Business Law Prof Blog

When Corporations Outsource Racial Discrimination

Earlier this month, Daniel Lennington, deputy counsel at the Wisconsin Institute for Law and Liberty, published a piece at The Federalist entitled, “How Corporations Launder Their Race Discrimination Through Third Parties.” Here is an excerpt:

[T]he world’s largest corporations desperately want credit for being “woke” and advancing “racial equity” through programs targeted solely at certain races. Such practices — involving blatant race discrimination — are immoral and contrary to core American values, despite being in fashion with corporate elites. Yet the typical guide rails — state and federal law — may be less available remedies if corporations launder their discrimination through third parties. Corporations should avoid this temptation to outsource their discrimination and perhaps take a lesson from Comcast, one of the first corporations to face legal scrutiny for its race-based program. Following the settlement with our clients, Comcast renewed its efforts toward something called “Project Up,” which, from all indications, is a race-neutral program designed to “advance economic mobility, and open doors for the next generation of innovators, entrepreneurs, storytellers, and creators.” Comcast will run this program itself and reap the goodwill that will undoubtedly come, while adhering to (lawful) nondiscrimination principles.

In response to this piece, Scott Shepard, director of the Free Enterprise Project at the National Center for Public Policy Research, published “States Can Stop the Outsourcing of Race Discrimination by Corporations” over at RealClearMarkets. Here is an excerpt:

The clearest route to ending this practice is through state corporations laws. A very short amendment would serve the purpose. Add to the law this phrase at an appropriate spot: “Corporate donations or other pecuniary grants to entities that discriminate, facially or in fact, on grounds forbidden by the civil rights acts of this state have breached their fiduciary duty to shareholders unless they have secured from each shareholder written confirmation of their desire to contribute corporate assets to discriminatory entities.”… [A] second move by states inclined to rein in the new discrimination …. [is to] add to their civil rights statutes a line to the effect that “publicly traded corporations doing business in this state violate this statute if they use corporate assets to fund entities that discriminate in violation of this statute” unless getting the express permission of all shareholders.

“The Court finds that the Complaint alleges significant encouragement and coercion that converts the otherwise private conduct of censorship on social media platforms into state action, and is unpersuaded by Defendants’ arguments to the contrary.”

From a New Civil Liberties Alliance press release (here):

In a thorough and well-reasoned decision, Judge Terry A. Doughty of the U.S. District Court for the Western District of Louisiana has denied government defendants’ motion to dismiss in State of Missouri, et al. v. Joseph R. Biden, Jr., et al. The New Civil Liberties Alliance, a nonpartisan, nonprofit civil rights group, represents renowned epidemiologists Drs. Jay Bhattacharya and Martin Kulldorff, as well as Dr. Aaron Kheriaty and Ms. Jill Hines, in a lawsuit that has exposed an elaborate, multi-agency federal government censorship regime. Judge Doughty wrote, “The Court finds that the Complaint alleges significant encouragement and coercion that converts the otherwise private conduct of censorship on social media platforms into state action, and is unpersuaded by Defendants’ arguments to the contrary.”

UPDATE (3/21/23): Keith Bishop was kind enough to pass along a related post of his entitled "Government Censorship By Proxy?" wherein he notes:

Last week, I wrote about an unsuccessful challenge to the activities of the Office of Elections Cybersecurity within the California Secretary of State's office: Is The California Secretary of State Monitoring What You Publish Online? In that case, O'Handley v. Weber, 2023 WL 2443073, the Ninth Circuit Court of Appeals found that the Secretary of State did not violate federal law when it notified Twitter of tweets containing false or misleading information that potentially violated the company's content-moderation policy. More recently, Judge Terry A. Doughty, who sits in the Western District of Louisiana, refused to dismiss claims for "alleged coercion by the Biden Administration and various government agencies and officials of social-media companies, urging those companies “to censor viewpoints and speakers disfavored by the Left". In this memorandum ruling, Judge Doughty distinguishes O'Handley as follows: ....

ComplianceNet 2023 - March 31 Submission Deadline

This just in from friend-of-the-BLPB Josephine Sandler Nelson:

 

ComplianceNet 2023's deadline to apply has been extended to March 31, 2023. This is an amazing conference. See info below and at the website here. There is also a best paper prize that attendees should know about.

ComplianceNet 2023 will be hosted by American University's Washington College of Law in Washington, DC on June 21-23, 2023. It will have an anti-corruption theme, though papers on all topics related to compliance will be welcome. We are currently accepting panel or paper submissions, with an extended deadline of Friday, March 31, 2023. 
 
ComplianceNet seeks to bring together scholars from a range of different disciplines to study the interaction between rules (broadly defined) and individual, group, or organizational behavior. The first five meetings have been highly successful, bringing together academics from business, criminology, economics, law, political science, psychology and sociology, among other fields. See the ComplianceNet website at www.compliancenet.org for more details about the organization’s structure and goals.

Call for Papers - DePaul Law Review "Succession" Symposium Issue

The DePaul Law Review will devote the third issue of its 73rd volume (slated for publication in Spring 2024) to a Symposium addressing the Emmy-winning scripted drama Succession from a legal and pedagogical point of view. The aim of this special issue is to collect in one place the insights of a variety of faculty members with different legal subject-matter expertise, as a resource for all who are interested in the use of this award-winning work for the teaching, practice, and study of law. The DePaul Law Review has already secured the participation of a number of distinguished scholars. 

The DePaul Law Review invites proposals from others for two to four additional contributions to be included in this special issue. Proposals for a contribution of between 5,000 and 10,000 words are welcome from all who teach any area of law. (The print symposium will be accompanied by simultaneous online publication with live hyperlinks, allowing readers to access video links if the author desires.)

Potential contributions to the special issue might take a variety of forms. For example, these essays might:

• explore the legal implications of various plotlines through a variety of doctrinal lenses (e.g., mergers and acquisitions, wills and trusts, corporate law, employment law, criminal law);
• share classroom techniques for using Succession, and its scenarios or characters, in law teaching;
• consider how matters such as race, gender, sexual orientation, and class are represented on Succession, or how the show depicts law, law enforcement, and lawyers; or 
• draw on literary techniques to illuminate (or critique) Succession's approach to the myriad legal issues it presents.

