This post is more up Christine's alley, but the New York State Lottery has a new game called "King Kong Millions."  Along with being one huge advertisement for the you-can't-escape-it movie, apparently King Kong Millions is "guaranteed to create the most millionaires ever on one drawing."  At a press briefing held at the Empire State Building, the ESB director of public relations said, ""I am very excited to purchase the first ticket sold at the Empire State Building for the King Kong Millions game, which I am doing in Fay Wray's memory."

So who's paying for all those ads on buses, telephone booths, and billboards with the big guy's ugly mug?  The press release notes that the state has "partnered" with Universal Studios on this new game.  But I can't find much about the partnership; the press reports I could find were all puff pieces.  And apparently New York is not alone -- there's this from the Georgia lottery (where they unveiled the world's largest lottery ticket!), and in Virginia, they've introduced the "Apprentice" scratch-off game, which this article describes as having increased scratch-off sales by 15 percent.  ("Want to get hired for your dream job? That won’t happen here, but you could win one of more than $10 million in prizes in this exciting $5 Scratcher.")

Is it just me, or are states wandering into some troubling territory here?  State-sponsored and monopolized gambling makes me uncomfortable enough, although I know it's all for the children.  But now the state is advertising for an upcoming Hollywood thriller?  I wish the details of this partnership were a little more public.  Where's the outrage?  If people can go crazy over a movie promo on first base, shouldn't they be troubled when the government's pushing the promos?

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I like this line from Mark Suchman et al,"The legal environment of entrepreneurship" in The Entrepreneurship Dynamic, Schoonhoven, C.B. & Romanelli, E. (eds): "For the typical entrepreneur, novelty, like a trace mineral, can be deadly both in absence and in surfeit."

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My second "two ways" post of the day, this time about two ways to get free Wi-Fi.

One is to go to New Orleans, which just launched a service created partly with equipment donated by Intel and Tropos Networks. Mayor Ray Nagin worked for cable provider Cox Communications before his election. When asked about the effect of dropping free wireless into a competitive environment, Nagin remarked, "In a competitive environment, someone will find a way to offer enhanced services." Not only that, but people who really care about speed will want cable or DSL for their home. The wireless is for the mobile user.

The other way to get free Wi-Fi is to go to Panera Bread or another cafe that is using free Wi-Fi as a competitive tool. This summer, in Salt Lake City, I was looking for Wi-Fi, and I definitely would have dropped a few dollars on a pastry and drink to get it.

Public Wi-Fi is a mess. John Dvorak predicts that free municipal Wi-Fi is a doomed concept, but I hope he is wrong. (Matt Buchanan thinks free Wi-Fi is "inevitable.") For me this is not so much about getting something for nothing as about getting something -- namely, a connection -- when I need it. The crazy quilt of fee-based Wi-Fi services is a major hassle, in addition to being expensive, especially for the occasional traveler.

Is free Wi-Fi a competitive advantage for New Orleans as it tries to attract convention business again? Will Panera force Starbucks to abandon T-Mobile in favor of free Wi-Fi? I don't know, but I am watching these experiments with interest.

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Steve Bainbridge is writing about self-plagiarism. This term seems contradictory, and Steve doesn't see the sense in beating yourself up over it: "Once you've got a pretty well-polished idea, which appropriately works its way into multiple sources, why do you need to keep paraphrasing it over and over again?" Agreed.

After reading Steve's entry, I noticed an article on the front page of yesterday's Wisconsin State Journal entitled "Who Owns An Idea?" (The link is to the Boston Globe, which featured the story on November 20. News travels slowly to Madison.) The article describes a longstanding dispute between two Penn sociologists over charges of "conceptual plagiarism." In a nutshell, Penn professor Elijah Anderson claims that a book co-authored by Kathryn Edin, another Penn sociologist, "owes a strong and almost entirely unacknowledged debt to" his previous books. (For more on that dispute, check here.)

This is not a new problem, of course, but it remains an interesting one. I am reminded of a business school colleague who described the transformation of a prominent university in California from a place a great collegiality and free exchange to a place where "everyone came to faculty meetings with a lawyer." When the stakes are high, ownership of ideas matters.

Fortunately, for most ideas, the stakes are not very high. On more than one occasion, I have noticed that the contents of a conversation to which I was a party subsequently appeared in a law review article without attribution. In most instances, it's no big deal. Indeed, I usually feel more flattered than wronged. Though acknowledgement is always nice, I suspect that most of us who spend our days floating ideas can't recall their provenance in every instance and are pretty forgiving of attribution failures.

