Conglomerate Blog: Business, Law, Economics & Society

December 16, 2011

Educating Today’s Law Students to Be Tomorrow’s Counselors and Gatekeepers

Posted by Marcia Narine

Law schools are under attack. Depending upon the source, between 20-50% of corporate counsel won’t pay for junior associate work at big firms. Practicing lawyers, academics, law students and members of the general public have weighed in publicly and vehemently about the perceived failure of America’s law schools to prepare students for the real world.

Admittedly, before I joined academia a few months ago, I held some of the same views about lack of preparedness. Having worked with law students and new graduates as outside and in house counsel, I was often unimpressed with the level of skills of these well-meaning, very bright new graduates. I didn’t expect them to know the details of every law, but I did want them to know how to research effectively, write clearly, and be able to influence the clients and me. The first two requirements aren’t too much to expect, and schools have greatly improved here. But many young attorneys still leave school without the ability to balance different points of view, articulate a position in plain English, and influence others.

To be fair, unlike MBAs, most law students don’t have a lot of work experience, and generally, very little experience in a legal environment before they graduate. Assuming they know the substantive area of the law, they don’t have any context as to what may be relevant to their clients.

How can law schools help?

First, regardless of the area in which a student believes s/he wants to specialize, schools should require them to take business associations, tax, and a basic finance or accounting course. No lawyer can be effective without understanding business, whether s/he wants to focus on mom and pop clients, estate planning, family law, nonprofit, government or corporate law. More important, students have no idea where they will end up after graduation or ten years later. Trying to learn finance when they already have a job wastes the graduate’s and the employer’s time.

Of course, many law schools already require tax and business organizations courses, but how many of those schools also show students an actual proxy statement or simulate a shareholder’s meeting to provide some real world flavor? Do students really understand what it means to be a fiducuiary?

Second and on a related point, in the core courses, students may not need to draft interrogatories in a basic civil procedure course, but they should at least read a complaint and a motion for summary judgment, and perhaps spend some time making the arguments to their brethren in the classroom on a current case on a docket. No one can learn effectively by simply reading appellate cases. Why not have students redraft contract clauses? When I co-taught professional responsibility this semester, students simulated client conversations, examined do-it-yourself legal service websites for violations of state law, and wrote client letters so that the work came alive.

When possible, schools should also re-evaluate their core requirements to see if they can add more clinicals (which are admittedly expensive) or labs for negotiation, client consultation or transactional drafting (like my employer UMKC offers). I’m not convinced that law school needs to last for three years, but I am convinced that more of the time needs to be spent marrying the doctrinal and theoretical work to practical skills into the current curriculum.

Third, schools can look to their communities. In addition to using adjuncts to bring practical experience to the classroom, schools, the public and private sector should develop partnerships where students can intern more frequently and easily for school credit in the area of their choice, including nonprofit work, local government, criminal law, in house work and of course, firm work of all sizes. Current Department of Labor rules unnecessarily complicate internship processes and those rules should change.

This broader range of opportunities will provide students with practical experience, a more realistic idea of the market, and will also help address access to justice issues affecting underserved communities, for example by allowing supervised students to draft by-laws for a 501(c)(3). I’ll leave the discussion of high student loans, misleading career statistics from law schools and the oversupply of lawyers to others who have spoken on these hot topics issues recently.

Fourth, law schools should integrate the cataclysmic changes that the legal profession is undergoing into as many classes as they can. Law professors actually need to learn this as well. How are we preparing students for the commoditization of legal services through the rise of technology, the calls for de-regulation, outsourcing, and the emerging competition from global firms who can integrate legal and other professional services in ways that the US won’t currently allow?

Finally and most important, what are we teaching students about managing and appreciating risk? While this may not be relevant in every class, it can certainly be part of the discussions in many. Perhaps students will learn more from using a combination of reading law school cases and using the business school case method.

If students don’t understand how to recognize, measure, monitor and mitigate risk, how will they advise their clients? If they plan to work in house, as I did, they serve an additional gatekeeper role and increasingly face SEC investigations and jail terms. As more general counsels start hiring people directly from law schools, junior lawyers will face these complexities even earlier in their careers. Even if they counsel external clients, understanding risk appetite is essential in an increasingly complex, litigious and regulated world.

When I teach my course on corporate governance, compliance and social responsibility next spring, my students will look at SEC comment letters, critically scrutinize corporate social responsibility reports, read blogs, draft board minutes, dissect legislation, compare international developments and role play as regulators, legislators, board members, labor organizations, NGOs and executives to understand all perspectives and practice influencing each other. Learning what Sarbanes-Oxley or Dodd-Frank says without understanding what it means in practice is useless.

The good news is that more schools are starting to look at those kinds of issues. The Carnegie Model of legal education “supports courses and curricula that integrate three sets of values or ‘apprenticeships’: knowledge, practice and professionalism.” Educating Tomorrow’s Lawyers is a growing consortium of law schools which recommends “an integrated, three-part curriculum: (1) the teaching of legal doctrine and analysis, which provides the basis for professional growth; (2) introduction to the several facets of practice included under the rubric of lawyering, leading to acting with responsibility for clients; and (3) exploration and assumption of the identity, values and dispositions consonant with the fundamental purposes of the legal profession.” The University of Miami’s innovative LawWithoutWalls program brings students, academics, entrepreneurs and practitioners from around the world together to examine the fundamental shifts in legal practice and education and develop viable solutions.

The problems facing the legal profession are huge, but not insurmountable. The question is whether more law schools and professors are able to leave their comfort zones, law students are able to think more globally and long term, and the popular press and public are willing to credit those who are already moving in the right direction. I’m no expert, but as a former consumer of these legal services, I’m ready to do my part.

December 12, 2011

Corporate Criminal Liability- Prosecutors in the Boardroom and the Call for an Affirmative Defense

Posted by Marcia Narine

Massey Energy and Walmart made headlines last week for different reasons. Massey had the worst mining disaster in 40 years, killing 29 employees and entered into a nonprescution agreement with the Department of Justice. The DOJ has stated in the past that these agreements balance the interests of penalizing offending companies, compensating victims and stopping criminal conduct “without the loss of jobs, the loss of pensions, and other significant negative consequences to innocent parties who played no role in the criminal conduct, were unaware of it, or were unable to prevent it.”

