The Faculty Lounge

Bartlett and Gulati on "Why Do We Allow Customer Discrimination?"

My Durham neighbors Katherine T. Bartlett and Mitu Gulati have just posted an exciting -- and I'd add controversial -- paper called "We do we allow customer discrimination?" Cribbing now from their abstract:

Customers discriminate. They discriminate in whom they buy from, how much they are willing to pay for what they buy, and how they evaluate those with whom they do business—among other things. Anti-discrimination norms in contemporary U.S. society are strong, as reflected by legal constraints on discrimination by employers, providers of public accommodation and so on. But there seems to be an exemption for customers. Why?

One of their proposals might require bundling of purchases as a response to discrimination (such as requiring the purchase of tickets to women's sports teams at the same time customers purchase tickets to men's sports teams.). This leads me to ask if this is really more about redistribution of wealth than about prohibiting/punishing customer discrimination. And if that is the case, perhaps we should just redistribute property outright? A second thought here -- and this likely the only time in my life I have found myself in agreement with Robert Bork; savor this because the moment is unlikely to recur -- but I think we allow customer discrimination because of the core ideology in our country that permits individuals to make choices about how to spend money, whom to associate with, and in what ways.

Download the paper here.

What We Might Learn from the Indictment of Dewey & LeBoeuf’s Former Management

As the Capitol Steps liked to remark, everyone loves a skicious vandal.  Schadenfreude sprang up like mushrooms in that springtime many of us are still longing for, first as Dewey & LeBoeuf became the biggest law-firm failure ever; then when stories of secret salary guarantees to the Pigs Who Were More Equal Than Others began to proliferate; then when the firm’s bankruptcy spawned “clawback” claims and widespread settlements with former partners who the Trustee contended had received more than their fair share before they left, or had exposed themselves to “unfinished business” claims by taking work and clients with them to their new firms.  Rumors flew that various unhappy partners had taken their displeasures to the Manhattan District Attorney, who was investigating alleged financial improprieties. 

And now the DA, having extracted guilty pleas and cooperation from half a dozen underlings, has indicted Dewey’s former Chair (managing partner), Steven Davis; his deputies, former Executive Director Stephen DiCarmine and former Chief Financial Officer Joel Sanders; and (somewhat puzzlingly) a 29-year-old former Client Relations Manager named Zachary Warren.  The charges include fraud, theft, falsifying business records and conspiracy. The SEC has filed its own civil complaint, naming Davis, DiCarmine and Sanders as well as former Finance Director Frank Canellas and former Controller Thomas Mullikan.  The New York Times’ coverage, with copies of the indictment and related SEC complaint, can be found here.

The widespread glee at the mighty fallen notwithstanding, we would all do well to remember that this is a genuine human tragedy.  Dewey employed over 1,000 lawyers and thousands more staff when it crashed.  All of them lost their jobs in the midst of the Great Recession.  While the legal press has chronicled the soft landings enjoyed by many of the more senior partners, many more were not so fortunate.

All of which should make us want to ask what we might learn here.  There will be the usual rash of sanctimony in the comments (you may consider your points made, and save them for another day), reducing the situation to the obvious, simplistic and therefore ineffectual admonition not to lie, cheat or steal.  These observations are usually coupled with the much less obvious but theologically entrenched creed that BigLawyers are all just Gordon Gekkos with bar cards, genetically predisposed to or trained from day one for greed, deceit and exploitation of their fellow man, so why is anyone surprised? 

Please.  There are hundreds of large law firms today, populated with well over 100,000 lawyers, that are not in bankruptcy, never will be, and are not (in the words by which one of the Dewey defendants allegedly described his activities to some of the others) cooking their books.  They may be more or less well-managed (a great many less, but that’s for another day), more or less forward-looking and responsive to their environments and clients (same comment), and more or less humane employers and community members, but they are not roiling dens of thieves.

So what was different about Dewey?  I want to suggest that, among the lawyers and law firms that have found themselves on the wrong end of criminal and SEC enforcement complaints, there are some unusual and noteworthy things about Dewey, things that illustrate some trends in this sector of the profession and offer a lesson or two more focused than a bare, if emphatic, rebuke of the deadly sins.

Set aside the regrettable population of those who become garden-variety criminals and happen to be licensed to practice.  Most lawyers who commit crimes and frauds as lawyers fall into two general categories:  Some steal from their clients—many by the simple expedient of taking client funds from their trust accounts, but some of the more ambitious and creative by kiting or otherwise perverting client trust accounts in Ponzi schemes and similar frauds.  Marc Dreier and Scott Rothstein are recent rather spectacular examples.  Others assist their clients in stealing from others—for example former Mayer Brown partner Joseph Collins, who is currently in federal prison for developing and implementing strategies allowing his client Refco to conceal devastating losses and omit them from a series of securities filings.  Neither happens all that much at large firms, not least because there is usually enough infrastructure and oversight to keep most rogue behavior in check.

