By now, the risk that a distressed European nation such as Greece might leave the Eurozone and thereby spark global economic calamity is well known. Regular readers of this blog may even privately relish the prominence of the issue. Not since the days of the gold standard has international monetary policy come so close to being a socially acceptable topic of dinner conversation.
As I noted in my first post, observers rightly perceive the Eurozone sovereign debt crisis to be driven by political and economic forces. But many consequences of a euro breakup would be determined by law, including sources of American (specifically New York) private law.
This is a complex issue. I try to address it more fully in a new article, "Boilerplate Shock," which I've just posted on SSRN.
In brief, and to continue picking on Greece, one key question in the event of a euro breakup would be: would a court recognize an attempt by Greece to convert its euro-denominated debt into its new currency, or would it instead insist that Greece pay in euros, the currency of contract? The answer is important because, as a practical matter, requiring payment in euro would be tantamount to forcing a default.
That's the familiar narrative, anyway. And I agree. But I believe that the ubiquity of boilerplate terms in these bonds—specifically, clauses selecting governing law (usually foreign) and currency of payment (euro)—is likely to make any dispute over redenomination even more damaging than this suggests.
In the article, I argue that the sparse literature on the question of redenominating sovereign bonds overlooks some sources—especially cases interpreting New York contract law and private international law—that, if extended to Eurozone sovereign bonds, could surprise the market and cause serious global repercussions. I argue that the reason for this is not only that the dominant view overlooks what are likely controlling sources of law. It is that standardization of contract terms across the Eurozone sovereign lending market makes the stakes of surprise that much higher.
If Greece's attempt to redenominate its bonds is declared a default, then the fact that the operative terms in Italian, Spanish, Irish, etc. sovereign bonds are the same or similar makes markets likely to demand unsustainable premiums from those countries. Capital and investor flight could be very rapid. We have seen several previews of this movie over the past few years in the Eurozone, and each time official-sector bailout institutions have saved the day. But the European Union/European Central Bank and IMF probably do not have the resources to stop a broad-based bank run of this nature, to say nothing of the political support necessary to attempt it.
Maybe none of that will happen. Nevertheless, the potential for uniform contract terms to create risk not just to individual third parties but to securities markets seems likely to grow at least as fast as those markets. Using Eurozone sovereign bonds as a case study, I introduce the term "boilerplate shock" to describe the potential for standardized contract terms—when they come to govern the entire market for a given security—to transform an isolated default on a single contract into a threat to the market of which it is a part, and, possibly, to the economy in general. My larger objective here is to foster a discussion of the potential for securities law and private-sector securities lawyers to manage (or alternatively, to contribute to) systemic risk.
I've posted an abstract below and will be returning to the subject. I look forward your comments.
Boilerplate Shock abstract:
No nation was spared in the recent global downturn, but several Eurozone countries arguably took the hardest punch, and they are still down. Doubts about the solvency of Greece, Spain, and some of their neighbors are making it more likely that the euro will break up. Observers fear a single departure and sovereign debt default might set off a “bank run” on the common European currency, with devastating regional and global consequences.
What mechanisms are available to address—or ideally, to prevent—such a disaster?
One unlikely candidate is boilerplate language in the contracts that govern sovereign bonds. As suggested by the term “boilerplate,” these are provisions that have not been given a great deal of thought. And yet they have the potential to be a powerful tool in confronting the threat of a global economic conflagration—or in fanning the flames.
Scholars currently believe that a country departing the Eurozone could convert its debt obligations to a new currency, thereby rendering its debt burden manageable and staving off default. However, this Article argues that these boilerplate terms—specifically, clauses specifying the law that governs the bond and the currency in which it will be paid—would likely prevent such a result. Instead, the courts most likely to interpret these terms would probably declare a departing country’s effort to repay a sovereign bond in its new currency a default.
A default would inflict damage far beyond the immediate parties. Not only would it surprise the market, it would be taken to predict the future of other struggling European countries’ debt obligations, because they are largely governed by the same boilerplate terms. The possibility of such a result therefore increases the risk that a single nation’s departure from the euro will bring down the currency and trigger a global meltdown.
To mitigate this risk, this Article proposes a new rule of contract interpretation that would allow a sovereign bond to be paid in the borrower’s new currency under certain circumstances. It also introduces the phrase “boilerplate shock” to describe the potential for standardized contract terms drafted by lawyers—when they come to dominate the entire market for a given security—to transform an isolated default on a single contract into a threat to the broader economy. Beyond the immediate crisis in the Eurozone, the Article urges scholars, policymakers, and practitioners to address the potential for boilerplate shock in securities markets to damage the global economy.
