November 07, 2011
Ambivalence to law and emotions scholarship: the guilty speaks
Posted by Usha Rodrigues

The semester is waning.  I've been traveling. It's a busy time.  Still, I've read Peter's posts with interest and, time and again, been tempted to put fingers to keyboard to write on the general topic that he's explored so fruitfully in law reviews and blog posts: happiness research.

I've had 2 children in the past 4.5 years, so take this with some salinity: I think happiness research has been the academic development that's had the most impact on me personally in the recent past.  I mean, I love the corporate law and securities, don't get me wrong.  But hedonics: what makes me happy as a person?  A short commute over long commute makes people markedly more happy.  People with children say that kids make them happy, but day-to-day kids make you unhappier than being without.  Are single people happier than married people?  Does the memory of vacation give you more pleasure than the vacation itself?  I find it all fascinating and it shapes my daily choices and reaffirms (or causes me to question) my life choices.  Happiness research goes to the core of myself as a person.

Still  I wonder: what does this have to do with law?  Which is the challenge Peter seems to issue, backhandedly, in his post.  I don't know that I'm afraid of law and emotions: I just don't see the academic implications of an admittedly fascinating field of research.  Cue Abrams and Keren, who say 

[Mainstream legal academics ] have not predictably viewed it as a resource for addressing questions within their substantive fields; it is often treated as a novel academic pastime rather than an instrument for addressing practical problems. This reception contrasts sharply with that accorded to two fields that have also challenged dominant notions of (legal) rationality: behavioral law and economics, and the emerging field of law and neuroscience....

Notwithstanding the breadth of its epistemological challenges, law and emotions scholarship can contribute to the familiar normative work of the law—revising and strengthening existing doctrine, improving decisionmaking, and informing new legal policies. Moreover, it can facilitate the less familiar but nevertheless valuable task of using law to improve people’s affective lives. 

I don't know.  The studies Peter cites about emotion governing financial markets sounds fascinating and worth reading.  What's the legal payoff, though?  I get that, over time, $6000 spent on a trip to Europe will give me more pleasure than spending $6,000 on a more expensive car.  That's useful information to me (although admittedly it just reinforces my prior inclinations).  But legal implications?  

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November 05, 2011
A Shout Out To Brazen And Tenured
Posted by Peter Huang

I am happy to recommend a new blog Brazen And Tenured - Law Politics Nature and Culture from two of my colleagues: Pierre Schlag, Byron White Professor of Constitutional Law, and Sarah Krakoff, Wolf-Nichol Fellow. Pierre's research interests include constitutional law, jurisprudence, legal philosophy, and tort law. Pierre wrote an essay, The Faculty Workshop, which examines how the institution of law school faculty workshops expresses, regulates, and reproduces legal academic behavior, governance, hierarchy, norms, and thought. Sarah's research interests include civil procedure; Indian law, and natural resources law. Sarah is working on a book about the different stages of humans' relationship to nature, which extends her book chapter, Parenting the Planet.



As Pierre described their blog, it's quite idiosyncratic as far as blogs are concerned. That having been said, Glom readers are likely to find their blog to be amusing, informative, and thought-provoking. Here are the two most recent examples.

Pierre's post entitled Tips for Legal Commentators: How to Talk to the Press is a delightful compendium of speaking points. It explains why the legal talking heads who come out of the woodwork to appear on television during any high-profile trial or other legal event always seem to say the same things with a high noise to signal ratio. My personal expeirence when speaking to print media financial journalists about securities fraud, materiality, derivatives, and Goldman Sachs is there is a very high probability (equal to one minus epsilon, where epsilon is a very small positive number) that I'll be misquoted to have said exactly the opposite of what I actually said! Pierre's advice for speaking to journalists has the virtue that it has the property of being subject matter and position invariant. In other words, no matter what legal topic and what viewpoint you have, Pierre's suggested sound bites will apply. Because they are universal and timeless, these quotes have the added virtue of making you sound profound and wise. Finally, these sample responses to media questions are brief, intuitive, memorable, and predictable. Once you deploy one, there is likely to be repeat demand for your expertise. On the other hand, if you do not enjoy being a talking head, then do the opposite of what Pierre recommends to ensure that reporters will not seek you out.

Sarah's post entitled The Economy versus the Environment? Not! (Or Why to Be Tigger Instead of Eeyore this Halloween) is a welcome reminder for both economists and environmentalists that being offered a choice between the economy and the environment is a false dichotomy that privileges a myopic time horizon and local opposed to global perspectives. Her post also nicely dovetails the small but growing literature applying empirical happiness research to support sustainable environmental policy. For example, Daniel A. Farber recently posted a working paper entitled Law, Sustainability, and the Pursuit of Happiness, which demonstrates that sustainability for society and the pursuit of individual happiness do not have to be at odds. 


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April 18, 2011
It's not what the judge had for breakfast, it is when she had lunch
Posted by Erik Gerding

Here is an amusing article from the Economist that reports on a study from Israeli scholars that shows delectable evidence that Israeali parole board judges are more likely to be lenient immediately after a meal.  On the other hand, there is evidence that being slightly hungry sharpens the intellect.