But Dewey is neither of these.  The allegations of the New York indictment are that the defendants, all (except Warren) senior management of a billion-dollar professional firm, developed and implemented a scheme they portentously dubbed the “Master Plan” to manipulate the firm’s accounting records in order to be able to report to their banks and other lenders at a time when firm performance fell well below projections that were probably unrealistic to start with that they had met loan covenants or deserved additional extensions of credit.  The SEC complaint focuses on the alleged accounting fraud the firm, through its management, employed in violation of the securities laws to float a $150 million private debt offering to various institutional investors that supplemented the firm’s $100 million revolving bank line.  In short, Dewey & LeBoeuf defrauded its own lenders. 

This is an all too common story in the business world, but among law firms—whose members regularly rehearse and dispute the details of such stories in which their clients are involved, and put their shoulders to the shovels that excavate the wreckage—it is unusual.  I have little doubt that it has happened before, but it is nowhere near as common among lawyers’ frauds as fraud on their clients or on those with whom their clients are dealing.  And to the best of my knowledge it hasn’t ever happened with anything approaching the scale or dishonesty alleged here.

It’s often enlightening to look behind the fraud to see what the alleged fraudsters wanted the money for.  And that’s where Dewey stands apart from most other lawyer frauds.  As chronicled in the most detail by James Stewart in the New Yorker, management was so concerned about keeping old and recruiting new rainmakers that they gave many partners extravagant salary guarantees, guarantees that exceeded the revenue necessary to support them.  By definition, then, the firm overpaid many of those partners, and then borrowed to cover the difference between what it had promised them and what they generated.  And then allegedly lied to its lenders for the wherewithal to keep the spiral rising.  Some of the partners apparently knew about some of the salary guarantees, and some knew about more of them than others.  All of the partners knew about the shortfalls when year-end bonus time came, as the firm proved unable to meet most of the guarantees management had made, and then had very little left after other expenses to pay the partners not shrewd, or valuable, or (more to the point) institutionally indifferent enough to have extracted one.  How many of the partners appreciated how directly the borrowed money translated to borrowed time is unclear.  Though many were deeply sophisticated observers and analysts of business and finance, few seem to have known or guessed that someone might be lying to keep their own thing going well after the clock had actually run out. 

So what’s new and what’s different?  In an extended time of flat demand for complex legal services—the first in the experience of almost anyone living today—compounded by downward price pressure on the limited pool of available work from (among other things) increasing commodification of much such work in the eyes (and checkbooks) of increasingly sophisticated and aggressive general-counsel consumers, BigLaw managing partners must struggle harder and harder to live within their means.  As Dave McGowan and I noted several years ago (see here at pages 14-18, 70), and Bill Henderson argued more recently (see, e.g.,  here), many law-firm managers today stubbornly cling to the belief that they can somehow earn their way out of an increasingly competitive market by buying revenue (that is, bidding for lateral partners with portable business) for a price equal to or even greater than the profits that revenue will generate.  For an astonishingly long time, the limited efficacy of this strategy was masked by the inexorably rising tide of client demand, which lifted even the leakiest and most ill-skippered boats, and allowed the lucky to believe they were smart.  But in the current market, if you pay a million dollars for a million dollars in profit, you don’t make it up on volume.

Dewey indulged in the errors of the current age to a greater degree than most.  Management hired more laterals at higher prices, and then found themselves forced to overvalue complaining incumbents equally in order to retain them, compounding the problem.  They did so in an uncritical belief that the conditions that had generally prevailed from 1980-2007 would go on forever—after all, in the experience of the senior lawyers implementing what eventually devolved into the “Master Plan,” they effectively had—and allow them to earn their way out of any hole they could afford to dig.  When the music suddenly stopped, it is alleged that they chose to lie about how many chairs they had—imagining, I would guess, as many who maneuver themselves into this position do, that the band would strike up again momentarily, and no one would ever need to count the chairs.

The pattern is familiar to anyone who studies financial fraud.  Management robbed debt (the firm’s lenders) to pay equity (the partners); as owners themselves, management benefited too, though apparently not disproportionately more than their innocent (or ignorant) colleagues.  Ironically, the beneficiaries of the alleged fraud (Dewey’s partners) were among its victims.  Most of that can be said, to about the same degree, about any Ponzi scheme (though I am not suggesting that the Dewey fraud is a conventional Ponzi scheme, just that it shares the feature that its beneficiaries and its victims overlap significantly).  What is unusual here is that the fraud appears to have happened in a large and highly pedigreed New York law firm, the sort of institution people imagine steeped in prudence and restraint.  And it happened in the service of mismanagement of a kind that, while not at all uncommon among large law firms today, was uncommonly carried beyond the practical limits that constrain most firms by what is alleged to have been sustained and systematic dishonesty amounting to theft.

