August 09, 2014
Disruptive Legal Technologies: Benefit Corporations and the Crowdfunding of Firms
Posted by Eric Orts

Two recent developments in the law and practice of business include:  (1) the advent of benefit corporations (and kindred organizational forms) and (2) the application of crowdfunding practices to capital-raising for start-ups.  My thesis here is that these two innovations will become disruptive legal technologies.  In other words, benefit corporations and capital crowdfunding will change the landscape of business organization substantially.

A disruptive technology is one that changes the foundational context of business.  Think of the internet and the rise of Amazon, Google, etc.   Or consider the invention of laptops and the rise of Microsoft and the fall of the old IBM.  Automobiles displace horses, and telephones make the telegraph obsolete.  The Harvard economist Joseph Schumpeter coined a phrase for the phenomenon:  “creative destruction.”

Technologies can be further divided into two types:  physical technologies (e.g., new scientific inventions or mechanical innovations) and social technologies (such as law and accounting).   See Business Persons, p. 1 (citing Richard R. Nelson, Technology, Institutions, and Economic Growth (2005), pp. 153–65, 195–209).  The legal innovations of benefit corporations and capital crowdfunding count as major changes in social technologies.  (Perhaps the biggest legal technological invention remains the corporation itself.)

1.  Benefit corporations began as a nonprofit idea, hatched in my hometown of Philadelphia (actually Berwyn, Pennsylvania, but I’ll claim it as close enough).  A nonprofit organization called B Lab began to offer an independent brand to business firms (somewhat confusingly not limited to corporations) that agree to adopt a “social purpose” as well as the usual self-seeking goal of profit-making.  In addition, a “Certified B Corporation” must meet a transparency requirement of regular reporting on its “social” as well as financial progress.  Other similar efforts include the advent of “low-profit” limited liability companies or L3Cs, which attempt to combine nonprofit/social and profit objectives.  In my theory of business, I label these kind of firms “hybrid social enterprises.”  Business Persons, pp. 206-15.

A significant change occurred in the last few years with the passage of legislation that gave teeth to the benefit corporation idea.  Previously, the nonprofit label for a B Corp required a firm to declare adherence to a corporate constituency statute or to adopt a similar constituency by-law or other governing provision which signaled that a firm’s sense of its business objective extended beyond shareholders or other equity-owners alone.  (One of my first academic articles addressed the topic at an earlier stage.  See “Beyond Shareholders:  Interpreting Corporate Constituency Statutes.”  I also gave a recent video interview on the topic here.)  Beginning in 2010, a number of U.S. states passed formal statutes authorizing benefit corporations.  One recent count finds that twenty-seven states have now passed similar statutes.  California has allowed for an option of all corporations to “opt in” to a “flexible purpose corporation” statute which combines features of benefit corporations and constituency statutes.  Most notably, Delaware – the center of gravity of U.S. incorporations – adopted a benefit corporation statute in the summer of 2013. According to Alicia Plerhoples, fifty-five corporations opted in to the Delaware benefit corporation form within six months.  Better known companies that have chosen to operate as benefit corporations include Method Products in Delaware and Patagonia in California.

2. Crowdfunding firms.  Crowdfunding along the lines of Kickstarter and Indiegogo campaigns for the creation of new products have become commonplace.  And the amounts of capital raised have sometimes been eye-popping.  An article in Forbes relates the recent case of a robotics company raising $1.4 million in three weeks for a new project.  Nonprofit funding for the microfinance of small business ventures in developing countries seems also to be successful.  Kiva is probably the best known example.  (Disclosure:  my family has been an investor in various Kiva projects, and I’ve been surprised and encouraged by the fact that no loans have so far defaulted!)

However, a truly disruptive change in the capital funding of enterprises – perhaps including hybrid social enterprises – may be signaled by the Jumpstart Our Business Start-ups (JOBS) Act passed in 2012. Although it is limited at the moment in terms of the range of investors that may be tapped for crowdfunding (including a $1 million capital limit and sophisticated/wealthy investors requirement), a successful initial run may result in amendments that may begin to change the face of capital fundraising for firms.  Judging from some recent books at least, crowdfunding for new ventures seems to have arrived.  See Kevin Lawton and Dan Marom’s The Crowdfunding Revolution (2012) and Gary Spirer’s Crowdfunding:  The Next Big Thing (2013).