I'm not sure whether to evaluate this evidence before or after dinner.

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April 21, 2010
Betting on the Goldman Suit
Posted by Erik Gerding

While we are on the subject of pure bets, when will there be a prediction market on the outcome of this case?  When will you be able to place your bets?

I am not ready to take an official position - "Goldman is liable" or the "SEC will lose."  What law professor would given that we are only at the beginning of learning the facts?

But that doesn't stop you from making educated guesses and bets.  There is of course an active arbitrage market on Wall Street betting on the outcome of things like high profile litigation and whether a regulator will allow a merger to go through.

When there is a Goldman prediction market, prices will change as new facts come up.

Is there any social value to this type of bet? -- you can probably predict what I will say if you read a previous post -- depends if any party to a bet has a pre-existing risk.

And there is entertainment value.

Would there be any intellectual value to a prediction market beyond giving me something to blog about?  Remember Oliver Wendell Holmes' old adage that law is just a prediction of what a court will do.

Does that mean a prediction market is the law?   

Addendum:  I wouldn't be at all shocked if lawyers -- even law professors -- will be hired by arbitrageurs to evaluate bets on the case.  There may be a lot less professional risk if you are placing a bet without putting your name in writing or on a blog. 

Here is a more gossipy question: if you were hiring a lawyer or law professor to help you place a bet on the outcome of the case, who would you pick? 

Here is a half serious legal question: could there be market manipulation if a professor then writes statements to influence the price without disclosing her interest?

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April 19, 2010
"Just the Facts” vs. Cycles of Fraud
Posted by Erik Gerding

Someone asked me “so did Goldman deceive ACA and investors?” I don’t know. Am I being coy or hiding the ball? No, I think that fraud cases like any litigation should revolve around the facts, not deductive logic and theory. And we are just starting to get facts.

Saying investors should have known these were risky securities and declaring “bubble” after the fact, doesn’t speak to whether there was fraud in this particular case. Just as noting that Goldman had many potential conflicts from playing every angle of a transaction doesn’t mean that there was deception.

It is a little strange to be an academic and call for focusing on facts not theory, particularly since I love me my theory. Theory may not be able to answer whether there was fraud in a particular case, but I think it can help us think about overall patterns in regulation and regulatory history. I wrote a 2006 law review article: “The Next Epidemic: Bubbles and the Growth and Decay of Securities Regulation” that talks about issues I am still grappling with. Some of the themes in the article:

  • An attempt to explain the political economy of the pattern of “deregulation” (which means more than just the repeal of statutes, but looser interpretations of law, laxer enforcement, even government stimulation of markets) during market booms followed by re-regulation after the bust.
  • An analysis of how securities law compliance – particularly with antifraud rules -- starts to decay during market booms.

This latter point is worth considering as we move from discussing individual litigation back to rethinking regulation. Post-hoc litigation strikes me as a poor substitute for regulation. One reason is that litigation is inherently pro-cyclical – that is, it only bites after the crash has occurred. Anti-fraud claims have little bite during market booms for any number of reasons, including it is hard to uncover fraud when prices are rising, there may not be a cause of action until prices drop, and regulatory budgets are stretched thin.

The deterrence value of fraud litgation after the fact is lessened by the time value of money, the fact that many individuals with responsibility will escape the net (for example by jumping a firm's ship in time) and the fact that expected liability (damages + other losses) * (probability of getting caught) may be a lot less than the gains.

We could just ratchet up the punishment or lower the standards of culpability to compensate -- "shoot them all" -- but that isn't exactly due process and it likely isn't effective either.

What's the upshot?  To best prevent "the next time" - let's keep our eyes on rethinking regulation.

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January 24, 2010
Global Corporate Citizenship - A Trend to Watch*
Posted by Rachel Anderson

Global Corporate Citizenship  ("GCC") emerged in management and business scholarship in the 1990s.  GCC posits that corporations have rights and obligations in society similar to citizens.  It addresses the ethical responsibilities of companies operating in a global market and the values that should guide corporations' engagement with society.   In effect, GCC requires that corporations engage with both financial and societal stakeholders as well as acting as stakeholders themselves. 

GCC is closely related to corporate citizenship (without the “global”).  Corporate citizenship is a business strategy, a voluntary model for business practice that is believed to incorporate core values while simultaneously supporting the pursuit of financial goals.  According to the Boston College Center for Corporate Citizenship, there are four key principles of corporate citizenship: (1) minimize harm, (2) maximize benefit, (3) accountability and responsiveness to key stakeholders, and (4) support strong financial results. 

Theories of GCC infuse the discussion of the role of corporations in society with questions of ethics, morality, and societal values, which are substantially lacking in the scholarly lineage that followed Berle’s line of argument.  (See my earlier Conglomerate post on Corporate Purpose.)  It is inherently interdisciplinary and draws from several fields such as management studies, political philosophy, international relations, sociology, and legal studies.  GCC already plays an important role in the actual business practices of transnational corporations ("TNCs"), goals and agendas of international institutions, and theoretical advancements in academic fields such as management, business, and economics.  

