January 26, 2015
The Silenced Connecticut Sex-Abuse Case
Posted by Josephine Sandler Nelson

My previous blogposts (one, two, three, four, and five) introduced why conspiracy prosecutions should be used to reach wrongdoing by agents within an organization. The 2012 prosecution of Monsignor Lynn for twelve years of transferring predator priests from parish to parish at the command and for the benefit of the Archdiocese of Philadelphia was defeated by the intracorporate conspiracy doctrine. Moreover, this was not the first time that the Roman Catholic Church had used the doctrine to help its bureaucrats escape liability for suppressing sex abuse cases.

In 1997, employees of the Roman Catholic Church in Connecticut were alleged—very much like Lynn—to have covered up the sexual misconduct of a priest, enabling him to continue to abuse children entrusted to the Church’s care by virtue of his office. When sued for civil conspiracy by the victims, the employees’ defense was that they were acting in the best interest of the corporation.

The Connecticut court found that the test for whether an agent is acting within the scope of his duties “is not the wrongful nature of the conspirators’ action but whether the wrongful conduct was performed within the scope of the conspirators’ official duties.” If the wrongful conduct was performed within the scope of the conspirators’ official duties, the effect of applying the intracorporate conspiracy doctrine is to find that there was no conspiracy. Because covering up the priest’s sex abuse was in the best interest of the corporate organization, the court found that the employees were all acting on behalf of the corporation. The court never reached the issue of whether the employees’ actions rose to the level of a civil conspiracy. Under the intracorporate conspiracy doctrine, it was a tautology that no conspiracy could be possible.

This case is interesting not only because it documents the way that the intracorporate conspiracy doctrine protects enterprises from inquiry into conspiracies, but also because of the subsequent history of its allegations. The full extent of the Bridgeport Diocese’s wrongdoings—if current public knowledge is indeed complete—only came to light in December 2009, twelve years after the 1997 case. It took twelve years, the combined resources of four major newspapers, an act displaying public condemnation of the Roman Catholic Church by members of the state legislature, and finally a decision by the U.S. Supreme Court to release the documents that could have become the basis of the intracorporate conspiracy claim in 1997. There is still no conspiracy suit or any criminal charge against the Diocese. Additional details about the case are available in my article The Intracorporate Conspiracy Trap. The article will be published soon in the Cardozo Law Review, and it is available in draft form here.

Astonishingly, none of the extensive news coverage about the sexual abuse cases in Bridgeport over those additional twelve years has connected these facts to the original 1997 case defeated by application of the intracorporate conspiracy doctrine. If the intracorporate conspiracy doctrine had not provided immunity, the case might have revealed the Diocese’s pattern of wrongdoing long beforehand and in a much more efficient way.

My next blogpost reveals additional dangers from the spread of the intracorporate conspiracy doctrine: frustration with the intracorporate conspiracy doctrine has started to distort other areas of law.

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January 23, 2015
How We Should Have Tried Monsignor Lynn
Posted by Josephine Sandler Nelson

My previous blogposts (one, two, three, and four) introduced why conspiracy prosecutions should be used to reach wrongdoing by agents within a business organization. The same legal analysis applies to religious organizations.

We should have been able to charge Monsignor Lynn and the Archdiocese of Philadelphia that directed his actions to hide the sexual abuse by priests with criminal conspiracy. Instead, Pennsylvania charged Lynn with two things: child endangerment and conspiracy with the priests.

As international news outlets later reported, Lynn could not be guilty of child endangerment because the state’s statute could not apply to an administrative church official who did not directly supervise children.

Lynn could not be guilty of conspiracy with the priests because he did not share their “particular criminal intent.” As the jury understood, Lynn was not trying to help a predator priest get from parish to parish so that “he can continue to enjoy what he likes to do.” Lynn was trying to protect the reputation of his employer, the Archdiocese—if the priests benefitted, that was a side issue.

So why didn’t the prosecution charge Lynn and the Archdiocese with conspiracy? It was the Archdiocese that directly coordinated and profited from Lynn’s actions. The intracorporate conspiracy doctrine, as discussed before, would bar that prosecution. In Pennsylvania, it is “well-settled that a corporation cannot conspire with its subsidiary, its agents, or its employees.”