What if easier capital crowdfunding combined with benefit corporation structures?  Is it possible to imagine the construction of new securities markets that would raise capital for benefit corporations -- outside of traditional Wall Street markets where the norm of “shareholder value maximization” rules?  There are some reasons for doubt:  securities regulations change slowly (with the financial status quo more than willing to lobby against disruptive changes) and hopes for “do-good” business models may run into trouble if consumer markets don’t support them strongly.  But it’s at least possible to imagine a different world of business emerging with the energy and commitment of a generation of entrepreneurs who might care about more in their lives than making themselves rich.  Benefit corporations fueled by capital crowdfunding might lead a revolution:  or, less provocatively, may at least challenge traditional business models that for too long have assumed a narrow economic model of profit-maximizing self-interest.  James Surowiecki, in his recent column in The New Yorker, captures a more modest possibility:  “The rise of B corps is a reminder that the idea that corporations should be only lean, mean, profit-maximizing machines isn’t dictated by the inherent nature of capitalism, let alone by human nature.  As individuals, we try to make our work not just profitable but also meaningful. It may be time for more companies to do the same.”

So a combination of hybrid social enterprises and capital crowdfunding doesn’t need to displace all of the traditional modes of doing business to change the world.  If a significant number of entrepreneurs, employees, investors, and customers lock-in to these new social technologies, then they will indeed become “disruptive.”

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August 07, 2014
New Directions in Corporate Disclosure: Politics, Environment, and Religion
Posted by Eric Orts

Corporate disclosure, especially in securities regulation, has been a standard regulatory strategy since the New Deal. Brandeisian “sunlight” has been endorsed widely as a cure for nefarious inside dealings. An impressive apparatus of regulatory disclosure has emerged, including annual and quarterly reports enshrined in Forms 10K and 10Q. Other less comprehensive disclosures are also required: for initial public offerings and various debt issuances, as well as for unexpected events that require an update of available information in the market (Form 8K).

For the most part, corporate disclosure has focused on financial information: for the good and sufficient reason that it is designed to protect investors – especially investors who are relatively small players in large public trading markets. Some doubts have been raised about the effectiveness of this kind of disclosure and, indeed, the effectiveness of mandatory disclosure in general. A recent book by Omri Ben-Shahar and Carl Scheider, More Than You Wanted to Know: The Failure of Mandated Disclosure, advances a wide-ranging attack on all mandatory disclosure. (I think that their attack goes too far: I’ll be coming out with a short review of the book for Penn Law’s RegBlog called “Defending Disclosure”).   Assuming, though, that much financial disclosure makes sense, what about expanding it to include other activities of business firms?

Consider three types of nonfinancial information that might usefully be disclosed: information about a business firm’s activities with respect to politics, the natural environment, and religion.

1. Politics. One good candidate for enhanced corporate disclosure concerns business activities in politics. Lobbying laws require various disclosures, and various campaign finance laws do too. It is possible to obscure actual political spending through the complexity of corporate organization. (For a nice graphic of the Koch brothers’ labyrinth assembled by the Center for Responsive Politics, see here.) Good reporters can ferret out this information – but they need to get access to it in the first place. My colleague Bill Laufer has been an academic leader in an effort to encourage public corporations to disclose political spending voluntarily, with Wharton’s Zicklin Center for Business Ethics Research teaming up with the nonpartisan Center for Political Accountability to rank companies with respect to their transparency about corporate political spending. The rankings have been done for three years now, and there are indications of increased business participation.  Recently, even this voluntary effort has been attacked by business groups such as the U.S. Chamber of Commerce for being “anti-business.” See letter from U.S. Chamber of Commerce quoted here.  Jonathan Macey of Yale Law School has also objected to the rankings in an article in the Wall Street Journal, arguing that the purpose of political disclosure is somehow part of “a continuing war against corporate America.” These objections, however, seem overblown and misplaced. What is so wrong about asking for disclosure about the political spending of business firms? One can Google individuals to see their record of supporting Presidential and Congressional candidates via the Federal Election Commission’s website, yet large businesses should be exempt? Political spending by corporations and other business should be disclosed in virtue of democratic ideals of transparency in the political process. Media, non-profit groups, political parties, and other citizens may then use the resulting information in political debates and election campaigns. Also, it seems reasonable for shareholders to expect to have access to this kind of information.

In Business Persons, I’ve gone further to argue (in chapter 7) that both majority and dissenting opinions in Citizens United appear to support mandatory disclosure as a good compromise strategy for regulation. One can still debate the merits of closer control of corporate spending in politics (and I believe that though business corporations indeed have “rights” to political speech these rights do not necessarily extend to unlimited spending directed toward political campaigns). It seems to me hard to dispute that principles of political democracy – and the transparency of the process – support a law of mandatory disclosure of corporate spending in politics.

2. Natural environment. Increasingly, many large companies are also issuing voluntary reports regarding their environmental performance (and often adding in other “social impact” elements). Annual reports issued under the International Standards Organization (the ISO 14000 series), the Global Reporting Initiative, and the Carbon Disclosure Project are examples. The Environmental Protection Agency (EPA) has also established a mandatory program for greenhouse gas emissions reporting, which is tailored to different industrial sectors. One can argue about whether these kinds of disclosures are sufficiently useful to justify their expense, but my own view is that they help to encourage business firms to take environmental concerns seriously. Many firms use this reporting to enhance their internal efficiency (often leading to financial bottom-line gains). As important, however, is the engagement of firms to consider environmental issues – and encouraging them to act as “part of the solution” rather than simply as a generating part of the problem.