Interested individuals should send an abstract outlining the topic and substance of their proposed contribution to the DePaul Law Review by email to Lizzie Carroll, Managing Editor of Lead Articles at lawreviewdepaul@yahoo.com, or to Prof. Susan Bandes, sbandes@depaul.edu, or Visiting Professor Diane Klein, dklein14@depaul.edu.  Abstracts (of 250 words at most) should be submitted by April 30, 2023. Proposals will be reviewed and invitations issued by June 1, 2023. Initial drafts will be due August 15, 2023, with final drafts due by October 1, 2023.

Baylor Law is Recruiting Business Law Faculty!

The following opportunities come to us from Patricia Wilson at Baylor Law.  The first two positions are directly related to business law.  The last two are more litigation-oriented but may be of interest to business litigation folks. *          *          * Baylor Law is currently recruiting to fill multiple faculty positions, as described below. The starting date for each position is no later than August 1, 2023. If you know of someone who may be interested in these positions, please encourage them to visit the Baylor Law employment opportunities webpage. Interested individuals are also welcome to contact Associate Dean Patricia Wilson by email or phone for more information. We are particularly interested in expressions of interest from individuals who would add to the diversity of our faculty. Please note that three of the listings are for full-time positions. However, if you or someone you know is interested in teaching as an adjunct, we regularly have adjunct positions available and are currently seeking adjunct instructors to teach transactional drafting and persuasive writing/litigation drafting. We are flexible in scheduling adjunct-taught classes, including developing a schedule that allows an adjunct to teach most classes remotely on Zoom.  Assistant Professor of Business/Transactional Law Tenure-track Baylor Law seeks an instructor who will have responsibility for electives in the areas of transactional, commercial, or business areas based upon Baylor Law's curricular needs and the applicant's experience. Such courses could include real estate finance, construction, oil and gas/alternative energy, debt financing, business succession planning, individual or entity income taxation, nonprofit organizations, digital/cybersecurity, elder law/special needs, retirement, international business transactions, international trade, consumer protection, bankruptcy, creditors remedies, negotiable instruments/payment systems, franchising, sports law, healthcare. More Information/Apply Full-time Lecturer Transactional Drafting; Non-tenure-track Baylor Law seeks a lecturer who will have responsibility for teaching in the Legal Analysis, Research & Communications (LARC) program. Responsibilities include working collaboratively with other faculty members of the Baylor Law Writing Program to create, teach and grade assignments for the LARC 4 course (Transactional Drafting) and coordinating all of the writing efforts across all three years of the curriculum to ensure consistency and best management of resources. The ideal candidate will have at least three years of transactional legal writing experience, including drafting and analyzing a variety of different contracts and business entity governing documents. More Information/Apply Full-time Lecturer Persuasive Writing; Litigation Drafting; Non-tenure-track Baylor Law seeks a lecturer with substantial experience in persuasive writing and litigation drafting, including drafting appellate briefs and a variety of different pleadings, trial motions, and similar work product. The selected individual will have responsibility for teaching in the Legal Analysis, Research & Communications (LARC) program, specifically LARC 3 (persuasive writing) and LARC 5 (litigation drafting). He or she will teach several sections of both courses each year and will be one of several LARC 3 instructors. With respect to the LARC 5 course, the candidate will be expected to collaborate and coordinate project planning with instructors for the LARC 4 course (transactional drafting). Thus, the ideal candidate will also have experience in analyzing and drafting a variety of contracts. The candidate will share additional responsibilities as well, such as periodically serving as a judge in the Practice Court program and collaborating with other legal writing faculty members to create problems for writing competitions. More Information/Apply Part-time Temporary Adjunct LARC 5 Baylor Law seeks a temporary adjunct to teach a section of the LARC 3 course, a course on persuasive writing, and LARC 5 course, a course that focuses on litigation drafting. The candidate should have experience in  drafting appellate briefs or producing similar work product, or litigation drafting, including drafting a variety of different pleadings, trial motions, and similar work product. More Information/Apply Prospective applicants can direct questions to Associate Dean Patricia Wilson at 254.710.6591 or 254.722.2564, or Patricia_Wilson@baylor.edu.

There's no joking in securities law

I’ve previously blogged about confusion regarding Section 10(b)’s requirement that a false statement be made “in connection with” a securities trade, when the speaker is a subsidiary of the securities’ issuer.  We have a new entry in the genre in In re Volkswagen AG Sec. Litig., 2023 U.S. Dist. LEXIS 43031 (E.D. Va. Mar. 14, 2023).

This case concerns Volkswagen’s stupid joke from two years ago where it announced that it was changing its name to “Voltswagen,” which roiled the stock for a couple of days until the company admitted that it was just kidding.  An equally stupid securities fraud lawsuit naturally followed, resulting in what is actually a fairly baffling dismissal.  Because whatever one thinks of the claim or its merits, the legal reasoning matters, not just for this case but for future cases. 

The setup:

Volkswagen is a German company, and its stock is not listed on a U.S. exchange.  Its “unsponsored” ADRs trade in the U.S. 

VWGoA is Volkswagen’s American subsidiary.  It is wholly owned by Volkswagen.

The original press release announcing the name change came from VWGoA and its officers, who posted it to the VWGoA website on March 29, 2021.  The press release was taken down, but news media got wind of it, and it popped back up again on March 30, 2021, including quotes from VWGoA’s CEO.  A Volkswagen twitter account – apparently controlled by VWGoA – also announced the change.  VWGoA’s Head of Technology confirmed the story to the Associated Press.  By the close of business on March 30, though, the press release was gone again, and the WSJ was reporting that it was all a joke.

The price of ADRs fell in response, and investors filed a Section 10(b) lawsuit against Volkswagen, VWGoA, VWGoA’s CEO, and VWGoA’s Head of Technology.

In dismissing the complaint, the court actually took the claims seriously, and conducted a thorough analysis of some of the knotty issues concerning Morrison v. Nat’l Australia Bank Ltd., 561 U.S. 247 (2010), but I think its reasoning faltered when it came to the ultimate holding.

