Transactional Lawyering and Contractual Innovation
2016 AALS Annual Meeting
New York, NY
In a world of dramatic economic, technological and legal change, there is a need for contractual innovation. Contractual innovation has traditionally been challenging for transactional lawyers due to a number of factors, including stickiness in contract terms, locked-in practices, and structural impediments to better contract design. Transformative technology and stresses on the legal profession, with a focus on reducing costs, may further affect contractual innovation. An early stage technology company, for example, can easily set itself up and generate customized legal forms through online tools that will help the company establish and run its venture with minimal up-front legal costs and little involvement from transactional lawyers. Even in more complex transactions, technology has led to automation of contract design. Panel members for this program will address a number of important questions as to how to encourage innovation by transactional lawyers in the face of these challenges: What role can and should transactional lawyers play in driving contractual innovation? To what extent can innovation in designing contracts provide transactional lawyers with new opportunities for premium work? What impact does the structure of law firms play in shaping the process of contract design and production? What roles do norms and standard practices in dealmaking play in shaping innovation in contract design? Does the process of innovation differ in one area of transactional practice from another, for example mergers and acquisitions versus venture capital financing versus establishing unincorporated entities?
The first part of our program will involve a panel of speakers who will focus their comments on the questions posed above. Panel participants include Professors John Coyle, Kevin Davis and George Triantis.
The Section on Transactional Law and Skills invites submissions from any full-time faculty member of an AALS member school who has written an unpublished paper, is working on a paper, or who is interested in writing a paper on this topic to submit a 1 or 2-page proposal to the Chair of the Section by August 31, 2015. The Executive Committee will review all submissions and select proposals for presentation as part of our AALS 2016 Section Meeting.
Please direct all submissions and questions to the Chair of the Section, Afra Afsharipour, at the address below:
Professor of Law & Martin Luther King, Jr. Hall Research Scholar
UC Davis School of Law, King Hall
Tel: +1 530 754 0111
The NFL is a nonprofit corporation. That should be no surprise when you stop to think about it. Many--indeed, most--trade associations are nonprofit, because their point is to create benefit for their members, not to create profits at the trade association entity level. IRC 501(c)(6) exempts from taxation for chambers of commerce (and professional football leagues) for just this reason.
For years, the NFL's tax-exempt status has been the subject of scrutiny and ridicule. To many people, the fact that a league headed by a commissioner making $44 million a year was categorized as a nonprofit was absurd.
This is not absurd, it's fuzzy thinking. Each NFL teams individually still pays tax on all its profits, since each is a for-profit entity. They teams pay taxes on any money the NFL distributes to them. But as an entity, it's not supposed to make a profit. Just because you're a nonprofit doesn't mean you can't make a profit. Harvard's endowment was $36.4 billion on June 30 of last year. It's doing quite well.
It's unclear exactly how much the NFL will save per year by forgoing its 501(c)(6) status--this WSJ article has estimates costing from $10.9 million to $91 million annually--this for a $10 billion-a-year organization. Commissioner Goodell's letter to the owners characterized the NFL's tax-exempt status as a "distraction,"--but even at the low-end estimate of costing $11 million per year, wouldn't you put up with the distraction? Reading between the lines, the reason is clearly that Goodell doesn't like the public disclosure attendant with 501(c)(6) status. Particularly the disclosure of his salary, which totaled $35 million in 2014.
Costing your organization $10 million a year because you don't like having your salary being public? Now that strikes me as absurd.
The member of the Zaring family who studies such matters passes along this editorial, which yes, indeed, "prior to publication, authors will have to remove all vestiges of the NHSTP [null hypothesis significance testing procedure] (p-values, t-values, F-values, statements about ‘‘significant’’ differences or lack thereof, and so on)." The idea is that this sort of testing is less useful in psychology research than is effects testing, given that it's a largely experimental field that often doesn't have huge sample sizes (though huge sample sizes present their own problems of spurious p-values). It doesn't seem to have led to a stampede away from significance testing yet, but there's an interesting overview of the controversy here. And I might as well link to the research on which a couple of my colleagues will be dining out for years, demonstrating the suspicious ease with which it is possible to find statistical significance in lots of cases. And here's a rant. My sense is that there is very little attention paid in empirical legal research to this issue; Dave Hoffman mulled this over last month, and said that at CELS, every single paper he saw came with a p-value.