The underlying values of GCC are recognized by an increasing number of corporations and business leaders and many TNCs have incorporated GCC into their business goals and policies.  For example, in 2003 CEOs of numerous TNCs published a joint statement with the World Economic Forum ("WEF").  This statement set out a framework for the implementation of GCC principles in the business context.  Since that time, the integration of GCC into the policies of TNCs has moved beyond the group of companies and CEOs associated with the joint statement.  For example, TNCs have begun including GCC in the portfolios of their in-house counsel and corporations are becoming increasingly engaged in promoting GCC.  

In addition to its integration into business policy and practice, GCC is also becoming institutionalized at the international level and an increasing number of non-governmental organizations are supporting GCC.  For example, GCC is being promoted by international institutions such as the United Nations Global Compact ("Global Compact") and the WEF.   The Global Compact is a public-private initiative that seeks to promote ten principals that focus on human rights, labor standards, the environment, and anti-corruption.  The WEF is a Swiss non-profit foundation that focuses on the equality of values and rules in shaping corporate governance and ensuring that economic progress and social development go hand-in-hand.  Both organizations support the creation of a framework that incorporates values and morals into corporate governance and operations while taking the interests of both financial and societal stakeholders simultaneously into consideration – key elements of GCC.

A body of scholarship on GCC has developed in some academic fields, for example, management and business theory.   In 1997, good GCC was defined as "meeting, within reason, the expectations of all its societal stakeholders to maximize the company's positive impact and minimize the negative impact on its social and physical environment, while providing a competitive return to its financial stakeholders" in a publication funded by the Hitachi Foundation.  Over the past decade GCC has continued to be discussed in the management and business literature.  In the management literature, GCC is used at times as an umbrella to include a range of corporate social responsibility and corporate social accountability initiatives.  The stakeholder model rather than a shareholder model for corporate responsibility has played and continues to play an important role in the management literature.  Recent articles argue that corporations are citizen-stakeholders in the global society and, therefore, they should play a more direct role in the advancement of society.

However, although the question of shareholder versus stakeholder models continues to be debated by legal scholars, GCC theory has received only minimal resonance in the U.S. legal discourse.  GCC has been mentioned briefly in several international law articles in connection with descriptions or discussions of the Global Compact and the Millennium Development Goals.  While some legal articles mention GCC in discussions of Corporate Social Responsibility and human rights, others go further and contemplate the definition a good global corporate citizen or propose regulating accountability for GCC.  A few legal articles briefly mention GCC in discussing how NGOs can strengthen their international roles and the role of NGOs in building global democracy.   Still others briefly mention the role that policymakers have in promoting GCC and how the tax advice of law firms and accounting firms may undermine GCC.  Despite brief acknowledgement of GCC in a handful of legal articles since 2000, there has not yet been an attempt to develop a theoretical framework for GCC in the legal context.

I believe that GCC offers a useful theoretical framework with which to integrate and analyze the interests of both financial and societal stakeholders in this age of globalization and my current scholarship focuses on exploring ways that GCC can inform legal theory and corporate, international, and human rights law.   Voluntary measures are an important way to create and realize behavior that is influenced by societal morals and values.  However, reliance on voluntary initiatives is insufficient to assure the protection of key human rights and societal values.  Although the body of scholarship that has developed in the business and management fields is a promising starting point, I believe that developing a legal theory of GCC offers another perspective from which to approach and, hopefully, make a useful contribution to discussions about how to regulate and govern corporations.   

*The main body of this post is excerpted from my article entitled Toward Global Corporate Citizenship: Reframing Foreign Direct Investment Law, 18 Mich. St. J. Int'l L. 1 (2009), which is available on SSRN here.

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January 22, 2010
Corporate Purpose - The Discussion is Not Over Yet*
Posted by Rachel Anderson

In an effort to stop the economic freefall of the most severe financial disaster since the stock market crash of 1929 Great Depression, the United States and governments around the world took action.  Government intervention ran the gamut from conservatorships, partial nationalization, rescue plans, guarantees, and aid requests to the International Monetary Fund.  While these measures may have prevented a total collapse of the global economy, they do not suggest a model for the future.  Two of the many questions one could ask in this situation are:  What can we do differently and who should be doing what?

As corporate law scholars and economists know, the role and responsibilities of public corporations has been the subject of debate since the birth of large public corporations in the late nineteenth century. Corporate responsibility can be categorized as: economic, legal, ethical, and discretionary.  In the United States corporations generally are considered to have a primarily economic function with corresponding economic goals and responsibilities that are then tempered by legal and ethical restraints while still allowing corporations to take on discretionary responsibilities such as philanthropy. However, both practitioners and theorists have questioned the primacy of the economic function.

Generally, when U.S. legal scholars question the primarily economic role of corporations in society, they do so either in the context of Corporate Social Responsibility ("CSR") or Corporate Social Accountability ("CSA") or both.  These theoretical frameworks can be traced back to arguments advanced by E. Merrick Dodd in a debate between Adolph Berle and E. Merrick Dodd in the 1930s.  Berle essentially argued for the primacy of obligations to financial stakeholders. Dodd essentially argued that corporations have responsibilities to both financial and societal stakeholders.  The modern legal discourse on CSR has its roots in Dodd’s position.  In more recent decades the CSA movement has expanded the discourse.

