Before returning to the legal boundaries of monetary policy, I wanted to briefly highlight some interesting contract and regulatory issues lurking just beneath the surface of an unusual Kansas state court order declaring a sperm donor to be the legal father of a child, against the wishes of all persons involved.
In 2009, a Topeka man answered a Craigslist ad soliciting sperm donations. The ad was placed by a lesbian couple, Jennifer Schreiner and Angela Bauer. The man supplied a donation. Schreiner became pregnant and delivered a baby. Schreiner began receiving Kansas welfare benefits for the child. Seeking child support payments, the state sued the sperm donor to establish paternity. The state argued that the donor—who lacks any relationship with the child or the couple (now estranged) beyond supplying the donation—was the child’s legal father, and therefore must pay child support.
This is where the case gets interesting as a matter of private ordering and trade regulation.
Prior to the donation, all persons involved—the donor and both members of the couple—signed a non-paternity agreement in which the donor waived his parental rights and was released from his parental obligations.
Both mothers opposed the state’s campaign to declare the donor the child's legal father.
Nevertheless, the court granted the state’s paternity petition, which means it can now seek to compel the donor to provide child support. The paternity finding also appears to give the donor a good shot at asserting parental rights (though he seems unlikely to try).
Justifying its decision to ignore the wishes of both parents and the donor, the court intoned:
A parent may not terminate parental rights by contract, however, even when the parties have consented.
Well, maybe this case is a morality tale about those who would seek a father for their child on Craigslist. A warning from a heartland state to those who would selfishly try to contract around their sacred parental obligations. A sign that courts place the welfare of the child above all else. Right?
Haha, of course not!
Kansas law makes it easy to conclusively terminate the parental rights and obligations of sperm donors by contract. Care to guess what you need to do, besides sign a contract?
Pay a doctor.
The court explained:
Through K.S.A. 23-2208(f) [PDF], the Kansas legislature has afforded a woman a statutory vehicle for obtaining semen for [artificial insemination] in a manner that protects her and her child from a later claim of paternity by the donor. Similarly, the legislature has provided a man with a statutory vehicle for donating semen to a woman in a manner that precludes later liability for child support. The limitation on the application of these statutory vehicles, however, is that the semen must be “provided to a licensed physician." [FN1] (emphasis added)
The parties failed to do this.
So, the upshot is that you are free to find a father for your child on Craigslist—and you can even count on the State of Kansas to keep him out of your child’s life in the future—so long as you hire a doctor to do the procedure. Similarly, you can spend your free time fathering children on Craigslist without losing sleep over child support suits—as long as you kick some of the action upstairs to an M.D.
It’s not just Kansas; California, Illinois, and as many as 10 other states [FN2] follow the same law, the Uniform Parentage Act of 1973.
I’m not a family law expert, but it seems to me that a complete list of legitimate and unique public policy concerns that are implicated when a couple and a third-party sperm donor settle their parental obligations by contract looks something like this:
- Ensuring that the state can identify who can be held legally responsible for supporting the child.
Nevertheless, let’s assume there are also truly compelling public health reasons to involve a physician in artificial insemination. After speaking with a few doctors, I’m skeptical that this is the case, but even if it were here are ten points that I think are worth considering:
- Should a mother who became pregnant by artificial insemination be forced to share parental rights with a stranger who donated sperm simply because she decided not to hire a doctor for the procedure?
- Conversely, should the scope of a sperm donor’s rights and responsibilities as a father turn on the decision whether to enlist a doctor to oversee the procedure?
- Should the adequacy of a child support scheme turn on whether couples using sperm donors choose to hire a doctor?
- There are sound public policy reasons to be concerned about voluntariness in agreements that waive paternity. But if this case is really about ensuring voluntariness, why is enlisting doctors the solution? Establishing consent during contract formation is not some novel problem. Hiring a doctor is a novel solution, but as an evidentiary device it is not very probative.
- Hiring doctors for artificial insemination is not cheap. A single attempt through a physician’s office costs about $3,000, and sometimes multiple attempts are necessary. Unsurprisingly, the American Fertility Association (a trade group for the fertility industry) applauded the court’s decision.
- This rule looks even more like an attempt to extract rents when you consider that for many people, the price of artificial insemination without physician assistance may be zero.
