Category: First Amendment

Rating Agencies: Privilege Without Responsibility

First Amendment fundamentalist Floyd Abrams is back on the attack, now in the service of the credit rating agency S&P. He says that their ratings are essentially the same as an editorial — a position I looked at with some skepticism here. Editorials fail to receive the regulatory subsidy routinely channeled to raters, via acts like the Secondary Mortgage Market Enhancement Act of 1984 and the Investment Company Act of 1940, and agencies like the National Credit Union Administration (all of which mandate the use of raters’ products). Abrams appears to want to let the raters get all the benefits of such government subvention, without the liability or extensive regulation it should naturally lead to.

On the Media has a great interview with Abrams, who vigorously defends the agencies’ actions:

[Interviewer] BROOKE GLADSTONE: Okay, so first of all, explain to me why this is more like an editorial. To me it seems more like a clothing inspector, the people who leave the little number inside the clothing you buy. They leave their number so that if the zipper was put in backwards, for instance, they could theoretically take responsibility. Why are the ratings companies different from that?

FLOYD ABRAMS: Well, because the rating agencies use their models, use their heads, use their common sense, have ratings committees. They sit down and they come out with their best judgment as to what is likely to happen in the future about repayment of debt. And that is not subject to mathematical yes/no answers. It’s not the same as saying, my zipper is no good or a couch is no good. It’s not being an inspector. It’s not.

BROOKE GLADSTONE: Fair enough. Let’s move away from that analogy and let’s go to one that attorney David Grais, who we just spoke to, came up with, that in many cases rating agencies want their ratings to be protected as opinion, like, say, a restaurant critic’s. But more often, he notes, they’re like critics who go into the kitchen, make the food and then come out and write about it. They help create these deals. And they have a financial stake in their own ratings ‘cause they’re paid by the very companies they rate, a seemingly obvious conflict of interest.

FLOYD ABRAMS: Rating agencies have analytic standards. They apply those standards. And, yes, they discuss with the entities that they’re rating why they’re doing what they’re doing. And if the entity asks them, well, you know, how come you’re giving us a triple BBB instead of a double AA, they tell them why. And if the entity wants to do things to get a higher rating, they can do them.

And it is not inappropriate, in my view, so long as they take good steps to deal with the potential for conflict of interest. It is not inappropriate that they get paid by the entities they rate. I mean, it is not conceptually that distinguishable from, you know, a large entity which puts big ads in – what, a motorcycle magazine and then they write about the motorcycles. Do they have to be careful? Yeah.

BROOKE GLADSTONE: The fact of the matter here is that the ratings agencies, in this case, were so widely off the mark, ultimately, that it doesn’t seem to have been just a series of mistakes of judgment.

I really look forward to seeing how Abrams would deal with facts like these if similar revelations emerge about his own client:

[In the package of loans it was to rate,] Moody’s learned that [over 38 percent of the borrowers] did not provide written verification of their incomes. . . . On the plus side, Moody’s noted, 94 percent of those borrowers with adjustable-rate loans said their mortgages were for primary residences. “That was a comfort feeling,” [one analyst] said. Historically, people have been slow to abandon their primary homes. When you get into a crunch, she added, “You’ll give up your ski chalet first.”

Borrowers have no chance of repaying via income and assets? Assume a ski chalet! (Much like the classic economic approach of assuming a can opener.) As the Summary Report of Issues Identified in the Commission Staff’s Examinations of Select Credit Rating Agencies (by the Office of Compliance Inspections and Examinations of the SEC) noted in July 2008, none of the rating agencies had specific procedures for collateralized debt obligations–even though 17 CFR 240.17g-2 required them to make certain internal documents public, including procedures and methodologies they use to determine credit ratings.

Sadly, I think that, given the current state of the law, Abrams’s First Amendment arguments will do well in front of many courts. But as David Segal states in the NYT article, “The First Amendment is no defense against fraud, and that is what is alleged by many of the plaintiffs.” Segal notes that, “Against them, Mr. Abrams will argue that S.& P. was every bit as blindsided as nearly everyone else in the private sector and in the regulatory sphere.”

Here are a few quotes that appear to be from S&P:

1. Internal Email: “rating agencies continue to create [an] even bigger monster – the CDO [collateralized debt obligation] market. Let’s hope we are all wealthy and retired by the time this house of cards falters.”