Finally, considering other options, Lynn could not have been charged with possible crimes such as obstruction of justice. Lynn was too good: Lynn and the Archdiocese were so successful at covering up the sexual abuse and silencing victims, there was no ongoing investigation to obstruct. “Aiding and abetting” the Archdiocese’s cover-up of the sex abuse would have been difficult to pursue (see more here) and is not allowed under RICO in the Third Circuit.

My next blogpost will demonstrate that the Monsignor Lynn case was also part of a pattern by the Roman Catholic Church in America to use the intracorporate conspiracy doctrine to hide the coordinated wrongdoing of its agents to cover-up sexual abuse by priests. Fifteen years before prosecutors attempted to try Monsignor Lynn, the silenced Connecticut sex-abuse case showed the Church how effective this defense could be.

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January 22, 2015
Sex Abuse, Priests, and Corporate Conspiracy
Posted by Josephine Sandler Nelson

My previous blogposts (one, two, and three) introduced the topic of how the intracorporate conspiracy doctrine prevents the prosecution of coordinated wrongdoing by individuals within organizations. This post illustrates the doctrine’s effect in the context of a specific organization—here a religious one: the Roman Catholic Archdiocese of Philadelphia and the systematic transfer of predator priests. This post is based on my article The Intracorporate Conspiracy Trap to be published soon in the Cardozo Law Review. The article is available in draft form here.

For twelve years, from 1992 to 2004, as Secretary for Clergy, Monsignor William Lynn’s job within the Philadelphia Archdiocese was to supervise priests, including the investigation of sex-abuse claims. In 1994, Monsignor Lynn compiled a list of thirty-five “predator” priests within the archdiocese. He compiled the list from secret church files containing hundreds of child sex-abuse complaints. On the stand, Lynn testified that he hoped that the list would help his superiors to address the growing sex-abuse crisis within the Archdiocese. But for twelve years Lynn merely re-assigned suspected priests, and he hid the abuse within the church. His superiors never acted on the list that Lynn gave them—in fact, they ordered all copies of the list destroyed—and Lynn never contacted outside authorities. As late as 2012, one of the “predator” priests on Lynn’s list was still serving in a parish.

All parties agree that Lynn’s actions in transferring priests who molested children allowed those priests to continue to abuse children, sheltered the priests from potential prosecution, and directly protected the Philadelphia Archdiocese’s reputation.

In fact, Lynn’s actions had been ordered by the archbishop on behalf of the Archdiocese. Lynn reported what he was doing to his superiors, who rewarded Lynn with twelve years of employment and a prominent position within the Archdiocese for doing his job as they saw it. Moreover, the archbishop himself inadvertently revealed the existence of the number thirty-five “predator” priests to the media, and he was the one who ordered all copies of the list to be shredded to keep it from being discovered in legal proceedings.

The instinct here is that this behavior—the transferring of predator priests to cover-up the sexual abuse of children—should have been illegal for Monsignor Lynn to pursue. But the Commonwealth could not prosecute Monsignor Lynn and the Archdiocese for conspiracy. Furthermore, immunity for Lynn’s behavior is now the rule in most state and federal jurisdictions around the country. As described in an earlier blogpost, the intracorporate conspiracy doctrine provides immunity to an enterprise and its agents from conspiracy prosecution, based on the legal fiction that an enterprise and its agents are a single actor incapable of the meeting of two minds to form a conspiracy.

My next blogpost will further investigate why this behavior was not illegal under our current system, and how we should have tried Monsignor Lynn.

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January 21, 2015
Where are the Prosecutions for Corporate Conspiracy?
Posted by Josephine Sandler Nelson

My first and second blogposts introduced why conspiracy prosecutions are particularly important for reaching the coordinated actions of individuals when the elements of wrong-doing may be delegated among members of the group.

So where are the prosecutions for corporate conspiracy??? The Racketeer Influenced and Corrupt Organizations Act of 1970 (“RICO”, 18 U.S.C.A. §§ 1961 et seq.), no longer applies to most business organizations and their employees. In fact, business organizations working together with outside agents can form new protected “enterprises.