Massey’s new owner Alpha Natural Resources, has agreed to pay $210 million dollars in fines to the government, compensation to the families of the deceased miners and for safety improvements (the latter may be tax-deductible). The government’s 972-page report concluded that the root cause was Massey’s “systematic, intentional and aggressive efforts” to conceal life threatening safety violations. The company maintained a doctored set of safety records for investigators, intimidated workers who complained of safety issues, warned miners when inspectors were coming (a crime), and had 370 violations. The mine had been shut down 48 times in the previous year and reopened once violations were fixed. 112 miners had had no basic safety training at all. Only one executive has been convicted of destroying documents and obstruction, and investigations on other executives are pending. However, the company itself has escaped prosecution for violations of the Mine Safety and Health Act, conspiracy or obstruction of justice. Perhaps new ownership swayed prosecutors and if Massey had its same owners, things would be different. But is this really justice? The miner’s families receiving the settlement certainly don’t think so.

Walmart announced in its 10-Q that based upon a compliance review and other sources (Dodd-Frank whistleblowers maybe?), it had informed both the SEC and DOJ that it was conducting a worldwide review of its practices to ensure that there were no violations of the Foreign Corrupt Practices Act (“FCPA”). Although no facts have come out in the Walmart case and I have no personal knowledge of the circumstances, let’s assume for the sake of this post that Walmart has a robust compliance program, which takes a risk based approach to training its two million employees in what they need to know (the greeter in Tulsa may not need in-depth training on bribery and corruption but the warehouse manager and office workers in Brazil and China do). Let’s also assume that Walmart can hire the best attorneys, investigators and consultants around, and based on their advice, chose to disclose to the government that they were conducting an internal investigation. Let’s further assume that the incidents are not widespread and may involve a few rogue managers around the world, who have chosen to ignore the training and the policies and a strong tone at the top.

As is common today, let’s also assume that depending on what they find, the company will do what every good “corporate citizen” does to avoid indictment --disclose all factual findings and underlying information of its internal investigation, waive the attorney client privilege and work product protection, fire employees, replace management, possibly cut off payment of legal fees for those under investigation, and actively participate in any government investigations of employees, competitors, agents and vendors.

Should this idealized version of Walmart be treated the same as Massey Energy? (For a great compilation of essays on the potential conflicts between the company and its employees, read Prosecutors in the Boardroom: Using Criminal Law to Regulate Corporate Conduct, edited by Anthony and Rachel Barkow). Should they both be charged and face trial or should they get deferred or nonprosecution agreements for cooperation? Do these NPAs and DPAs erode our sense of justice or should there be an additional alternative for companies that have done the right thing -- an affirmative defense?

A discussion of the history of corporate criminal liability would be too detailed for this post, but in its most simplistic form, ever since the 1909 case of New York Central & Hudson River Railroad Co v. United States, companies have endured strict liability for the criminal acts of employees who were acting within the scope of their employment and who were motivated in part by an intent to benefit the corporation. As case law has evolved, companies face this liability even if the employee flouted clear rules and mandates and the company has a state of the art compliance program and corporate culture. In reality, no matter how much money, time or effort a company spends to train and inculcate values into its employees, agents and vendors, there is no guarantee that their employees will neither intentionally nor unintentionally violate the law.

The DOJ has reiterated this 1909 standard in its policy documents. And because so few corporations go to trial and instead enter into DPAs or NPAs, we don’t know whether the compliance programs in place would have led to either the potential 400% increase or 95% decrease in fines and penalties under the Federal Sentencing Guidelines because judges aren’t making those determinations. The DPAs are now providing more information about corporate compliance reporting provisions, but again, even if a company already had all of those practices in place, and a rogue group of employees ignored them, the company faces the criminal liability. The Ethical Resource Center is preparing a report in celebration of the 20^th Anniversary of the Sentencing Guidelines with recommendations for the U.S. Sentencing Commission, members of Congress, the DOJ and other enforcement agencies. They are excellent and timely, but they do not go far enough.

A Massey Energy should not receive the same treatment as my idealized model corporate citizen Walmart. Instead, I agree with Larry Thompson, formerly of the DOJ and now a general counsel and others who propose an affirmative defense for an effective compliance program- not simply as possible reduction in a fine or a DPA or NPA.

While the ideal standard would require prosecutors to prove that upper management was willfully blind or negligent regarding the conduct, this proposed standard may presume corporate involvement or condonation of wrongful conduct but allow the company to rebut this presumption with a defense.

In the past decade, companies drastically changed their antiharassment programs after the Supreme Court cases of Fargher and Ellerth allowed for an affirmative defense. The UK Bribery Act also allows for an affirmative defense for implementing “adequate procedures” with six principles of bribery prevention. Interestingly, they too are looking at instituting DPAs.

I would limit a proposed affirmative defense to when nonpolicymaking employees have committed misconduct contrary to law, policy or management instructions. If the company adopted or ratified the conduct and/or did not correct it, it could not avail itself of the defense. The company would have to prove by a preponderance of the evidence that: it has implemented a state of the art program approved and overseen by the board or a designated committee; clearly communicated the corporation’s intent to comply with the law and announced employee penalties for prohibited acts; met or exceeded industry standards and norms; is periodically audited and benchmarked by a third party and has made modifications if necessary; has financial incentives for lawful and penalties unlawful behavior; elevated the compliance officer to report directly to the board or a designated committee (a suggestion rejected in the 2010 amendments to the Sentencing Guidelines); has consistently applied anti-retaliation policies for whistleblowers; voluntarily reported wrongdoing to authorities when appropriate; and of course taken into account what the DOJ has required of offending companies and which is now becoming the standard. The court should have to rule on the defense pre-trial.

Instead of serving as vicarious or deputized prosecutors, under this proposed standard, a corporation’s cooperation with prosecutors will be based on factors more within the corporation's control,rather than the catch-22 they currently face where if employees are guilty, there is no defense. And if the employees are guilty, this would not preclude the government from prosecuting them, as they should.

Responsible corporations now spend significant sums on compliance programs and the reward is simply a reduction in a fine for conduct for which it is vicariously liable and which its policies strictly prohibited. A defense will promote earlier detection and remedying of the wrongdoing, reduce government expenditures, provide more assurance to investors and regulators, allow the government to focus on companies that don’t have effective compliance program, and most important provide incentives for companies to invest in more state of the art programs rather than a cosmetic, check the box initiative because the standard would be higher than what is currently Sentencing Guidelines.

Perhaps only a small number of companies may be able to prevail with this defense. Frankly, corporations won’t want to bear the risk of a trial, but they will at least have a better negotiating position with prosecutors. Moreover, companies that try in good faith to do the right thing won’t be lumped into the same categories as those who invest in the least expensive programs that may pass muster or worse, engage in clearly intentional criminal behavior. If companies have the certainty that there is a chance to use a defense, that will invariably lead to stronger programs that can truly detect and prevent criminal behavior.