Bernie

Slavery and Business History

Forbes has a nice article about Caitlin Rosenthal's work on the business practices of slave-owners.  Cribbing a little from the conclusion of the article:

Rosenthal is aware that what started out as a straightforward history of business practices could become highly controversial, with some misconstruing her research as a kind of justification of slavery. Instead, she wants her research to inform managers and companies to become more aware of the complicated legacy of today’s business practices and the origins of some their day-to-day management practices.

“I got into this because I followed my sources,” Rosenthal says. “I didn’t mean to walk into this minefield.”

I don't think anyone should think she's justifying slavery.  Though this does remind me of the discussion we had here a while back on whether slaves were "paid" for work.  And I was happy to see that in addition to mentioning her book in progress, “From Slavery to Scientific Management: Capitalism and Control in America, 1754-1911,” that there will be a chapter in Sven Beckert and Seth Rockman's edited collection, Slavery’s Capitalism.

H/t Eric Fink.

Adler On Skirt Suits

Here.

No, NOT Jonathan.  (Or this Jonathan.)  

Amy Adler.  

Apple Loses E-Book Antitrust Litigation

Cross-posted from Madisonian.net ...

The District Court for the Southern District of New York today handed down its decision in the ongoing Apple e-book antitrust litigation holding that Apple violated antitrust law in its participation in (one might say orchestration of) a scheme to raise retail prices of e-books in 2009-2010 when it launched its iBookstore with the iPad. Story and judgment available here. And for anyone interested in the structure of the e-book industry, the recitation of the facts re how the industry works and how Apple sought to change the original model dominated by Amazon is very instructive and reads not unlike a Greek drama. It’s probably the most detailed account I’ve read explaining the distribution and price determination models within the industry.

Boilerplate Symposium Continues Next Week

As I mentioned in a post last week, ContractsProf Blog has been hosting an on-line symposium on Peggy Radin’s new book, Boilerplate: The Fine Print, Vanishing Rights and the Rule of Law, which continues into next week.  If you haven’t yet read Boilerplate, I highly recommend it. The book is no less than you would expect from Peggy Radin, which is to say: bold, thoughtful, and almost certain to be influential. 

I’ll post something here, of course, once next week’s reviews (including my own) appear over at ContractsProf.  But for those wanting a preview, the images included in this post should give a taste (click the liability waiver to enlarge, and you may have to zoom to read all of the text.)  Those of you who know me, and are also familiar with Peggy’s work, will not be surprised to learn that we have very different views regarding the virtues of private ordering as compared to public solutions, particularly when it comes to substantive limitations on freedom of contract.  But, as is the case with her work on contested commodities, Peggy forces us to think hard about the potential shortcomings of private ordering in certain contexts. 

I remain largely unconvinced that substantive restrictions on freedom of contract are the best way to overcome those limitations, but Peggy has very thoughtfully shown the increasingly poor fit between many traditional contract law principles and modern day contracting practices.  The issues raised by Boilerplate likely will continue to generate discussion over the coming years.  In any event, read the book if you haven’t done so already, as well as this review by Omri Ben-Shahar, and stay tuned for further posts in the on-line symposium.  

 

(The author, in Patagonia, after signing the above liability waiver)

Race and Infertility Care

Several research assistants and I spent last summer looking at websites from virtually every US fertility clinic.  One of the things we recorded was the race of any babies pictured on the first page of the clinics’ websites.  I have no background in critical legal studies or critical race theory, so I am probably not the best person to do this study, but I was looking at other advertising issues on the website, and I had read that minorities use assisted reproductive technologies at a much lower level than Whites, despite experiencing higher rates of infertility and even when states mandate fertility insurance (which should control for wealth effects).

 I was surprised by the results, which are included here.  It turns out that the picture of fertility care in America on websites is quite literally a picture of White doctors helping patients have White babies. 

Tax Deductibility of "Rainmaking"

Earlier this month, the folks at TMZ.com reported (here) on statements by rappers Bizzy Bone, The Game, and Daz Dillinger regarding the tax deductibility of "making it rain," or throwing stacks of money up in the air at strip clubs so that the bills "rain down" on the women working in the club.  (For other, less PG meanings of the phrase, see here.)  In the rappers' statements, tax folks will no doubt recognize (and reject) characterizations of the payments as charitable contributions, salaries, advertisement or entertainment expenses.  Entertaining all the same!

An interesting paper from Jack Balkin

Has been posted on Balkinization and on SSRN The First Amendment is an Information Policy. This paper sounds like it could have interesting implications for an issue which I intend to return to on the scholarship front, that is, what happens when some of what appears in law reviews has been "sponsored" or "commissioned" ? And when I say "sponsored" or "commissioned" I am not referring to law school summer research grants. Such grants are never conditioned on the topic or on the author reaching a particular result.  The only string attached are usually that the faculty member actually produce something that results in a publication.