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Greetings, Glommers! (and hello, Janet and Mario*!)
It’s an honor to join this extremely sharp and thoughtful community of corporate and commercial law scholars for the next two weeks. The Conglomerate has long been one of my favorite law blogs and it’s truly a privilege to walk among these folks for a time (if a bit daunting to follow not just them but Urska Velikonja and her excellent guest posts). Thanks to Gordon, David, and their Glom partners for inviting me to contribute.
By way of biographical introduction, I’m currently a Visiting Assistant Professor at the University of Denver Sturm College of Law, where I teach International Business Transactions and International Commercial Arbitration. Last year, I did a VAP at Hofstra Law School (and taught Bus Orgs and Contracts). I am on the tenure-track market this year.
In the next few weeks, I’ll be exploring a number of issues related to law and global finance. I have a particular interest in currencies and monetary law, or the law governing monetary policy. Two of my current projects (on which more soon) address legal aspects of critical macroeconomic policy questions that have emerged since 2008: U.S. monetary policy and the Eurozone sovereign debt crisis.
Without further ado, I will take a page from Urska and kick off my residency here with a somewhat meta question: should scholars refrain from writing about legal issues in macroeconomics, specifically monetary policy?
One thinks of monetary policy decisions—whether or not to raise interest rates, purchase billions of dollars of securities on the secondary market ("quantitative easing"), devalue or change a currency—as fundamentally driven by political and economic factors, not law. And of course they are. But the law has a lot to say about them and their consequences, and legal scholarship has been pretty quiet on this.
Some concrete examples of the types of questions I’m talking about would be:
- Pursuant to its dual mandate (to maintain price stability and full employment), what kinds of measures can the Federal Reserve legally undertake for the purpose of promoting full employment? More generally, what are the Fed’s legal constraints?
- What recognition should American courts extend to an attempt by a departing Eurozone member state to redenominate its sovereign debt into a new currency?
When it comes to issues like these, it is probably even more true than usual that law defines the boundaries of policy. Legal constraints in the context of U.S. monetary policy appear fairly robust even in times of crisis. For example, policymakers themselves often cite law as a major constraint when speaking of the tools available to the Federal Reserve in combating unemployment and deflation post-2008. Leading economics commentators do too. Yet commentary on “Fed law” is grossly underdeveloped. With the exception of a handful of impressive works (e.g., by Colleen Baker and Peter Conti-Brown), legal academics have largely left commentary on the Fed and macroeconomics to the econ crowd.
A different sort of abstention characterizes legal scholarship on the euro crisis. Unlike the question of Fed power, there is a burgeoning literature on various “what-if” euro break-up scenarios. But this writing tends to focus on the impact on individual debtors and creditors, not on the cumulative impact on the global financial system. Again, the macro element is missing.
It is curious that so many legal scholars would voluntarily absent themselves from monetary policy debates. The subtext is that monetary policy questions are either normatively or descriptively beyond the realm of law. If that is scholars’ actual view, I think it is misguided. But maybe the silence is not as revealing as all that.
- One issue is sources. You will not find a lot of useful caselaw on the Fed’s mandate or the Federal Reserve Act of 1913, and the relevant statutes and regulations are not very illuminating. Further, it’s a secretive institution and that makes any research (legal or otherwise) on its inner workings challenging.
- Another issue is focus. Arguably the natural home of legal scholarship on domestic monetary issues, for example, should be administrative law. But the admin scholarly gestalt is not generally as econ-centric as, say, securities law. Meanwhile, securities scholars tend to focus on microeconomic issues like management-shareholder dynamics.
- A final possibility, at least in the international realm, is historical. After World War II, Bretton Woods established a legal framework intended to minimize the chance that monetary policy would again be used as a weapon of war. The Bretton Woods system collapsed over forty years ago, the giants of international monetary law (Frederick Mann, Arthur Nussbaum) wrote (and died) during the twentieth century, and now even some of the leading scholars who followed in their footsteps have passed away. At the same time, capital now flows freely across borders and global financial regulation has become less legalized in general. These factors plus the decline of exchange-rate regulations (most countries let their currencies float) may have undermined scholars’ interest in monetary law. But as the ongoing euro saga demonstrates, international monetary law and institutions remain as critical as ever.
These are some possible explanations for why legal scholars have largely neglected questions of monetary law, but I’m sure I’ve overlooked others. What do you think?
*Pictured are Janet Yellen and Mario Draghi, chiefs, respectively, of the Federal Reserve and the European Central Bank.