What’s going on here? In this area and many other parts of the law, we are witnessing the power of the intracorporate conspiracy doctrine. This doctrine provides immunity to an enterprise and its agents from conspiracy prosecution, based on the legal fiction that an enterprise and its agents are a single actor incapable of the meeting of two minds to form a conspiracy. According to the most recent American Law Reports survey, the doctrine “applies to corporations generally, including religious corporations and municipal corporations and other governmental bodies. The doctrine applies to all levels of corporate employees, including a corporation’s officers and directors and owners who are individuals.” Moreover, it now extends from antitrust throughout tort and criminal law.

What is the practical effect of this doctrine? The intracorporate conspiracy doctrine has distorted agency law and inappropriately handicaps the ability of tort and criminal law to regulate the behavior of organizations and their agents. Obedience to a principal (up to a point) should be rewarded in agency law. But the law should not immunize an agent who acts in the best interest of her employer to commit wrongdoing. Not only does the intracorporate conspiracy doctrine immunize such wrongdoing, but the more closely that an employer orders and supervises the employee’s illegal acts, the more the employer is protected from prosecution as well.

My next blogpost illustrates how the intracorporate conspiracy doctrine operates to defeat prosecutions for coordinated wrongdoing by agents within an organization. Let’s examine the case of Monsignor Lynn.

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January 20, 2015
Corporate Conspiracy Charges for the Financial Crisis
Posted by Josephine Sandler Nelson

In my previous blogpost, I granted the merit of defense counsel’s argument that the actions of discrete individual defendants—when the law is not permitted to consider the coordination of those actions—may not satisfy the elements of a prosecutable crime.

But what is the coordination of individuals for a wrongful common purpose? That’s a conspiracy. And, for exactly the reasons that defense counsel articulates, these types of crimes cannot be reached by other forms of prosecution. The U.S. Supreme Court has recognized that conspiracy is its own animal. “[C]ollective criminal agreement—partnership in crime—presents a greater potential threat to the public than individual delicts.” When we consider the degree of coordination necessary to create the financial crisis, we are not talking about a single-defendant mugging in a back alley—we are talking about at least the multi-defendant sophistication of a bank robbery.

Conspiracy prosecutions for the financial crisis have some other important features. First, the statute of limitations would run from the last action of a member of the group, not the first action as would be typical of other prosecutions. This means that many crimes from the financial crisis could still be prosecuted (answering Judge Rakoff’s concern). Second, until whistle-blower protections are improved to the point that employees with conscientious objections to processes can be heard, traditional conspiracy law provides an affirmative defense to individuals who renounce the group conspiracy. By contrast, the lesson Wall Street seems to have learned from the J.P. Morgan case is not to allow employees to put objections into writing. Third, counter to objections that conspiracy prosecutions may be too similar to vicarious liability, prosecutors would have to prove that each member of the conspiracy did share the same common intent to commit wrongdoing. The employee shaking his head “no” while saying yes would not be a willing participant, but many other bankers were freely motivated by profit at the expense of client interest to cooperate with a bank’s program.

My next blogpost will ask: where are the prosecutions for corporate conspiracy?

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J.P. Morgan’s Witness and the Holes in Corporate Criminal Law
Posted by Josephine Sandler Nelson

It is a pleasure to be guest-blogging here at The Glom for the next two weeks. My name is Josephine Nelson, and I am an advisor for the Center for Entrepreneurial Studies at Stanford’s business school. Coming from a business school, I focus on practical applications at the intersection of corporate law and criminal law. I am interested in how legal rules affect ethical decisions within business organizations. Many thanks to Dave Zaring, Gordon Smith, and the other members of The Glom for allowing me to share some work that I have been doing. For easy reading, my posts will deliberately be short and cumulative.

In this blogpost, I raise the question of what is broken in our system of rules and enforcement that allows employees within business organizations to escape prosecution for ethical misconduct.

Public frustration with the ability of white-collar criminals to escape prosecution has been boiling over. Judge Rakoff of the S.D.N.Y. penned an unusual public op-ed in which he objected that “not a single high-level executive has been successfully prosecuted in connection with the recent financial crisis.” Professor Garett’s new book documents that, between 2001 and 2012, the U.S. Department of Justice (DOJ) failed to charge any individuals at all for crimes in sixty-five percent of the 255 cases it prosecuted.