In contrast, in, what for lack of a better word I will call "commissioned" or "sponsored" scholarship, the author has been paid precisely because of the viewpoint he or she espouses.  Drug company sponsorship, or worse ghostwriting (i.e. paying a doctor to add his or her name to an article) has long been a problem in medical journals relating to pharmaceutical drug research and has led to some overhauls on most medical journal's requirements about financial disclosures. Most law reviews don't have such policies. Should they? A few have implemented them.  Perhaps more will come. But the fact that there is some interest in financially supporting the production of law review scholarship to promote a particular point of view raises some interesting questions about the reliability of the information, whether "the marketplace" is a good sorter of the best ideas, as the "marketplace of ideas" metaphor is often used to imply.  And, more prosaically, illustrates that somebody thinks law reviews are worthwhile enough to pay for the production of these sorts of articles. Who is doing this, how much of this goes on and what difference it makes are big unknowns at this point but may bear some investigation. 

In the meantime, going back to Professor Balkin's paper, I think there might be some interesting implications for these questions given what looks like his thesis --- that one purpose of the First Amendment is to generate information.  Stay tuned.

KCON 8

Some time ago I posted a note about the upcoming 8th International Conference on Contracts to be hosted at Texas Wesleyan Law School this past week. I thought that I would take this opportunity to make some observations on what seemed to be the most pervasive topic addressed by variety of folks on various panels: The decade or so longer armistice on contracts of adhesion/form contracts has come to an end.

There has always been an undercurrent of academic discomfort or outright hostility to the notion that persons, typically consumers, are bound by the terms of an agreement they've not read and which the drafting business knows they've not read. However, the ubiquity of form contracts, which increased with the advent of Internet click wrap, coupled with academic arguments that such agreements were efficient, had seemed to tamp down criticism.

Perhaps occasioned by Margaret Radin's new book, Boilerplate, questions about the moral and political justifications for legal remedies for form contracts are back on the front burner. The implications of behavioral economics have weakened the efficiency argument. Others find Randy Barnett’s analogy of consent to form contracts to a promise to do whatever is provided in an unopened envelope to have stretched the notion of consent a step too far.

The overall mode at the conference was decidedly negative toward the virtual carte blanche courts have given to form contracts. But this raises another question: How are we to account for such judicial acquiescence? It seems unlikely that nearly all judges are followers of neo-classical economics or are thralls to corporate America. There must be something behind judicial approval of form contracts and, behind that application, the more comprehensive notion of grounding contract formation on “objective manifestations of assent.” Until professedly pro-consumer academics identify and respond to the zeitgeist of consumerism, I’m not confident we’ll see any change in the law of form contracts.

David Segal Trains His Haggler's Eye on Vet Schools

This story from the New York Time's Sunday business section should give some pause to those who think that law students' debt plight is unique to law students. High Debt and Falling Demand Trap New Vets. Maybe no one that thinks that, but at times, judging from some of the commentary, it sure has seemed that way.

Now I bring this up, not as a kind of "things are tough all over," so there's no problem, get over it. Far from it. But if things are tough all over, at least debt-wise, in higher education, which they seem to be (and we haven't  yet talked about the situation for graduate students in disciplines like English, Philosophy, History, etc.) then perhaps we should consider whether this is a systemic problem, especially since the Times also reports that at least in some quarters a 4 year degree is the new entry level standard previously represented by a high school degree.  It Takes A B.A. to Find a Job as a File Clerk

If it is true that at least part of the law school debt problem is a reflection of wider social forces, that suggests it is one that is not necessarily going to be solved by tweaks of the law school curriculum (and let me just say here that I assume that it is always a good idea to be open to continuous revision and reform in light of new information and conditions, as long as we also try not to reflexively discard valuable practices which may be good) or changes in accreditation practices.  Nevertheless, one aspect of this article stands out for me - the role played by the for-profit vet school.  Could it be that the combination of a federal student loan program designed and launched before the era of for-profit higher education and the emergence of these institutions has driven some of the problem by saturating the market? Or could it be that a general faith in for-profit entities and identification with market-based analogies and imagery has infected higher ed in a way that has been harmful to students? Bemonaing the corporatization of higher education Don't know. And it would probably be hard to prove a connection. But it is food for thought.

Addictive Junk Foods

The New York Times has a very provocative article coming out in tomorrow's magazine about the junk food industry.  It is definitely worth a read.  The author draws parallels between the big food industry tactics and big tobacco.  This is an analogy made earlier by Kelly Brownell  Rudd Center for Food Policy and Obesityand his co-author Kenneth Warner in this article "The Perils of Ignoring History: Big Tobacco Played Dirty and Millions Died. How Similar is Big Food"? The Perils of Ignoring History.  One aspect of this story that may be a revelation to many people is the degree to which food has been deliberately engineered to engender what the article calls "the bliss" point.  What should be apparent is that the industry has spent, and continues to spend, billions of dollars on engineering these foods and fine-tuning their marketing pitches. And data mining allows them to be more fine-tuned than ever, as this article from Advertising Age suggests. Facebook to Partner with Acxiom.