One caveat that is relevant to all nonfinancial disclosure regimes:   The scope of firms required to disclose should be considered.  I do not believe that the case is convincing that only public reporting companies under the securities laws should be included.  (For one influential argument to the contrary, see Cynthia A. Williams, “The Securities and Exchange Commission and Corporate Social Transparency,”  112 Harvard Law Review 1197 (1999)).  Instead, it makes to sense for different agencies appropriate to the particular issue at hand to regulate:  the Federal Election Commission for political disclosures and the EPA for environmental disclosures.

3. Religion? In the wake of the Hobby Lobby case, some have called for greater disclosure about a firm’s values on this score both with respect to employment and investors. See, e.g., Joan Heminway’s piece here. Stephen Bainbridge has also called attention to this question here.  Probably it makes sense to consider disclosure as a partial solution, though the idea of mandatory government disclosure of religious characteristics makes me nervous on “separation of church and state” grounds. It might be better to “wait” (as Frank Partnoy advises us often to do in his recent book) and see how the Hobby Lobby line of cases develops. My guess is that some tensions will become apparent that may result in keeping Hobby Lobby limited to the context of close and usually small corporations (though Hobby Lobby itself is an exception, having more than 10,000 employees).
 
But a rule of disclosure might not be the best approach with respect to religion and firms. Better in this context perhaps to bite the bullet and ascertain when for various legal purposes a business firm “crosses the line” from a private organization (with rights of self-organization and self-determination with respect to many internal business practices) to a public-facing organization (with duties to treat public customers, employees, and business partners in a non-discriminatory manner). These issues are not easy. As I suggest in Business Persons (chapter 3), a central problem in business theory concerns “the public/private distinction” which I conceive as involving “two faces of the business enterprise.” Here, the religious preferences of private owners require balancing with the public role undertaken when holding out one’s shingle in public markets. Drawing legal lines isn’t always easy, but often it’s necessary.  And disclosures alone will not always be sufficient.

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August 05, 2014
The Legal and Social Ontology of the Firm
Posted by Eric Orts

Thanks to Gordon Smith and my Wharton colleague David Zaring for inviting me as a guest blogger on The Conglomerate.  I am a new entrant in the blogosphere here, and I appreciate this invitation very much.

What follows is a written version of remarks that I presented at the Society for Business Ethics in Philadelphia on August 3 at a panel on “Corporate Personhood – For or Against or Whether It Even Matters?” organized by Kendy Hess of Holy Cross.  (Thanks, Kendy!)  The panel also included excellent presentations on the topic by two of my Wharton colleagues, Gwen Gordon and Amy Sepinwall, as well as Kendy.  A longer version will be presented in a conference in London in September, and a written version will also be included in a book that I'm co-editing with Craig Smith called The Moral Responsibility of Firms (forthcoming in Oxford University Press).  It will also inform chapter 1 of a book that is underway (and still forthcoming) currently called Rethinking the Firm: An Interdisciplinary Interpretation (also under contract with OUP). 

In these posts, I've been kindly invited to revisit some themes of my new book on Business Persons:  A Legal Theory of the Firm.  So I hope that I'll generate some interest in the book:  or perhaps make some of the ideas there more accessible in "blog-sized" pieces.  The following contribution is a first entry.

***

Let me be provocative first and say affirmatively: Corporations are legal persons and it matters. The thesis is qualified, however, by the fact that to say that corporations are persons is a conclusion that only then begins arguments about what it actually means in practice with respect to particular issues.  The fact that corporations are “persons” means only that we provide them – through law – with certain capacities and powers, and certain rights and obligations.  It remains to be decided what the nature and limits of these capacities and powers, and rights and obligations, may and will be.

Three main arguments support my claim.

1. Firms exist.  Some economists (and lawyers following them) have argued that firms do not really exist.  They are mere fictions, they say, and any serious epistemological analysis must look past the “legal fiction” of the firm – or the “corporation” in the form we are discussing here – to the actual human beings who are involved.  Although this methodological reduction may be useful for some kinds of analysis (economic modeling, etc.), it is wrong from a realistic legal and social perspective.  Firms exist because the law has evolved to say that they exist.  They are constructions of human relationships that are socially sanctioned and legally recognized.  They are “fictions” in the sense that they are created through the artificial mechanisms of law and government.  They are also “real” because people acting under law and in society believe in them and make them real.  Firms are therefore what I’ve called “real fictions”:  both nominalism and realism are right, but only when they are combined together into a nominalist realism.  See Business Persons, ch. 1.  Philosophers such as Margaret Gilbert, John Searle, and Philip Pettit support this view.  People acting in social groups form collective realities, which are reinforced and articulated by organizational law.  Business firms – including for-profit corporations – are in this sense social constructions.  Corporations are like money and nation-states.  Exxon-Mobil and Patagonia are as real as China and the United States.  They exist because we believe in them.  We act as if they exist – and so as social constructions they exist.  They have power and authority.