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It is after the jump, and it is at Wharton in November....abstract deadline June 25, hope to see you there!
The American Society of International Law’s International Economic Law Interest Group (ASIL IEcLIG) is pleased to issue a Call for Proposals for its inaugural Junior Scholars Research Forum, to be held at the University of Pennsylvania’s Wharton School, in Philadelphia, on November 22, 2013. This one-day Research Forum will provide junior international economic law scholars with a supportive and constructive environment in which to present and receive feedback on their works-in-progress. Participation in the Forum is by invitation only. IEcLIG is inviting untenured international economic law scholars, including academics in tenure-track or non-tenure track positions, scholars with temporary academic appointments (e.g. VAPs, Fellows) and practitioners looking to enter legal academia in the near future to submit proposals for the Research Forum. Only authors of approved works-in-progress and a select group of established international law scholars will be invited to attend. Participants will present their work to a panel of other junior scholars and to a select group of established international law scholars, and will receive helpful and friendly suggestions on their work. Established scholars in international economic law will be assigned to each paper to provide helpful comments and suggestions. All topics concerning international economic law, (broadly defined to include areas related to but not limited to trade, investment, finance, international intellectual property) will be considered. Lunch and dinner will be provided. A registration fee of $75.00 is required for ASIL non-members. Becoming an ASIL member is strongly encouraged if you plan to attend this event. If you are a junior scholar working in the area of International Economic Law and are interested in participating in the Research Forum, please email a title and short abstract (no more than 500 words) detailing the subject of your intended paper, and a current CV to the Co-Chairs of ASIL-IEcLIG, Jason Yackee at email@example.com and Elizabeth Trujillo at firstname.lastname@example.org. The selection committee, made up of active scholars in international economic law, will review the submissions by blind review. Please do not include your name on the submission, but please do include an email so we can contact you. The deadline for receipt of proposals is June 25th, 2013. Invited participants must be committed to circulating a full draft paper to the Forum organizers at least three weeks prior to the Research Forum. Unfortunately, the IEcLIG budget does not allow for any travel or other financial assistance for participants. The IEcLIG leadership will make its selection decisions by July 25th, 2013 and authors of selected proposals will be contacted by that date.
In a trade-in-services dispute that looks quite a bit like pre-WTO trade in goods disputes, Indonesia is conditioning the sale of one of its banks to a Singaporean company on access to the Singaporean market:
Difi A. Johansyah, a spokesman for Bank Indonesia, said it would be “unfair” if Indonesian state-owned banks like Bank Mandiri, Bank Negara Indonesia and Bank Rakyat Indonesia could not expand in neighboring Singapore while DBS could expand in Indonesia because of the country’s more open ownership regulations.
“We will still open the door if they want to increase the stake up to 67 percent, but it’s conditional on whether M.A.S. grants access to our national banks to enter Singapore, which is still under negotiation,” he said in an interview.
This sort dynamic is a point of modest tension between economists and business people. The former would surely insist on unilateral surrender by Indonesia on the access issue. Who wouldn't prefer a big foreign investment in your country's infrastructure to no foreign investment? But businesses often look to leverage access on access, it is one of the things, ironically, that keeps some commitment among export-oriented industries to trade barriers - so their government can have something to give up.
If you'll excuse the outsource, and personal stake, I find the efforts to bridge the gaps betrween international law and business law to be interesting, partly because the gaps are so big. International law basically stops thinking about business after it starts thinking about the WTO and investor-state arbitrations. There are many efforts to change that, however, and Friday's post was part of my bit to spread the news about the economic law panels at the American Society of International Law's annual meeting. Here's some other recaps of portions of that meeting that might interest you, if you're interested in that sort of thing:Anti-Corruption Initiatives in a Multi-Polar World
I do international financial regulation, but you really have to turn to others for sovereign debt. Here's Buchheit and Gulati's three page long solution to the Cypriot debt crisis. Here's Felix Salmon on it:
Their plan is simple:
First, leave all deposits under €100,000 untouched. Hitting those deposits was by far the biggest mistake of the Cyprus plan as originally envisaged, and everybody would be extremely happy if guaranteed depositors could be kept whole.
Second, term out everybody else by five years, or ten if they prefer.
That’s it! That’s the whole plan, and it’s kinda genius. If you have bank deposits of more than €100,000, they will be converted into bank CDs, with a maturity of either five years or 10 years — your choice. If you pick the longer maturity, then your CD will be secured by future Cypriot gas revenues, which could amount to hundreds of billions of dollars.