A good deal of the advertising dollars spent by advertisers or these products are spent directing ads at children and teens, which, when one considers what is being pitched, doesn't make the analogy between tobacco and junk food seem that far fetched. See for example this quote from the AdAge article: "The targeting would hypothetically enable Coca-Cola to target to teenagers who've bought soda in the last month..."

I have long wondered why it doesn't bother people more than it seems to that so much money is spent pitching directly to kids,  since no one thinks children or teenagers are fully rational choosers (even if we pretend for sake of argument that adults are). So why is it okay to train this battery of persuasive efforts at them? And in many cases marketing efforts are clearly aimed at very young children. The figure of Ronald McDonald is an example.  Is Ronald McDonald the New Joe Camel?

However, just as this issue is getting more attention (again - it saw a good run in the 1970s in the FTC's ill-fated  "Kid-Vid" investigation),  the commercial speech doctrine has become so much more protective of advertising that any proposed restriction on advertising, even if it is to apply only to the most vulnerable group, children, is likely to fail First Amendment scrutiny. Indeed, some academics argued that even the mere proposal by an Interagency Working Group see here formed to try to propose industry self-regulatory guidelines on marketing of junk food to children, would fail the First Amendment because mere publication of such suggestions which did not have the force of law, might have a "chilling effect."  See here and here . It appears it was the government not the marketers, which was "chilled." FTC weakens proposals.  The irony is that given the state of the law, it might be easier to ban certain products, as mayor Bloomberg did, than it is to regulate the marketing of those same products. Yet, for those worried about the "Nanny state" a ban is arguably far more intrusive on liberty than a ban on marketing -- except the marketers' liberty. But the whole idea in protecting commercial speech was that it was supposed to further consumers' liberty, not advertisers. So this is a bit of a puzzle. 

The Ex Ante/Ex Post distinction

Lawrence Solum over at the Legal Theory Blog has this excellent discussion of the ex ante and ex post question as it comes up in analyzing best legal rules and depending on the orientation of the analyst as to whether we care most about outcomes (regardless of fault) or fault (regardless of outcomes). Ex Ante and Ex Post.  (These would be extreme ends of the spectrum).

But the ex ante/ex post problem also extend to the analysis of any issue where you are not sure what the right distribution of resources and investments are.  Ex post, when you know how a particular decision has come out, that decision tends to look inevitable and thus it is easy to criticize the choices made or not made as ones which ignore the "obvious" likely outcome. This is often termed hindsight bias (or Monday morning quarterbacking) and can make decisions seem easier than they were at the time they were made.

In contrast,  a lot of decisions require us to make assessments ex ante - before we know how it is going to "turn out."  And that is one of the problems raised in an earlier post on the value of  scholarship.  How can you calibrate the right amount to invest (even assuming you could come up with an accurate assessment of its cost, a proposition I am skeptical about), if you don't know how much of the "bad" stuff you have to support in order to get the "good" stuff.  And that also omits the even more problematic question about assigning labels like "good" and "bad" to something which  may defy easy calculation in market terms. 

There is an analog to this problem in advertising circles. The old joke goes:  "I know that 50 % of my advertising budget is wasted. I just don't know which half!"  For advertisers the ROI problem (return on investment) is both ex ante and ex post since, although they can track dollar returns from investments in certain advertising campaigns, they can never be sure that they know why a given campaign seemed to drive sales so successfully.  The annals of advertising lore are littered with examples of an advertiser trying to take a proven formula only to have it bomb. Hence the joke. But advertisers have one advantage over academics in any field - they are marketing a product which is sold in the market, not in the so-called "marketplace of ideas," one with a price in dollars (which of course may have little or not connection to its intrinsic worth in some other system of valuation) and advertisers can measure the sales number before and after a campaign. They may not be able to say for sure that it was the campaign that made the difference, but it is often a reasonable inference.

For the hapless evaluator of legal scholarship there are no such clear metrics for tracking the dollar value of scholarship and such metrics as exist (citation counts, downloads, US News peer reputation scores) are, as I observed previously, incomplete at best and woefully inadequate at worst. It may be that investments in scholarship are maldistributed, although I have yet to see an argument for this proposition that doesn't rely on generalizations about legal academics and law schools that I don't think apply as widely as some argue.  Maybe the expenditures on scholarship should be reduced. But deciding on the "which half" part of that question is surely part of the problem presented by any such proposal. 

 

Crowdfunding JOBS

Crowdfunding, a variation on crowdsourcing, is an Internet-driven way to raise money apart from the traditional capital markets. Since the late naughts its use has increased from $530 million in 2009 to $2.8 billion in 2012. Thus far, however, crowdfunders have not been able to receive a stake in the object of their largesse. Thus, notwithstanding increasing crowdfunding revenues, most contributors are still driven by sympathy or personal interest and receive nothing more tangible than free T-shirts, movie tickets, and the like.