Meanwhile, the typical debate over why white-collar criminals are treated so differently than other criminal suspects misses an important dimension to this problem. Yes, the law should provide more support for whistle-blowers. Yes, we should put more resources towards regulation. But also, white-collar defense counsel makes an excellent point that there were no convictions of bankers in the financial crisis for good reason: Prosecutors have been under public pressure to bring cases against executives, but those executives must have individually committed crimes that rise to the level of a triable case.

And why don’t the actions of executives at Bank of America, Citigroup, and J.P. Morgan meet the definition of triable crimes? Let’s look at Alayne Fleischmann’s experience at J.P. Morgan. Fleischmann is the so-called “$9 Billion Witness,” the woman whose testimony was so incriminating that J.P. Morgan paid one of the largest fines in U.S. history to keep her from talking. Fleischmann, a former quality-control officer, describes a process of intimidation to approve poor-quality loans within the bank that included an “edict against e-mails, the sabotaging of the diligence process,… bullying, [and] written warnings that were ignored.” At one point, the pressure from superiors became so ridiculous that a diligence officer caved to a sales executive to approve a batch of loans while shaking his head “no” even while saying yes.

None of those actions in the workplace sounds good, but are they triable crimes??? The selling of mislabeled securities is a crime, but notice how many steps a single person would have to take to reach that standard. Could a prosecutor prove that a single manager had mislabeled those securities, bundled them together, and resold them? Management at the bank delegated onto other people elements of what would have to be proven for a crime to have taken place. So, although cumulatively a crime took place, it may be true that no single executive at the bank committed a triable crime.

How should the incentives have been different? My next blogpost will suggest the return of a traditional solution to penalizing coordinated crimes: conspiracy prosecutions for the financial crisis.

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May 29, 2014
Harvard Grads as Bubble Predictors
Posted by Erik Gerding

Here is an old saw: the best way to predict bubbles is to look at the industry to which Harvard MBA grads are flocking.  I used this as a laugh line when I spoke to David’s students at Wharton in October.  Now Matt O’Brien at the Washington Post Wonkblog extends the analysis to Crimson undergrads.

O’Brien’s article is the latest salvo in the analysis of what makes “Organization Kids” flock to finance.   Kevin Roose’s Young Money made a splash when it was published earlier this year.  Academics looking to understand students should consider delving into what makes students who enter finance and law with more than a dismissive lament of “kids these days.”  Indeed, the modern university seems designed specifically to create organization kids.  Think of how the bizarre gatekeeping rituals of college admissions filter down to create an achievement junky culture that begins in middle school if not earlier.  Students and parents seek to anticipate the divinations of middle aged oracles who themselves attempt to divine meaning from personal statements and lists of extracurriculars.

The Harvard MBA Indicator is a fun parlor game.  But it also suggests that in trying to understand deep questions such as why bubbles begin and how financial institutions operate, we might look at a broader set of disciplines than just economics.   Some very interesting legal scholarship on bubbles, financial markets (think Stuart Banner’s history) and financial institutions (Annelise Rile’s sociological studies of Japanese firms) serves as examples of the possibilities.  If academics lament their students being organization kids, they should have a little self-awareness and step outside their own institutional comfort zone.

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May 28, 2014
Law and Society: the Corporate Law Panels
Posted by David Zaring

Law and Society has its usual strong contingent of corporate law panels - Anne Tucker has the details.  I'll be presenting at the conference early early early Sunday morning on international financial regulation; do come say hello, if you like that sort of thing.

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June 05, 2013
"Vision without Execution is Hallucination"
Posted by Erik Gerding

This Thomas Edison quote comes from Paul Volcker in a short interview in the Washington Post Wonkblog.  The source of Tall Paul's consternation: the decline of schools of public administration in universities and the shift in many of these schools from "public administration" to "public policy."  (Here is one example of what Volcker describes: the lawsuit (over 5 years ago) brought against Princeton by the heirs to the A&P fortune that alleged that the Woodrow Wilson School was not using an endowment to educate students for careers in government).