Friend of the Conglomerate Larry Cunningham points to Popular Science's September roundup of 100 inventions that changed the world, only one of which is a legal innovation: the corporation (link not available - ask your librarian!). It's a strong contender; indeed, I can't really think of another legal fiction with such significance, though patents probably come close, and I guess I wonder if an agency is a legal fiction. But you can have your constructive trusts, trade secrets, and asset-backed securities! Readers are invited to provide their own suggestions for similarly consequential legal inventions in the comments.
They've got the details over at Business Law Prof Blog.
I'm also a week late on the Etsy IPO, and I trolled around the likely law prof blogs to see if anyone else had beat me to the punch (if I missed someone, please let me know and I'll update accordingly).
Etsy IPO'd last Thursday, pricing at $16 and opening at $30, raising $267 million. According the WSJ Blog, that's the most ever for a NY-based VC-backed firm.
But for my money the more interesting take came from the NYT, since it concerned organizational form. Etsy is a B-Corp-- but not a benefit corp. Here's Haskell Murray on the difference. Bottom line, a B-Corp is a certification thing, and you can be a for-profit B-Corp. A benefit corporation is a whole separate kind of entity, one organized not just for profit.
Here's the NYT on the importance of the B-Corp designation to Etsy:
Etsy declares in its public offering prospectus that it wants to change the decades-old conventional retail model of valuing profits over community. It states that its reputation depends on maintaining its B Corp status by continuing to offer employees stock options and paid time for volunteering, paying all part-time and temporary workers 40 percent above local living wages, teaching local women and minorities programming skills, and composting its food waste.
But wait, there's more. To maintain its B-Corp status, Etsy must reincorporate as a benefit corporation in a few years. B Lab's website says "companies must elect benefit corporation status within four years of the first effective date of the legislation or two years of initial certification, whichever is later." The NYT suggests a slightly longer glide-path: "B Lab is giving companies four years from the date any relevant state legislation is passed to comply with the state law or risk losing B Corp certification. Since Delaware passed that law in August 2013, Etsy has until 2017 to become a benefit corporation." Yet Etsy CEO Chad Dickerson is quoted as saying Etsy had no plans to reincorporate as a benefit corporation: “Regardless of certification, we plan to focus on delivering a strong business that also generates social good,” he said."
It will interesting to see how a publicly traded corporation like Etsy weighs the benefits of B-Corp certification against the risks and costs of moving to benefit corporation status. Risks like opening yourself up to 10b-5 and derivative shareholder suits if you fail to fulfill whatever social purpose you articulate in your articles of incorporation. Not to mention the securities law issues around stressing the importance of B-Corp status while seeming to suggest that it will lose that status in a few years.
Update 2: I knew Haskell Murray must have been on this, but I didn't look back far enough to see this post.
The end of the semester hit like a ton of bricks, so there are a few blogposts that I semi-composed in my head and left unwritten. Plus this Associate Dean thing can make life a bit busy. But lest I get out of the habit of blogging entirely, here's a belated rant on Michael Malone's WSJ opinion piece, Reviving the Flagging Spirit of Silicon Valley.
Malone paints a picture of the vibrant, Wild-West Silicon Valley of yesteryear, where "anyone with brains, hard work, the guts to take real risks, and a whole lot of luck can become successful beyond their wildest dreams. That “anyone”—scientist, entrepreneur, secretary or receptionist—has a shot at the brass ring."
In Malone's story
The great turning point came with the dot-com bubble and its bust at the turn of the century. The bust allowed powerful institutions to get their hands on a place considered too renegade, too independent, and too successful to decide its own destiny. The federal government, long believing the Valley’s great companies were not displaying sufficient fealty—i.e., lobbyists and campaign money—came down hard on the tech industry. And as we all know, the Valley caved.
Then came a series of regulatory handcuffs. First was Sarbanes-Oxley, sold to the public as a curb on the corruption of the stock markets by over-pumped IPOs. In reality Sarbox was a way for Washington and big, mature tech companies to suppress new competitive startups that would lure away their talented employees. Next came the expensing of stock options by the Financial Accounting Standards Board.
I'm struggling with why my reaction to Malone's op-ed is so viscerally negative. After all, I teach and write in entrepreneurship. I like startups. And, for the record, what Malone says about the political economy is clearly right--it paid the price for thumbing its nose at Washington. Silicon Valley now spends a lot more money on Capitol Hill, and has reaped handsome returns, viz the JOBS Act.