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There's a very interesting article in the New York Times about a drive by the Service Employees International Union to organize janitorial employees at five big Houston companies.  The article reports that the union is claiming victory in their drive to organize over 5,000 employees.  In many ways, the union is using a familiar tactic: organizing all the employers in a particular community and/or industry, thus ensuring that cheaper competitors won't undercut the unionized firms.  SEIU has used this strategy in its "Justice for Janitors" campaign in other cities.  As a chart at this SEIU website makes clear, janitors in New York, Los Angeles, and Chicago are represented by SEIU and make considerably more than their Houston counterparts.

However, there is a lot about the Houston campaign that represents a new approach to organizing.  The union and the employers have committed to a card-check neutrality agreement.  Essentially, instead of exercising their rights to tell employees why not to join the union, the employers here have agreed to remain neutral.  And instead of insisting on a secret ballot election, the employers will accept a union victory if a majority of employees sign cards asking for union representation.

Although still uncommon, card check neutrality agreements are becoming a much more crucial tactic in union organizing campaigns.  Such agreements give unions a much better opportunity to make their case and ensure that employees are not coerced by employer threats.  The question with these agreements always is: why would employers agree to these conditions?  The details about this agreement -- or lack thereof -- present an interesting story.

We don't really know why the employers went along with the agreement.  It includes a confidentiality provision, so the parties aren't talking on the record.  According to other union leaders, the Houston employers were pressured by building owners and pension funds into signing the agreement; in addition, sympathy strikes in other cities played a role.  Government officials, such as the mayor and several congressmen, as well as members of the clergy also pressured the companies to remain neutral.  According to the NYT, the Catholic archbishop told janitors at a union rally that "God was unhappy that they earned so little and did not have health coverage."

The Times report may be premature; this Houston Chronicle article reports that there has been no determination that the union has gotten the necessary majority.  But a union victory wouldn't be a surprise.  The Chronicle quotes Bill Bux, head of the labor and employment law section for Locke Liddell & Sapp in Houston, who represents several building owners that hire cleaning companies.  "I thought they'd have the cards signed within 30 to 60 days.  How hard can it be to get people to sign a card with all the cooperation they're getting?"

Is this organizing drive an isolated story?  We don't know exactly how the union persuaded these employers to sign up.  But two factors likely predominated.  First, the agreement encompassed the five big players in the market, thus removing labor costs from competition.  While unions can no longer do this at domestic manufacturing firms, there may be some services that cannot be farmed out to foreign workers.  Janitorial work is one example.  Second, community pressure seems to have played a significant role here.  Unions are likely to get more community support when they represent poorer workers, such as janitors or migrant laborers.  That may mean these tactics are not available for unions looking to represent middle-class employees.

In this article Jim Brudney persuasively argues why card-check neutrality agreements should be the wave of the future.  But I've always wondered why employers would ever agree to them.  Although the parties aren't talking, I hope further details emerge so we can understand exactly what is happening in Houston.

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Note the high quality of the hair braiding.

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Gordon's post this morning on franchising reminded me that I wanted to post on Chick-Fil-A.  I love Chick-Fil-A, and the scarcity of these Southern restaurants in the Midwest causes me some grief.  On a VC post yesterday, Juan N-V used Chick-Fil-A as an example of why Blue Laws are unnecessary to allow stores that close on Sundays to compete with other stores.  However, a commenter noted that Chick-Fil-A is a privately held company, so we don't know what the trade-offs of that policy are in terms of profits. 

I wish we had data to determine whether Chick-Fil-A's mission is an example of CSR that actually cuts into profits or an example of CSR that benefits the company because of branding and customer loyalty.  Chick-Fil-A is different; besides being closed on Sunday, Thanksgiving and Christmas, it has books and other "value-based" materials in kids' meals, and it offers caffeine-free Diet Coke and both regular and diet lemonade (one of the reasons we love it).  It's website lists the following mission:

Our official statement of corporate purpose says that we exist "to glorify God by being a faithful steward of all that is entrusted to us and to have a positive influence on all who come in contact with Chick-fil-A." That's why we invest in scholarships, character-building programs for kids, foster homes and other community services. Come to think of it, it's also not a bad motive for striving to serve a really, really good sandwich.

Could Chick-Fil-A exist as a public company? Is there a trade-off between the mission and profits? Does Chick-Fil-A make 6/7 of the profits of its competitors? If true, would public shareholders be satisfied with that?

