Street Journal article:

"Business schools need a clear, compelling value proposition," Dr. Smith says. "But it can't be vacuous. It has to be backed up by proof points in the curriculum and the school's graduates."

Berkeley's Haas School believes its "Leading Through Innovation" slogan is already well supported by its strengths in technology and entrepreneurship and by its students' creativity. But it plans to put even more substance behind its new brand.

Professors and industry experts are teaching seminars on innovation, and the curriculum includes new courses on leadership, managing innovation and change, and creativity and innovation in marketing and finance. Faculty members also are writing new case studies and articles for the California Management Review, which is published by the Haas School, about leadership and innovation.

To attract the right kind of student, the Haas School has added an essay question to its application that asks people to tell how they have demonstrated innovation and creativity in their professional or personal lives. "We're looking for intelligent students without arrogance, who can lead and manage in a changing environment," says Tom Campbell, the Haas School's dean.

We used to talk in the business about "internal focus" and "external focus."  External focus was generally on getting the job done, being concerned about the growth and vibrancy of the institution, and on serving customers (the sine qua non of everything else we aspired to do).  Internal focus was on US:  our compensation, our needs, our careers.  Having shuffled back and forth between law firm and corporate, my casual empiricism was that external focus was a moderately unnatural act for lawyers.

Russell Korobkin (UCLA, right) has written extensively on what I think is the closest thing to a branding analysis** for law schools, both in the Texas Law Review and the Indiana Law Journal (the latter as a keynote address at the symposium on law school rankings at IU a couple years ago).  To summarize quickly, Professor Korobkin sees the rankings as a coordination mechanism by which schools more efficiently compete in the market for status.  Not to take anything away from the scholarship (and the somewhat prurient appeal of the rankings), but it seems to me this is indicative of an internal focus - our competition for status - rather than an external focus - how do we make the education we offer distinctive?  Perhaps the mega-elite law schools need not worry about it - the brand is established - but the rest of us might want to take a lesson from the premier business schools.

*We here at LPB are indebted to Stuffucrave.com, where you can order all the Fearless Leader collectibles you want.  My own Fearless Leader stuffie is sitting on my shelf, right next to the Dancing Hasid, my stuffed Sigmund Freud, and my great philosopher (Kant, Plato, Nietzsche, and Hegel) finger puppets, all of whom served as participants in my recently concluded Secured Transaction class.

**I also want to acknowledge Vic Fleischer's (Colorado) work on branding in the IPO context.

The Availability Heuristic Strikes Again: Generalissimo Francisco Franco is Still Dead,* But May Have Backdated Some Options

This is the "availability heuristic."  You are in a rush to get some place.  It seems like you hit every red light.  You get to the destination, and say "my god, I hit every freaking light on the way over here."  In fact, you didn't hit lights any more frequently than you normally do, but because you were focusing on it, it seemed like you did.  I have already ranted as to the way in which scholars are apparently no less immune than others to the availability heuristic, at least when it comes to corporate governance.

The option backdating issue is a perfect example.  I'm not condoning backdating for a minute.  I don't know whether it's right that a general counsel takes the fall for option backdating, but I'm on record as saying that it was either wrong or colossally bad judgment for a GC to listen to somebody propose backdating an option grant and say "well, yes, there's an argument in favor of that...." (Or in Nixonian terms, we could raise $1,000,000 in hush money, but it would be wrong, wink wink.)

And, of course, it's not news to say "952,788 citizens here in Metropolis were not the victims of crime today," or "Paul Newman and Joanne Woodward remain happily married."  So news itself plays to the availability heuristic.  But we owe it to our constituencies as scholars rather than shills (for any position) at least to struggle with whether it's our theory or the facts that are the dog and the tail and which is doing the wagging.

Joann S. Lublin, who I think is a good reporter over at the Wall Street Journal on career matters, has a story today on several companies that have announced they will only issue options at a set time every time.  What a shock!  As I have pointed out, there are over 9,000 public companies in the U.S., and as Ms. Lublin observes, "There's no precise count of how many companies unaffected by the scandal are altering option-grant policies.  But several executive-pay specialists estimate that more than two dozen [ed. note:  two dozen equals 24 which is something like one quarter of one percent of all public companies] have acted so far.  Option-backdating has sparked regulatory investigations at more than 130 concerns [ed. note, let's see, that's 1.5% or so] . . . ."