November 06, 2011

Daylight Saving Time, Finance, Emotions, and Law

Posted by Peter Huang

Except for Arizona and Hawaii, the United States ended this calendar's observance of Daylight Saving Time at 2 a.m. local time today. In a fascinating book titled A Time for Every Purpose: Law and the Balance of Life, Harvard University Byrne Professor of Administrative Law Todd D. Rakoff argues that social regulation of time can and should create more room for people to balance time at work with time away from work.

In the article Losing Sleep at the Market: The Daylight-Savings Anomaly, three financial economists document that in international financial markets, the average Friday-to-Monday return on daylight-savings weekends is much lower than expected, with a magnitude 200 to 500 percent larger than the average negative return for other weekends of the year. This finding is consistent with psychological research about how changes in sleep patterns have impacts on accidents, anxiety, decision-making, judgment, reaction time, and problem solving. In this article Winter Blues: A SAD Stock Market Cycle, financial economists found that the lack of sunlight during winter months tends to depress stock prices across international markets. More recently, the article This is Your Portfolio on Winter: Seasonal Affective Disorder and Risk Aversion in Financial Decision Making reported that people with SAD (Seasonal Affect Disorder) exhibited financial risk aversion that varied across seasons because of their seasonally changing affect. SAD-sufferers had much stronger preferences for safe choices during winter than non-SAD-sufferers, and SAD-sufferers did not differ from non-SAD-sufferers during summer.

In two articles, The Psychophysiology of Real-Time Financial Risk Processing and Fear and Greed in Financial Markets: An Online Clinical Study, Andrew Lo and co-authors find traders who respond with too little or too much emotion tend to be less profitable than traders with middle of the range types of emotional responses. Another article Endogenous Steroids and Financial Risk Taking on a London Trading Floor documents that traders tend to make more money on days when their testosterone levels are higher than average.

All of the above differing strands of empirical research share in common the finding that emotions play important roles in how people arrive at financial judgments and financial decisions. Of course, even just a moment of introspection is enough for us to realize that we are like other people in making emotional judgments and emotional decisions. In the article Who's Afraid of Law and Emotions?, the Herma Hill Kay Distinguished Professor of Law at Boalt Hall Kathryn Abrams and Southestern law school professor Hila Keren analyze the ambivalent reactions by mainstream legal academics to law and emotions scholarship and conclude that part of the reason for such responses is the persistence of rationalist tendencies within the legal academy.

I have often heard after making a presentation about emotions in financial markets and regulation the view that emotions could matter in non-financial areas of life and law, but emotions in general and happiness in particular are not what business and business law are and should be about. Such a point of view strikes as being wrong and closed-minded. As economist Andrew J. Oswald cogently observes in the opening paragraphs of his article Happiness and Economic Performance:

"Economic performance is not intrinsically interesting. No-one is concerned in a genuine sense about the level of gross national product last year or about next year's exchange rate. People have no innate interest in the money supply, inflation, growth, inequality, unemployment, and the rest. The stolid greyness of the business pages of our newspapers seems to mirror the fact that economic numbers matter only indirectly.

The relevance of economic performance is that it may be a means to an end. That end is not the consumption of beefburgers, nor the accumulation of television sets, nor the vanquishing of some high level of interest rates, but rather the enrichment of mankind's feeling of well-being. Economic things matter only in so far as they make people happier."

I will expand in a later post on decisions to measure happiness by an increasing number of governments of countries, states, and cities as diverse as Bhutan, England, Guandong province in China, Maryland, and Somerville in Massachusetts. For now, check out:

Finally, Glom readers may find this five-day free virtual event of interest: The Enlightened Business Summit which takes place this week November 7-11 and is hosted by Chip Conley, the founder of Joie de Vivre, a two-time TED Speaker, and author of the book Peak: How Great Companies Get Their Mojo from Maslow and the forthcoming book Emotional Equations: Simple Truths for Creating Happiness + Success:

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.

November 04, 2011

Corporate Greed, Behavioral Economics, and Financial Regulation in the Movies and on TV

Posted by Peter Huang

An article in today's Life section of USA Today titled Movies tap into anger at Wall Street describes how 3 movies in current release mirror public angst over economic inequalities and inequities: Tower Heist, In Time, and the already mentioned in 2 Glom blogs, Margin Call.

This autumn's documentary Chasing Madoff recounts Harry Markopolos’ multi-year crusade to expose the multi-billion dollar Ponzi scheme perpetrated by Bernie Madoff. Alleged victims of this massive fraud include the celebrity couple of Kyra Sedgwick (star of The Closer on TNT) and Kevin Bacon (of the original Footloose (1984) fame). The Dodd-Frank Wall Street Reform and Consumer Protection Act included a broad set of whistleblower provisions under which the Securities and Exchange Commission adopted specific rules and procedures to incentivize potential whistleblowers by way of cash rewards and protection from retaliation.

There is also a 2009 documentary about the subprime mortgage fiasco, which is now available on DVD, American Casino. 2001 economics Nobel laureate Joseph Stigltiz described it as being "a powerful and shocking look at the subprime lending scandal. If you want to understand how the US financial system failed and how mortgage companies ripped off the poor, see this film."

This May, the HBO Films production of Too Big to Fail, based on the book of the same name with the subtitle of The Inside Story of How Wall Street and Washington Fought to Save the Financial System--and Themselves depicted the autumn 2008 U.S. financial crisis and the sequence of (less than intertemporally consistent) policy responses by the Treasury department, the Federal Reserve, and other financial regulators.

Last autumn's Inside Job made a compelling argument in five parts about how the American financial services industry systematically and systemically corrupted the United States government and in so doing brought about changes in banking practices and legal policies that led directly to the Great Recession.

Although the documentary Client 9: The Rise and Fall of Eliot Spitzer focused primarily on the interaction of ego, hubris, power, scandal, sex, and politics, it also touched upon Wall Street and efforts by Spitzer to reform its excesses.