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The cover story in the December issue of Fortune ("Risk Reward") is on franchising. Here is the provocative theme: "The scant research that exists suggests that, as risky as starting an independent business is, buying a franchise is an even bigger roll of the dice." The article paints a pretty dreary picture for franchisees:

[B]uying a franchise too often ensnares would-be entrepreneurs in the worst of both worlds: You get all the financial exposure, headaches, and stress of business ownership—but someone else collects royalties on every nickel that comes through the door, not to mention fees for marketing, fees for this, fees for that, more fees for anything you can imagine (and some stuff you can't); and all the while, the franchisor dictates virtually every detail of what you can do, including what kinds of signs you can put up, how you price your wares, how much overtime you can pay your employees, and who'll be your suppliers. Violate the agreement, even in some tiny particular, and the franchisor can—and often will—snatch your franchise back.

I once taught a student who had been in franchising, at times as a franchisor and at times as a franchisee. After he graduated and formed his own law firm, I asked him, "If someone came to you with an idea for a franchise, how would you advise them to proceed?"

"Stop. Don't proceed. Find another idea."

To be fair, I have spoken with many franchisors and franchisees who love their businesses, and in certain industries (fast food being the prime example), franchising has made many people quite wealthy. Franchising may be more treacherous than starting an independent business, but I suspect that the reason failed franchisees are so outspoken is that they develop a sense of entitlement from the payment of the franchise fee.

The perception that a franchised business is a "sure thing" is enhanced by the disclosure that accompanies franchise sales. Although franchisors are every bit as vigilant at paying lip service to risks as sellers of stocks and bonds, the message does not always penetrate the eager franchisee's brain. Instead, they see projected earnings and imagine themselves as successful, independent entrepreneurs. The law reporters bear testimony of failed dreams. Franchise disputes are common, despite elaborate contracts. The bottom line is that franchising is a tough business, from both sides of the table.

Thanks to Marc Shuman for pointing me to the article.

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Many thanks to Vic, Gordon, and Christine for inviting me to join in for two weeks.  I'm really looking forward to it.  I'm hoping to spend a little more time on some of the issues that regularly get batted around by the business law blognoscenti, such as SSRN, Eliot Spitzer, and Sarbanes-Oxley.  And the timing seems especially auspicious given the Ideoblog takeover by the "Truth on the Market" folks.  Nice title, by the way -- could we call it "the Truth" for short?  I'm sure Paul Pierce or Carl Williams wouldn't mind.

Hedge funds have been all the rage recently, both for wealthy investors and for blogging profs.  When I saw the New York Times article, my first thought was that hedge funds had officially jumped the shark.  There has been such a craze over hedge funds that we seem to be entering a familar loop: (1) below-the-radar investment vehicle gets above-average returns, (2) the financial press starts to make noises about this great! new! thing!, (3) positive news stories start appearing in the mainstream press, and (4) money from semi-sophisticated investors starts pouring in.  What generally happens after that?  (5) Everyone is talking about this great new investment vehicle, (6) some commenters start making knowing asides with pessimistic predictions, (7) the vehicle gets even stronger, despite the odds, (8) some negative stories start coming in -- fraud here, poor returns there, (9) the vehicle hits an abrupt speedbump, and (10) the bottom falls out.  It happened with "junk" bonds in the 1980s and high-tech stocks in the 1990s.  Frank Partnoy makes a persuasive case that it has happened and will happen again with derivatives.

Hedge funds seem particularly likely to flame out because of the ease of setting up a hedge fund as well as the secrecy associated with them.  Unlike high-tech stocks or junk bonds, you don't need sophisticated Wall Street banks to set up the vehicle or manage the IPO.  All you need are a bunch of rich folks and a dream.  When will we read about a "hedge fund to the stars"?  (Maybe I missed it already.)  You could hedge with Paris Hilton!  I had hoped that the coming hedge fund implosion would only really affect investors who should know better, but the NYT article dispelled some of that hope for me.  Further evidence that pension funds will be the S&Ls of the new century.

I suppose these stories also include (11) Regulation is imposed after the implosion, but it is criticized as "too late" or "too intrusive".  I agree with Vic that maintaining ERISA's presence here is not a bad thing.  But hedge fund managers hate the new SEC rules, which seem somewhat benign as well.  I'm not sure what the overall answer is.  But I've seen this story before, and it seems fairly inevitable that before too long I'll be able to buy a hedge fund puppet on eBay.

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To round out this morning's musings on compensation, I am going to "braid" together thoughts on three types of fees:  attorney fees, merger consulting fees, and hair braiding fees.  Hang with me.