The first issue: did plaintiffs allege a “domestic transaction” for Morrison purposes?  In Stoyas v. Toshiba Corp., 896 F.3d 933 (9th Cir. 2018), the Ninth Circuit held that if the ADRs are traded in the U.S., transactions in them are domestic for Morrison purposes.  If they are unsponsored – the subject company truly had no involvement in their creation – there might be a question whether the subject company’s false statements are made in connection with a domestic transaction, but the transaction itself remains domestic and subject to U.S. law.

The Volkswagen court followed this reasoning, and concluded that the plaintiffs’ ADR purchases were domestic.  (Recently, the district court in Toshiba held that even a domestic ADR purchase might be treated as “foreign” if it involved the creation of a new ADR via an overseas purchase of the underlying shares, Stoyas v. Toshiba Corp., 2022 WL 220920 (C.D. Cal. Jan. 25, 2022), but the Volkswagen court questioned that reasoning, see op. at *32 n.8, and in any event, found that such determinations were inappropriate on a motion to dismiss). 

So. Domestic purchase.

Next, the court turned to the potential liability of the Volkswagen parent.  And here, the court employed Janus Capital Grp., Inc. v. First Derivative Traders, 564 U.S. 135 (2011) to hold that the plaintiffs had not alleged sufficient facts to show that Volkswagen had exercised “ultimate authority” over the statements issued by VWGoA; therefore, Volkswagen had not “made” a statement for Janus purposes.

I mean, I could go on a riff about the artificiality of treating Volkswagen as distinct from its wholly-owned subsidiary, which the court recognized as being completely under the control of its parent, but the court gave the plaintiffs leave to replead on this and I’ll skip it. 

That left the liability of VWGoA and its officers.  The court agreed that the officers had acted at least recklessly when issuing the press release, their scienter could be attributed to VWGoA, and that plaintiffs had established materiality and loss causation. 

So, the court turned to the defendants’ arguments that, because the ADRs were unsponsored, any statements by VWGoA were not made “in connection with” ADR transactions.

The court first held that, given the relationship between the subsidiary and the parent, the statements by VWGoA were not so attenuated from securities of Volkswagen as to eliminate 10(b) liability.  Op. at *67. 

The court next held that, while it was possible that statements about underlying securities may not be made “in connection with” unsponsored ADRs, in this case, plaintiffs had sufficiently alleged that Volkswagen had had some approval power/involvement with the creation of the ADRs, such that statements about Volkswagen stock would also be “in connection with” its ADRs.  The court thus concluded, “because Plaintiffs have implicated a specific depositary institution, which has publicly confirmed it requires the approval of the foreign issuer prior to launching an unsponsored ADR program, Plaintiffs’ allegations provide a plausible basis that the alleged misstatement ‘touches’ or ‘coincides’ with ‘the purchase or sale of any other security in the United States.’” Op. at *70-71.

Finally, the court held that the statements themselves were distributed in a medium on which investors would rely: “Plaintiffs have adequately averred that VWGoA publicly disseminated a press release on multiple occasions and that such announcement was material. Not only did the announcement itself detail an upcoming significant rebranding effort by the Company across North America, but it also generated a widespread public response.  Given the alleged seriousness with which the market perceived the name change, it is entirely reasonable that investors would have relied upon the press release.” Op. at *71.

But did the claims against the VWGoA defendants survive?

They did not.  The court concluded:

This Court will not contravene Janus by holding that the statements of a non-publicly traded wholly-owned subsidiary and its employees may be actionable upon the parent issuer when the Amended Complaint fails to adequately plead that the alleged material misstatements may be attributed to the parent issuer. Without a plausible theory of liability ascribed to the issuer, Plaintiffs’ purchase or sale of Volkswagen ADRs cannot be said to “touch[]” or “coincide” with the alleged false statements of the Individual Defendants and VWGoA.

In sum, Plaintiffs have sufficiently alleged that Volkswagen continues to play an active role in the unsponsored ADR program and that it was reasonable for investors to rely upon those alleged false statements. But they have not sufficiently pleaded that the alleged false statements by the Individual Defendants and VWGoA “coincide” with or “touch[]” the ADRs purchased by Plaintiffs because the issuer of the underlying securities has not been shown to be liable under § 10(b).

Op. at *72-73.

I ... do not follow.  The court seems to be hung up on Volkswagen’s liability, when the question of the liability of VWGoA and its officers is distinct.  Why should VWGoA’s liability for false public statements turn on whether Volkswagen parent is liable?  We have three actors: VWGoA, its CEO, and its head of tech, all of whom, with scienter, made false statements about Volkswagen’s business – about, the court found, Volkswagen’s securities – in a medium on which investors would (and did) rely.  It’s now well-established – the court even says in its opinion, at *65-66 – that actors other than issuers can be liable for issuing fraudulent statements in connection with the issuers’ securities.  Analysts, auditors, brokers, all might lie about a company’s securities; the company may be entirely innocent, but that does not absolve the speaker.  If I adopt some kind of pseudonymous identity and go online and make false statements about a publicly traded security, I would surely expect the SEC to come after me, even if the issuer had nothing to do with it.  

Nonetheless, the court seemed to hold, that logic only extends to actors who are independent of the issuer.  It does not extend to actors who are related to the issuer, such as wholly owned subsidiaries.  Those speakers, uniquely, get a free pass.

In other words, VWGoA and its officers escape liability because there is both too much control by Volkswagen – it would contravene Janus to hold a controlled subsidiary liable for statements it actually made about its parent – and too little, because there was not enough control by Volkswagen to make Volkswagen the legal “maker” of the statements.

Notably, the court’s holding would seem to create an open season for subsidiaries to make false statements about parent companies – which is particularly bizarre because, earlier in its opinion, that’s exactly what the court wanted to avoid:

For purposes of standing, Plaintiffs’ fulsome allegations demonstrate the appropriateness of extending Rule 10b-5’s reach to securities of a parent company, when that parent company exercises substantial involvement over the day-to-day operations of a wholly-owned subsidiary alleged to have violated federal securities laws. If this were not so, issuers exercising such concrete control over their subsidiaries would never be legally responsible for the statements of their non-publicly traded wholly-owned subsidiaries. That would reward issuers with a scapegoat mechanism through their unlisted subsidiaries to avoid§ 10(b)’s remedial scheme.