Of course, no list of movies related to the recent financial crises would be complete without including documentary film-maker Michael Moore's 2009, Capitalism: A Love Story, which criticizes the current American economic system in particular and capitalism in general. At one point, it asks if capitalism is a sin and whether Jesus would be a capitalist, who wanted to maximize profits, deregulate banking, and have the sick pay out of pocket for pre-existing conditions via clips from Jesus of Nazareth. Moore asks if one could patent the sun and questions how the brightest American youth are drawn towards finance and not science. He proceeds to Wall Street asking for non-technical explanations of derivative securities in general and credit default swaps in particular. Both a former vice-president of Lehman Brothers and current Harvard University economics professor Kenneth Rogoff fail to clearly explain either term. Moore thus concludes that our complex economic system and its arcane terminology exist simply to confuse people and that Wall Street effectively has a crazy casino mentality.

Finally, the PBS Nova episode, Mind Over Money, which originally aired on April 26, 2010 asks whether markets can possibly be rational when people clearly are not. In other words, is there a version of the efficient markets hypothesis that can be true in a world populated by at least some boundedly rational actors? In posing this question, the show offers an entertaining, yet quite informative survey of elements of behavioral economics and finance. Its companion website provides additional resource materials concerning the role of emotions in financial decision-making. The debate which it depicts between the University of Chicago school of economics and the behavioral economics approach (including scenes of Dick Thaler playing pool) is a bit overdone and perhaps unintentionally comical, but it raises the question of whether it matters for law and policy how people make their financial judgments and decisions? Of course, the natural follow-ups of if so, then how and if not, then why not, are questions about which business law professors, Glom readers, and policy makers are likely to have perhaps quite strong and certainly divergent opinions.

A television program that has become quite popular is the USA network's original dramatic series White Collar, which is based upon the premise of an F.B.I. agent solving white collar crimes with the assistance of consultant who is a former (and current?) art thief and con man extraordinaire. Episodes have featured a black widow, baby selling, bank robbery, black market kidneys, bond theft, collusion, corporate espionage, derivatives, financial fraud by a Wall Street brokerage firm, identity theft, and political corruption.

It is reminiscent of the 1960's campy, classic, and tongue-in-cheek television series, It Takes A Thief.

November 02, 2011

Fear, Greed, and the Film Margin Call: A Cognitive Neuroscience Perspective

Posted by Peter Huang

I recently saw the movie, Margin Call, which is currently playing in theaters and is available on demand at Comcast. There are curretly 34 reviews of it by viewers at imdb, where it has a rating of 7.3 out of 10.

I also just finished reading this paper, Fear, Greed, and Financial Crisis: A Cognitive Neuroscience Perspective, prepared for a forthcoming handbook on systemic risk. This chapter is by finance professor Andrew Lo, who is the director of the MIT laboratory for financal engineering. He also wrote another excellent paper which Glom readers are likely to find of interest, namely Reading About the Financial Crisis: A 21-Book Review, that was prepared for the Journal of Economic Literature.

In the interests of full disclosure, I taught at Temple law school a seminar titled Law, Emotions, and Neuroscience and co-taught at Yale law school with professor Dan Kahan a seminar titled Neuroscience and the Law. The seminars covered some basic materials about affective,cognitive, and social neuroscience before analyzing the potential and limits of applications to business law, conflict resolution, criminal law, ethics, evidence, morality, paternalism, and social policy. Media coverage of neuroscience and law has a tendency to focus almost exclusively on such controversial issues as free will and responsibility in the criminal law context. Glom readers are more likely to focus on neuroeconomics and neurofinance, two nascent fields that ask how human brains engage in JDM (Judgment and Decision Making) in general and over time and under risk in particular.

Also, as cognitive neuroscientist Michael Gazzaniga recently stated: responsibility, like generosity, love, pettiness, and suspiciousness, is a strongly emergent property, which although being derived from biological mechanisms, has fundamentally distinct properties, just like the case of ice and water. The press and the public also seem to be fascinated with very colorful fMRI brain scans because they like the idea of being as the Wall Street Journal science writer, Sharon Begley, calls them: cognitive papparazi.

My system 1 believes in synchronicity, so this post, as evidenced by its title's homage to Lo's chapter, approaches the movie Margin Call from a cognitive neuroscience perspective informed by Lo's chapter. Lo provides a brief history of what we know about brains. He then explains how fear and the amygdala can exacerbate financial crises. He also demonstrates how the reward of money appears to share the same neural system and the release of the neuortransmitter dopamine into the nucleus accumbens as these rewards do: beauty, cocaine, food, music, love, and sex.

Lo proceeds to discuss a neurophysiological explanation for Kahneman and Tversky's experiment demonstrating people's aversion to sure loss. Lo proposes a neuroscientifically informed view of rationality that differs very much from an economic rational expectations conception, with the key difference being the role that emotion plays in JDM. Lo extends his analysis from individuals to groups by explaining the neurophysiology of mirror neurons, theories of mind, social interactions, and the efficient markets hypothesis. He concludes his neuroscience survey by describing the marvels and limits of the human prefrontal cortex, also known as the "executive brain." Of particular interest to Glom readers is decision fatigue, documented recently among judges rendering favorable parole decisions around 65% of the time at the start of and close to 0% by the end of each of 3 daily sessions that were separated by 2 food breaks (a late morning snack and lunch). This empirical finding that parole rates increased after food breaks is consistent with recent experimental research finding that glucose can reverse decision fatigue and the common adage to not make important decisions when tired.

Lo provides several practical and reasonable suggesions based upon cognitive neurosciences about how policymakers can engage in financial reform to deal with systemic risk. He concludes by advocating that financial economists utilize the great recession to re-conceptualize, rethink, and revamp neoclassical economics by forging a consilience between the neurosciences and financial economic theory. Building a deeper and better understanding of economic phenomena through improved economic models and intellectual frameworks can and should lead to a more appropriate financial regulatory infrastructure.

And now onto a few comments about the movie Margin Call. Without giving away the plot for those who may want to see it without any knowledge of its ending, this movie raises ethical and moral questions about individual versus social optimality, trading on the basis of private information, panic selling, professional codes or norms of behavior, and the costs a company may impose on society and pay to others to survive. There is certainly lots of fear and greed on display in this film. Set over the course of a day and sleepless night in NYC, the movie viscerally illustrates various forms of JDM and how individuals and groups of individuals can persevere under stress and time pressures. It is a movie that can and should provoke discussion about what could have been done differently by individuals, financial firms, and regulators. It is a film that I'm going to put on the list of movies at the start of the chapter about business law in the text, Law and Popular Culture: Text, Notes, and Questions (LexisNexis Matthew Bender, 2007) by David Ray Papke, Melissa Cole Essig, Christine Alice Corcos, Lenora P. Ledwon, Diane H. Mazur, Carrie Menkel-Meadow, Philip N. Meyer, Binny Miller, and myself that we are revising for a second edition.