This decline in public administration results in a deficiency of expertise in how to run governments well.  A particularly choice quote from the former Fed Chairman:

Everybody likes to talk about big issues of war and peace and how we take care of poor people and what we do about other social problems in the United States or elsewhere.  They do all this talking but they too seldom know how to implement what they’re talking about.

The legal academy ought to take heed.  Much of the interesting spadework in financial regulation scholarship involves questions of institutional design rather than substance.  That is, not what is the right legal rule, but how do make sure agencies have the capacities and incentives to write, interpret and enforce rules in the right way and over the long haul.

In terms of education, should law schools look to fill part of the gap in teaching public administration that Volcker identifies?  

Increasing the space for public administration or public policy in the law school curriculum faces some challenges.  One challenge is economic: how much gold is in them hills?  Will this help students find jobs and build careers?  A more daunting challenge is philosophical.  Law schools largely teach rhetoric.  Public administration/policy programs are about making decisions.  Just because the first word is the same doesn't mean that policy arguments and policy analysis belong to the same genus.

Still, there are some pearls for law schools even in Volcker's short interview, for example, teaching statistics and how statistics should and should not be used.

 

 

 

 

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June 04, 2013
Monday AM Reading
Posted by Erik Gerding

After spending a great few days in Boston, I decided to broaden my reading list. (Law & Society seems to attract about 10x the number of hipsters as AALS).  A few samples:

He loves to take the punch bowl away: Ben Bernanke questions meritocracy (among other things), at, of all places, Princeton's commencement.  

Too close to home: Does Colorado have a republican form of government?  Or did a anti-tax amendment to the state constitution deprive us of one?

The fat lady sings: Does the failure of a tenor to hit a High C in Verdi's Il Trovatore explain constitutional intepretation?

Stride la vampa!

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May 24, 2013
LSA Happy Hour - at the Sheraton on Saturday at 9
Posted by David Zaring
For those going to Law and Society, there's a Saturday happy hour, co-organized by Prawfsblawg, at the Sheraton hotel bar at 9.  I'll be there (indeed, I helped choose the locale, so do blame me if the corporate macrobrews are not to your liking); do come say hello.

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November 23, 2012
Thought for Food
Posted by Erik Gerding

A few links to tide you over during your tryptophan-induced torpor:

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August 10, 2012
Pit Bull Profiling and the ABA
Posted by Christine Hurt

So, this post is sort of a stretch for me, and I need to make some disclaimers:  (1) I love dogs and am lovingly tolerant of cats; (2) I eat animals, though not dogs, and make use of animal by-products; (3) I prefer to eat animals that have been humanely raised and killed, but do not go to great lengths to do so; (4) I'm not particularly against gun control law, though I have always had guns in the house; and (5) I'm a poodle-person, not a pit bull-person.

So, the ABA House of Delegates has passed a resolution urging cities and states to pass dangerous dog laws that are breed neutral.  (Friend of the Glom Rebecca Huss is on the committee that wrote the report.)  OK, so let's get a sense of what a breed-discriminatory law looks like compared to a breed-neutral one.  (I will say that the report is a little light on breed-discriminatory cites and I could only find a few more, suggesting these laws may not be that prevalent.)

Illinois (breed-neutral) -- Counties must pass ordinances in line with Animal Control Act, which provides for a process to determine if a dog is a "vicious dog," which includes investigations, medical records, interviews, expert testimony, etc.  The burden is on the petitioner, and the standard is "clear and convincing evidence."  If a dog is deemed a vicious dog, the owner must pay a fine, the dog must be spayed and microchipped, and the dog must be fenced.  if not, the dog will be impounded.  If the impoundment isn't appealed, then the dog is euthanized.  Sounds like sufficient (some might say "due" process).

Prince Georges County, MD (breed-discriminatory) -- prohibits the ownership or keeping of Staffordshire Bull Terriers, American Staffordshire Bull Terriers, American Pit Bull Terriers, or "dogs which have the appearance of being predominantly of the breed of" those listed breeds.  (The county also prohibits wild animals, poisonous snakes and reptiles, hogs, skunks, raccoons, possum, foxes, bears, wolves and any member of the cat family besides the domesticated cat.)  Dogs that meet that definition are impounded, and then you know what happens then.