And if you have sovereign bonds, they too will be termed out by five years, giving Cyprus a bit of breathing room to get its act together.
Do that, say Buchheit and Gulati, and you manage to reduce the size of the needed bailout bymore than the €5.8 billion that Cyprus is currently planning to raise with its tax on bank deposits — and you don’t touch anybody’s principal at all. To be sure, the new CDs, which would be tradable, would surely trade at less than par: there would be a present-value haircut on deposits over €100,000. But that’s going to happen anyway. And at least in this case patient depositors will have a chance of getting all their money back in full — with interest. And, most importantly, guaranteed depositors will remain unscathed.
And here's Matt Levine on how the crisis is so strange.
The various reasons to object to this boil down to its violations of absolute priority; the way things are supposed to work is more or less:
- When a bank goes bad its equity holders lose,
- If zeroing the equity holders doesn’t cover the losses, then the bondholders lose,
- If zeroing the bondholders doesn’t cover the losses, then the depositors lose,
- But even there deposits under €100,000 shouldn’t lose, since they’re government guaranteed under the EU deposit insurance scheme.
In Cyprus sort of the opposite happened: equity holders are being diluted but not confiscated,1bondholders weren’t touched (there are essentially no bonds),2 and depositors under €100,000 were haircut in order to limit the damage to depositors over €100,000. The reasoning for this is unclear; a leading theory is that softening the blow on over-€100,000 deposits was viewed as necessary to retain Cyprus’s status as a haven for offshore deposits by tax-dodging Russian oligarchs. This is an odd theory; losing 9.9% of their money is no doubt a more pleasant proposition than losing 15% though it’s not what you’d call absolutely pleasant and they don’t seem particularly pleased with it.
It is strange, but I agree with Andrew Sorkin that haircuts, in this case, aren't supremely terrible to contemplate.
By the way, if you’re wondering why investors left so much money in troubled Cypriot banks, here’s a trivia question: Would you have been better off leaving your money in a bank in the United States or in Cyprus over the last five years?
The answer: You would have been better off in Cyprus, even after the bailout, when your money was “confiscated.” If you had 100,000 euros in a Cypriot bank account over the last five years, where the interest rate has averaged about 5 percent, you would have about 127,600 euros today. Even after the bailout, which would require you to give up 10 percent of your deposit — 12,760 euros — you would be left with 114,840 euros. The American bank? The $100,000 you deposited at Bank of America five years ago is about $105,100, at the going rate of about 1 percent interest a year.
The Post says that international financial regulatory reform is grinding to a halt, and Mark Carney, who, as Bank of Canada supremo got so active in the subject that the Bank of England hired him to be its supremo, filed a report to the G-20 that was positive, but observed that only 8 of 27 rich jurisdictions have issued final Basel III regulations.
Dan Drezner concludes that travail and intermittent progress is all you can expect from IFR, and most things, presumably. I only sort of agree. Carney's report to the G-20 is way better than the sort of mealy-mouthed declarations that characterize much international missive-writing. Europe is going to implement something substantially stronger than Basel III - call it Basel III plus a Tobin tax - and that will add a bunch more jurisdictions to the total. And anyway, the deadline for the accord is not yet upon us.
But nobody promised you a rose garden. If you put your trust in international process, as financial regulators must, you expect backsliding, inconsistency, and progress at extremely ponderous speeds. You might even characterize is as the worst way to regulate - except for all the others that have been tried.
Elizabeth Trujillo, Jason Yackee, Sonia Rolland, and yours truly are the new leadership of the American Society of International Law's International Economic Law Group, Sonia and I in the vice-chair role. So hurrah and all that.
The historiography of this group is a bit different from that of the usual business law outfits. Corporate and securities regulation academics have been thinking about Delaware and the SEC for a very long time, and it seems to me that the new areas of research - executive compensation, what to do about private equity, and so on - fit within the Delaware and SEC framework. International economic law meant, until about 2000, one thing, and one thing only: the WTO (well, maybe also letters of credit, not that there's a lot of research on that). Then it meant two things that don't really overlap - the WTO and investment arbitration. Now there is a third group of financial regulation scholars in the mix, and the next emerging outfit will likely be one focusing on debt instruments. So what you see on the committees, and at the conferences, are trade specialists, investment specialists, and financial regulatory specialists, with sovereign debt to come. It isn't easy to knit those research interests together. But that is why we have the IELG.
So I'm excited to add VCASILIELG to my already impressive acronymic title roster (see also CCABAALSILC)
Anyway, the official announcement follows.