2. Firms are persons.  The method of legal recognition is to bestow “personality”:  The law recognizes an individual human being as a “person” who has “standing” to bring or defend a claim in court.  A person has rights: personal rights against mistreatment and rights against violations of one’s dignity and physical integrity.  The law matters here.  Consider the situation of a slave (historically not so very long ago in the United States) or an illegal immigrant (such as children from other countries crossing the southern border of the United States today).  The law does not recognize them fully as “persons” – or at least not to the same level of available rights and obligations as “citizens.”  Even children of citizens do not have a complete set of rights:  they cannot drive cars or enter contracts legally until reaching an age allowing legal capacity.  The law makes other distinctions:  “person” is a legally denominated concept.  It is extended (or not) for various reasons of philosophy and social policy.  Is a fetus a “person”?  What rights does a “terrorist” have?  Even: is a dog, such as my dog Butterbean, a legal person for certain purposes?  I cannot, for example, torture him for fun (assuming that I’m that kind of person, which I’m not).  In this sense, then, a dog too is a person:  he has some minimal rights recognized under law (though he'll need someone else to speak for him).

An analogous argument applies to firms.  They are “persons” because the law recognizes them as such and as having certain rights and obligations:  standing in court, holding of property, a party to contracts, an organizational principal, a target for tort liability, and a potential plaintiff to insist on its “rights,” whatever they may be.  The exact nature of these various rights of firms remains to be decided:  The controversial recent cases of Citizens United and Hobby Lobby extend claims of political and religious freedom to include corporations as persons.  Are these cases correctly decided?  The answer does not, I believe, turn on whether they are considered “persons” or not.  Firms are uncontroversially legal persons for many purposes.  The question is whether or not we should extend certain kind of rights to firms as “persons” derivatively – representing the people who act collectively through them.  Note that the answer can be qualified.  We may say: “Yes, corporations hold property and should have standing to object on constitutional grounds if a government attempts to expropriate the property without compensation.”  But we may also say: “No, corporations usually represent diverse groups of people regarding religion, so in these cases it is not correct to say that corporations should have religious rights" (contrary, of course, to the holding of Hobby Lobby).  I make this latter argument in a previous blog for The Conglomerate on Hobby Lobby here.

3. Legal personality matters, but it is not dispositive. Firms exist, firms have legal personality, and it matters.  The fact that a corporation is a person does not settle the argument for or against an assertion of rights or obligations.  This is a mistake in argumentation, in my view, that opinions on both sides of the divided Justices of the Citizens United and Hobby Lobby cases make.  In these kinds of cases, the Court should ask – as legislatures and citizens should as well – what is the purpose of a firm and of a corporation given the question that we're asking?  Arguably, as Justice Alito argues in Hobby Lobby, business firms are not just profit maximizers (as some students are taught in some business school classes).  They are moral creatures because the people who compose them are moral creatures (or, at least they have the potential to be moral -- nobody's perfect!)  But we then have to dig deeper and ask “who” is involved in the firm.  Why are we asking the question: “persons” for what purposes?  Perhaps firms should have political rights, but perhaps also they should be constrained in this respect for good reasons of political theory and modern democracy.  Perhaps some kinds of firms should have religious rights, but the scope of these potential rights should be constrained.  Rights of employees may be equal to those of owners and managers in this context.  There are other limits in principle that need to be drawn here too:  but my main point here is that doing so assumes that “legal personality” matters.  It is then a question of filling in the institutional portrait:  who is this person?  What kind of person?  And how does the nature of this person relate to the considerations in play on a specific issue?

4. Conclusion.  My argument is designed mostly to set up rather than to answer the hard questions, so I hope that my position will not be too controversial.  Here again are my main propositions.

a.  Firms exist. For our purposes here, corporations are a kind of firm.  (The difference between for-profit and profit corporations raises another set of issues.)

b.  Firms, including corporations, have legal personality.  The question is not whether firms are persons, but what the fact that they are persons means with respect to particular further questions regarding the rights or obligations that we should extend to them as persons.

c.  Legal personality matters, but is not dispositive.  To argue about whether firms are persons or not persons does not advance the ball very much.  The popular debate conflates the meanings of "persons" and "people."  Firms are persons; begin there.  And then engage the substantive policy issues as hand.  Move the discussion forward, while recognizing the truth of the “real fictions” of firms as legal persons.

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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.

Schlag

Krakoff

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. 

FacultyPhoto2.php

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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
Predictability
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
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