The exact scope and contours of CSR are disputed within the U.S. legal discourse and also varies from country to country.  However, it is fair to say that CSR relates to the scope of ethical obligations that corporations have to stockholders, stakeholders, and society more generally.  In corporate legal theory, CSR generally focuses on economic and governance issues.  The underlying question revolves around the purpose of the corporation.  In the U.S. corporate law context, the rules governing CSR tend to be found in state and federal statutes and these "hard laws" are generally enforceable in a court of law.  In international legal theory, CSR generally focuses on human rights.  The underlying question revolves around what is acceptable conduct from a moral and societal standpoint.  In the international and transnational business arena, the rules governing CSR tend to be found in codes of conduct or documents produced by international organizations.  These types of "soft law" tend to be non-binding and unenforceable in a court of law.  In the U.S. legal discourse, domestic corporate governance and international human rights occasionally have uncomfortable meetings.  However they not yet been integrated into one overarching theoretical framework.

The CSA movement attempts to implement the principles of CSR as legally enforceable "hard law."  Among other things, CSA is an attempt to link human rights, the environment, and other societal issues to the economic and corporate governance concerns of corporations.  This can take the form of disclosure rules, national and international standards, and legal liability for the social and environmental effects of corporate actions.  CSA is a shift from CSR because it moves from a discussion of moral and ethical obligations and responsibilities to a discussion of socially and legally enforceable obligations and responsibilities.  However, CSA is more instrumental than theoretical.  It allows us to link domestic corporate governance with international human rights in an instrumental manner.  However, it does not offer a theoretical framework for bridging the gaps between the interests of financial and societal stakeholders.

From where I sit, the recent financial crises suggest both a need and an opportunity to bring the corporate purpose and corporate social responsibility and accountability discussions to the forefront of legal scholarship.  I plan to continue this discussion in an upcoming post.  

*The main body of this post is excerpted from my article entitled Toward Global Corporate Citizenship: Reframing Foreign Direct Investment Law, 18 Mich. St. J. Int'l L. 1 (2009) (citations omitted), which is available on SSRN here.

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October 25, 2008
Some Metatheory on Justifying Lawyers' Existence
Posted by Jeff Lipshaw

My previous post (or stream of consciousness rant) on the classic Ronald Gilson value creation article generated a number of interesting comments here and from Mike Madison and Mike Risch.  These are all interesting and fair comments, and most are not inconsistent with my thesis. Rather than bury this in the comments, I thought I would do a follow-up.

Let me be clear.  I am not suggesting lawyers do not create value for their clients.  That would be foolish.  My project is instead to propose a counter-explanation that deals in value and meaning, and one that plays off what Bob Ellickson referred to (in a wonderful coinage - it's in the Yale Journal of Law and Humanities somewhere) as the creative tension between the yin of social-science universalizers and the yang of humanistic particularizers.  I spent 26 years out in the world of transactions, and my intuition is that the latter has as much explanatory power as the former, even in the world of financial returns and Kaldor-Hicks equilibria and executive compensation.  Corporations are made of people who are subjective agents, and not black boxes, but the worldview of economic analysis is to treat business and people as black boxes - hence, Richard Posner's priceless epigram that in doing economic analysis, it would not be a solecism to speak of a rational frog.

Gilson's attempt to justify the lawyers' existence is based wholly on the assumption going in that lawyers must necessarily increase value of the transaction (i.e. expand the surplus).  It's that jumping-off point I think is questionable.  To take the example of one commenter, I certainly agree that keeping up to date on forms, like the MAC clause, is something lawyers do, but I'm not as convinced that's the value clients see in hiring a lawyer.  Moreover, the casuistic nature of common law-making is that the adaptation of the law into agreements usually has the feel of generals fighting the last war.  How the social-science universalizing of economics deals with this is to start with perfect rationality, which doesn't take account of language as a social construction, and then to back off into bounded rationality. The equivalent lingo in contracts is "complete" and "incomplete" contracts.  I've written previously in some detail about why I think that concept is wrong, or perhaps more appropriately, incomplete.

Without for a minute making a judgment about the exercise (although I confess that when I was a general counsel and hired Wall Street firms to help do acquisitions, I couldn't bear to stay in the room when they were negotiating the reps and warranties), I think most things lawyers negotiate in acquisitions end up in the long run being trivial either because (a) there's no real dispute about what the deal is or what the language means, or (b) there's no real likelihood that the language will ever come into play to resolve a dispute.  Did I think negotiating the caps, baskets, and survival period of the indemnification was important?  Yes.  But the documentation of that tended to be trivial. Did I think the set of representations about the corporate bona fides to do the deal were important?  Of course.  Was there ever a dispute about the corporate bona fides?  No.  Is the negotiation of a "force-the-vote" provision in a public company takeover important? Yes.  But what it really has to do with is providing assurance or certainty, and that's equally as valid an explanation as the suggestion that somehow the lawyers created more utils along the way. 