September 30, 2011

Assessing DC's Bag Tax

Posted by Lisa Fairfax

When it was enacted, I blogged about DC's bag tax law which went into effect in January of 2010 and charges customers five cents for each disposable bag they take at checkout. After well over a year, several studies have emerged assessing the law's impact, with some conflicting results--perhaps reflecting the conflicts inherent in such a law.

On the one hand, at least one study suggests that the law is having a negative impact on DC's economy and jobs in the area. According to the study, the law causes people to purchase fewer items and avoid shopping in DC, leading to a drop in sales and a corresponding drop in jobs. The study also points out that the law has not generated the amount of revenue proponents projected, indicating that the revenue collected under the law will be at least $1 million less than expected. To be sure, this revenue shortfall highlights a potential contradiction of the law--to the extent it successfully encourages reduction in bag use, one should expect a corresponding reduction in any revenues associated with that use.

Advocates of the law appear to insist that the law is a win-win for DC’s economy and environmental efforts. First, such advocates question these negative studies not only because they fail to pinpoint any actual job loss, but also because they do not seem to account for other studies in which most business owners report that the law has either had no impact or a positive impact on their business. Proponents also point out that business owners receive one cent out of the five cents collected under the law. Second, advocates note that the law has led to significant reduction in bag use. Hence, one study found that after the law's enactment, customers used 3.3 billion bags in one month, compared to an estimated 22.5 billion being used prior to the law taking effect. Estimates of the overall reduction in bag use range from 50% to 80%. And this reduction has an impact on bags found in the Anacostia River. Hence, one cleanup agency reported a 50% drop in the number of bags found in the river, suggesting that the law is having its desired environmental impact of helping cleanup efforts at the river.

Since the law's enactment I certainly have found myself using less disposable bags and more reusable bags. There are also many times when I am buying a small number of items where I simply will not use a bag, and this is true both in DC and in places where there is no bag tax law. So the law has changed my behavior and I was interested to know if it was having its desired impact--but perhaps that depends on your perspective about the desired impact the law was aimed at having.

September 29, 2011

Another Say on Pay Update

Posted by Lisa Fairfax

As David notes, one of the fallouts of a negative say on pay vote have been shareholder lawsuits. The lawsuits allege, among other things, that the negative say on pay vote is an indication not only that the board breached its duty of loyalty, but also that the board should not be given the presumption of the business judgment rule for demand futility purposes--and hence that such suits should be allowed to survive a motion to dismiss. This semester I am writing an article on the feasibility of these say on pay lawsuits, and hence I was surprised when earlier last week a U.S. District Court in Ohio allowed shareholders say on pay lawsuit against Cincinnati Bell to survive a motion to dismiss in an order that relied on the negative say on pay vote.

Shareholders brought suit against the directors of Cincinnati Bell after 66% of shareholders voted against the 2010 executive compensation at its May 2011 annual meeting. The order framed the issue in this way, "This civil lawsuit presents the question, among others, whether a shareholder of a public company may sue its directors for breach of the duty of loyalty when the directors grant $4 million dollars in bonuses, on top of $4.5 million dollars in salary and other compensation, to the chief executive officer in the same year the company incurs a $61.3 million dollar decline in net income, a drop in earnings per share from $0.37 to $0.09, a reduction in share price from $3.45 to $2.80, and a negative 18.8% annual shareholder return." To be sure, with such a framing it seemed pretty clear where the court was headed. . .

In its order, the court stated that shareholders' allegations "raise a plausible claim that the multi-million dollar bonuses approved by the directors in a time of the company's declining financial performance violated Cincinnati Bell's pay-for-performance policy and were not in the best interest of Cincinnati Bell's shareholders. In so stating, the court specifically noted shareholders' assertions that the negative say on pay vote provides "direct and probative" evidence that the compensation awards were not in the best interests of the shareholders. This finding is of course precisely what shareholders hoped to achieve with say on pay litigation. Indeed, each of the lawsuits makes a similar claim that the say on pay vote reflects shareholders' independent assessment that the challenged compensation awards were not in their best interests, and as a result, such negative votes should be used to rebut any presumption that directors' action ofapproving executive compensation awards were in the shareholders' best interests. Moreover, the suits often rely on corporate disclosure in their proxy statement and other public documents that expresses a commitment to pay for performance to demonstrate that the challenged award conflicts with the company's own pay policies. The Cincinnati Bell order suggest that relying on corporate disclosure in this way is effective. In that regard, it also may prompt corporations to alter their disclosure to avoid such reliance.

Importantly for purposes of shareholders being able to get their day in court, the order agrees with shareholders' contention that they were excused from making any presuit demand. In the court's view, the fact that directors had approved the compensation award, recommended that shareholders approve the award, and suffered a negative shareholder vote, demonstrated that demand would be futile on such directors. This is interesting. On the one hand, you can imagine directors contending that they only did what federal law now requires them to do. Moreover, Dodd-Frank has a provision specifically stating that the say on pay vote is advisory and should not be construed as overruling directors' decisions, or changing or adding additional fiduciary duties for directors, and many commentators have argued that such a provision indicates that say on pay votes should not be used to somehow alter the law in this area, including the law with respect to demand rules. On the other hand, some commentators have noted that Dodd-Frank does not prevent such votes from being used to support a finding of a fiduciary duty breach. The Cincinnati Bell court cites this latter commentary.

Of course, just because a suit survives a motion to dismiss does not mean that shareholders will win at trial (see e.g., Disney!). Then too, Cincinnati Bell is an Ohio corporation--though the court did cite Delaware law in its demand futility discussion. However, a decision like this certainly prolongs these say on pay lawsuits. Such a decision also suggests that these say on pay votes may impact, and even change, fiduciary duty law regarding compensation.

August 11, 2011

The Revenge of the Rating Agencies

Posted by Lisa Fairfax

My colleague Jeffrey Manns has an op-ed in the New York Times called The Revenge of the Rating Agencies in which he argues that the financial crisis "jeopardized [credit rating] agencies' privileged position," and that such agencies are taking advantage of the country's financial problems to "ensure that regulators do not reduce their autonomy and influence." It is an interesting read.

May 15, 2011

Anti-Social Networks: Disrupting Terror and Insider Trading

Posted by Erik Gerding

The last two weeks have witnessed dramatic victories against two very different lawbreaking networks. First the death of Bin Laden removed the leader of al Qaeda. Second, the conviction of Raj Rajaratnam represented a major victory for prosecutors against the so-called expert insider trading networks. Although the two lawbreaking networks have a multitude of differences – in terms of social harm, motivations, and structure – they also have important similarities.