Op. at *66-67. 

Yes!  I agree!  But still, the court says there’s no liability even for the subsidiary that made the statements, with scienter.

In any event, the plaintiffs have leave to replead (including to replead Volkswagen’s involvement in the whole thing), so we’ll see what happens.

A Review of Some of Larry Fink's Recent Letters

Some word counts that may be of interest to BLPB readers (please check my work and let me know if I've gotten any of these wrong):

Letter	“ESG”	“stakeholder”	“stakeholder capitalism”
2023 Letter to Investors	0	3	0
2022 Letter to Shareholders	0	7	0
2022 Letter to CEOs	1	18	5
2021 Letter to CEOs	4	13	0

Compare word counts for "Wachtell Lipton Discusses Larry Fink’s [2023] Annual Letters to Investors": "ESG" = 0; "stakeholder" = 6; "stakeholder capitalism" = 2.

Addendum: The Wachtell post notes that "[f]or more than ten years, Larry Fink, Chairman and CEO of BlackRock, the world’s largest asset manager, has published separate annual letters — one to CEOs and another to BlackRock’s shareholders. This year, Fink combined the two letters into one."

Wake Forest Law - ESG and Blockchain

I am honored to be speaking later today on ESG, blockchains, and corporate governance at this symposium at Wake Forest University School of Law.  This practitioner-centered symposium promises to offer significant information useful to my teaching and scholarship.  My fellow speakers hail from law firms and other organizations across the United States.  I am excited to share and learn!

Yale Law Clinical Fellowships

I just heard about this a few days ago, but I do not think anyone has posted on it yet.  Sadly, it looks like the formal application deadline has passed.  But they may still be accepting applications.  Those considering applying may want to inquire . . . .

*          *          *

YALE LAW SCHOOL CLINICAL FELLOWSHIPS

in the Veterans Legal Services Clinic   
and Housing and Community & Economic Development Clinics

Yale Law School seeks applicants for two clinical fellowships in the Jerome N. Frank Legal Services Organization, within Yale Law School's clinical program. These Fellowships are two-year positions with a third-year option, beginning on or about July 1, 2023, and are designed for lawyers with at least three years of practice who are considering a career in law school teaching. Each fellow will work with a different clinic. Responsibilities include representing clients, supervising students, assisting in teaching classes, and pursuing a scholarship agenda. Fellows also have an option to co-teach a section of a six-week fall program for first-year students, Introduction to Legal Analysis and Writing, for additional compensation. Candidates must be prepared to apply for admission to the Connecticut bar (candidates may qualify for admission without examination). All work will be conducted with the support of the clinical faculty and will focus on providing legal assistance to low-income and civil rights clients and organizations. 

The Jerome N. Frank Legal Services Organization is committed to building a culturally diverse and pluralistic faculty and staff to teach and work in a multicultural environment. Candidates must be able to work both independently and as part of a team, and must possess strong written and oral communication skills. Experience in creative and community-driven advocacy is a strong plus. Annual salary is $75,000-80,000. In addition, Fellows will receive health benefits and access to university facilities. 

Email a resume, cover letter, writing sample, and names, addresses and telephone numbers of three references to Osikhena Awudu, Program Manager, The Jerome N. Frank Legal Services Organization, osikhena.awudu@yale.edu.  Please indicate the clinic or clinics to which you are applying. Applications will be accepted until March 15, 2023 but will be reviewed on a rolling basis (early applications encouraged).

More details about each fellowship follow below.

Veterans Legal Services Clinic (VLSC)

VLSC is a semester-long, in-house clinic whose students represent veterans and their organizations in VA benefits, record correction, and civil rights litigation in administrative, state, and federal courts, and in state and federal policy advocacy.

Illustrative cases include representation of individual veterans seeking disability compensation benefits for injuries incurred during military service, in initial applications, administrative appeals, and judicial review in federal court; former service members in applications to upgrade a less-than-honorable discharge before Defense Department boards and on judicial review in federal court; plaintiffs in federal civil rights cases, such as a woman raped while a cadet at the U.S. Military Academy at West Point and Black veterans seeking reparations for historic discrimination in VA benefits programs; three nation-wide classes of Iraq and Afghanistan Era veterans who received less-than-fully-honorable discharges, despite having PTSD or related conditions attributable to their military service; a nation-wide class of U.S. Air Force veterans exposed to radiation after cleaning up two hydrogen bombs accidentally dropped on Spain in 1966, in the first appeals class action certified in the history of the U.S. Court of Appeals for Veterans Claims; and local and national veterans' organizations in campaigns to address gender discrimination in congressional nominations to the military service academies; curb retaliation against servicemembers who report sexual harassment or assault; and make veterans with bad paper eligible for state veterans' benefits.

The principal supervisor for the position will be Professor Michael Wishnie.

Housing and Community & Economic Development Clinics

The Community & Economic Development (CED) is a semester-long, in-house clinic that provides transactional legal services to clients seeking to promote economic opportunity and mobility. CED's clients include affordable housing developers, community development financial institutions, farms and farmer's markets, fair housing advocates, and neighborhood associations. CED's legal services help our clients to expand access to financial services, bring arts institutions and grocery stores to chronically under-resourced communities, break down barriers to affordable housing development in high-opportunity communities, promote access to healthy foods, and facilitate entrepreneurship among low-income people.

The Housing Clinic is a semester-long, in-house clinic that represents tenants facing evictions and substandard housing conditions; homeowners facing foreclosures and seeking affirmative relief for illegal behavior by mortgage lenders and servicers; and individuals and advocates in affirmative fair housing litigation.