Here's the rub for me: A lot of the policy arguments for the JOBS Act amounted to "We don't have as many IPOs/public companies as we used to! That's bad! Let's fix that!" To which I respond: How do you know what the right number of IPOs/public companies are? Just because they used to be at a certain level--say, in 2000--doesn't mean that's the right number. Maybe there are other reasons why IPOs declined, that have nothing to do with U.S. securities law.
To be fair, Malone 's gripe focuses on the fact that companies no longer widely distribute stock options to secretaries, receptionists, and the like. He blames FASB's move to expense stock options in 2004. But I keep coming back to Warren Buffet's simple questions: "“If stock options aren’t a form of compensation, what are they? If compensation isn’t an expense, what is it? And, if expenses shouldn’t go into the calculation of earnings, where in the world do they go?” FASB's rules should make sure that a corporation's books accurately reflect its finances. They're not about social engineering or fostering startups.
Malone mistakes correlation for causation thusly: "Say what you will, but the pre-Sarbanes, pre-FASB, pre-RSU Silicon Valley worked." It's not clear that the pre-Sarbanes, Pre_FASB Silicon Valley world was sustainable, even in a world without Sarbanes-Oxley or options-expensing. Moreover, his argument seems a particularly strange one given that Silicon Valley-style startups don't need any encouragement right now. A landscape with 83 private firms valued at $1 billion or more seems more bubblicious than moribund.
And, for the second time, get off my lawn.
Greenberg is suing the government for treating his firm unconstitutionally differently than other firms bailed out during the financial crisis - he argues, correctly, that AIG got killed, and was used as a vehicle to pay AIG's struggling counterparties out at 100 cents on the dollar. Whether that's a taking, given 1) that the government couldn't possibly treat everyone identically during the crisis, and 2) that AIG would have failed without the government's intervention, making the measure of damages difficult, is why many people have found the case to be unlikely.
So now that Greenberg is getting some good rulings, and sympathetic questions from the bench, the received wisdom seems to be that he is doing surprisingly well (though if he wins, an appeal is certain). I haven't read every transcript, but I do wonder whether the "day in court" effect is at work here. In appellate cases, I think that oral argument is an excellent predictor of the outcome. But at trial, with appeal likely, savvy judges often let the side that is going to lose put on plenty of evidence, and do well with motions, so that there can be no allegation of bias, and to minimize things to complain about on appeal. They get, in other words, their day in court. I'm not sure if that's what's going on there, but I know that when I was a litigator, I wouldn't want the court to treat long-shot adversaries with contempt, but rather with tolerance.
I don't totally get the advocacy play, but comics fans will enjoy the series of displays at the SEC's metro station - they are nice art, and they seek an SEC rule requiring disclosure of political contributions by publicly traded firms. Via Corporate Counsel, here's an example:
The corporate law community often places high hopes in judges as a mechanism for checking government or (in Delaware) defendant excesses. They usually go along, sure, but may in dicta indicate displeasure, or give critical speeches, and sometimes, as in the Newman insider trading case, the refusal to accept the Citigroup settlement, the ethics critiques made during the KPMG prosecutions, that displeasure will sprout into an adverse ruling.
It's a pretty interesting, but pretty gauzy, was of thinking about adjudication, maybe Orin Kerr would find it persuasive in the Fourth Amendment context, but in other areas of public law, administrative law, for example, the small community of bench and bar just don't see their roles that way. It's not, "SEC you've gone too far this time, and so we're cooking up a new reason to reverse you," it's "SEC [or EPA, or whoever], we substantively disagree with this policy, and we're cooking up a procedural reason to reverse it." Different, in that administrative law is not governed by equity, it is governed by process.
Anyway, my theory about the way white collar works in New York - opaque, clubby, but almost chivalrous - gets what I'm taking as a vote of confidence in James Stewart's nice overview of the fight between the judges and the US Attorney's Office in Manhattan over the pushy, PR-savvy nature of the US Attorney. The whole column is well worth reading - for one thing, it sounds like a bunch of judges talked to Stewart, which never happens, and there's the requisite, "greatest judges ever! but" from the prosecutors office and "whatta prosecutor! however" from the judges. But here's an excerpt that illustrates the way that this weird "just do justice" method of handling white collar crime works:
[Former statehouse speaker Sheldon] Silver’s lawyers moved to dismiss his indictment because Mr. Bharara had orchestrated a “media firestorm” that tainted their client’s right to a fair trial. Such motions are considered long shots, but Judge Valerie Caproni of Federal District Court in Manhattan wrote that Mr. Silver had a legitimate argument that the case should be thrown out because Mr. Bharara, “while castigating politicians in Albany for playing fast and loose with the ethical rules that govern their conduct, strayed so close to the edge of the rules governing his own conduct.”