So, the ABA report argues that laws like the Prince George's County ordinance are bad for a number of reasons, which seem to fall into two categories:  the law is stupid and the law is unfair.

Bad Idea Jeans Law -- According to the ABA report, a study found that the PGC lawmakers must have ahd on their "bad idea jeans" because the no pit bull law has been extraordinarily expensive for PGC.  And, if this was a nationwide law, it would cost hundreds of millions of dollars to impound and euthanize every dog "which has the appearance of" a pit bull.  Perhaps 7% of the nation's dogs would fit this definition.  And, if the goal is to prevent dog attacks/dog bites, this doesn't seem to be the best way to do this.  This may be a variation of the "stop and frisk" argument.  If you have to stop and kennel every dog that looks like a pit bull, this takes resources away from the problem.  And, unfairly targets innocent dogs, which brings us to. . . .

Unfair -- vague.  What does "have the appearnce of a pit bull terrier" mean?  I vaguely remember something from first-year con law on "void for vagueness."  Of course, this has to be unfair to the owner, not the dog.  Dogs are property.  I saw this repeatedly and make my Torts students say it out loud.  I knwo that bar examiners (and Torts exam writers) like to make you forget that dogs are property for purposes of Torts, but the law treats them as property.  Any duties we owe to dogs are derivative of the duty we owe their owners.  Which brings us to. . . .

Unfair -- due process.  So, this argument is that before the State deprives someone of their property, the State must afford some sort of "process."  The Illinois state law requires a lot of process before declaring a dog to be "vicious."  The PGC ordinance just says that all pit bull-like dogs are prohibited, assuming that they are all vicious or dangerous.  So, I'm on board with saying that before the State takes a dog I own and destroys it, I need to be afforded process.  But I'm not sure about dogs I don't own yet.  The PGC grandfathers in already-owned pit bull-like dogs, though there is some fencing, spaying sorts of requirements.  Otherwise, it just prohibits them, like other sorts of property, including poisonous snakes, foxes, raccoons, hogs, etc.  Each individual fox may not be dangerous, but they are all prohibited.  I think I'm ok with that.  I'm not sure how I feel about people who move to PGC with previously-owned pit bulls though.  There, my thinking gets a little clouded.  I imagine a pit bull rescue center on the county line, with foxes and chickens and other things.  But lastly. . . .

Unfair -- generally (not law-based).  This argument is pit bulls are not solely responsible for all dog attacks, and studies are conflicted as to whether they are responsible for more than their fair share.  Pit bull owners definitely think that these dogs have gotten a bum rap and so owners who wish to have them should be allowed to have them.  I would put this argument in the same pile as residents who want to have chickens or clotheslines.  There are a lot of good reasons to have backyard chickens and clotheslines, so I would urge folks in a community to allow residents to do that.  But, I'm not sure I have a moral right to these things or even a moral right to be able to keep a certain kind of dog within city limits.  (that doesn't sound very American, though.)

Finally, what's sort of interesting to me is that the base of the argument is that "pit bulls don't attack people; bad pit bull owners negligently let  pit bulls attack people."  Pit bulls aren't inherently vicious; bad owners mistreat/don't train pit bulls, who then may become vicious.  This is sort of like guns, right?  Except guns can't get free and round around. 

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May 02, 2012
Lawyers as Transaction Cost Engineers in Medieval Germany
Posted by Erik Gerding

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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December 14, 2011
Does a Corporation Have a Conscience and Can It Tempt Ethical People to Do Bad Things?
Posted by Marcia Narine

Time Magazine’s “person of the year” is the “protestor.” Occupy Wall Street’s participants have generated discussion unprecedented in recent years about the role of corporations and their executives in society. The movement has influenced workers and unemployed alike around the world and has clearly shaped the political debate.

But how does a corporation really act? Doesn’t it act through its people? And do those people behave like the members of the homo economicus species acting rationally, selfishly for their greatest material advantage and without consideration about morality, ethics or other people? If so, can a corporation really have a conscience?