On behalf of our clients, our students represent clients in federal and state courts; negotiate and draft contracts; provide advice on the tax consequences of deal structures and entity choices; structure and carry out real estate transactions; represent borrowers and lenders in financings; engage in legislative and regulatory advocacy; form for-profit and not-for-profit entities; and resolve land use and environmental issues. In addition to representing clients, students in their first semester of the clinic take a seminar which covers federal, state and local policies affecting urban and suburban places; substantive law in tax, real estate development, and corporate governance; and transactional and regulatory lawyering skills, such as negotiation and drafting contracts.

The principal supervisor for the position will be Professor Anika Singh Lemar.

Yale University considers applicants for employment without regard to, and does not discriminate on the basis of, an individual's sex, race, color, religion, age, disability, status as a veteran, or national or ethnic origin; nor does Yale discriminate on the basis of sexual orientation or gender identity or expression. Title IX of the Education Amendments of 1972 protects people from sex discrimination in educational programs and activities at institutions that receive federal financial assistance. Questions regarding Title IX may be referred to the University's Title IX Coordinator, at TitleIX@yale.edu, or to the U.S. Department of Education, Office for Civil Rights, 8th Floor, Five Post Office Square, Boston MA 02109-3921. Telephone: 617.289.0111, Fax: 617.289.0150, TDD: 800.877.8339, or Email: ocr.boston@ed.gov.

Michigan Law - Entrepreneurial Teaching Fellowship

The University of Michigan Law School is seeking a clinical teaching fellow in its Zell Entrepreneurship Clinic (ZEC). Law students in the ZEC provide transactional legal services to early-stage startups and play a significant role in the entrepreneurial ecosystem of Ann Arbor. Typical matters include business entity formation, intellectual property, contract drafting, and other common early-stage legal issues. This is a two-year appointment with the possibility of extension for a third year, beginning in the summer of 2023.

You can find more info about the clinic here: www.law.umich.edu/clinical/ec, and the job posting here: careers.umich.edu/job_detail/231796/...

Professor Sitaraman on Deplatforming

This week, I read Professor Ganesh Sitaraman's fascinating article, Deplatforming (forthcoming, Yale Law Journal).  As he states in the introduction, "Deplatforming has also not been limited to individuals and content on social media."  My research isn't focused on tech platforms or social media.  However, it does encompass banking, financial market infrastructures, and other evolving financial market platforms where this issue either has arisen or might arise in the future.  I'm grateful that this article will help me in thinking about such questions.  Here's the abstract:

"Deplatforming in the tech sector is hotly debated, and at times, it might even seem unprecedented. In recent years, scholars, commentators, jurists, and lawmakers have focused on the possibility of treating social media platforms as common carriers or public utilities, with the implication that imposing a duty to serve the public would restrict them from deplatforming individuals and content.

But in American law, the duty to serve all comers was never absolute. In fact, the question of whether and how to deplatform—to exclude content, individuals, or businesses from critical services—has been utterly common and regularly debated throughout American history. In the common law and the major infrastructural and utility sectors—transportation, communications, energy, and banking—American law has long provided rules and procedures for when and how to deplatform.

This Article offers a history and theory of the law of deplatforming across networks, platforms, and utilities. Historically, the American tradition has not been one of either an absolute duty to serve or an absolute right to exclude. Rather, it has been one of reasonable deplatforming—of balancing the du-ties to serve and the need to, in limited and justifiable cases, exclude. Theoretically, deplatforming raises common questions across sectors: Who deplatforms? What is deplatformed? When does deplatforming occur? What are permissible reasons for deplatforming? How to deplatform? The Article uses the history of deplatforming to identify these and other questions, and to show how American law has answered them.

The history and theory of deplatforming shows that the tension between service and exclusion is an endemic issue for common carriers, utilities, and other infrastructural services—including contemporary tech platforms. The Article considers ways in which past deplatforming practices can inform current debates over the public and private governance of tech platforms."  

Tomorrow!! Virtual Teach-In: The Failure of Silicon Valley Bank

Dear BLPB Readers,

Professor Nadav Orian Peer at the University of Colorado Boulder Law School shared that tomorrow, Wednesday March 15th at 2pm ET (noon MT), there will be a "virtual teach-in at Colorado Law about SVB and its significance."  Interested readers can join the event at:  www.cu.law/svb 

LSU Law is Seeking a Visitor or Adjunct for Business Associations Courses

This just in from friend-of-the-BLPB Christina Sautter:

The Louisiana State University Paul M. Hebert Law Center seeks visiting or adjunct professors for the 2023-2024 academic year to teach Business Associations I (fall and spring) and Business Associations II (spring).  Additional courses, such as Mergers & Acquisitions or Securities Regulation will also be considered. Interested individuals should email Pamela Hancock at phancock@lsu.edu for more information, as well as to obtain a link and instructions for uploading a CV and cover letter.

LSU is committed to providing equal opportunity for all qualified persons in admission to, participation in, or employment in the programs and activities which the University operates without regard to race, creed, color, marital status, sexual orientation, gender identity, gender expression, religion, sex, national origin, age, mental or physical disability, or veteran's status. LSU is committed to diversity and is an equal opportunity/ equal access employer. LSU believes diversity, equity, and inclusion enrich the educational experience of our students, faculty, and staff, and are necessary to prepare all people to thrive personally and professionally in a global society.

Everything is a Security

This week, NYAG Letitia James filed a complaint against KuoCoin, a crypto exchange, for various violations of NY law, including running an unregistered commodities and securities exchange, and acting as an unregistered securities broker.

The allegations focus on three different crypto assets: Luna, TerraUSD, and Ether.  In particular, James claims that Ether is both a commodity and a security – the latter allegation necessary to support the claim that Kuo should have registered as a securities broker.

Now, as we all know, the SEC and the CFTC have generally taken the view that Ether is a commodity, not a security, but Ether’s shift to a proof-of-stake model has raised questions about whether Ether’s status should change under federal law.  James highlights the proof-of-stake model in her briefing in support of a petition for a permanent injunction against KuoCoin.  But more interestingly, she argues in the alternative that Ether is a security under New York State’s prehistoric Waldstein test, articulated in In re Waldstein, 160 Misc. 763 (Sup. Ct, Albany Cnty. 1936).  That test says a security is “any form of instrument used for the purpose of financing and promoting enterprises, and which is designed for investment.”