Most disputes are opportunistic, I've argued before, in the sense that circumstances will present themselves, and parties will assess whether either under a formal approach or a contextual approach they can argue the agreement language to support their opportunism. That, despite the way I've said it, is not a judgment about the value of the lawyer to the client.  The language the lawyer drafts, and the counsel the lawyer gives, may be the only tree in the storm of uncertainty and contingency the client has. 

Shaking hands upon meeting is a ritual.  It says "I have no weapon and you are safe with me."  It's a simple one because it doesn't have to predict very far out into the future.  Shaking hands to seal a deal is a ritual.  It says "your transaction is safe with me."  But it's not a very precise ritual.  Signing a contract to seal a deal is also a ritual, and it is far more sophisticated than shaking hands, but it's still a way of saying, "subject to these terms and conditions, your transaction is safe with me."

The fundamental difference, and one that I've decided I need to put together in an essay, is whether you approach explanation from a purportedly scientific, objective perspective, or whether you approach it from an interpretative, subjective perspective.   In the former, you explain down from perfect rationality to what people do to account for uncertainty, and in the latter you explain up from individuals' reconciliation of the way the world is and the way it ought to be. What the former seems to claim is a privileged status as knowledge, and that's what strikes me as wrong.  Maybe I'm beating a dead horse to take on a 1984 law-and-economics view of the world, but it is a great and creative piece of theory.  And if indeed it's "the reigning academic account of what business lawyers actually do," then it seems to me it's fair game.

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October 23, 2008
The Mythology of Value Creation: Lawyers, Neckties, and Balinese Cock-Fighting
Posted by Jeff Lipshaw

Usha's post below, with its reference to Ronald Gilson's 1984 article on value creation by lawyers, prompts me to a short rant, not about Usha's post, but about the article, which Usha rightly calls a "classic" and  "the reigning academic account of what business lawyers actually do."  Honestly, with all due respect to Professor Gilson (who joined the Stanford faculty the year I left as a student), the article has bugged me since I read it a couple years ago; indeed, I have a comprehensive list from a Lexis search I did a while back of every article that had cited it, because I was trying to do a literature search to see if anybody else had said what I'm about to say here.  Since I haven't followed up on my list, I don't know, and I therefore apologize if I'm repeating a critique somebody has already written.  I also apologize for the stream of consciousness approach that follows.

What about the article bugs me?  Let me count the ways:

1.  If I were taken with law and economics in 1984, but had no way of showing empirically that the reams and reams of hours that lawyers spent doing deals actually produced anything with intrinsic value (which Professor Gilson forthrightly admitted, at pp. 247-48 of the article), but was inclined to hope that they did, with an interest in justifying their existence (as again Professor Gilson forthrightly admitted at footnote 149), this is, I suppose, exactly the article I would write.  What we have here is an attempt to make sense of the world, by way of scientific (or quasi-scientific) theory, but it is "over-determined" in the sense that the theory selected happens to be rational actor economics, rather than, say, the theoretical view Clifford Geertz applied to Balinese cock-fighting.

2.  The theory is capsuled as follows.  All transactions occur because buyers value an asset more than sellers.  The difference between the two values is surplus.  Haggling over the split of the surplus is of no interest generally to economists; that is mere strategic bargaining.  Each party, being rational, would know that hiring a lawyer to grab a bigger portion of the surplus won't work, because the other side will respond in kind, and the lawyers, not the parties, would get the benefit of the surplus.  So, in the long run, rational actors being what they are, it must be the case that "[t]he increase must be in the overall value of the transaction, not merely in the distributive share of one of the parties. That is, a business lawyer must show the potential to enlarge the entire pie, not just to increase the size of one piece at the expense."  That's a rational actor trope, and one that I have criticized in another context here.

3.  As I said in a comment to Usha's post, if I were to apply an economic model to lawyers in deals it would be the Prisoner's Dilemma. Both clients would be better off cooperating by throwing all the lawyers out of the room for most of the issues in the deal, hence eliminating the transaction cost of arguing over myriad reps and warranties and other contract niceties that don't make any difference anyway. So imagine a Prisoner's Dilemma matrix with Party A and Party B, and the choice for each is "Lawyer" or "No Lawyer." The payoff for each side choosing "No Lawyer" is a huge reduction in costs (say, 5, 5) compared to both sides choosing "Lawyer" (say, 10, 10)" But both sides keep their lawyers, for fear of the (1, 20) or (20, 1) outcomes in the Lawyer/No Lawyer boxes that are akin to one prisoner confessing but the other one not.

4.  There are places where lawyers reduce transaction costs, say, by mediating between two positions to reach a solution, but there's nothing particularly lawyerly about that. That's a negotiating skill.  Moreover, lawyers may well be necessary to getting the deal through the regulatory thicket, whether it is Hart-Scott-Rodino pre-merger notification or CFIUS review.  But that hardly seems fair, because lawyers created the regulatory thicket.

5.  We have a neighborhood association in northern Michigan.  A lot of people in the association are rich.  When something happens that they don't like, they say things like, "if you do that, I'll have 10 lawyers from the Humungous Law Firm, who I have on retainer, up here the next day."  Since I'm a lawyer, and I used to be a partner at the Humungous Law Firm, I laugh at that, but it's an effective club when wielded against non-lawyers.  I rarely hear non-rich people say this, which goes to my next point.