In her book Cultivating Conscience: How Good Laws Make Good People, Lynn Stout, a corporate and securities professor at UCLA School of Law argues that the homo economicus model does a poor job of predicting behavior within corporations. Stout takes aim at Oliver Wendell Holmes’ theory of the “bad man” (which forms the basis of homo economicus), Hobbes’ approach in Leviathan, John Stuart Mill’s theory of political economy, and those judges, law professors, regulators and policymakers who focus solely on the law and economics theory that material incentives are the only things that matter.

Citing hundreds of sociological studies that have been replicated around the world over the past fifty years, evolutionary biology, and experimental gaming theory, she concludes that  people do not generally behave like the “rational maximizers” that ecomonic theory would predict. In fact other than the 1-3% of the population who are psychopaths, people are “prosocial, ” meaning that they sacrifice to follow ethical rules, or to help or avoid harming others (although interestingly in student studies, economics majors tended to be less prosocial than others). 

She recommends a three-factor model for judges, regulators and legislators who want to shape human behavior:

 “Unselfish prosocial behavior toward strangers, including unselfish compliance with legal and ethical rules, is triggered by social context, including especially:

(1)         instructions from authority

(2)         beliefs about others’ prosocial behavior; and

(3)         the magnitude of the benefits to others.

Prosocial behavior declines, however, as the personal cost of acting prosocially increases.”

While she focuses on tort, contract and criminal law, her model and criticisms of the homo economicus model may be particularly helpful in the context of understanding corporate behavior. Corporations clearly influence how their people act. Professor Pamela Bucy, for example, argues that government should only be able to convict a corporation if it proves that the corporate ethos encouraged agents of the corporation to commit the criminal act. That corporate ethos results from individuals working together toward corporate goals.

Stout observes that an entire generation of business and political leaders has been taught that people only respond to material incentives, which leads to poor planning that can have devastating results by steering naturally prosocial people to toward unethical or illegal behavior. She warns against “rais[ing] the cost of conscience,” stating that “if we want people to be good, we must not tempt them to be bad.”

In her forthcoming article “Killing Conscience: The Unintended Behavioral Consequences of ‘Pay for Performance,’” she applies behavioral science to incentive based-pay. She points to the savings and loans crisis of the 80's, the recent teacher cheating scandals on standardized tests, Enron, Worldcom, the 2008 credit crisis, which stemmed in part from performance-based bonuses that tempted brokers to approve risky loans, and Bear Sterns and AIG executives who bet on risky derivatives. She disagrees with those who say that that those incentive plans were poorly designed, arguing instead that excessive reliance on even well designed ex-ante incentive plans can “snuff out” or suppress conscience and create “psycopathogenic” environments, and has done so as evidenced by “a disturbing outbreak of executive-driven corporate frauds, scandals and failures.” She further notes that the pay for performance movement has produced less than stellar improvement in the performance and profitability of most US companies.  

She advocates instead for trust-based” compensation arrangements, which take into account the parties’ capacity for prosocial behavior rather than leading employees to believe that the employer rewards selfish behavior. This is especially true if that reward tempts employees to engage in fraudulent or opportunistic behavior if that is the only way to realistically achieve the performance metric.

Applying her three factor model looks like this: Does the company’s messaging tell employees that it doesn’t care about ethics? Is it rewarding other people to act in the same way? And is it signaling that there is nothing wrong with unethical behavior or that there are no victims? This theory fits in nicely with the Bucy corporate ethos paradigm described above.

Stout proposes modest, nonmaterial rewards such as greater job responsibilities, public recognition, and more reasonable cash awards based upon subjective, ex post evaluations on the employee’s performance, and cites studies indicating that most employees thrive and are more creative in environments that don’t focus on ex ante monetary incentives. She yearns for the pre 162(m) days when the tax code didn’t require corporations to tie executive pay over one million dollars to performance metrics.

Stout’s application of these behavioral science theories provide guidance that lawmakers and others may want to consider as they look at legislation to prevent or at least mitigate the next corporate scandal. She also provides food for thought for those in corporate America who want to change the dynamics and trust factors within their organizations, and by extension their employee base, shareholders and the general population.

 

 

 

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