That should have changed a month ago. On April 15, 2012, President Obama signed the Jumpstart Our Business Startups (JOBS) Act that added a new exemption to the application of the Securities Act of 1933 for issuers that raise money through crowdfunding. The JOBS Act directed the SEC to issue regulations by the end of January but so far none have been forthcoming.  One of these days, however, the regs will be issued and crowdfunding will add investment for profit to its current hipster image.

One of the perks of being ABI Resident Scholar is the opportunity to do smashups. So listen here if you like as I discuss using crowdfunding as a tool for businesses in financial distress. My conversationalist is David McGrail who has some interesting ideas about using crowdfunding to finance a Chapter 11 reorganization.

In short, the $1 million limit on a single issuer's use of crowdfunding will limit its utility to small cases. But even that's a plus because financially distressed small business debtors have a very hard time getting new capital. More important are changes the JOBS Act made to the exemptions from registration under Regulation D and Rule 144A of the Securities Act.

I don't need to pretend that I know next to nothing about securities law but McGrail knows more than a bit. I learned a lot talking with him and I think our conversation should interest many folks.

The Scylla and Charybdis of Central Hudson

I have said elsewhere ("A Necessary Cost of Freedom"?) that the Supreme Court's decision in Sorrell v. IMS Health may have, for all intents and purposes, done away with the Central Hudson test which any regulation relating to commercial speech must pass.  That test, for those unfamiliar with the doctrine (and really who is familiar with it outside of those litigating around it?), has 4 parts. The first two elements are almost never controversial. Prong 1 is whether the product or service is legal and whether the speech in question about that legal product or service is truthful and not misleading. (There is a wealth of complication here is this deceptively simple requirement but that is a post for another day. Suffice it to say that this is not usually where the fights are).  Prong 2 asks whether a substantial government interest is involved. Again, this is not usually the question around which a fight arises.

The fights usually arise around prongs 3 and 4. Prong 3 requires that the government show that its regulation "directly advance" the goal in prong 2 and Prong 4 requires that it does so without being "more extensive than necessary" to advance that goal in prong 2.

As we look at the many public health issues - off label use marketing, junk food marketing and others - you might notice a problem.  Regulatory efforts which are effective are likely to be fairly broad - say banning certain types of advertising altogether or banning in particular venues and thus will very often run afoul of prong 4.  In contrast, when agencies or legislators try to very narrowly tailor a particular rule, chances seem very good that it will be harder and harder to measure effectiveness or to attribute any change to a particular measure so narrowly tailored provisions may fail prong 3.  This last observation may be exacerbated by courts willingness to interpret the standards for the admissibility of expert evidence under Daubert to require unrealistic standards for causation or, at the very least, to give an advantage to those entities able to marshal a great deal of evidence to cast doubt on a particular claim. The Most Influential Supreme Court Decision You've Never Heard Of.

This may be only one of many reasons not to mourn the potential irrelevance of Central Hudson, although I caution that nominally it is still good law and the Court took pains not to overrule it.  But many an effective intervention could easily get crushed between the jaws of prongs 3 and 4, particualrly in the current environment where courts seem inclined to treat claims for freedom for commercial speech so generously. That is probably bad news for the public health community and perhaps for the regulation of the marketing practices of the financial industry. 

Free speech and the rating agencies

Now that the United States has sued Standard and Poor's over the subprime mortgage fiasco, see The S&P Lawsuit, it will be interesting to see whether S & P will raise a First Amendment defense as it has in some of the civil cases.  Some observers say that the courts are likely to give it a chilly reception. S&P Lawsuit First Amendment Defense May Fare Poorly, Experts Say. I am inclined to agree, although not because the case law wouldn't permit the courts to consider this defense. Rather, I suspect the implications for permitting the rating agency's opinions to be treated like fully protected opinions and subjected to a New York Times v. Sullivan standard, a standard under which a certain amount of falsity is protected as a necessary evil so that we can protect the speech that we value, would have intolerable implications for 10(b)5 and maybe fraud cases generally. 

Hobby Lobby and the Corporate "Soul"

That the old saying that a corporation has "no body to kick, no soul to damn" may have to be revised. While it still has no body to kick (or, for that matter, to send to jail -  BP pleads guilty to manslaughter), recent lawsuits filed on behalf of corporations challenge the ACA on the grounds that its mandatory coverage for contraception and some other post-intercourse medications intended to prevent pregnancy, violates the plaintiffs' rights to free exercise of their religion under the First Amendment and is in conflict with RFRA (The Religious Freedom Restoration Act, 42 U.S.C. sec. 2000bb et seq.)  So perhaps a corporation has a "soul" after all, or at least a religion it wants to exercise. Hobby Lobby is only one of several of these cases. Hobby Lobby complaint.