Judge Caproni ultimately sided with the government, so there’s no way of knowing how close she came to tossing the indictment. But the possibility she even seriously considered such a step has set off alarms among some of her fellow judges. Judge Caproni herself acknowledged that dismissing an indictment is a “drastic remedy” that is “rarely used.” She also noted that the motion was not a disciplinary proceeding against Mr. Bharara. That didn’t stop her from spending a good part of the opinion questioning his ethics and chastising him for his public comments about the case.
This is, as they say, developing, and if you think that Bharara may be AG some day, one question is whether he will be able to avoid being blackballed by the bench ... and whether a blackballing would work outside of the white hankie world of white collar crime administration (didn't seem to work out so badly for Rudy Giuliani).
Over at Prawfsblawg, contributors are posting about their memories of blogging from the past ten years. I thought I would add mine here.
Gordon and I began Conglomerate in November 2004 after combining/abandoning our two "weblogs," BizFems Speak! (wince) and Venturpreneur. I'm sure I won't get this all right, but the other blawgers on the block were Volokh Conspiracy, Bainbridge, Ideoblog (Larry Ribstein), The Right Coast, Leiter Reports, Crescat Sententia (then law student Will Baude and others), Sentencing Law & Policy, Crooked Timber (ok, economists), and a handful of others. Then came Prawfsblawg. Then Concurring Opinions. Then my Marquette colleage Eric Goldman's Technology & Marketing Blog. Not to mention the Law Professors Blog Network (Paul Caron). Then everybody. I wrote with nostalgia about 2005:
Blawgosphere 2005 was like a freshman dorm. I felt like I was great friends with all sorts of law professors, and we all sort of new about each other, just from the blog. We knew what Steve had for dinner and Orin linked to a picture of my dog. Sure, we all had different specialties, but we were thrown together for intramural sports and mixers. On our blogs, we spent a lot of time talking to each other just about law school in general. Now, we're like in graduate school. We each focus on our own stuff, and link to primary sources in our field. We link to each other occasionally, out of nostalgia, but not often. Back then, we had a lot of conversations that were rarely discussed in big groups: getting into law school, going through the meat market, whether students should be on law review, whether students should clerk, what the standard course package was, etc. One of our posts that got the most traffic was on blind grading! But now, these discussions seem stale. Do we really need to have another round of "where are the women bloggers?" or "what should professors wear to class" or "what do you call your students?" It's almost like your freshmen buddies asking you five years later "Is Goofy a dog?" and you think, "Didn't we already cover this?"
I remember going to Law & Society in 2005 in Las Vegas, and it was like a family reunion with cousins I hadn't seen since childhood, even though I had never met them in person. Suddenly, even though I was teaching in Milwaukee, Wisconsin, I had colleagues across the country it would have taken me years to meet through going to conferences. It was a little weirder meeting readers, where the informational asymmetry was real -- they knew what movie I went to last week, but I didn't know their names. Still, I loved it. I loved the camaraderie and the fellowship.
Of course, Danny Markel was a big part of that camaraderie, and many of the anniversary posts at Prawfs are dedicated to his memory. And, of course, Larry Ribstein. I unwittingly picked a fight in the blawgosphere with Larry Ribstein, and he recommended me for a job. The rest is history.
I'm behind on a few movies, so here's a twofer. I'll start with the bad news.
Spongebob. However bad you thought it would be, it's worse. The kids and I went on a cold day during Spring Break when it was at the dollar movie. We overpaid. The youngest, age 7, swears it was good, but he's just doing that to save face.
I'm not a Spongebob hater. Back in the early 2000s, when I had toddlers and a stream of Blue's Clues, Dora the Explorer and Caillou, Spongebob was a welcome respite from cloying sweetness. Spongebob was laugh-out-loud funny but still had a sweet spirit. I can still tell you episodes I enjoyed: the claw episode, the driving test episode, the marching band episode, anything with Sandy. But then Spongebob became annoying to me. I have not spent enough time or analysis to know whether the show got worse, or it just wasn't new any more, or Phineas and Ferb filled that smart-but-sweet family cartoon void better. Anyway, I have outlawed Spongebob in the same way that others outlawed Barney. Too much is too much. But here we are watching (the second) Spongebob movie in the theater.
