Sunday, January 27, 2008

The Stoneridge Decision and the Rule of Hyperbole

Posted by Jeff Lipshaw

My curmudgeonly beef today has to do with the hyperbolic use of the phrase "the Rule of Law."  To be sure, misuse of this phrase does not bother me as much as the far more widespread problem of being able to hear "music" coming from other peoples' iPods even though they are standing four feet away on the other side of the subway car and there is a full rush hour's worth of ambient noise.  (Somebody coined a great word for this:  earspill.)  God knows what they are doing to their hearing in there.  I really don't want to have to pay my share of the societal cost of repairing broken eardrums over the next thirty years.  For some reason I shy away from the physical confrontation it would take to tell somebody on the T to turn it down, so I'm turning to a second-best problem to grump about publicly.

Last Friday's Wall Street Journal featured an op-ed by Paul S. Atkins, an SEC commissioner, entitled "Stoneridge and the Rule of Law."  As most everyone knows, the Supreme Court rejected a theory of scheme liability against peripheral actors in a securities law violation in the case of Stoneridge Investment Partners LLC v. Scientific-Atlanta.  As much as I agree with the outcome of the case, however, I am not prepared to say that a result that had gone the other way would have reflected a diminution in the "Rule of Law."

To recap the bidding, the underlying facts of Stoneridge, which had to be taken as true given the procedural posture, were really nasty.  Charter Communications wanted to inflate its 2000 earnings.  Charter was (and is) a cable company and bought cable boxes from Scientific-Atlanta and Motorola.  Charter persuaded representatives of those two vendors to engage in a scheme whereby Charter would actually overpay by $3 per box ($17 to $20) on the condition that the two vendors immediately turned around and spent that money on advertising with Charter at ad rates four to five times the normal rates.  Why?  Because Charter could capitalize the cost of the boxes, but bring the ad revenue directly into current earnings, with the effect of inflating earnings.  For my money, it's simply impossible to believe that the S-A and Motorola people didn’t have some idea about what the purpose behind all this was.

Larry Ribstein, Elizabeth Nowicki, and others have already done a fine job of parsing the pros and cons of the Supreme Court opinion (the primary criticism of which, even from those who support the result, is that the reliance test was misplaced; instead the Court should have held that Section 10b simply does not contemplate "scheme" liability against anyone other than the hatcher of the scheme).   That's not my point here.  I just want to kill the hyperbole.

Commissioner Atkins applauded the recent decision as "the mark of a court that insists on predictability and the rule of law - principles that are fundamental to the protection of investors and success of their investments."  I think I understand predictability, and predictability is certainly one element that theorists suggest marks the "Rule of Law," but mere unpredictability of outcomes is not the only factor in a Rule of Law analysis.  Indeed, the Rule of Law question is a tough nut.  First, there is some doubt whether the question "should the Rule of Law prevail in an ordered society?" is even a meaningful question.  (As Andrei Marmor points out, it's either a tautology if it means that any form of social control is law, or it's a different question having to do with whether good law should prevail.)  Second, lots of theorists have chimed in on the indicia of the rule of law, and we can assume they include more than predictability (see Fuller, Raz, Finnis, et al. on generality, promulgation, no retroactivity, clarity, stability, consistency, etc.).  Third, even if predictability were the only criterion, it's not clear to me that a result the other way (in my view, not a good thing) would have go so far as not to uphold the Rule of Law.

Personally, I think we are all better off saving "Rule of Law" rhetoric for instances in which detainees are convicted in secret hearings without counsel or due process, in which autocratic rulers shut down fledgling democratic institutions with the temerity to challenge the fiats of the autocrat, or in which cases are decided not on argument, but by cash payoffs to the judge.  If the latest outrage doesn't rise to that level, call it bad policy, call it outrageous, call it ridiculous, but leave the Rule of Law alone.

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