6.  Professor Gilson's "empirical" testing of this theory is to walk through the most heavily lawyered of all documents, the typical business acquisition agreement.  If lawyers really created value accordingly to the theory, we ought to be able to test it not in mega-million or mega-billion dollar deals, but in little deals that happen all the time.  But the reality there is that most transactions occur without lawyers.  Sometimes there is boilerplate that lawyers had a hand in.  But if a lawyer being involved in a transaction necessarily made the pie bigger, why don't lawyers appear in almost all transactions?

7.  Professor Gilson spends many pages on the information-exchanging value of representations and warranties, and puzzles over the lack of any indemnification mechanism in public company deals (the representations and warranties expire at closing largely because once the proceeds in stock or cash are distributed to widely dispersed shareholders, there's no putting Humpty-Dumpty back together again). He acknowledges that indemnification may be partial or limited in time (there's also the "basket" or deductible, but I don't think that gets mentioned), but the real question, it seems to me, is whether the actual instances of acting on the indemnification clauses warrant the investment in the reps and warranties.  My guess is they have some amount of in terrorem effect, but neither of us have a whole lot of data to go on.  (The one empirical study of which I'm aware on this subject is by Steve Schwarcz, and it is based on surveys of clients who hire transactional lawyers.  To quote Steve's abstract:  "Contrary to existing scholarship, which is based mostly on theory, this article shows that transactional lawyers add value primarily by reducing regulatory costs, thereby challenging the reigning models of transactional lawyers as 'transaction cost engineers' and 'reputational intermediaries.'")

8.  My equally non-testable theory is that lawyers sometimes add value to deals, sometimes subtract value, and appear most of the time during the deal for the same reason neckties do:  it's part of the ritual.  There is no intrinsic reason they have to be there.  Lawyers, like neckties, have value, not because they necessarily make the pie bigger, any more than neckties make the pies bigger, but because somebody values the lawyer enough to pay more for her to be there than it cost for her to get there (marginally speaking, of course).  That's the reason we buy $75 neckties and Rolex watches as well.  But we don't feel a need to justify the presence of the necktie or the watch as a "transaction cost mechanism."

9.  I am persuaded by years of observation that great lawyers (like Jim Freund, who Professor Gilson cites repeatedly) help make deals, but that there is nothing particularly lawyerly about it.  It is, as Vic Fleischer suggests, quarterbacking, or as David Zaring suggests, closing.  That strikes me as an aspect of leadership, something business schools teach, but with which law schools and law (qua law) struggle immensely. 

10.  Mostly, though, I step back and see the process as something akin to a Balinese cockfight, a ritual or ceremony that gives us some limited assurance of certainty in a highly uncertain and contingent world.  I find it equally plausible that the presence of all those lawyers doesn't do a damned thing to make the pie bigger - but they are necessary, and they do have value, just as the accoutrements to the cock-fight have value to the participants.  Their value is in what they do to give us the courage to overcome fear, panic, seller's remorse, buyer's remorse, and risk averseness. Again, as I said over in the comments, lawyers provide an alternative model for resolving disputes about the deal that is better than pistols at twenty paces, but the idea that the contract language provides certainty in anything other than trivial cases is a self-justifying illusion for lawyers.  I suppose what really bugs me comes from my intuition that the Gilson thesis is theory-laden in the sense that Ian Shapiro criticized in The Flight from Reality in the Human Sciences.  What comes first is the economic model and its assumptions about value and rationality, which is then imposed on a linguistic exercise, which is itself an imperfect model of a complex world.

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May 20, 2008
The Love Song of the Delaware Court of Chancery
Posted by David Zaring

From The HLS Corporate Governance Blog:

Let us rule then, you and I,
When there’s theft of corp’rate opportunity
Like a patient over-billed by doctors able;
Let us read through certain less well-researched briefs,
The nimbly wrought conceits
Of high-paid lawyers in nearby hotels
Who work so hard all day for corporate shells;
Days that follow, full of insipid argument
Of questionable intent
That lead some to such aggravating questions . . .
Oh, do not ask, “Why is it?”
Let us rule, and don’t inquisit!

In the court attorneys come and go
Talking of prices high and low.

By David Kessler.  Via Ribstein, with his own well-written literary take.


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March 04, 2008
Posted by Gordon Smith

A group of faculty at BYU has been working through The Canon of American Legal Thought one article at a time. The project started because John Fee and I were interested in the possibility of teaching a class from the book, but it has thrived because all of the participants are having great fun being students again. Our sessions have produced some memorable moments, like when John said, "Wesley Hohfeld seems like the kind of person who would take pleasure in reminding you that a tomato is a fruit, not a vegetable."

One of the recurring themes in the early works in this volume is predictability. In "The Path of the Law," for example, Holmes asserts that "pretty nearly the whole meaning of every new effort of legal thought is to make [our] prophesies [of what courts will do] more precise, and to generalize then into a thoroughly connected system."