Elizabeth Trujillo from Suffolk University Law School and Jason Yackee from University of Wisconsin School of Law have been elected to be Co-Chairs of the International Economic Law Interest Group for ASIL. Jason and Elizabeth are stepping in after 2 years as being Co-Vice Chairs under the wonderful leadership of Sungjoon Cho and Claire Kelly. New Co-Vice-Chairs are David Zaring and Sonia Rolland. The election took place at the ASIL-IEcLIG Biennial conference held at George Washington Law School in Washington DC on Nov. 29-Dec. 1, 2012. The new leadership will be assuming their positions at the ASIL 2013 Annual Meeting in April. The ASIL-IEcLIG Biennial, in cooperation with George Washington University School of Law and the Federal Trade Commission, was on "Re-Conceptualizing International Economic Law: Bridging the Public/Private Divide." Keynote speakers included Professor Ralph Steinhardt from GW Law School, the Honorable Donald C. Pogue, Chief Judge United States Court of International Trade, and Amelia Porges from the Law Offices of Amelia Porges. There were over 100 registered participants from all over the world including the U.S., Europe, Latin America, New Zealand, and Asia.
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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I've got a review up over at Opinio Juris on an interesting new book on informal international lawmaking - presumably I'm part of the symposium on the book because I study the Basel Committee and IOSCO, and they are prominent examples of such lawmaking. It's not core business law stuff, but it is an excellent book, here's a taste of my take, the rest is over at OJ, and hopefully I've already convinced you that this is the sort of lawmaking that is going to set the groundrules for finance going forward:
[Pauwelyn, Wessel, and Wouters] develop both a definition and a metric for evaluating informal international lawmaking. Their defintion – figuring out whether that international phenomenon is IN-LAW or not – looks to its output, process and actors. If the output (non-treaties), process (non-diplomacy) or actors (non-states) are different from those in conventional international law then, PWW argue, you are in the world of IN-LAW. And that world includes a large number of public governance efforts ranging from technical regulation to much more political work like that done by APEC and the G20.
IN-LAW isn’t a bad rubric, but policing the borders of these kinds of categorization exercises is irresistible. Is it really so valuable to take heads of state exercises like APEC and the G20 and try to jam them into the same space as much more technical exercises on, for example, the Global Strategy on Diet or the Internet Engineering Task Force? PWW do that. But one is politically legitimate from its first moment. The other stakes its legitimation claims on its expertise, to say nothing of the differences in media attention, significance, and scope. Informal, yes, they both are. But I’d like to see an even better reason to group them.
I'm in Colorado, as one of the co-organizers of an international law conference that has turned out to be only somewhat focused on the business end of things - if anything, I'd say it is interesting that so many of the papers are focused on delegation (and I'd include mine in that number). International organizations, like the Basel Committee, but including a variety of others, are making an appearance too, which might suggest that the writers at this conference, anyway, are seeing something of a regulatory turn in international law. Anyway, it's a good group - younger scholars giving papers, wise senior ones beginning the conversation about them.
1. Daniel Abebe, University of Chicago
2. Asli Bali, University of California, Los Angeles
3. Kristina Daugirdas, University of Michigan
4. Katerina Linos, University of California, Berkley
5. Tim Meyer, University of Georgia
6. David Pozen, Columbia University
7. Anna Spain, University of Colorado
8. Pierre Verdier, University of Virginia
9. David Zaring, Wharton
1. Kal Raustiala, University of California, Los Angeles
2. Ed Swaine, George Washington University
3. Annecoos Wiersema, University of Denver
Here is a highly productive way for business law professors to procrastinate from grading exams:
The National Bureau of Economic Research just circulated a new version of a paper that provides a medieval complement to the law & finance literature and to Gilson's lawyer as transaction cost engineer idea. The paper by Davide Cantoni and Noam Yuchtman presents evidence that the training of commercial lawyers by new universities contributed to the expansion of economic activity in medieval Germany. Here is the abstract:
We present new data documenting medieval Europe's "Commercial Revolution'' using information on the establishment of markets in Germany. We use these data to test whether medieval universities played a causal role in expanding economic activity, examining the foundation of Germany's first universities after 1386 following the Papal Schism. We find that the trend rate of market establishment breaks upward in 1386 and that this break is greatest where the distance to a university shrank most. There is no differential pre-1386 trend associated with the reduction in distance to a university, and there is no break in trend in 1386 where university proximity did not change. These results are not affected by excluding cities close to universities or cities belonging to territories that included universities. Universities provided training in newly-rediscovered Roman and Canon law; students with legal training served in positions that reduced the uncertainty of trade in medieval Europe. We argue that training in the law, and the consequent development of legal and administrative institutions, was an important channel linking universities and greater economic activity.