2. Instant Message: “It could be structured by cows and we would rate it.”

These people don’t sound blindsided to me. Rather, they, like the three ratings agency CEOs who together earned $80 million themselves over the past 6 years, sound like people who knew exactly what they were doing: getting while the getting was good. If Abrams succeeds, he’ll be making that particular Wall Street strategy all the more foundational for America’s brave financial innovators.

But would a loss for S&P change anything? I really don’t know. What I do believe is that the US discourse on rating agencies would probably benefit from some input by scholars like John Quiggin, who argue that “Among the many challenges in reconstructing a sustainable system of global finance, the replacement of ratings issued by for-profit agencies with an alternative system, in which AAA ratings actually mean something, is among the most important.” Quiggin notes that the rating agencies are biased in many important ways:

[T]hey have a long-standing ideological bias against the public sector. This is reflected in the fact that state and local governments, which rarely default on their debt, are assessed far more stringently than corporate issuers. In the last year, thousands of private-sector securities issued with AAA ratings have been downgraded to junk, and many have subsequently gone into default.

By contrast, defaults on government debt have remained rare. One effect of the differential ratings practices of the agencies is that government borrowers have been forced to seek insurance from bond insurance companies such as AMBAC that are, in reality, less sound than the governments they are insuring.

Unfortunately, the 2006 Credit Rating Agency Reform Act specifically prohibited the SEC from regulating the “substance of the credit rating or the procedures and methodologies” used to calculate it. Reform measures proposed by the Obama administration have barely addressed the CRA’s. At the very least the government ought to be able to use FAIR v. Rumsfeld to insist on more responsible behavior (as Jennifer Chandler has argued, in another context, here). CRA’s should take the bitterness of regulation with the sweetness of regulatory subsidies.

I believe that as long as the US government provides a de facto regulatory subsidy to CRA’s, it should require them to factor into at least some of their ratings the full social value of the rated entity—not simply its likelihood to default. Ratings are often a self-fulfilling prophecy, and the state should harness their value to promote projects that improve the health, safety, security, and well-being of citizens. At the very least, the government should set up a “public option” in credit rating (akin to the proposed public option in health insurance) that is more transparent and accountable than extant credit raters. If the finance sector is going to grow as dependent on government help as the health care sector has, it should learn to accept the same web of standards and regulation that guarantee some minimal accountability for providers who accept government funds. Looking at the AHRQ and comparative effectiveness research could be a good place to start.

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Professor John Doe Is An Ugly [Insert Racial Slur]!

Law students sometimes use the internet to widely disseminate racist or gendered comments about women and minority faculty members. For example, I have heard about law students using teaching evaluation forms or Facebook or Myspace to make comments to the effect that that a female faculty member is a bitch with PMS or that an African-American faculty member is a [insert racial slur]. Indeed, the Auto-Admit debacle from a couple years back revealed that law students or potential law students seem to at least sometimes use the internet to convey vicious gendered and/or racist comments.

When I hear about these situations, I always wonder about the “character and fitness” implications. It seems to me that a law student who is publicly judging a female faculty member negatively on a gendered basis or who is characterizing minority faculty members by way of stereotyping and ugly slurs is raising questions about his/her character and fitness to practice law. In the same way that a lawyer who embezzles is not fit to practice, one might argue that a law student who dismisses individuals with ugly characterizations based only on race or gender might also be of questionable character for purposes of practicing law. Yet not everyone agrees with this assessment, and, with respect to law students using the internet for such attacks, there has not been a lot of discussion about the character and fitness issues raised.

Therefore, the AALS Section on Women in Legal Education will be presenting a panel at the AALS Annual Meeting in New Orleans examining the issues raised – including the character and fitness issues – when law students, lawyers, judges, or potential law students use the internet to make gendered or racist comments. If a student posts on her Myspace page that Professor John Doe, who teaches Gender and Race and the Law, is an “ugly [insert racial slur] who only has a job due to affirmative action,” does that pose a character and fitness concern? Should we care?

There is a call for papers for this panel presentation, and anyone interested in submitting a paper or paper proposal is welcome to e-mail me for the details.