- If the state interest in the use of doctor-assisted artificial insemination is so compelling, maybe the law should simply require it on penalty of criminal sanction. I have never even heard this idea floated, probably because it would be perceived (rightly) as an excessive intrusion on various important freedoms…
- …yet while they do not provide criminal sanctions, about 13 states are willing to provide unbelievably harsh "family-law sanctions." If a woman declines to hire a doctor, she is placing herself and her child in eternal jeopardy; at any time, the donor or the state can move to declare the donor to be the legal father, which would put the donor in a position to seek full parental rights—even if he is a stranger. (The same is true in reverse re: child support.) It is unsurprising that both mothers opposed the state’s petition.
- Although facially neutral, this rule is almost certainly discriminatory in practice. It means that lesbian couples must either hire a doctor or adopt—there is no other way they can safely preclude the donor from being granted parental rights. And of course this is just one of many unofficial taxes gays and lesbians must pay, especially in states like Kansas that do not allow them to marry. It seems to me that there’s a good argument the law should fail rational basis or equal protection review, but I will leave that brief to the con law scholars.
- Finally, beyond any constitutional infirmity, this law should serve as a reminder that protectionist regulations—which often take the form of onerous occupational licensing restrictions and NIMBY zoning rules—frequently have regressive distributional consequences, because they tend to favor powerful incumbents. And although probably not the case here, such laws can harm the broader economy as well by stifling innovation.
I welcome your comments. And I hope my doctor friends still talk to me.
* * * *
[FN1] It should be noted that under the letter of the statute as well as a 2007 Kansas Supreme Court decision (PDF) on this issue, the court did not have an obvious alternative to finding for the state. The problem, such as there is one, is with the statute.
[FN2] An accurate count is not possible without doing a full 50-state survey. As I have written about previously, the Uniform Law Commission’s Enactment Status Maps are often unreliable or imprecise (see FNs 163 & 188).
The Bitcoin exchange Mt. Gox appeared to be undergoing more convulsions Tuesday [February 25], as its website became unavailable and trading there appeared to have stopped, signaling a new stage in troubles that have dented the image of the virtual currency. . . .
Investors have been unable to withdraw funds from Mt. Gox since the beginning of this month. The exchange has said that a flaw in the bitcoin software allowed transaction records to be altered, potentially making possible fraudulent withdrawals. No allegations have been made of wrongdoing by the exchange, but the potential for theft has raised concern that the exchange wouldn't be able to meet its obligations.
The apparent collapse of Mt. Gox is just the latest shock to hit Bitcoin, the price of which is now off more than 50% from its December 2013 peak:
For those better acquainted with the dead-tree/dead-president variety of money, Bitcoin is a virtual currency not backed by any government. Rather than being printed or minted by a central bank, Bitcoins are created by a computer algorithm in a process known as "mining" and are stored online or on your computer. They are bought and sold on various exchanges, including until recently Mt. Gox (whose troubles have been reported for a few weeks now).
There are many reasons, some of them even lawful. Bitcoins can be regarded as a medium of exchange, an investment, a political statement...or a way of avoiding capital controls and other pesky laws like bans on drug trafficking and human smuggling.
But the criminal potential of Bitcoin is probably overstated. The Chinese have gotten wise to its use for avoiding capital controls. Using Bitcoin for criminal or fraudulent activity would be difficult at scale (PDF). The Walter White method is still far and away the best way to ensure your criminal proceeds retain their value and anonymity.
I don't share the utopian fervor for Bitcoin expressed in tech and libertarian circles (see, e.g., this supposedly non-utopian cri de coeur), but it may have some positive potential as a decentralized and lower-cost electronic payments system. We'll see if that ever gets off the ground.
In the meantime, the Mt. Gox collapse is pretty huge news for Bitcoinland. Unlike the NYSE (the failure of which would be hard even to imagine), Mt. Gox does not benefit from any systemic significance and thus is unlikely to receive a lot of official-sector help. The situation has some early adopters running for the Bitcoin exits, like this leading Bitcoin evangelist.
Despite (because of?) my agnosticism on the currency, I'll be writing more about Bitcoin soon. (Mainly, I wanted to stake a claim to being the first to write about Bitcoin on The Conglomerate.) If your Palo Alto cocktail party can't wait, however, this explainer (PDF) from the ever-impressive Chicago Fed should tide you over.
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Last week, some number of Americans tuned in to President Obama's State of the Union Address (or caught the highlights on radio/web). Governors had their own "State of the State Addresses," like Gov. Pat Quinn here in Illinois. Among other proposals that he mentioned, one jumped out: the $39 limited liability company.
Illinois wants more businesses headquartered here. (Illinois almost lost ADM, lost part of Jimmy John's operations, and lost Office Depot. Illinois state corporate taxes are often cited as the culprit. Illinois also wants to start more small businesses. Illinois also has the highest limited liability organization fee in the country: $500.