A very interesting read.
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I'm pleased to be a part of the organizing committee for this second research forum, which I very much hope will include a strong contingent of international economic papers law papers. To apply, you need only complete an abstract. The call is reprinted below, please feel free to get in touch if you have any questions:
Second Annual American Society of International Law Research Forum
October 20-21, 2012, Athens, GA
The American Society of International Law calls for submissions of scholarly paper proposals for the ASIL Research Forum to be held at the University of Georgia School of Law on October 20-21, 2012.
The Research Forum, a Society initiative introduced in 2011, aims to provide a setting for the presentation and focused discussion of works-in-progress by Society members. All ASIL members are invited to attend the Forum, whether presenting a paper or not.
Interested participants should submit an abstract (no more than 500 words in length) summarizing the scholarly paper to be presented at the Forum. Papers can be on any topic related to international and transnational law and should be unpublished (for purposes of the call, publication to an electronic database such as SSRN is not considered publication). Interdisciplinary projects, empirical studies, and jointly authored papers are welcome. Member proposals should be submitted online here by April 15. Proposals will include 1) the name, institutional affiliation, professional position, and contact information for the author(s), and 2) an abstract. Review of the abstracts will be blind, and therefore abstracts should not include any identifying information about the author. Abstracts containing identifying information will not be reviewed. Proposals will be vetted by the Research Forum Committee with selections to be announced by July 15
At present, it is the intent of the Research Forum Committee to organize the selected paper proposals around common issues, themes, and approaches. Discussants, who will comment on the papers, will be assigned to each cluster of papers. All authors will be required to submit a draft paper four weeks before the Research Forum. The expectation is that drafts will be posted on the Research Forum website.
The 2012 ASIL Research Forum Committee:
Laura Dickinson (George Washington), Co-Chair
Timothy Meyer (Georgia), Co-Chair
Jose Alvarez (NYU)
Laurence Helfer (Duke)
Hari Osofsky (Minnesota)
Kal Raustiala (UCLA)
David Zaring (Wharton)
Law schools are under attack. Depending upon the source, between 20-50% of corporate counsel won’t pay for junior associate work at big firms. Practicing lawyers, academics, law students and members of the general public have weighed in publicly and vehemently about the perceived failure of America’s law schools to prepare students for the real world.
Admittedly, before I joined academia a few months ago, I held some of the same views about lack of preparedness. Having worked with law students and new graduates as outside and in house counsel, I was often unimpressed with the level of skills of these well-meaning, very bright new graduates. I didn’t expect them to know the details of every law, but I did want them to know how to research effectively, write clearly, and be able to influence the clients and me. The first two requirements aren’t too much to expect, and schools have greatly improved here. But many young attorneys still leave school without the ability to balance different points of view, articulate a position in plain English, and influence others.
To be fair, unlike MBAs, most law students don’t have a lot of work experience, and generally, very little experience in a legal environment before they graduate. Assuming they know the substantive area of the law, they don’t have any context as to what may be relevant to their clients.
How can law schools help?
First, regardless of the area in which a student believes s/he wants to specialize, schools should require them to take business associations, tax, and a basic finance or accounting course. No lawyer can be effective without understanding business, whether s/he wants to focus on mom and pop clients, estate planning, family law, nonprofit, government or corporate law. More important, students have no idea where they will end up after graduation or ten years later. Trying to learn finance when they already have a job wastes the graduate’s and the employer’s time.
Of course, many law schools already require tax and business organizations courses, but how many of those schools also show students an actual proxy statement or simulate a shareholder’s meeting to provide some real world flavor? Do students really understand what it means to be a fiducuiary?
Second and on a related point, in the core courses, students may not need to draft interrogatories in a basic civil procedure course, but they should at least read a complaint and a motion for summary judgment, and perhaps spend some time making the arguments to their brethren in the classroom on a current case on a docket. No one can learn effectively by simply reading appellate cases. Why not have students redraft contract clauses? When I co-taught professional responsibility this semester, students simulated client conversations, examined do-it-yourself legal service websites for violations of state law, and wrote client letters so that the work came alive.
When possible, schools should also re-evaluate their core requirements to see if they can add more clinicals (which are admittedly expensive) or labs for negotiation, client consultation or transactional drafting (like my employer UMKC offers). I’m not convinced that law school needs to last for three years, but I am convinced that more of the time needs to be spent marrying the doctrinal and theoretical work to practical skills into the current curriculum.