Waldstein has, according to Westlaw, been cited in a total of 32 cases since it was articulated in 1936, and in many of those cases, it’s mentioned but not really applied.  When it is applied, it seems to have been used in conjunction with Howey and/or Reves, and it seems courts often conclude that the instrument under consideration comes out the same way under all tests.  See, e.g., People v. Van Zandt, 981 N.Y.S.2d 275 (Sup Ct., Bronx Cnty. 2014); Xerox Corp v. New York State Tax Appeals Tribunal, 973 N.Y.S.2d 458 (App. Div. Third Dep’t 2013); People v. First Meridian Planning, 614 N.Y.S.2d 811 (App. Div. Third Dep’t 1994); All Seasons Resorts v. Abrams, 68 N.Y. 2d 81 (1986).  But this time, James is using Waldstein in a manner that (might) diverge from how at least federal agencies have interpreted Howey, which begs the question whether New York courts will hold that Waldstein and Howey are different, and/or that Waldstein is still good law.  Mostly, though, this is a lesson for my students that though we focus on Howey and Reves in class, states can have entirely different definitions of what counts as a security for the purposes of state regulation.

Recommended: "A Roundtable on Recent Developments at the FTC"

On March 6, the Federalist Society hosted "A Roundtable on Recent Developments at the FTC." Yesterday, I had the chance to listen to a podcast of the event and I think it may be of interest to BLPB readers. All the relevant links can be found here. Below is a brief description of the event.

Recent months have seen a flurry of notable developments at the Federal Trade Commission, including oral arguments in the high-profile Axon v. FTC and SEC v. Cochran Supreme Court cases, administrative complaints challenging deals between Altria and JUUL and Illumina and GRAIL, and FTC Commissioner Christine Wilson’s announced resignation. Please join us for an in-person luncheon featuring a panel of antitrust law experts examining these developments and debating what might come next at the FTC.

Central Michigan University Seeking Tenure-Track Entrepreneurship Faculty

Position Summary

The College of Business Administration at Central Michigan University invites applications for one or more entrepreneurship faculty members to begin service at the rank of assistant professor, associate professor, or full professor on August 21, 2023.

CMU anticipates the successful applicant will take a leadership role in the department. This could include serving as the Department Chairperson, serving as the Director of the Master in Entrepreneurial Ventures (MEV) program, or service in another administrative capacity. A reduced teaching load is available for successful applicants serving in one of these roles.

Tenure-track faculty are generally expected to teach three courses per semester, maintain an active research agenda, and actively participate in service activities. Courses may be face-to-face or online and at the undergraduate or graduate level. Faculty may also: advise students; engage in assessment of learning activities; help develop and promote CMU’s entrepreneurship offerings; support CMU’s New Venture Competition (NVC) and other extra-curricular initiatives; and strengthen partnerships on and off campus.  Candidates must have the ability to perform the essential functions of the job with or without reasonable accommodations.

Required Qualifications

Candidates must have a terminal degree: (i) a Ph.D. or D.B.A in entrepreneurship or a related business field (from an AACSB accredited institution); or, (ii) a J.D. (from an ABA accredited institution) with significant entrepreneurship-related experience; or, (iii) other relevant terminal degree (from a major national university) with significant entrepreneurship-related experience.  For those pursuing a Ph.D. or D.B.A., ABD applicants will be considered if it is clear that the applicant’s degree will be conferred at the time of appointment.

Message to Applicants

CMU encourages applicants from diverse academic backgrounds to apply. You must submit an online application to be considered an applicant for this position. To apply, please visit our website at https://www.jobs.cmich.edu/. Inquiries about the position may be directed to the Entrepreneurship Chairperson David Nows at David.Nows@cmich.edu; however, the applicant must apply directly through the online Central Michigan University applicant portal.

CMU, an AA/EO institution, strongly and actively strives to increase diversity and provide equal opportunity within its community. CMU does not discriminate against persons based on age, color, disability, ethnicity, familial status, gender, gender expression, gender identity, genetic information, height, marital status, national origin, political persuasion, pregnancy, childbirth or related medical conditions, race, religion, sex, sex-based stereotypes, sexual orientation, transgender status, veteran status, or weight (see http://www.cmich.edu/ocrie).

Professor Packin on Financial Inclusion Gone Wrong: Securities and Crypto Assets Trading for Children

Today, a LexisNexis alert shared the great news that Professor Nizan Geslevich Packin's article, Financial Inclusion Gone Wrong: Securities and Crypto Assets Trading for Children, has now been published in the Hastings Law Journal.  It's a fascinating work that I had the privilege of seeing presented at last year's National Business Law Scholars Conference (NBLSC) at OU Law.  I'm excited to see it's now published, and I can't wait to learn about more exceptional work like this at this year's NBLSC in Knoxville, Tennessee.  Hope to see many of you there! 

Article citation: Nizan Geslevich Packin, Financial Inclusion Gone Wrong: Securities and Cypto Assets Trading for Children, 74 Hastings L. J. 349 (2023). 

Here's the abstract posted on SSRN:

"According to studies, for most Americans, money is a major source of anxiety. Looking for ways to help Americans address this source of anxiety, some believe that increasing children’s financial orientation could help lower their money-related anxiety levels as adults. Identifying this market as a business opportunity, and reassured by research that shows that by age six, children are already veteran consumers of mobile apps, financial technology (FinTech), decentralized finance (DeFi) and even traditional financial entities have started offering services and products to children. These services and products include a broad array of financial-related products and services – from enabling children to earn money for doing their chores, to trade stocks and crypto assets, and even earn digital assets and currencies while playing video games.
The potential of this new market’s clientele is valuable for two reasons. First, having more customers is always a good thing. Second, children will eventually mature into adult customers and presumably will continue using the services and products they like and with which they are familiar. And although some legal challenges are associated with children, who are minors, not only entering into financial-based contracts but also doing so online, this business trend will continue to grow as offering financial services to children is becoming socially acceptable. Society’s newly adopted paradigms for describing, understanding, and shaping children’s rights, domestic relationships, custodial status, and even digital purchasing power are all supportive of this trend. Moreover, FinTech and DeFi financial apps and games can help teach children about the value of money, the importance of investing, and the risks involved in trading.
Yet, FinTech and DeFi apps and games could also have a developmentally and behaviorally disruptive effect on children, similarly to other consumed digital content. Moreover, they should be a source of concern to anyone focused on investor and consumer protection, including regulatory agencies such as the SEC and FINRA, which have already expressed concerns about gamification and digital engagement practices. Given “the financialization of everything,” using legal and ethical reasoning, and behavioral economics tools, this Article calls for the search for effective financial literacy education for children to be replaced by a search for policies more conducive to good consumer and investor protection outcomes, which should guide lawmakers in regulating FinTech and DeFi apps and games offered to children in light of: (i) the addictiveness of digital gaming; (ii) how gamifying finance makes it feel less serious; (iii) the connection between gamification and gambling; (iv) how children’s financial choices are more susceptible to the influence of outside parties than are those of adults; (v) the FinTech and DeFi apps and games’ failure to teach children the importance of concepts such as debt, credit, and financial commitments; and (vi) the unrealistic burden on young parents who already struggle with the need to constantly supervise their children’s online activities, in our digital era, by expecting them to monitor their children’s online financial activities."   

2023 National Business Law Scholars Conference - Call for Papers

The website for the previously announced 2023 National Business Law Scholars conference at The University of Tennessee College of Law is live!  The call for papers for the conference can be found there, but the essential information is repeated below, for your reference.

The conference will take place Thursday, June 15 and Friday, June 16, 2023. This is the 14th meeting of the National Business Law Scholars Conference, an annual conference that draws legal scholars from across the United States and around the world whose work spans a variety of business law disciplines.

Call for Papers

We welcome all scholarly submissions relating to business law. Junior scholars and those considering entering the academy are especially encouraged to participate. If you are thinking about entering the academy and would like to receive informal mentoring and learn more about job market dynamics, please let us know when you make your submission.

Submission Guidelines

You may use the “Submit now!” button on the conference website to submit an abstract by Friday, April 7, 2023. Please be prepared to include in your submission the following information about you and your work:

– Name
– E-mail address
– Affiliation/school
– Paper title
– Paper description/abstract
– Keywords (3-5 words)
– Does the paper relate to DEI issues?*
– Dietary restrictions
– Mobility restrictions

*If yes, based on availability, would you prefer to be on (1) a DEI-focused panel, (2) a subject matter-focused panel (not specifically DEI-focused), or (3) any panel (i.e., no preference as to type of panel)?

Questions

If you have any questions, concerns, or special requests regarding the schedule, please indicate that in your submission or email Professor Eric C. Chaffee directly at eric.chaffee@utoledo.edu. We will respond to submissions with notifications of acceptance a few weeks after the submission deadline. We anticipate the conference schedule will be circulated in May.

I hope to see many of you in Knoxville in June!  It is a lovely time to be in East Tennessee.  If you would like to do local sight-seeing, Nashville is only about 2.5 hours away by car, Chattanooga is 1.5 hours away, and Asheville, North Carolina is just 2 hours away.  It can be less expensive to fly into those other local cities, and they all are great places to visit in this part of the world.

"Keeping Your Own Counsel" - Walter Effross

Friend-of-the-BLPB Walter Effross recently informed me of his blog, Keeping Your Own Counsel (subtitled “Simple Strategies and Secrets for Success in Law School”). The blog is a companion piece to Walter's new book designed for pre-law and law students, also entitled Keeping Your Own Counsel. Walter let me know that one can check out the book’s table of contents, preface, and first two chapters through Amazon’s “Look inside” feature and that a summary of six of the book's themes is in his most recent blog post.

He also noted that his February 25th blog post provides links to his conversations with leading in-house and outside counsel about the definition and goals of, career opportunities in, and ways to remain current on, the increasingly relevant practice of Environmental, Social, and Governance (ESG) law.  He specifically recommends one of those conversations--the one with Fox Rothschild LLP partner David Colvin--even to law students who are not specifically interested in ESG because it addresses practical ethical issues.  He indicated (and I agree) that the overall post may be of particular interest to our readers.  So many of us are focused on ESG and related regulation in our work at the moment . . . .

I send congratulations to Walter on the blog and the book, along with gratitude that he alerted us to both.

Much Ado About Nothing

After VC Laster held that officers have Caremark duties, and can be the subject of derivative suits for violating them, there was a flurry of commentary to the effect that this would radically expand legal liability, open corporate officers up to a host of new lawsuits, and generally represented a bold new direction in Delaware law.  Now, of course, he’s done what was the most predictable thing in the world: He dismissed the claims on grounds of demand futility.   Which demonstrates there was nothing radical – or even particularly new – about his opinion originally.

So, the backstory:

The McDonald’s plaintiffs alleged that the directors of the company, its CEO, and its “Chief People Officer,” David Fairhurst, created and/or ignored a culture of pervasive sex discrimination and sexual harassment.  Fairhurst in particular was alleged to have done nothing about employee reports of harassment, to have tolerated a culture where employees feared reporting harassment, to have cultivated a “party atmosphere” that encouraged harassment, and ultimately to have engaged in sexual harassment himself.  Matters were so bad that there were coordinated EEOC complaints, nationwide employee walkouts, and inquiries from U.S. Senators.

On January 26, VC Laster held that if the allegations were true as to Fairhurst, then Fairhurst had violated his fiduciary duties to the corporation under Caremark by failing to identify the problem, attempt to redress it, and report matters to the board.  Fairhurst also violated his duties by personally engaging in illegal conduct – harassment – for his own benefit.  

On March 1, VC Laster issued a second opinion dismissing all claims against the directors on grounds of demand futility, with an additional order that claims against Fairhurst were also dismissed on demand futility grounds (that order is available on the docket, but is not currently on the court’s public website).

So, when it comes to the claims against Fairhurst, which were the ones that inspired the handwringing, it’s important to distinguish two separate issues which were collapsed in some of the reporting.  One is, what were Fairhurst’s duties to his employer?  The other is, assuming he violated those duties, can shareholders bring lawsuits over it?