So, Gov. Quinn announced that he wants to lower that fee to the lowest in the country, $39, to spur small business growth.
So, there's a lot of faulty reasoning here. I have no problem with lowering the LLC fee, but Gov. Quinn shouldn't be surprised if it has no effect on job growth in Illinois.
First, as anyone reading this blog knows, organizing in a state does not mean that you will move your operations there. (See, e.g., Delaware.) Now, it could bring indirect benefits to the state, like franchise taxes and litigation expenditures, but unless Illinois becomes the Delaware of LLC law, it won't bring any jobs (and then not that many). Second, it's hard to imagine a would-be entrepreneur thinking "Gee, I really want to start a business, but the LLC fee is $461 too high." Any small business owner in Illinois could organize an LLC anywhere (Delaware -- $90!; Indiana -- $90!). Third, the ongoing costs of incorporation (annual fees, taxes) may be more inportant than the organization fee for attracting incorporations, even if we thought out-of-state incorporations would be a boon to Illinois.
I spend a lot of time talking to people who study entrepreneurship, and many of them are enthusiasts. Of course, many of use are Walter Mittys, living our lives vicariously through the daring business people we study, so it's easy to proclaim, entrepreneurship is for everyone. Then I stumbled on this infographic that made me think that might actually be true ...
'Opportunity' is a central concept in entrepreneurship research, and this Article explores the relationship between law and entrepreneurial opportunities. We adopt the widely held view that entrepreneurial opportunities are ideas created by entrepreneurs, rather than resources waiting to be discovered. Of course, as with all products of the imagination, entrepreneurial opportunities draw on existing resources for inspiration, and we contend that some legal systems are better than other legal systems at encouraging entrepreneurs to think about existing resources in new ways. We also contend that when entrepreneurial opportunities are exploited, the inventory of resources expands, thus laying the foundation for the creation of more entrepreneurial opportunities. This 'opportunity cycle' leads to plentiful and continuous opportunity creation.
Legal rules play an important role in each stage in the opportunity cycle, and two sets of stories told about law are foundational to innovation research. The first is that property rights (i.e., rights to exclude) are essential in the development of innovative resources because property rights assure market participants that they can retain many of the benefits of their success. The second is that various sets of legal rules – including laws limiting barriers to entry, bankruptcy laws, and corporate laws relating to limited liability and asset partitioning – reduce the costs of entrepreneurial action and failure, thus emboldening entrepreneurs to exploit opportunities. Our thesis is that all of these stories are part of a grander tale about the opportunity cycle, and the central theme of that tale is that the promotion of entrepreneurial action is a fundamental value of the U.S. legal system, the expression of which through positive law inspires entrepreneurs to create more opportunities.
I've been chatting with my co-blogger Gordon, who is now next door thanks to this great visiting gig at BYU, about laws and entrepreneurship in advance of next week's Cornell law review symposium on the topic. One of the memes in the literature is how law can facilitate entrepreneurship. However, one thing that has struck me in researching microfinance is that laws in the United States do more to hinder entrepreneurship than assist it. One group of laws intentionally tamp down on entrepreneurship and the other group unintentionally raises opportunity costs, which make the concept of microfinance a hard sell here.
1. Regulation. In the U.S., we have a lot of laws that are meant to protect citizens, promote health and sanitation, and generally promote safety in various industries. That's great. This is why I would much rather live here than in most counties. However, some of the laws are used mostly to keep folks out of "professions" such as taxi driver, hair stylist, shoe shiner, etc. The myriad occupations that require licensure strain logic. Farmer's markets are filled with regulations about what sorts of things can be sold there. So, in developing countries, if a microborrower gets a loan for $100, the microborrower can buy a goat and sell milk or baby goats, buy chickens and sell eggs, buy ingredients and sell pastries, or various other things that will support borrowing $100 even at a fairly high rate of interest. However, in the U.S., that $100 would quickly go to license applications and wouldn't even begin to cover the cost of a certified commercial kitchen or a taxicab license. So, in the U.S. "microloans" tend to be in the thousands of dollars through the Small Business Administration loan program or community development loan program to be used for small to medium enterprises, not microbusiness. We have regulated out microbusiness.