On our recent Disney cruise to the Bahamas, my daughter and I succombed to the lure of hair braiding.  For those of you land lubbers, note that one cannot step off of a cruise ship onto the Bahamas without someone asking you if you want your hair braided.  In Nassau, a public park outside the dock had been turned into a veritable braiding brothel.  Women in matching tunics walk around Nassau, solicit hair braiding work, then take you back to this open-air braiding salon. ( As an aside, I asked my hair braider if they all worked for one person; she replied that they worked for the government.  I do not know if this is true.)  As I was negotiating the price for my daughter's and my braids, the woman would not quote me a full price.  She kept saying, "$2 a braid."  When I repeatedly asked how many braids would be required, this information was not forthcoming.  Finally, I told her that my stingy husband had only given me $70 spending money, so both heads could not be more than $70.  She argued with another woman until finally they both agreed to the two heads = $70.  (I believe there was some discussion between the women of opportunity cost, which seemed to be zero as neither had any other customers.)  Again, hang with me here.

As we were being braided, an unhappy customer was arguing.  She had agreed to the $2/braid deal and had wound up with 45 braids.  So had her two daughters.  She was now being charged roughly $90 times three.  She balked.  Not only was the price too high, but she thought her braids were too small.  She accused her hair braider of unnecessarily adding braids to increase the price!  Interestingly, when our hair was finished, between my daughter and I, we magically had 35 "not small" braids.  (35 x 2 = $70).  So, you can pay by the braid or by the job, but the end result is going to be that the product will be equal to the price paid.

As with attorney fees.  If a client requests a flat fee, then chances are that the firm will put in only as many hours as equals the fee divided by its usual hourly rate.  The risk is that the work will not be what the client envisioned because corners may be cut.  If you pay by the hour (or the braid), then the firm will have an incentive to fill the project with more hours (or more braids).  As it stands, investment banks charge a flat percentage of a merger price.  If, as suggested in the NYT article discussed below, banks went to an hourly fee, the guys with the models will be able to come up with an hourly fee that will approximate the flat fee.  If hair braiders can figure this out, I'm pretty sure that investment bankers can, too.

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A warm welcome to Matt Bodie, who will be guest-blogging with us for the next two weeks.  Matt recently became a perma-blogger at prawfs, but we still like him anyway. 

Matt teaches at Hofstra and writes about contracts, corporate law, and labor and employment law.  You can find his SSRN papers here.  Welcome!

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Yesterday, the NYT had another article touching on "undeserved" compensation.  This time, the target was investment banks that put together mergers that ultimately (or even quickly) tank.  Of course, real estate brokers get commissions regardless of whether your house turns out to be your dream home or a money pit, and I'm sure that matchmakers in their day didn't have to return their fees when a marriage went sour, but I too have wondered about the agency problems inherent in having someone tell you whether a merger makes financial sense when that person will get a "ginormous" fee if it does, but zero if it doesn't.

When I was in practice, the custom was for investment banks to receive no fee if a merger/acquisition fell through but to have first dibs at the next merger the client proposed.  The high success fee compensates the investment bank for all of the undone deals, and for repeat players (both clients and banks), the end result is theoretically a wash.  Perhaps this industry custom decreases somewhat the incentive for an investment banker to push a merger that doesn't make sense, but (as I tell my students) never underestimate the value of money in your hand.  Also, the L&E answer to this agency problem is that the investment banker will feel reputational constraints to push the bad merger, but I'm not convinced of that, either.  There are just too few fancy investment banks for the fear of reputational backlash.  Because the cost of this agency problem is inevitably borne by the shareholders, not merely the managers who listen to the investment bankers, it may be a problem that we should care about.  However, what is the solution?

The article has no solution, but mentions the possibility of paying investment banks in lengthy stock options or paying by the billable hour.  The first proposal requires the banks to take on systematic risk and the risk of other unforeseen factors, which may not be feasible and may cause banks to demand an even larger return.  The second proposal sounds about right because after all, M&A lawyers are paid by the hour, right?  Theoretically, lawyers have the duty/ability/incentives to tell their clients when to walk away from the table.  However, the billable hour is rife with its own problems, and I suspect that the bottom line would end up being the same or possibly even more lucrative for the bank.

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I'm a little behind on blogging, but I wanted to mention an article written by Ben Stein in the 11/20 edition of the NYT:  Everybody's Business:  Don't Beat Up Big Oil; It's Just Doing Its Job.  The article was in the Business section, but is no longer available for free online.  It is available on Westlaw.