Starting with Fairhurst’s obligations, the main concern was about Caremark duties and whether VC Laster unduly expanded them.  Now, sure, there’s an ongoing larger debate about why we have Caremark duties and what their function is or should be – compare Stephen M. Bainbridge, Don’t Compound the Caremark Mistake by Extending it to ESG Oversight with Elizabeth Pollman, Corporate Oversight and Disobedience – but in this case, I think the label “Caremark” obscured more than it illuminated.  Fairhurst was the human resources guy.  His literal function – his actual responsibilities, what he was hired to do – was to handle employee relationships.  The most basic aspects of his job were to ensure the company was complying with employment and labor laws, and generally to maintain a good or at least tolerable company culture.  And he, quite flagrantly, did not do his job.

Professor Bainbridge (no fan of Caremark liability in the first place), was particularly vexed that VC Laster’s opinion expanded Caremark duties to mere garden variety lawbreaking instead of “mission critical” lawbreaking.  I think that misapprehends the point of the “mission critical” label, and this is something that VC Laster elucidates in his March opinion dismissing claims against the director defendants.  “Mission critical” was intended to identify things that are important enough to the company that they deserve board-level attention, and, in particular, things where the board should be affirmatively setting up a reporting system even in the absence of notice of a problem.  I.e., “mission critical” is how we know whether it’s a Big Thing or a little thing, and we don’t expect board members to constantly monitor little things even before they become Big Things, because being a board member is only a part time gig.  “Mission critical,” in other words, is how we define the scope of the board’s non-delegable oversight duties at the outset.  It is how we define the board’s actual job.

But Fairhurst was an officer, not a board member, and he had a different job.  Even if I concede that avoiding sexual harassment would not have been “mission critical” for McDonald’s at the board level, it absolutely was “mission critical” for Fairhurst.  We can call it Caremark, but we can also call it Fairhurst’s job description.  When it came to Fairhurst’s sphere of authority, this was not a little thing, it was a Big Thing.  If Fairhurst had been charged with keeping the copiers supplied with toner, and he ignored that job, it also would have been “mission critical” for him.  Which is why, in the January opinion, VC Laster made clear that when it comes to officers, who (unlike board members) do not have responsibility for the whole company, Caremark duties are shaped by their particularized spheres of authority.  

After that, we are in Agency 101 territory, or, more specifically, Restatement (Third) of Agency § 1.01 territory, namely, that agents are fiduciaries who consent to act under the principal’s control.  I can’t think of an agency principle in the world more fundamental than that agents should not flagrantly ignore their assigned responsibilities. 

So, yes, of course, the Chief People Officer violated his fiduciary duties to the company when he decided that he just wasn’t going to do his job, resulting in – I cannot emphasize this enough – nationwide employee walkouts.  The only surprising thing about the whole mess is that, in the Year of Our Lord 2022 (when this was briefed), Fairhurst even made the argument that, as Chief People Officer, he had no duty to prevent sexual harassment, and further, that he expected a court would accept that argument and write it down and publish it where other people could see it.

But then there’s the next question, which is, if he did violate his duties, can shareholders be the ones to bring the lawsuit?  And on this, again, VC Laster got it exactly right, exactly the way I explain it to my students, and it surprises me that anyone could think otherwise. 

Namely, we all experience little torts every day.  Someone bumps into us on the street; a delivery is late, or wrong; the dry cleaner loses our clothes.  We (usually) make a decision not to sue over these things, because it would be expensive to do so, or time-consuming, or the tortfeasor is judgment proof, or a lawsuit would expose us to embarrassing discovery.  Instead, we handle matters other ways.  We lump it, or we complain to the manager, or we refuse to do business with the vendor again.  Companies are in the same boat – sure, they could sue every employee who makes a mistake or steals some petty cash, but sometimes, most of the time, it makes more sense to handle matters with a firing or some other form of internal discipline.  And boards are charged with making those decisions, just as they’re charged with other aspects of managing the company.

But occasionally, we don’t actually trust that boards can make that decision fairly.  When?  Well, most obviously, when the board members themselves were the tortfeasors.  But there might be other situations, such as when board members have close relationships with the tortfeasors.  In those scenarios, shareholders get to substitute their judgment for that of the board, and bring the lawsuit in the company’s name.  And that’s what a derivative lawsuit is.  Not every defendant in a derivative lawsuit is a board member, or even an officer – a while ago, for example, shareholders of HealthSouth brought a derivative lawsuit against the company’s auditor, on the ground that the auditor had breached its contract with the company by failing to catch all the accounting fraud.  See Ernst & Young, LLP v. Tucker ex rel. HealthSouth Corp., 940 So. 2d 269 (Ala. 2006).

The demand requirement of Rule 23.1 is how we sort out situations where we can and can’t trust the board to decide whether the company should bring a lawsuit – and that is how we ensure that imposing duties on corporate officers will not result in an explosion of liability, not by limiting their duties in the first place.  And that is exactly what happened in McDonald’s.  Fairhurst violated his duties to the company (and very possibly his employment contract).  That potentially triggered liability to the company, in the same way that any employee who abandons his responsibilities would be liable for damages caused.  But, ultimately, boards decide when a lawsuit is the most appropriate method of discipline, and VC Laster concluded that shareholders did not have a good reason to think that the board could not make that decision in this case.

That also takes care of another objection to VC Laster’s original ruling, namely, the part where he held Fairhurst violated his duties by engaging in sexual harassment personally.  Any agent violates their duties when they engage in misconduct; this is the kind of thing I teach in the beginning of a BizOrgs class.  The agent might also violate his employment agreement, behave negligently, or do any of a thousand other things that could trigger either contract or tort liability to his principal, just as Ernst & Young might have violated its contract with HealthSouth by conducting a negligent audit.  A finding that there is liability as between the employee (or the contractor) and the company is entirely unremarkable.  The rubber meets the road when it comes to what the principal decides to do about those things, and in particular, who makes that decision.  When that law changes, it’ll be notable.