Washington Post Fire Sale

As newspapers falter, we often hear about how terrible it would be if public funding supported them. Imagine the conflicts of interest! Well, we’re now getting an inside look at the “stealth marketing” media may need to engage in in order to survive:

Mike Allen at Politico.com [has] reported that Post publisher Katharine Weymouth has decided to solicit payoffs of between $25,000 and $250,000 from Washington lobbyists, in return for one or more private dinners in her home, where lucky diners will receive a chance for “your organization’s CEO” to interact with “Health-care reporting and editorial staff members of The Washington Post” and “key Obama administration and congressional leaders. . . .”

Though the Post’s leadership quickly backed away from the plan, we can only imagine what kinds of fire sales a few more years of economic hardship will bring:

Looks like Dan Froomkin got out just in time!

Modern Day McCarthyism

I was recently listening to a program on the rise of “red-baiting” in some Vietnamese-American communities. It’s apparently becoming a common rhetorical strategy:

On April 16, 2009, the Thurston County Court ruled in favor of a Vietnamese man who sued for defamation. This case was the first of its kind in the state of Washington. . . . The court found the five defendants . . . guilty for wrongly accusing the plaintiff . . . of having communist sympathies.

[I]n this case, both the defendants and plaintiffs fought against communism during the Second Indochina War. All those interviewed invoked a word commonly used within the Vietnamese émigré community to describe the act of wrongly accusing someone of communist sympathies: chụp mũ. As this trial brought to light, chụp mũ is a widespread practice among Vietnamese community leaders. However, it is very rare for a person who has been chụp mũ to sue his/her accusers.

This might be an interesting precedent for those accused by shock jocks of being socialist, Marxist, Bolshevik, or in favor of concentration camps.
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Contracts, Confidentiality, and Speech: Connecticut Supreme Court Upholds Agreement Not To Speak

I am sure that free speech, First Amendment gurus/junkies will have more to say about this one, but a recent case out of the Connecticut Supreme Court, Perricone v. Perricone, seems to merit a mention here. As the title of the case indicates, it is a divorce case. Apparently the husband runs a skin care company and millions of dollars are at stake. According to The Connecticut Law Tribune, the New York Post covered the divorce. Nonetheless, during the case Ms. Perricone “signed a confidentiality agreement to prevent pretrial discovery documents from being publicized. In it, she agreed that Perricone’s lucrative skin care business ‘may be severely harmed’ if she made disparaging or defamatory statements about him.” When she wanted to talk to 20/20 about the case, however, Mr. Perricone obtained an injunction by arguing that the confidentiality agreement controlled and that an integration clause in the final settlement did not supersede that agreement. In short, Ms. Perricone was still prevented from talking about the divorce. The court agreed with Mr. Perricone.

As First Amendment matter, the Connecticut Supreme Court held that the agreement was not a prior restraint on speech. I am sure that there are articles about the problem of what is state action in this context and whether one can waive First Amendment rights via contract. The court in this case relied on Cohen v Cowles Media Co. and held: “that a party’s contractual waiver of the first amendment’s prohibition on prior restraints on speech constitutionally may be enforced by the courts even if the contract is not narrowly tailored to advance a compelling state interest.”

As I am not a First Amendment guru and/or junkie, all I can say here is that it seems that there are some continuing problems here. The idea “that a judicial restraining order that enforces an agreement restricting speech between private parties [does not] constitute[] a per se violation of the first amendment’s prohibition on prior restraints on speech” appears correct if non-disclosure agreements and other confidentiality agreements are to work. Indeed, as our own Dan Solove and Neil Richards discuss in Rethinking Speech and Civil Liability:

Since New York Times v. Sullivan, the First Amendment requires heightened protection against tort liability for speech, such as defamation and invasion of privacy. But in other contexts involving civil liability for speech, the First Amendment provides virtually no protection. According to Cohen v. Cowles, there is no First Amendment scrutiny for speech restricted by promissory estoppel and contract. The First Amendment rarely requires scrutiny when property rules limit speech. Both of these rules are widely-accepted. However, there is a major problem – in a large range of situations, the rules collide.

Although I am not sure I agree with the paper’s solution, I recommend the paper as a way to think not only about the Perricone case but the problems encountered when free speech and private law intersect.