Two additional points.  Apparently the Council of Institutional Investors is doing some empirical work to find how pervasive this problem by writing to the 1,500 biggest firms by market capitalization, and asking (it seems to me the academic paper posted on the CII website is fraught with correlation versus causation issues, and hence suspect, but at least you can point out its flaws!).  In the kind of anecdotal evidence that passes for learning in this area, the letter from CII provoked Becton Dickinson, a large cap pharmaceutical company, to write down what had always been a perfectly legal and common sense, but informal, practice of issuing option grants on an annual basis.

[Jeff Lipshaw]

*I realize I may be dating myself with this particular reference to the Saturday Night Live Weekend Update.

But Your Fifteen Minutes Are Not Quite Up Yet

Posted by Alan Childress
On the occasion of the wedding of Alene and Jeff Lipshaw's daughter Arielle today to Simon, LPB has decided to put Jeff through the Warholizer, a site that is sure to make Intellectual Property professors scurry to add a question to their exams. (HatTip to Minor Wisdom.)  The startling results:

  Congratulations Jeff & Alene

The Moving Finger

A student just stopped by, having just turned in a take-home exam for someone else, and now doing a post-mortem on everything that went wrong, no doubt to the detriment of study for the next exam.  I turned to the adages I store on my PDA, and pulled out one we were taught by the late great John Kaplan* at Stanford:

"The Moving Finger writes; and, having writ,
Moves on: nor all your Piety nor Wit
Shall lure it back to cancel half a Line,
Nor all your Tears wash out a Word of it."

- The Rubaiyat of Omar Khayyam

[Jeff Lipshaw]

* For a lovely remembrance of Professor Kaplan (the first law professor ever to call on me), see "A Student Remembers," 42 Stan. L. Rev. 847, 852 (1990), by my friend and colleague at Tulane, Jancy Hoeffel.   

Character and Skiing: An Analogy?

An old professional friend (the lawyer for another side in a deal many years ago) switched firms because his broke up.  He commented:  "That type of event does not seem to bring out the best in people."

Character is like skiing.  It's easy to hold your form when the hill is gentle and smooth; it's much tougher when it's steep, icy, and full of moguls.

[Jeff Lipshaw]

The BCS and Applied Moral Philosophy

As I predicted here yesterday morning, Florida edged out Michigan (wolverine, ironically not native to Michigan, shown below right) for the right to meet Ohio State in the national championship game.  Because the computer rankings had it a tie, and because Michigan hadn't played since November 18, the decision turned on human voters, and, no doubt, their reaction to the argumentation on behalf of the contending schools.

One of the chief advocates for Florida was its young coach, Urban Meyer, who has jawboned his team's case for the last several weeks.  Wolverine coach Lloyd Carr, on the other hand, refused to show his wolverine-like claws (left, costumery available at ForeverGeek.com).  While I have no doubt that total Michigan utility would have been greater with Michigan once again playing Ohio State, but on a neutral field (a possibility that provoked Ohio State coach into not voting in the polls; if he voted for the weaker team he'd rather play, Florida, he would have violated the unspoken rule that you support your own conference teams), I nevertheless take an inexplicable satisfaction in commentary such as that from Dan Wetzel at Yahoo Sports:

And so Michigan and its coach go down winners even in this most disappointing of times. This program, Bo Schembechler's program, is supposed to be about just what Carr demonstrated, right or wrong, smart or stupid, hopelessly old school or not.

* * *

Whether you agree with his old-school, bedrock-value approach or not, whether you think he blew it by not sticking up for his team, you have to appreciate that when everything was on the line, he walked the walk.

When a shot at a national title was in the balance, Lloyd Carr, the old Michigan man, proved that even in this hyper-competitive era, even in this senseless system, the values he always expounds – pride, respect, humility – still can take precedent over all.

[Jeff Lipshaw]

More on Antinomies in the Transactional Practice: What Do Great Real Estate Lawyers Do?

Posted by Jeff Lipshaw

It's exam season in law school, and the perennial struggle over "just tell me the rules" versus whatever it is we law professors teach about the relationship between a rule and its application is repeating itself in review sessions everywhere.

But as much as law students like rules, and social scientists like theories capable of prediction and algorithms and models, I have harped here (and elsewhere) on the inherent paradox (or antinomy) of judgment.  As elucidated by Kant, the issue with judgment is that simultaneously we understand the conclusion is ours alone (and people can differ), but at the same time we ascribe universality to the conclusion.  (This is one of the themes of the Critique of Judgment - we look at a painting, and at the same time, (a) know it's just a matter of taste, but (b) ascribe some objective standard of bad, good, better, worse, and best to the art.)  If there were an algorithm for judgment, we wouldn't prize it in individuals the way we do, and we'd be letting our computers rather than our lawyers negotiate our deals.