In the article, Stein laments the circus of the recent congressional hearings whereby media-savvy senators quizzed oil company executives about why these companies mysteriously posted profits during a time of high oil prices and low supply.  This article reminded me of a thread started by Vic and Kate on this blog and carried over by Matt Bodie on Prawfs about whether any type of compensation in a market economy could be "undeserved."  I assume that Stein would say that the answer to this question would be "no," but then he surprised me with asking a subtler question.  If there are those that think that some compensation is undeserved, then wouldn't those people be focusing on a different group than oil companies:

If oil company profits are bad, why are profits at hedge funds sacrosanct? I am always amazed that no one in Congress raises a finger when entities that perform the valuable function of trading derivatives based on arcane debt instruments make staggering profits that go into making their traders multimillionaires at 30 -- and good luck to them, I say. But when a company that allows us all to heat our houses and drive our children to school makes money, somehow that is a sin. Why?

I am working on a paper on our culture's resentment of windfalls. In contracts, we learn that breach may be efficient, but windfalls are not allowed. Why not? Why are we concerned about windfalls, whether they be from having one's contract breached or from being a victim of another's negligence or from being a victim of a national disaster? Why is there also scorn for indirectly profiting from a national disaster because of low supply and high prices? And, yes, why is there scorn for generating a fee when little if no value is created by your own activities, whether you are a hedge fund manager, an I-banker or an attorney? (See next post for continuation of thread.)

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The NYT had a story yesterday about the trend of pension funds pouring money into hedge funds.  Thanks to JJ Prescott for pointing me to the story.

Pension funds and hedge funds go together like milk and orange juice.  The hedge fund industry hasn't done a good job of managing its brand image.  Hedge funds have lost their original connotation of being a hedge against the market, and many laypersons instead equate hedge funds with gambling.  If hedge funds were called "absolute return funds," i.e., funds designed to produce steady returns in any market conditions, they would actually seem a perfect fit for pension funds. 

With the equity markets rather flat, pension funds are hungry for "alpha" -- positive risk-adjusted returns.  Hedge funds claim to be able to provide that.  The law, however, is getting in the way.  If hedge funds accept more than 25% of their assets from ERISA plans, the fund's assets become "plan assets," making the hedge fund managers subject to ERISA's fiduciary duty requirements.  The hedge fund industry is pushing to move the limit from 25% to 50%.   

In a sense, hedge funds just want to compete on equal footing with venture funds:  venture funds can avoid ERISA by becoming a VCOC (venture capital operating company) if they make so-called qualified venture investments.  Hedge funds have no similar exemption, in part because there is less of a difference between what many hedge fund managers do (manage a portfolio of investments in liquid securities) and what pension fund managers do (the same). 

I haven't yet heard a compelling argument for lifting the ERISA limit from 25% to 50%.  As long as we're going to have ERISA, it should have some bite.  (More on this another time.)  ERISA could help keep hedge fund managers in line.  The hedge fund industry is not yet a mature industry.  And as I've argued before, the typical compensation structure gives hedge fund managers an incentive to take on more risk than its investors would like.  Until reputation becomes a more effective constraint against this moral hazard risk, hedge fund managers who want pension money should be willing to take on ERISA fiduciary status.  The fact that some hedge fund managers already do this voluntarily suggests, to me, that change is unnecessary. 

But I haven't yet heard the arguments on the other side, so maybe I'm missing something.  Why do hedge fund managers want to avoid being ERISA fiduciaries?  Does ERISA force more disclosure?  If so, why is that so bad? 

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The WTO's gamble on China seems to have paid off. Import tariffs have fallen dramatically over the past four years, and trade with China has been booming. This interesting article in the IHT quotes Owen Nee, a U.S. lawyer at the Orrick firm, on the effect of WTO requirements on China's internal political situation:

If Beijing tells provincial authorities to do something, they don't listen. But if they are told these are WTO rules then there is more chance of compliance.... You have this very interesting situation post-Tiananmen Square where, in order to stay in power, the Communist Party has to run a capitalist economy, and they are doing it quite well.

The W$J is also covering this story in anticipation of upcoming meetings in Hong Kong, where the U.S. is expected to pressure China for increased reforms, especially with regard to enforcement of intellectual property rights. We are all familiar with this problem, but the W$J points to another issue that could take on increased importance in the near future:

Standards. Beijing has begun to introduce national technology standards for a range of products that foreign firms say erect new nontariff barriers in violation of WTO rules requiring fair competition. They say China is developing standards that diverge from leading international technologies in such areas as Internet protocols, mobile communications and data protection.

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