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Responsibility and Duty Meet Social Networking

In light of the events in Iran, many may laud the power of tools such as Twitter and Facebook as they allow information to reach the world. Here in the United States, however, a few stories highlight how social networking tools and blogs run into ideas of fairness, honesty, and even justice. First, the FTC is planning on investigating bloggers who are paid for their posts but who do not disclose their affiliation. The article claims “The common practice of posting a graphical ad or a link to an online retailer — and getting commissions for any sales from it — would be enough to trigger oversight.” Second, the Ninth Circuit has just ruled that a woman’s blog posts about her co-workers and job environment were not protected speech. As such, her demotion was lawful. Third, a recent Law.com article makes a strong argument that tweeting while on a jury should not be allowed and jeopardizes the fairness of a trial.

The FTC action seems too aggressive, yet it shows that the idea of blogs having some sort of purity is not always the case. But if it prompts bloggers to be more forthcoming about their affiliations and to develop some best practices (as the article suggests), that could be a good outcome. It also seems to embrace the idea of more information is better which may keep many online happy. Those who think tweeting is some sort of anointed right err. The trial context shows that rather well. As for the blog and speech case, I need to find the decision. The article claims that the court “concluded that [the plaintiff’s] speech was not a ‘public concern’ but rather was ‘racist, sexist, and bordered on vulgar,’ and it characterized her behavior, in part, as ‘salacious’ and ‘mean spirited.'” I leave it to the First Amendment folks to unravel that one, but I wonder whether this case will be appealed to the Supreme Court.

In any event, these three events show that while we can say that tools that enhance free speech are wonderful in the extreme cases such as the situation in Iran, the more subtle cases raise on-going questions about the contours of speech. As always the issues are familiar. Now, however, simply saying keep your hands off the Internet or keep it free is an insufficient guideline. Too many people are online and too much online behavior tracks offline experiences and problems. In other words, although the technologies seem to make the questions different and requiring special treatment, they may only make the old questions and responses more salient.

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Barnes v. Yahoo!, CDA Immunity, and Promissory Estoppel

yahooThe Ninth Circuit recently decided Barnes v. Yahoo!, a case with some very interesting holdings relating to the Communications Decency Act § 230 as well as promissory estoppel.  I wrote about this case briefly in my book, The Future of Reputation, long before it made it up to the Ninth Circuit.

Celia Barnes’ ex-boyfriend created fake profiles in her name on Yahoo.  Moreover, as the court relates:

The profiles contained nude photographs of Barnes and her boyfriend, taken without her knowledge, and some kind of open solicitation, whether express or implied is unclear, to engage in sexual intercourse. The ex-boyfriend then conducted discussions in Yahoo’s online “chat rooms,” posing as Barnes and directing male correspondents to the fraudulent profiles he had created. The profiles also included the addresses, real and electronic, and telephone number at Barnes’ place of employment. Before long, men whom Barnes did not know were peppering her office with emails, phone calls, and personal visits, all in the expectation of sex.

Barnes contacted Yahoo to get the profiles taken down:

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IP Law and the Presidential Sneakers…

President Obama is likely the first true “celebrity president”, at least the first in our time, in the sense that people see opportunities for making money from his persona and likeness.  Early on in the presidency, his office made some remarks to the extent that they were working on a policy asking people to be respectful of the president and his family in restraining some of these commercial impulses.  Of course, all of this raises the fine line between free speech and personality rights – a topic much debated on the cyberprof listserve in the early days of this presidency.

In this vein, I couldn’t resist posting an ad I came across last night that squarely raises these legal issues.  A company that appears to be in Michigan (although they do not give their postal address, but do require Michigan residents to pay sales tax on purchases from their website) has set up an “Obama shoes” website.  On this website, you can purchase Obama sneakers, backpacks, and basketballs.

The website uses video clips from one of Obama’s speeches and refers to itself as selling merchandise that is inspirational to young folks and that is intended to commemorate Obama’s inauguration. Thus, it obviously intends to juxtapose free speech interests in the inauguration against the commercial use of Obama’s name and likeness.

There are some other interesting little sidenotes about this business venture that suggest the people who set it up sought at least some legal advice before doing so.