To quote the Hobby Lobby complaint, while neither Hobby Lobby nor Mardel (another plaintiff in the case) are religious orders, churches, or other exempt organizations but instead are "privately held, "for-profit" corporations organized under Oklahoma law, the owners aver they (the owners) are "Christian and, from the beginning, ...sought to run Hobby Lobby in harmnoy with God's laws and in a manner which brings glory to God." Complaint at para 18- 24.  (As a pleading aside, imagine how, if you are the defendant, you respond to this allegation: "admit"? "deny" "insufficient information"? And if you are the plaintiff, how do you prove that it is true? ). The ACA, the suit alleges, makes this impossible in that the company must pay for insurance coverage which includes medications and devices which, in their view, their religion forbids.

The Hobby Lobby case is actually one of many cases brought on behalf of many companies and individuals seeking to undermine the Health Care Act on religious grounds. The ones brought on behalf of corporations open up a new front - the free exercise clause - on what I have described in my book Brandishing the First Amendment, as an agressive use of the First Amendment to repel legislation aimed at regulating business. However, with this new free exercise claim, proponents may have  have exceeded the bounds of what the public thinks is reasonable when it comes to anthropomorphizing the corporate "person."

The issue is complicated further because these various lawsuits often have slightly different facts, some of which may make a difference. Hobby Lobby is a closely held private company and so the notion that there is some sort of greater identity between the owners and the company has, at least at first glance, some appeal. But then consider Martha Stewart: if suits like this are successful, how should publicly traded companies be treated? And what of the views of the shareholders? Should the corporation be able to claim it is exercising their religious beliefs as well? 

Another complication is that not all these suits raise precisely the same objection. Rejection of coverage for contraception is probably what gets the most press and which would be the most widespread public pushback since contraception generally is very popular. However, despite some claims in the press to the contrary, the Hobby Lobby suit does not raise an objection to what the plaintiffs call "non-abortion-causing contraception drugs and devices" (complaint at para. 57), but rather only to those drugs or devices which constitute (in their view, and this is contested by some in the medical community) "abortifacients." 

Other law suits, such as the one filed by Annex Medical, Inc. in the 8th Circuit, do  object to providing contraception coverage. And the ferocity of the objection is fairly intense because in the Annex case, Annex Medical has fewer than 50 employees, so it is  exempt from the mandate in any event. Yet, according to the plaintiff in that case, the owner's religion requires him to pay for medical coverage for his employees, and because there are no options which do not include coverage for contraception the exemption is not sufficient.  Annex Medical - Order issuing preliminary injunction. Positions like these suggest that the Administration's recent announcement that it would provide a further exemption Exemption will not satisfy many because it will not extend to fully for-profit businesses like Hobby Lobby.

The circuits are split on these suits, (the 10th Circuit denied Hobby Lobby's request for an injunction, a denial which was upheld by Justice Sotomayor acting in her capacity as the Circuit Justice for the 10th Circuit).  Hobby Lobby - Supreme Court Order Although their different facts may suffice to reconcile apparently contradictory results, these various claims seem destined to make their way to the Supreme Court.

Whatever one thinks about the sincerity of the objections raised in these law suits, one thing that is notable is that they seek to elevate the free exercise claim of the corporate entity over constitutional and statutory rights of employees, many, if not most of whom may not share their employers' interpretation of what their faith requires of them.

Indeed, it is clear that not even all those who identify themselves as a part of the same faith community as Hobby Lobby's founders agree that their faith precludes accepting the insurance mandate. For example,  one commenter quoted in the Christian Post noted: "I'm still not seeing a cause for alarm here. The majority of the U.S. thinks women's healthcare needs should be included in insurance plans […] I'm a Christian, and if I start a business then I expect I'll have to comply with all the government regulations that come with incorporation. I wouldn't expect special treatment for my personal religious beliefs. "  (emphasis added)  Christians Question Hobby Lobby's Defense, Biblical Stance Against Obamacare

"Others question why Hobby Lobby has chosen to address the contraceptive mandate but not other morally questionable issues within government, such as the funding of wars in Iraq and Afghanistan" Id. And some have raised the issue that "many of Hobby Lobby's products are made in China," a country with laws which violate many of the precepts the Hobby Lobby founders say they attempt to observe in the running of their business. Id.

There are several strands that are interesting here and they all probably deserve separate posts. One is the resistance to women's full exercise of constitutionally and statutory rights. Another is the framing of this issue as one that purports to put those of faith at odds with the government, (although that obscures that the First Amendment not only promises free exercise but also freedom from religion). But for me the most interesting aspect  is this attempt to raise the free exercise claim on behalf of the corporate entity.

If we take the Hobby Lobby pleading at face value then it would seem that what its owners are attempting to do is to create some sort of hybrid for-profit religious corporation that doesn't exist under current law, at least not as they would like it to exist. And the Greens (Hobby Lobby's founders) would seem to be trying to engage in what might be called "selective piercing" or the corporate veil:  that is, they wish to pierce it for purposes of their religious beliefs, beliefs which they would like to exercise by denying even those employees of other faiths a benefit the law would otherwise provide, but presumably they would like the corporate shield to remain intact for other purposes, like protection against individual liability.