Third, schools can look to their communities. In addition to using adjuncts to bring practical experience to the classroom, schools, the public and private sector should develop partnerships where students can intern more frequently and easily for school credit in the area of their choice, including nonprofit work, local government, criminal law, in house work and of course, firm work of all sizes. Current Department of Labor rules unnecessarily complicate internship processes and those rules should change.
This broader range of opportunities will provide students with practical experience, a more realistic idea of the market, and will also help address access to justice issues affecting underserved communities, for example by allowing supervised students to draft by-laws for a 501(c)(3). I’ll leave the discussion of high student loans, misleading career statistics from law schools and the oversupply of lawyers to others who have spoken on these hot topics issues recently.
Fourth, law schools should integrate the cataclysmic changes that the legal profession is undergoing into as many classes as they can. Law professors actually need to learn this as well. How are we preparing students for the commoditization of legal services through the rise of technology, the calls for de-regulation, outsourcing, and the emerging competition from global firms who can integrate legal and other professional services in ways that the US won’t currently allow?
Finally and most important, what are we teaching students about managing and appreciating risk? While this may not be relevant in every class, it can certainly be part of the discussions in many. Perhaps students will learn more from using a combination of reading law school cases and using the business school case method.
If students don’t understand how to recognize, measure, monitor and mitigate risk, how will they advise their clients? If they plan to work in house, as I did, they serve an additional gatekeeper role and increasingly face SEC investigations and jail terms. As more general counsels start hiring people directly from law schools, junior lawyers will face these complexities even earlier in their careers. Even if they counsel external clients, understanding risk appetite is essential in an increasingly complex, litigious and regulated world.
When I teach my course on corporate governance, compliance and social responsibility next spring, my students will look at SEC comment letters, critically scrutinize corporate social responsibility reports, read blogs, draft board minutes, dissect legislation, compare international developments and role play as regulators, legislators, board members, labor organizations, NGOs and executives to understand all perspectives and practice influencing each other. Learning what Sarbanes-Oxley or Dodd-Frank says without understanding what it means in practice is useless.
The good news is that more schools are starting to look at those kinds of issues. The Carnegie Model of legal education “supports courses and curricula that integrate three sets of values or ‘apprenticeships’: knowledge, practice and professionalism.” Educating Tomorrow’s Lawyers is a growing consortium of law schools which recommends “an integrated, three-part curriculum: (1) the teaching of legal doctrine and analysis, which provides the basis for professional growth; (2) introduction to the several facets of practice included under the rubric of lawyering, leading to acting with responsibility for clients; and (3) exploration and assumption of the identity, values and dispositions consonant with the fundamental purposes of the legal profession.” The University of Miami’s innovative LawWithoutWalls program brings students, academics, entrepreneurs and practitioners from around the world together to examine the fundamental shifts in legal practice and education and develop viable solutions.
The problems facing the legal profession are huge, but not insurmountable. The question is whether more law schools and professors are able to leave their comfort zones, law students are able to think more globally and long term, and the popular press and public are willing to credit those who are already moving in the right direction. I’m no expert, but as a former consumer of these legal services, I’m ready to do my part.
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As mentioned during my inaugural post, I spent the last nineteen years in the private sector, most recently as deputy GC and compliance officer for a multinational Fortune 500 company that manages supply chains for other companies. As compliance officer, I with others spent time in various countries conducting training and risk assessments, interviewing employees in warehouses, assessing our agents and looking for opportunities for bribery, which would subject our company to liability under the Foreign Corrupt Practices Act, the UK Bribery Act and the admittedly under-enforced local laws.
At the same time, I became passionately interested in the struggles in the Democratic Republic of Congo (“DRC”), a country the size of Western Europe and the fifth richest nation in the world in terms of minerals. For those following the news, you may know that the country is set to announce the winner of its hotly contested election either today or tomorrow and there is such fear of violence after the announcement that many of the wealthy are already fleeing the capital.
Notwithstanding its vast wealth, the UN recently designated this former personal colony of Belgium’s King Leopold II, the least developed country and the rape capital of the world. I first learned of these issues via a 60 Minutes piece in which Anderson Cooper described the atrocities perpetrated by Rwandan genocidaires and Ugandan and Congolese rebel forces that control many of the mines containing the minerals necessary to produce cell phones, computers, cameras, electronics and component parts. Cooper graphically described the use of mass rape as a weapon of war, and noted that 5-6 million people have died during the various wars in the Congo, making it the deadliest conflict since World War II. I co-founded a foundation to raise money to provide surgeries for rape survivors and to train midwives to reduce the rate of maternal and infant mortality (www.footprints-foundation-org). A number of Hollywood celebrities have joined the large group of activists working to improve conditions in the Congo, most notably the odd couple of actor Ben Afflek and Cindy McCain (John’s wife, who has worked on Congo issues since 1994). Both testified knowledgably and passionately on behalf of their foundation the Eastern Congo Initiative during a Congressional hearing on the Congo last March.