For one thing, both terror networks and insider trading networks present an opportunity to study social networks in a rigorous manner. “Networks” are more than just loose metaphor, but instead the subject of the emerging field of network theory that borrows from and links computer science, sociology, economics and a host of other fields. “Emerging” does not mean new: some of the germinal research stretches back over four decades. For example Granovetter’s work on “weak ties” in sociology. Mark Lemley and David McGowan authored a wonderful piece on network effects and law over 10 years ago and the legal literature continues to blossom (from Aviram to Zaring). Network theory has arrived.

And it is being put to use. A number of years ago, media reports suggested that the U.S. intelligence agencies were seeking to use network theory to crack Al Qaeda (see here for a law review article by Christopher Borgen on network theory and terrorism). The extent to which financial regulators and prosecutors have done the same with respect to insider trading is not clear, although scholars have recently suggested new potential approaches.

We may not know for a long time the extent to which network theory is influencing law enforcement. You can understand that intelligence and law enforcement would be unwilling to disclose the methods they use to catch bad guys. But the secrecy means that their methods do not enjoy the benefits – one could even say network effects – of being subject to the scrutiny of a larger community. Observers could help answer vital questions, such as “how effective are these efforts against lawbreakers?” and “could they be improved?” According to Linus’s Law: “given enough eyeballs, all bugs are shallow.” Aside from questions about efficacy, there are lingering and legitimate concerns about the implications of national security surveillance over internet communications.

But even the information we have learned about the two recent victories against anti-social networks leads to some interesting, if tentative observations. First, the ultimate value of these government operations is not in traditional deterrence alone, but in disrupting networks. In other words, successful operations against networks rely not only on crude deterrence of criminal behavior by scaring off would-be criminals. After all, it isn’t clear that a jihadist will be sobered by Bin Laden’s fate. By contrast, one thing that does disrupt networks is interfering with their capacity to send signals. Driving bad guys off the net seriously interferes with their ability to conduct business. From news reports, it doesn’t look like Bin Laden was all that successful in managing operations without an internet connection or a phone line. (Some reports suggest that the one time he did use a phone contributed to his location by U.S. intelligence.) Of course, government surveillance is thwarted not only by encryption, but by the daunting task of finding a needle in a haystack of data. Old-fashioned informants will still prove a critical tool.

Indeed media reports suggest that the government is heavily relying on informants in cracking the expert insider trading networks. From the perspective of law enforcement, this is important not only because it may lead to prosecutions, but also because it might disrupt the thing that these networks most rely on: trust.

So network theory suggests that we pay more attention to the marginalia of the Rajaratnam story. It is not the conviction alone that matters. It also argues for looking at other policy tools – such as a use of bounties in corporate crime – in another dimension, namely engendering distrust and thwarting the development of illegal networks. Of course, bounties for corporate crime and promoting snitching can create their own perverse incentives and pernicious effects. (Eleanor Brown penned an interesting essay on snitching, immigration, and terrorism that uses network theory.)

Another problem with a broader use of these tools is that they don’t always yield headline grabbing successes. No one sees the insider trading or terror attacks or law breaking that didn’t happen. The political economy of deterrence rewards prosecutors for victories in the courtroom, not necessarily for crime prevented.

Still, the events of the last week should give new life to study of network theory. There is evidence that network theory has become white hot. Consider this graph (from Google’s nifty Ngram tool) that plots the rising use of “network effect” compared to “deterrence effect” in books from1970 to mid 2007.

One can now also see a lot of those neat network graphs (see below) in news reporting.

Source: Wikipedia /Author: DarwinPeacock/Created with Guess software/See wikimedia commons for license terms

Of course, the popularization of theory also threatens to reduce the intellectual rigor. Let’s hope the network effects of this line of inquiry are positive.

May 11, 2010

Commercial speech and tobacco: The Commonwealth case

Posted by Tamara Piety

As I mentioned earlier several tobacco companies, including Commonwealth Brands, Lorillard and RJ Reynolds, brought a lawsuit in the Western District of Kentucky challenging the constitutionality of many aspects of the Family Smoking Prevention and Tobacco Control Act of 2009 which brought the regulation of tobacco under the aegis of the FDA. Plaintiffs had a veritable cornucopia of claims about the ways in which the Act violated their rights under the First Amendment (my favorite might be that the prohibition on free samples was a First Amendment issue).

The district court issued an opinion in January of 2010, granting in part and denying in part the plaintiff companies' motion for summary judgment. Opinion. Most of the First Amendment arguments the plaintiffs raised were rejected except for two: the ban on color and graphics in advertising and the ban on implying that a tobacco product is safer because of FDA regulation. [The last issue illustrates one of the thorny problems with giving over the regulation of tobacco to the FDA because there does not appear to be any safe use of tobacco and this is in some tension with the FDA's consumer safety mission.] This latter involved concerns about vagueness and overbreadth and since it is possible the Act could be amended to overcome this problem, it is the first issue, involving the use of color and brand symbols, that I think is the more interesting one.

The district court wrote "[The plaintiffs] are clearly right when they say that images of packages of their products, simple brand symbols, and some uses of color communicate important commercial information about their products, i.e., what the product is and who makes it. The government's contrary suggestion -- that all uses of images in tobacco labels and advertising create noninformative associations of the sort likely to encourage minors to use a tobacco product -- is plainly wrong." (Opinion at 14).

The court may have felt that the attempt to link these associations to the use by minors was the "plainly wrong" part. And it could be the weakness in the argument. But consider that the "important commercial information" is the brand information and that branding is inextricably linked with all of the advertising and marketing efforts which attempt to make emotional associations with the brand. Doesn't this argument raise questions about what it means for something to be "informational"?

In any event, I think what we are really talking about here are the property interests in the brand, not the informational aspects of the brand; which is part of why the First Amendment is not a good fit (in my view) for the interests which plaintiffs seek to protect. And it is worth walking their claims in this case back a bit to consider the interests which led the Supreme Court to create the commercial speech doctrine in the first place and whether the tobacco companies' arguments further those interests or obstruct them. Virginia Pharmacy created a new category of protected speech labeled "commercial speech" on the grounds that commercial speech was important to listeners. It was the interests of the consumers that both justified the protection and which dictated that protection be reserved for truthful speech. The case did not focus on the speakers' right to engage in promotional speech. This makes sense if you are concerned about regulating false or misleading commercial speech. Nevertheless, the Virginia Pharmacy Court apparently thought that truthful commercial speech might be subject to regulation given a governmental interest that was sufficiently compelling to outweigh the speech interests involved.