2. Opportunity Cost. Because entrepreneurship in the U.S. takes the form of small to medium enterprises with large start-up costs, the cost is often more than the opportunity cost of being an employee. In developing countries, there aren't many opportunities to be an employee, but in the U.S. there are. Of course, in tough economic times, these opportunities dwindle, but even the prospect of a minimum-wage job may outweigh the risks of borrowing money for a small business. This may be preferable -- many of the microborrowers I meet in developed countries would much prefer the stability of steady employment in a subsistence economy, but there are obviously deeper satsifactions that can be had by being a successful entrepreneur. I think it's interesting that many of the successful start ups that we are familiar with are started by young, single men in college. There opportunity costs are low. It would be an interesting study to see what the opportunity costs were of most successful enterpreneurs.
Longtime Glom readers know that I've been interested in the new private secondary markets for quite some time. Indeed, my summer writing focused on these new markets, where accredited (i.e., wealthy) investors can buy shares of pre-public companies from current shareholders. Security Law's Dirty Little Secret, forthcoming in the Fordham Law Review, was the result.
In the piece one of the concerns I voice is that these new markets risk disrupting the "nurturing" model of venture capital. The dominant VC narrative is that part of what makes Silicon Valley et al. so successful is that venture capitalists bring not only dollars, but also expertise and support, to the entrepreneur. VCs take seats on a start-up's board and actively advise it on the myriad challenges a fledgling company confronts. My worry was that the secondary market, by providing an easier exit for venture capitalists and substituting faceless investors for engaged, experienced VCs, risked upsetting the successful Silicon Valley start-up model.
Enter AngelList, a website backed by SecondMarket, one of the two big players in the new secondary market. According to today's WSJ, AngelList allows angel investors to invest directly in start-ups via the web. Using this website, accredited investors can buy shares straight from the company. Investors may never meet or even speak with the entrepreneurs at all.
Off the cuff, here are some thoughts:
- Angels aren't VCs. The loss-of-expertise point may matter less here. Angels generally are less active investors than VCs and take fewer control rights, so substituting unknown web investors for angels may not make much of a difference. Where you come out on this depends upon what kind of intangibles you think angels bring to the table.
- Small dollar amounts from investors--as low as $1,000, according to the article--may lower the incentives of the angels to monitor any one investment. The WSJ quotes one investor: "You say how much, hit 'go,' and you're committed," he said. "It's almost as easy as the Amazon one-click checkout." This ain't you grandmother's--or Peter Thiel's-- angel investment, boys and girls.
- This money, unlike with the secondary markets, goes straight to the start-ups, and gets there closer to when they need it. That seems like a huge plus.
- It's more egalitarian. One attraction of Angelist is that it brings the Internet's "cut-the-middleman" angle to angel investing, and makes it less dependant on who you know in the Valley.
- But it's only available to accredited investors, and thus ripe for criticism from two fronts. First, from the "$1 million ain't what it used to be" crowd, investors with that net worth and/or $200,000 in annual income aren't necessarily sophisticated enough to handle these kinds of risky investments.
- On the flipside, if you're intrigued by AngelList, you're out of luck unless you have the money to get in the door. With more and more Americans qualifying as accredited investors, AngelList is just one more reminder that, when it comes to investing in the U.S., some investors are more equal than others.
Ried Hoffman, founder of LinkedIn, is quoted as saying, "If you are not embarrassed by the first version of your product, you’ve launched too late."
According to the Times, Silicon Prairie is the big new thing, and I'm proud of the fellow Iowans who got the paper to run a story making that claim (admittedly, on a holiday weekend, but still). Here's the evidence that Iowa, Nebraska, and Missouri have become a hub of entrepreneurial tech:
Although a relatively small share of the country’s “angel investment” deals — 5.7 percent — are done in the Great Plains, the region was just one of two (the other is the Southwest) that increased its share of them from the first half of 2011 to the first half of this year.
That's it. The rest is just anecdote, layered with plenty of hedging. You can, however, tell yourself a story why Silicon Prairie might be real. Tech can be done anywhere, and so might as well be done on a flat, featureless landscape; the Midwest does well in creating high quality, not-so-high-wage white collar; and universities like Iowa State (home of the first computer!) have aggresively tried to prove their worth to the state by fostering spin-offs.
Will this conlfuence of factors create a real technological hub, to the extent that a "hub" encompassing hundreds of miles of farmland even makes sense? My guess is that it simply reflects a transformation of the economy going on everywhere, and not just in the fields of dreams. But it is nice to have a label.
The latest edition of The Economist has a fascinating article on “Chilecon Valley” that discusses the emergence of a startup community in Chile. The article focuses on a unique program of Startup Chile (a new Chilean governmental body) that gives grants to entrepreneurs in the United States and elsewhere to move to Chile for several months as they work on building their company and developing their technology. The grant recipients are then expected to network with, speak to, and mentor Chilean entrepreneurs.