In Llewellyn's contribution -- "Some Realism About Realism" -- we again encounter the assertion that appellate litigation is indeterminate and the aspiration that legal theory can enhance predictability:

[The Realist "movement" is] a first attack upon the realm of the unpredictable in the actions of courts. That attack suggests strongly that one large element in the now incalculable consists in the traditional pretense or belief ... that there is no such area of uncertainty, or that it is much smaller that it is. To recognize that there are limits of the certainty sought by verbalism and deduction, to seek to define those limits, is to open the door to that other and far more useful judicial procedure: conscious seeking, within the limits laid down by precedent and statute, for the wise decision. Decisions thus reached, within those limits, may fairly be hoped to be more certainly predictable than decisions are now--for now no man can tell when the court will, and when it will not, thus seek the wise decision, but hide the seeking under words. And not only more certain, but what is no whit less important: more just and wise (or more frequently just and wise). [Italics in original; bold added.]

One thing I find interesting about this passage is Llewellyn's focus on judicial decision making. While it stands to reason that more insightful judges would make more predictable and just decisions,  this claim is quite a bit different from the usual claim about the contribution of Realism. For example, Brian Leiter, Rethinking Legal Realism: Toward a Naturalized Jurisprudence, 76 Tex. L. Rev. 267 (1997), argues that the Core Claim of Legal Realism is that "judges respond primarily to the stimulus of facts. Put less formally--but also somewhat less accurately--the Core Claim of Realism is that judges reach decisions based on what they think would be fair on the facts of the case, rather than on the basis of the applicable rules of law."

Proceeding from this Core Claim, the main contribution of Realism to predictability would not be that the nature of judicial decision making had changed, but rather that our understanding of those decisions had improved. Again, from Brian Leiter:

[I]f the Sociological Wing of Realism--Llewellyn, Moore, Oliphant, Cohen, Radin, among others--is correct, then judicial decisions are causally determined by the relevant psycho-social facts about judges, and at the same time judicial decisions fall into predictable patterns because these psycho-social facts about judges--their professionalization experiences, their backgrounds, etc.--are not idiosyncratic, but characteristic of significant portions of the judiciary. Rather than rendering judicial decision a mystery, the Realists' Core Claim, to the extent it is true, shows how and why lawyers can predict what courts do.

In the end, I am left wondering whether predictability of appellate decisions has improved at all since the 1930s. Most legal questions, even those raised in appellate courts, seem quite a bit simpler than those portrayed by Llewellyn in this passage:

[T]he line of inquiry via rationalization has come close to demonstrating that in any case doubtful enough to make litigation respectable the available authoritative premises--i.e., premises legitimate and impeccable under the traditional legal techniques--are at least two, and that the two are mutually contradictory as applied to the case at hand.

Even most appellate cases are not "doubtful enough to make litigation respectable" if this sort of indeterminacy is required for respectability. And those cases that must be resolved from "mutually contradictory" premises are likely no easier now than they were then.

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August 20, 2006
"It takes a theory to beat a theory"
Posted by Gordon Smith
July 20, 2005
Little Lochners
Posted by Will Baude

All of the posts and comments on this blog about the Wisconsin Supreme Court yesterday danced around the general question of the propriety of having courts give some review to economic legislation. Call this Lochnering. (Consider Ted Frank's and Plainsman's skepticism or Christine Hurt's applause.] In response to Christine's question about what degree of generalized cost-benefit legislative review courts ought to engage in, I offer the following thoughts:

I will be the first to acknowledge that it's quite likely that there is no authorization in the U.S. Constitution for the U.S. Supreme Court to engage in such a practice. And further, there are plenty of reasons that it might be undesirable for the U.S. Supreme Court to do it. Federal judges are unelected, likely to be out of touch with the electorate, often unfamiliar with economics, unable to review more than a handful of cases, and therefore likely to have trouble creating a coherent Lochner doctrine. Their decisions would be seriously entrenched against popular review (because the U.S. Constitution is quite difficult to amend). Such U.S. Supreme Court review would be injurious to decentralized economic policy, especially since judges tend to be skeptical of the unfamiliar, and thus their decisions would tend to rein in outlying states, just as its criminal procedure jurisprudence has done. The Court also is unlikely to be familiar with the procedural and political process in every state, and therefore not particularly likely to engage in a useful Ely-style analysis of whether the law had been created by democracy as usual. All right.
But what's the practical case against a low, but nontrivial level of review by the courts of a U.S. state? Obviously, the state constitution might or might not authorize such review, but let us suppose that the voters or framers of a constitution were thinking about authorizing such review, or having gotten stuck with it, were debating whether to amend the constitution and rebuke the court. What's so bad about having states who wish to engage in Little Lochnerism?

Many state supreme courts are elected, at least in retention elections, and state constitutions are all easier to amend than the federal one is. These choices may arise from a skepticism of judicial power, but they also mean that judicial review in a given area has lower stakes, because the judiciary is less likely to have undefeatably final say. State courts tend to be more familiar with local politics and concerns, and may be better able to engage in political-process review a la John Ely. State judges, for better or worse, tend to be marginally less elite than many of their equivalents on the federal bench, and therefore presumably less out of touch with the electorate. Their efforts to bring constitutional doctrine to bear on economic legislation also will not be as injurious to federalism, since their decisions reach only a single state, and very few people believe that counties or municipalities ought to enjoy the same degree of sovereignty that states do. State courts also tend to have larger dockets, and (obviously) many more cases from a single state, so it would be more conceivable for them to craft a coherent economic-review doctrine. So, what would be so bad about a state deciding to turn its court into a low-level legislative-rationality-review-board?