If we look at the marketing of cigarettes it seems like there are at least three interests that might be called speech interests: (1) the interest of the speaker (here the tobacco companies) in marketing a legal product; (2) the interest of consumers in receiving truthful information about the health consequences of smoking (and perhaps even their interest in being shielded from attempts to manipulate their interest in smoking); and (3) consumer interest in receiving brand information about the product.

The consumers' interest in receiving the promotional information really looks like the least compelling of the possible speech interests. And when weighed against the legitimate governmental interest in promoting public health, it seems particularly puny; especially when you consider that the government's interest in public health converges with the consumers' purported First Amendment interest in receiving truthful information about the health consequences and dangers of smoking. The interest in consumers receiving the "information" involves in the brand associations seems to me to be far less about the consumers' interests and more about the property interests of the manufacturers.

Of course, at the end of the day these interests can't be neatly or clearly unraveled. But I think protecting branding as a First Amendment issue in this context is not really about speech but about protecting the economic value in the brand. And that does look a lot like Lochner all over again.

Only time will tell whether the courts will continue down this path of converting property interests into speech interests. For the time being I suspect they will. But I predict that at some point this movement will begin to reverse. In terms of tobacco the First Amendment argument seems to be the last best hope for keeping the industry on life support, given that public acceptance of smoking appears to continue to decline.

May 10, 2010

BP's Image Problem

Posted by Tamara Piety

As oil continues to pour out of the BP managed rig in the Gulf of Mexico, the discussion in marketing circles is (of course) what this will mean for BP's image. See Advertising Age. About a decade ago BP launched an intensive effort to brand itself as the "responsible" and "green" oil company with its "Beyond Petroleum" campaign and a logo change to a green and yellow stylized sunburst. (This campaign apparently included some pretty weird, but entertaining, viral videos. See this I say "apparently" because although the production values of the video are very high, it almost seems like a spoof with its inclusion of things like breast implants ["beyond pain, joy"] and a guy running out of toilet paper ["beyond fear, courage"]).

Some observers think the campaign was never anything more than greenwashing; that is, it was an attempt to manipulate public perception without any significant commitment to alternative energy exploration. For example see this criticism in 2000 and this in 2010.

But reading the article in Advertising Age, which dissects what PR observers appear to think is a less than stellar response to the accident on the part of BP, is instructive about what everyone in the business thinks is going on with these campaigns. A problem they say is that BP's campaign was so successful it underscored the disconnect between the campaign claims and the reality in the Gulf. (Ironically, BP was actually on the verge of winning an award for its safety record, an award the article implies, but does not say, may have been more attributable to the campaign than to the actual record.) This disconnect is a problem. But you'd think it is one that could have been avoided by making a commitment to these issues that was more than rhetorical. Too often though the commitment stops at the marketing.

On the blow out, management at BP has apparently been slow to control "the message" and has actually been doing things that might make a bad situation worse; like "offering $5,000 settlements to residents if they waived their rights to sue for any damages." As one PR pro put it:

"That's a profoundly disturbing message to have resonating as one of your first public messages ... When the public sees the company leading with a legal protection agenda trying to limit legal exposure, it's not a good thing. The next shoe to drop is usually the attorney general intervening to remind the company of its obligations. Perception-wise, this is out of control."

Uh, yeah. Although perhaps it isn't just the perception.

This is a perennial problem with PR - the temptation to believe that the response stops with managing the public perception and that changing the perception is the solution to any problem. That can work pretty well until reality collides with promotion. And then promotion may not help much. As the article notes:

"Of course, all the social media in the world won't do much if millions of gallons of oil wash ashore, crippling the fishing industry in Louisiana and Mississippi or destroying the white-sand beaches (and tourism trade) in Alabama and Florida."

It will be interesting to see if BP does manage to get its arms around a better PR strategy, in addition to actually fixing the problem. But I'm betting it does the first before it does the second.

April 28, 2010

Citizens United ....Something different Part II

Posted by Tamara Piety

I promised yesterday I would prove that my concerns about how Citizens United would be used were not hypothetical. Today I will talk about where it is showing up, US v. Philip Morris USA, Inc., et.al., See DCCA opinion

This was a civil RICO case filed by the United States in 1999 against several tobacco companies and two of their non-profit organizations, the Council for Tobacco Research and the Tobacco Institute. The lawsuit accused these entities of engaging in a conspiracy, taking place over a period of approximately 50 years, to mislead the public about a number of issues related to smoking including: the potential health consequences of smoking; the dangers of environmental smoke (second-hand smoke); whether nicotine was an addictive substance; whether the tobacco companies were manipulating nicotine content; whether the tobacco companies were intentionally targeting youth in their advertising and promotional efforts; whether they were intentionally marketing cigarettes as "light" or "low tar" to imply health benefits (or less detriment) the companies knew did not exist because of a phenomenon known as "compensation," and other claims.

The case went to trial in 2004 and lasted for about 9 months. In 2006 D.C. District Court Judge Kessler, issued an opinion with findings of fact and conclusions of law that ran about 1700 pages. The evidence buried in these pages is unequivocally damning.

Several years later, in 2009 the D.C. Circuit Court affirmed most of these findings in the per curiam opinion above. The defendants (and the government) filed petitions for cert. The petitions of the parties are available here. Whether the Supreme Court will agree to hear the case is unknown, but with the government seeking review as well it may do so. And issues of commercial speech and the First Amendment are raised through out the case. Indeed, the amicus brief filed by the Washington Legal Foundation and the National Association of Manufacturers explicitly says this case offers the Court the opportunity to answer the question that it left open in Nike v. Kasky, writing "This Court has recently reaffirmed that the speech of corporate actors may be entitled to full First Amendment Protection" (Page 19 of the brief which you can view here citing yes, Citizens United).

The 5th case down in the Table of Authorities is Citizens United and it is cited twice in the argument. The brief argues the lower court ignored that much of the misleading speech took place in the form of editorials, op-eds, press releases and the like and involved issues of "public concern" and thus was fully protected speech. Mind you these press releases, so-called informational pamphlets (some sent to school children purporting to educate them about the "debate"), came from a group of defendants who the record amply demonstrates did meet together with their public relations and law firms to come up with a strategy to manufacture a debate that really didn't exists since their problem was that there was scientific consensus on the basic facts about the health risks of smoking and that these facts would be very damaging to future business. Their strategy is succinctly captured in the phrase found in some internal documents and widely reported on since, "Doubt is our product." It is important to be clear on what they are asking for; they are asking for constitutional protection for the manufacture of a phony debate, to obfuscate rather than to clarify information about a product for which there is no safe level of use.