My seemingly unconnected and disparate background as a corporate compliance officer and nonprofit board member became relevant when I learned about Dodd-Frank’s conflict minerals disclosure provision, which has not yet been implemented due to intense lobbying by industry groups and nongovernmental organizations. The provision requires U.S. issuers to disclose their use of “conflict minerals” (tin, tungsten, tantalum and gold) and describe the measures taken to conduct audits and due diligence of their supply chains with a statement as the “DRC-conflict free” nature of their minerals (this also includes the nine countries surrounding the DRC). The provision also charges the State Department with developing a Conflict Minerals Map and strategy to “address the linkages between human rights abuses, armed groups, mining of conflict minerals and commercial products.” The Comptroller and Secretary of Commerce must provide a list of all known conflict mineral processing facilities worldwide and report on the quality of the private sector audits.
When proposing the original Congo Conflicts Minerals Act of 2009 which led to Section 1502 of Dodd-Frank, Senator Sam Brownback (R-KS) explained, "metals derived from inhumanely mined minerals go into electronic products used by millions of Americans. In the Democratic Republic of Congo, many people - especially women and children - are victimized by armed groups who are trying to make a profit from mining 'conflict minerals.' The legislation introduced today brings accountability and transparency to the supply chain of minerals used in the manufacturing of many electronic devices. I hope the legislation will help save lives."
Dubbed a “name and shame” law by a congressional staffer, the SEC provision has no criminal penalties for issuers who use conflict minerals. Instead, the provision merely seeks disclosure so that the company that uses conflict minerals can face the reputational pressures from an educated public. The public, presumably, will choose to boycott products or divest from companies deemed complicit in the conflicts minerals trade with the attendant rape, kidnapping and child slavery. Films called “Blood on the Mobile” have gone viral online. Phone apps such as Free World and Free2work --“transparency shopping aids” -- allow you to see the “slavery footprint” of certain products and send a note directly from your smartphone to the company.
In short, the activist community is doing an excellent job shining a spotlight on the estimated 6,000 affected issuers and their hundreds of thousands of suppliers. Apple and Motorola are obviously subject to the law, but Kraft, which uses tin in its packaging of cookies will have to work with its hundreds of suppliers to ensure compliance. The California Transparency in Supply Chains Act goes into effect in January, and many U.S. universities have announced that they will divest their funds from companies that are not DRC-conflict free.
The SEC will issue its regulations any day now and the State Department has introduced a public-private partnership to work on the issue. An OECD pilot is also underway, although some believe that it will not succeed either because it does not go far enough or because it goes too far. The legislation will likely be one of the next targets for litigation by the US Chamber of Commerce and other industry groups using the same theories that undermined Dodd-Frank’s proxy-access provisions. A further hurdle for the legislation- a recent independent study from Tulane University found that the SEC had vastly underestimated the proposed costs of compliance.
Although many of the Republican presidential contenders have promised to dismantle Dodd-Frank, it’s likely that if conflict minerals legislation survives court scrutiny, it will be here to stay. It would be interesting to hear what Newt Gingrich, who wrote his PhD thesis on the Congo would have to say about that.
I initially felt conflicted about this well-intentioned law because of the unimaginable suffering going on in the Congo, but I was skeptical about the viability and the logistics of actually complying with it. Having conducted audits myself in the past, you never really know if you’re hearing the whole story or seeing everything that you’re supposed to see. None of the countries I visited in my former life had such allegations of corruption, public officials who go for months without getting paid, or known perpetrators of the Rwandan genocide and other rebel groups involved directly or indirectly in the supply chain.
My foundation work in Congo and Rwanda in September, my dialogue with local Congolese including rape survivors and NGOs, US business leaders, and activists on both sides of the debate and my former experience conducting audits confirmed my skepticism, although many want the law enacted immediately. While I don’t doubt the good intentions of the law and the urgency of stopping the rape, child slavery and forced labor, in my next post, I will discuss why I believe that the legislation will likely have serious unintended consequences, may hurt the very people its designed to help, and what Congress and the SEC should have done differently.