There is some noise that this would be violative of separation of powers principles. This is not necessarily bad, of course-- states aren't required to separate powers in the same way the national government does, and may not particularly want to. Many states don't have a powerful near-unitary executive, vast administrative state, or jealous judiciary. But at any rate, it should be obvious that engaging in economic review if it is authorized by law is not violative of separation of powers, but rather the essence of it. Laws require courts to make substantive doctrinal judgments all the time, whether through zoning enabling statutes, civil-rights statutes like RLUIPA and RFRA, constitutional provisions like the "reasonable"ness prong of the 4th Amendment, or substantively economic statutes like the Antitrust Act or the code on trademarks.
Similarly, there is some suggestion that courts lack the institutional expertise to do economics. Somehow it seems generally accepted that they can review campaign finance legislation or school district boundaries or a school prayer policy to see whether it is constitutional, but the minute they have to do something like contemplate gas prices in Hawaii, everybody gets nervous. It is hard to imagine why. It is not as if most legislators engage in substantive economic analysis of every bill on their own. They deputize overworked staffers and take a great deal of information from competing lobbyists and then do their best. Maybe a Little Lochner state court would need a few extra clerks, but is there any reason to think that the adversarial process in court would work a whole lot worse than the adversarial lobbying process that already happens in statehouses?
It's also true that such judicial review would place limits on the ability of legislatures to log-roll, combining some provisions that each person thinks is dubious until the resultant combination is okay with everybody. How possible this would be in a Little Lochner world depends in part on the state's severability laws. But while some log-rolling may be a good thing, it is not obvious that the optimal constraints on log-rolling are zero; that is why many states have germane-amendment rules or single-subject rules. Log-rolling may make elements of the legislative process harder for the people to supervise, and also may make it easier for the legislature to weave unconstitutional provisions together with popular constitutional ones. The people might reasonably decide to authorize the judiciary to strike down the most egregious pieces of legislation.

Legislators and legislatures are highly imperfect agents for the people who elect them. This is why some states retain popular-democracy provisions and why we have authorized some types of judicial review. Surely many allegations of racial discrimination or religious oppression or unconstitutional disuniformity in state taxes involve tough and imperfect judgment calls, even when proceeding by neutral rules (which are themselves imperfest). But is there any theoretical reason why people ought to force their courts to get out of the tough and imperfect judgment calls business altogether?

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April 25, 2005
More on Legal Method
Posted by Gordon Smith

Over the weekend, I began reading H. Patrick Glenn's excellent book Legal Traditions of the World, which is extremely well written and informative. In the chapter on the civil law tradition, I found this tidbit about legal method:

Aristotle said that what you really can’t do, what nobody will let you get away with in argument, is affirming at the same time two things which contradict themselves. Put the other way, between two contradictory things, there is no middle (it’s excluded). You heard this as a child -- you can’t have your cake and eat it too. And everybody now knows this. There is no middle ground between contradictory things…. So once you know that two things are contradictory, once they have been defined and boundaried so that you know they are contradictory, that’s it. You have irreconcilable difference, or separation, or possibly incommensurability, or quite possibly conflict…. But what you now have is precision, since you have a notion of consistency, and consistency is what allows you to build, as opposed to simply wandering around amongst the differences.

As regular readers of this blog may remember, I posted some thoughts about legal method back in February and focused on analogical reasoning. The principle of consistency is an implicit requirement of analogical reasoning. Lawyers spend a great deal of time and energy probing facts and doctrine to discover consistencies and inconsistencies.

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April 20, 2005
Legal Classics Online
Posted by Gordon Smith

Wow! HeinOnline has a great new website containing 100 "legal classics." Which would you read first? I opened Langdell's famous casebook, Selection of Cases on the Law of Contracts, and read the preface, which included this:

I entered upon the duties of my present position, a year and a half ago, with a settled conviction that law could only be taught or learned effectively by means of cases in some form.... Law, considered [as] a science, consists of certain principles or doctrines. To have such a mastery of these as to be able to apply them with constant facility and certainty to the ever-tangled skein of human affairs, is what constitutes a true lawyer; and hence to acquire that mastery should be the business of every earnest student of law. Each of these doctrines has arrived at its present state by slow degrees; in other words, it is a growth, extending in many cases through centuries. This growth is to be traced in the main through a series of cases; and much the shortest and best, if not the only way of mastering the doctrine effectually is by studying the cases in which it is embodied. But the cases which are useful and necessary for this purpose at the present day bear an exceedingly small proportion to all that have been reported. The vast majority are useless and worse than useless for any purpose of systematic study.

Thus commenced the modern teaching of law. But take a look through the body of that work and note how short the cases are, how many Langdell included, and the absence of explanatory text. Modern casebooks bear only passing similarity to this seminal text.

Thanks to Bonnie Shucha for the tip.

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