This seems an appropriate juncture to raise Justice Jackson's admonition that "the Constitution is not a suicide pact." It seems like the government ought to be able to regulate a potentially lethal product, and that regulation of advertising and marketing is a necessary part of such appropriate regulation in the public interest. Such a regulation has recently been passed in the form of the Family Smoking Prevention and Tobacco Control Act, Pub. L. 111-31, 123 Stat. 1776 (2009). The Act permits the FDA to regulate tobacco products and includes very strict limitations on permissible forms of advertising and promotion.

But a group of tobacco companies is attacking this statute in a District Court in Western Kentucky (much forum shopping there?) on the grounds (among others) that it violates the First Amendment. The companies even wanted to claim First Amendment protection for marketing practices like giving out free samples! The district court denied most these claims, but nevertheless found that some of the statute's regulation of color and trade dress did violate the First Amendment. The opinion is here It was issued before Citizens United came down. But taken together with the arguments raised by the Washington Legal Foundation in the Philip Morris RICO case, I think we can expect Citizens United may well be used in the future in this case as well. Only time will tell. I would worry about giving them ideas, but the connection between Citizens United and commercial speech protection claims is clearly already out there amongst firms litigating these issues.

Later I will post some other aspects of the Philip Morris case which may be of interest to Glom readers, in particular whether a corporations can commit conspiracies or have specific intent.

April 27, 2010

Citizens United ...and now for something slightly different

Posted by Tamara Piety

Much of the outcry about Citizens United has focused on its anticipated impact on elections, see here and here, as well it might since the decision was, after all, one about the proper interpretation of the Bipartisan Campaign Reform Act, aka McCain-Feingold. However, for my money (no pun intended), its most pernicious impact is likely to be not on elections (there was already a lot of corporate money in elections), but rather its influence on the future interpretation of the commercial speech doctrine. The commercial speech doctrine permits the regulation of commercial speech for its truth.

What has this got to do with political speech you might say? Nothing, unless one considers why for-profit corporations get into campaign finance or lobbying in the first place. They do so for the same reasons they engage in commercial speech; to further the economic interests of the corporation (and/or the shareholders if you prefer). Even though the Supreme Court did not hold in Citizens United that a corporation enjoys the same First Amendment rights as a human being, the rhetoric in the opinion, what I call the "anti-discrimination rhetoric," is likely to be used as if the Court had said just that and in support of an argument that the Court should not "discriminate" against commercial speech and relegate it to the category of an intermediate scrutiny test but rather should apply to it a strict scrutiny test, a New York Times v. Sullivan test. Suffice it to say that this permits regulation in theory, but little in practice.

There is evidence that Citizens United will be used this way if you look at how at how Bellotti was used. Bellotti was another corporate election law case. It was decided in 1978, only two years after Virginia Pharmacy, the case in which the commercial speech doctrine was first announced. It has been repeatedly used to argue for expanded protection for commercial speech. Most recently in the Supreme court in 2003 in the Nike v. Kaksy case. See here, here and here.

Theoretically Bellotti was a case that had nothing to do with commercial speech. Nevertheless, it has regularly showed up, as it did in Nike, in arguments in favor of more protection for commercial speech, supposedly for the proposition that speech is not less valuable because a corporation utters it. May be. But consider this, if we (or the Court) gets this argument tangled up with some notion that First Amendment protection is offered on the basis of some anti-discrimination principle we may be in very deep waters indeed, because for a business corporation its political expression is surely tangential to its main organizing purpose. It's core expressive activity is commercial speech. If we are protecting the speaker then it would seem that its core expressive activity ought to be protected. However, going that way would seemingly wreak havoc on any sort of regulation of commerce. How can you regulate commerce if you can't regulate commercial speech? If the Court goes the way of offering strict scrutiny protection to a lot of commercial speech it may make debate about reform of the financial sector moot. Not to mention the idea that corporations need protection against discrimination is a fairly difficult one to swallow. (It makes for some good editorial cartoons though! This month's Vanity Fair has a great one which you can only see if you buy the magazine; but you can find in the table of contents here under the Vanities section. A similar cartoon showed up earlier in the Boston Phoenix and that one you can view here .)

This is not just a theoretical proposition. There is a case now pending before the Supreme Court which (arguably) involves commercial speech and at least one amicus brief suggests that this is the case in which the Court can resolve the status of commercial speech (in favor of more protection, natch) and answer the question raised but not answered in Nike v. Kasky. Guess which case is included in its list of authorities? Yep. Citizens United. I will save for another post which case this is and where else Citizens United is popping up. But this is one of those First Amendment cases that could have very widespread impacts on all sorts of regulation of business. That may be a happy thing if you think less is more in the regulatory arena for business. May be not so happy if you think the government should have more of a hand in the regulation of the safety of food, drugs or... financial services.

April 08, 2010

GAO on U.S. as Auto Industry Creditor/Shareholder and Pension Regulator/Insurer

Posted by Mae Kuykendall

The General Accounting Office has released TROUBLED ASSET RELIEF PROGRAM: Automaker Pension Funding and Multiple Federal Roles Pose Challenges for the Future, brought to my attention by my colleague, Anne Lawton. The general subject is the impact of GM/Chrysler failure on the Pension Benefit Guaranty Corporation ("PGBC") and the conflict inherent in the government's role as shareholder. Anne has looked over the executive summary and what follows is based on her report.

First point. Over the next 5 years, GM and Chrysler will need to make significant contributions in order to satisfy minimum funding requirements for their defined benefit plans. For example, GM projects that total to be $12.3 billion for 2013 and 2014, with the possibility of additional further contributions. That's fine if the firms are profitable enough to make those contributions. But, what happens if the pension funds fail? About a year ago, PBGC estimated that the losses from failure of GM's and Chrysler's defined benefit plans would be $14.5 billion.

Second point. The Treasury is a shareholder in the firms. But, PBGC is governed by a three-member board and the Treasury Secretary (along with Labor and Commerce Secretaries) are the board members (right now, the Assistant Secretary of the Treasury for Financial Institutions is the board rep.) So, the report asks, how is the government "dealing with the potential tensions between its multiple roles as pension regulator and insurer, and its new roles as shareholder and creditor?"

That's a good question. To remind you, the report is here.