1. They used the domain name “obamashoes.tv” presumably either because they couldn’t get a “better” domain name or because they wanted to avoid claims under the Uniform Domain Name Dispute Resolution Policy. They could argue that even if Obama’s name operates as a TM, they have not used his actual name in the domain name, but have added “shoes” to the end of it so no one will think it’s an authorized Obama website.

2. They include a disclaimer on their webpage to the effect that: “Obamashoes.tv is a private entity and makes no claim of affiliation or endorsement by President Barack Obama or his campaign for office.”

3. Interestingly, there is also a disclaimer on their FAQ page about the design of the sneakers themselves. “Q. Why does [sic] the shoes look like Nike Air Force Ones (AF1) and the Jordan Brand?
A. These design is [sic] been proven to be commonly preferred by most Adults & Children (black or white).” Now, I personally don’t know anything about sneaker designs, but I assume this is intended as a preemptive strike to ward of claims in trademark, trade dress, and/or design patent with respect to the actual design of the shoes.

So, interesting business model…
Legitimate free speech? Or intellectual property law infringement as far as they eye can see?

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The Free Speech Implications of Gene Patents

61px-dna-splitLast week, the ACLU and Cardozo Law School’s Public Patent Foundation (PPF) filed a lawsuit in the S.D.N.Y., challenging the constitutionality and validity of Myriad Genetics’ patents for BRCA1 and BRCA2 gene mutations, which are linked to an increase risk of breast and ovarian cancer.  Plaintiffs, a collective of breast cancer and women’s health groups, individual breast cancer patients, and scientific associations, sued the U.S. Patent and Trademark Office, patent owner Myriad Genetics, and directors of the University of Utah Research Foundation.  The lawsuit asserts that the USPTO granted a patent on the association between mutations conferring an increased risk of cancer and, in turn, patented “an idea, a scientific fact, or a piece of knowledge.”  According to the complaint, patenting genetic sequences violates the First Amendment because it hinders the free flow of information.

Although the controversy over BRCA genes isn’t new, the case is groundbreaking.  As PPF’s Daniel Ravicher explained in this month’s The Cancer Letter, no court case in the U.S. has “ever questioned whether genes can be patented.”   The lawsuit calls into question the constitutionality of “thousands of patents covering human genes.”  Although plaintiffs could have challenged other patents, they chose the BRCA ones because, as Ravicher notes, “these are offensive patents, and they have a large impact.”  ACLU’s science advisor Tania Simoncelli explains that Myriad’s control over the BCRA genes hampers clinical research given its exclusive right to prevent anybody from looking at the genes in research.  The patent also impairs patient access to the tests, which can cost over $3,000.

Do gene patents restrict the exchange of ideas in practice?  Harry Ostrer, NYU School of Medicine’s Director of the Human Genetics Program, explained to The New York Times that his laboratory, and others like it, would focus on unsolved mysteries in BRCA gene variants if they did not face the risk of a patent lawsuit from Myriad.  A 2006 report from the National Research Council, however, found that patented biomedical research “rarely imposes a significant burden” for researchers.  Europe’s experience may be instructive: European law precludes patent holders from exercising patents when their IP is being used for research.  Whatever the European example may teach us about gene patentability’s impact on research, this is surely a case to watch.

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Flu and Censorship

It is often said that a famine cannot occur in a country with a free press.  In other words, natural disasters become severe catastrophes only when corrective measures are not taken due to a lack of awareness.  This point was driven home during the recent swine flu outbreak, which was often compared to the dreaded 1918 influenza pandemic.

While people often condemn the modern media for sensationalizing issues such as swine flu, consider the alternative.  In John M. Barry’s excellent book on The Great Influenza, he points out that a major factor in the spread of the 1918 virus was wartime censorship.  Newspapers did not report on the virus until long after it was in the population, and when they did the information was scanty and unhelpful.  Likewise, public officials were slow to inform the public and were reluctant to admit that there was a problem.  Why?  Largely because people were worried about hurting wartime “morale” by talking about bad news.  Some of this involved official censorship and some involved a culture of conformity created by Woodrow Wilson’s Administration.  The result, one could say, was even more harmful to morale — hundreds of thousands of deaths.

While there are costs to media hype, muzzling the press directly or indirectly is usually more costly.