The basic plot is familiar -- Plankton wants to steal the formula. The actual plot is beyond my understanding: something about Antonio Banderas as a pirate reading a magical book about Plankton trying to steal the formula, then the pirate ending up with the formula and Bikini Bottom looking worse than Pottersville after Uncle Billy loses the money. There's a time machine and a magical space dolphin. Then the Bikini Bottom characters go to the surface to get the formula back from the pirate. (the trailer is almost all about the "out of water" portion of the movie, but 90% of the movie is not "out of the water.' It's almost as if the writers were on some sort of psychedelic imagination-enhancers and everyone got to put in an idea. Don't go. Don't Redbox. Just don't. Surely there's a rerun of Phineas and Ferb on.
Home. This movie may not be the good news, but it's better than Spongebob. We were very excited to see this movie based on the trailer and it was a Friday night destination. It was ok. The marketing is really interesting. To "seed" the idea of a new movie with new characters based on a little-knownchildren's book "The True Meaning of Smekday," the producers created a short film called "Almost Home," which played in theaters before other Dreamworks movies. That short film, featuring Steve Martin as the incompetent leader of the alien Boov, was really funny. The longer movie is not quite as funny.
As seen in the short, the Boov are on the run from another alien race, the Gorgs, and are having a hard time finding a hospitable planet. They finally find Earth. Of course, Earth has inhabitants, so Captain Smek tells the Boov that humans are stupid and in need of the Boov to take over, which they do. The Boov relocate the humans to Australia. (The Boov are all on one spaceship, so it's hard to imagine that they fill up the entire non-Australian planet, but they seem to fill up at least New York and London.) Our heroine, Tip (full name Gratuity, unexplained), is separated from her mom and hiding out in New York from the Boov. Our almost hero, Oh, is a Boov on the run after he is blamed for attracting the attention of the Gorgs to the Boov's new planet. Soon, Oh and Tip are driving a car (made to hover by Oh, who is something of a technician) to Australia. Apparently the car moves at the speed of the Concorde, though it looks to just be ambling in the sky. Like other road movies with two opposite characters, the scenes between Oh and Tip are pretty funny. The best scenes are in the trailer if you don't want to spend any money.
I haven't read the book, but the movie requires you to suspend a lot of disbelief. If Tip is 14, how does she know how to drive a car? In New York? Why is she named Gratuity? How do 7 billion people fit in Australia? Where did all of those row houses for the humans get built in one day? How did any of this happen in one day? The best part of the movie is of course Oh, who is voiced by Jim Parsons from The Big Bang Theory. His character is very similar to Sheldon's character. He is very literal, selfish, and lovable.
When you join a transnational regulatory network, you have to report to the network that you're acting consistently with its principles, that you have the powers that it expects you to have, and that you're a worthy member of the club. The SEC just made its case to its peers through a 700 page Q&A that is worth a look, though it exemplifies the differences in the way a lawyer or a social scientist might approach the question "what do you do?" The SEC is full of lawyers, and so this report includes not so many numbers, but plenty of discussion of regulatory powers, and representative matters that show how those power are exercised.
However there is some aggregate data. For example, the SEC keeps track and categorizes the sorts of cases that it brings. In 2013, the agency was, for example, mostly likely to initiate a securities offering proceeding, which it did 103 times, followed by 68 reporting and disclosure cases, 50 market manipulation cases, and, bringing up the rear, only 44 insider trading cases (the agency was only asked about these categories, the reporting is on page 184 et seq. Did I know this? More pump and dump proceedings than insider trading cases? Anyway, it's that sort of thing that will surely have you reading the whole 700 pages, just as I did.
The 14th annual workshop on Conducting Empirical Legal Scholarship, co-taught by Lee Epstein and Andrew D. Martin, will run from June 15-June 17 at Washington University in St. Louis. The workshop is for law school faculty, lawyers, political science faculty, and graduate students interested in learning about empirical research and how to evaluate empirical work. It provides the formal training necessary to design, conduct, and assess empirical studies, and to use statistical software (Stata) to analyze and manage data.