I wonder if those pursuing these lawsuits have thought fully through the possibilities that might arise if they are successful with these suits. If they succeed, why should such companies not also receive special tax treatment? (I think there is a movement afoot with the social benefit corporation model to do something like a hybrid). And if they do not receive special tax treatment, perhaps, no organization should if all organizations have potentially equal capacity to exist as moral, not just business entities. These may be questions for tax scholars and theologians, but it looks like a bumpy road ahead.

Katie Holmes, Attorney At Law?

For readers desperate to confirm that Katie Holmes, actress and ex-wife of Scientologist Tom Cruise, is headed to law school, I have very good news: there has never been a better year for the daughter of Toledo attorney, 67 year old Martin J. Holmes Sr. to attend law school.  I trust that, if she is going to learn to think like a lawyer, she'll head to the family law school: the University of Toledo College of Law.  Her dad and her brother (the Junior, of course) are both graduates of UT and both practice in Toledo.  

I assume that having survived all the law-talk over the dinner table, as a kid, she'll get boffo LSAT scores and win a generous scholarship.  (Shoot: she got a 1310 on her SAT's and could have attended Columbia University.  She didn't, of course, and now she's going to have to complete 3/4 of her college degree first in order to go to an ABA accredited law school.  Alternatively, she could attend the California accredited  Southern California Institute of Law, which seems to admit people with no virtually no undergrad coursework, so long as 90% of the coursework that does exist is nonvocational.  But she should be forewarned that the school is boasting a 0% pass rate on the California bar recently.)   

In any case, she may not want to spend a ton on her legal education so she can stash away most of the $400K in annual child support she receives so that Suri's 529 plan will be nicely stuffed when it's time for her to head to college.   At the current pace, Suri's tuition at Columbia - should she be accepted and choose to attend - will be $84,702 per year in 2024, when she turns 18.   Of course, she could save a ton of money by attending a state school - say, the University of Toledo - for her BA.  At $43, 335 per year, it's sure to be a bargain!

 

Subversion At The Margin

After teaching Contracts for nearly 15 years I've gradually come more to question the extent of its place in contemporary American life. Regardless of our theoretical justification for contract law--vindication of personal autonomy or increasing net social welfare--the increasing depth of penetration of contract into our lives leads me to be more easily convinced of the warrant for doctrines like unconscionability that, so to speak, upset the apple cart.

You can read a review of a book that gets where I'm heading here. Arlie Russell Hochschild's The Outsourced Self: Intimate Life in Market Times (2012) observes that we've moved from being objects of contract to its subjects. Contract is less a tool by which the self achieves its aims than a substitute for the self. "The more the market is the main game in town, the more hooked we get on what it sells, and the more convinced that paid expertise is what we lack and an even larger service mall is the only way to go.” From needs, to desires, to the most intimate decisions of our lives, our decisions are no longer found within the self formed as part of a community. Or, as the reviewer puts it, "Choices that used to be made based on communities of family, neighborhood or work are now being outsourced to 'consultants' in everything from clothes and style to baby names."

What has this to do with teaching Contracts? With the luxury of two three-credit semesters I've always taken the opportunity to explore the the why of contract law. Where does it fit and where should it fit in society? This is a fertile field of class discussion perhaps in part because of Regent's religious mission. Over the years, American Evangelicals, who make up a substantial portion of Regent's students, appear to have become slightly more skeptical of identifying market economics with the Christian gospel. Am I
starting to sound like Wendell Berry?

I hope no one misunderstands my expressions of discontent with the place of my field of teaching in American society as a suggestion that we replace contract law with central planning. Things could be worse. Far worse. Yet to the extent we permit limited subversions of the regime of private ordering, the law can show that values in addition to autonomy and welfare are important.

A Second Job

My first week as the American Bankruptcy Institute "Resident Scholar" has proved interesting. I had been active as a member of the ABI as a practicing lawyer and had remained involved after switching to the law teaching side. Back in 2010 I received a call about serving as what's impressively called "resident scholar" and was finally able to fit it into our schedules for the spring 2013 semester. I'm still teaching a light load home at Regent but until I got here, I didn't really know what I'd be doing.

I've taught bankruptcy and secured transactions many times and have published on both topics but a large part of my spring gig will be helping to design a continuing legal education program. I've done individual CLE presentations in the past but here I'll be working on an all-day "Nuts & Bolts" program for new lawyers or lawyers new to the bankruptcy practice.

Over the years I've used three bankruptcy casebooks and have wrestled with the amount of practice-oriented detail to mix with policy (along with a soupçon of a theology of debt relief) and very challenging material. I hope to use the results of this project to give my future students a leg up on the world of practice without sacrificing the deeper, more analytical aspects of a law school class.