If you skip the front of the Sunday Business section of the New York Times today (I leave the Morgenson-beating to Larry Ribstein), and proceed to the back page, you find an interview with Carl F. Schwartz, NYC lawyer extraordinaire, under the unlikely title "Finding a True Passion in Real Estate Law."  (I'm waiting for the article about finding true passion in ERISA law, but for the time being we have to rely on Professor Secunda, right, over at sister blog Workplace Law Prof Blog for strange and fascinating obsession with top hat plans and the PBGC.)  I want to highlight three counter-algorithmic data points from this article:

1.   Mr. Schwartz's comment on transactional lawyering:  "The most important thing is that the deal gets signed and closed. . . . Sometimes that means the lawyering is less than perfect.  Instead of making 200 comments on a contract, you're going to make 50 or 75 and have the judgment to say, 'This is important, and this isn't.'"

2.  The role of emotion in negotiations.  Mr. Schwartz noted a negotiation (over management rights to several landmark NYC buildings, including the Empire State Building) in which the side seeking the management rights tried to change the tenor of the emotional dispute by sending the "ceding" party a set of lifetime family passes to the ESB observatory.

3.  The role of inter-personal chemistry.  Schwartz plays bass guitar in a rock band in which one of his clients plays keyboards.  Says the client, "There are a large number of lawyers and law firms in town where you can go to get excellent technical execution of a deal. . . .  But what's really important in the relationship of a client and a lawyer is the chemistry.  The fact that we share some sensibilities adds to that."

Lawyers for the BCS

Any lawyer or law student looking for training in advocacy - the gathering of data and the making of argument - need only look at the media for the briefs (mostly amici) pro-Florida and pro-Michigan backers are now filing in connection with the upcoming Bowl Championship Series game in Glendale.

I bleed Maize and Blue, but even I can't see how Florida can be denied a shot at Ohio State.  And if I were Ohio State, I would rather be facing Florida than Michigan on a neutral field.

[Jeff Lipshaw]

Review Sessions, Exams and Other Exercises in Paranoia

First, we could do a Wittgensteinian philosophy of language riff on what is posted over at Law Librarian Blog with regard to ambiguous exam questions, or just laugh.

Second, I'm about to roll into the second of my review sessions (classes ended yesterday).  A full semester's good will and reputation as a "nice guy (for a prof)" evaporates as I get in touch with my inner snark, particularly in regard to (a) any question that starts with "are we responsible for...", given that I have repeated ad nauseum that we are responsible for anything in the readings or discussed in class; and (b) any matter that could have been answered by reference to my copious postings on TWEN (e.g., is the exam open book?  will you tell how many points each question is worth?).

I almost incited a riot yesterday yesterday when in response to the question "will we need a calculator?" I uttered the infamous three words:  "let me think...."

[Jeff Lipshaw]

Lipshaw on Rationalization, Business Ethics, and the Art of Empathy and Dialog

Posted by Alan Childress

Just out on SSRN's Law & Society: The Legal Prof. journal edited by Bill Henderson is an article by Jeffrey M. Lipshaw (Tulane Law, and also LPB and MoneyLaw), entitled: "Law as Rationalization: Getting Beyond Reason to Business Ethics."  It is published at 37 University of Toledo Law Review 959-1020 (2006).  Its abstract:

Embedded in the way we use the law is the tendency of human reason to justification; in the words of one philosopher, a thirst for rationality [that] is a major source of lies. I contend that this tendency is exacerbated by the conflation of what is knowable as a matter of science, and that which we might believe is normative. I rely on Kant's critique of theoretical and practical reason to assess claims to objectivity in social science approaches to law, and to suggest it is not surprising that the operation of theoretical and practical reason would tend to the conflation of the descriptive and the normative. When we understand the illusions of which reason is capable, we may be more circumspect about claims of objective knowledge and more willing to challenge assertions of a single right answer on normative issues (the modus operandi of most legal argumentation).

Nevertheless, we have a sense that there are objective standards of right and wrong, bespeaking right answers, if not single right answers, on difficult issues, and these are the basis for ethics, if not law. How does one bring broad universalisms down to practical application, and have the confidence one's judgments are right, and not someone else's view of dogmatism? I discuss the mystery that lies behind the process of judgment, and conclude that the best check against the illusions of reason is our ability to have a relation with, and understand the viewpoints of, others. In particular, I consider Buber's concept of dialogue, and how it might affect common types of ethical decisions in business.