The article touches on how law can foster or hinder the growth of a startup community, including by liberalizing immigration laws and allowing failed ventures to get a fresh start in bankruptcy.
Chile is making considerable efforts to diversify its economy beyond extractive industries like mining and agriculture. My spouse is co-organizing a fantastic three-day conference in Santiago from November 28 to December 1st that will focus on social entrepreneurship, sustainability, and innovation. The conference includes a fantastic line-up of speakers, including a keynote address by Al Gore, a pitch competition for social entrepreneurship startup companies, and some awesome music, including Devendra Banhart and Denver’s own Devotchka. Several panels will analyze the contribution of law to developing a entrepreneurial ecosystem in Chile.
You can check out my wife’s newly launched blog and website on the Chilean startup community here.
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One of the things I love about the Crocker Fellows course is that we have faculty from five different departments in the room simultaneously (Business, Engineering, Computer Science, Life Sciences, and, of course, Law). Each of the disciplines represented in the room has its own canonical ideas, and listening to those ideas play out is educational for all of us.
For example, today a faculty member invoked the Five Whys (of Toyota fame) in trying to help one of the teams understand the root cause of a problem. Here is the idea, in a nutshell, as stated by Kenichi Ohmae: "If instead of accepting the first answer, one … persists in asking 'Why?' four or five times in succession, one will certainly get to the guts of the issue, where fundamental bottlenecks and problems lie."
A couple of years back, Eric Ries wrote a nice blog post on "The Five Whys for Start-Ups" at HBR, and Jeff Lipshaw noticed the affinity of the Five Whys with the Socratic method. Want a lean startup? Hire a law professor as a manager!
In the Crocker Fellows class today, we talked about teams. I have blogged about entrepreneurial teams and teams in the classroom, but the Crocker Fellows Program is built on a particular notion of teams, captured by the famous definition of teams in Katzenbach and Smith (1994): "a small number of people with complementary skills who are committed to a common purpose, performance goals, and approach for which they hold themselves mutually accountable." In our class, the teams of five people comprise a mix of majors, including engineering, computer science, business, life science, graphic design, etc.
Chris Mattson led the discussion, using the Nightline episode on IDEO as an illustration. Here it is:
Does anyone use the IDEO shopping cart? I haven't seen any in the US, but there are reports of similar carts in France. And Chris has seen similar carts in China ... so has this guy. If you are interested in more on IDEO, you might also check out Tom Kelly on Stanford's ecorner.
As for the Crocker Fellows, the teams are still in the "forming" stage (see Tuckman's stages of group development), but they are transitioning quickly into the "storming" phase. While I am eager to see what emerges from these teams, I was asking myself some questions today in my observer status:
- What is the role of law and lawyers, if any, at this stage in the innovation process?
- Lawyers work in teams to develop briefs or documents ... is the IDEO process essentially the same as writing an innovative brief or constructing a new deal structure?
- Could we use teams in this way to teach law? (My classroom teams have a more modest function than the teams we are using in the fellows program.)
No answers, yet, but maybe by the end of the semester I will have some more ideas.
No, thank you.
But I digress. The point of this post is not to direct you to IMVU, but to link to Stanford's Entrepreneurship Corner, an excellent resource for students of entrepreneurship. In fact, Eric Reis talks about his experiences building IMVU in several videos on ecorner.
Not as flashy as TED, but good stuff.
This year BYU is inaugurating the Crocker Innovation Fellowships, and I am fortunate to be on the faculty, albeit in a very limited role. Nathan Furr (Business), Marc Hansen (Life Sciences), Chris Mattson (Mechanical Engineering), and Dan Olsen (Computer Science) have been pulling the laboring oars, so far, and I will make my main contributions in the fall semester.
As noted on the Fellowship website, "The goal of the course is to change the way students view the world and inspire the next generation of innovators." Closer to the ground, the year-long course begins this semester with an introduction to innovation, continues over the summer with an internship, and concludes in the fall with the students developing their own innovations.
As a distant observer, I have been fascinated by the communications among the 20 Fellows as they build their collaborative community. They are sharing all sorts of ideas through Google Docs and LinkedIn, encouraging and correcting and building each other. Their energy is pretty infectious ... and I haven't even been able to meet them in person, yet!
Anyway, you are on notice. Watch for some great new businesses emerging from BYU in the fall 2012 semester.