Category: General Law


The Unintended Consequences of Good Intentions

The chapter 11 bankruptcy cases of Chrysler and General Motors received a great deal of press coverage in 2009. (For an excellent and concise summary of these chapter 11 cases, see here.) Although both cases were extremely quick, they were very painful for many people. For example, Chrysler and General Motors collectively terminated their relationships with almost 2,000 franchisees (i.e., local auto dealers), leaving these dealerships with little ability to continue their business operations. For many franchisees, their dealerships were their livelihoods.

Now you may ask, “How can this happen?” You may even agree with some of the dealers and observers that it is “un-American.” As counterintuitive as it may seem, however, this type of contract termination is very common and completely permissible under U.S. bankruptcy laws. When a company files for chapter 11 protection, it receives the right to evaluate its executory contracts (including franchise agreements) and decide whether to keep the contract, assign it to another party or reject it. The non-debtor party to the contract can object to, and the Bankruptcy Court must approve, the debtor’s decision. The non-debtor party also can assert a bankruptcy damages claim if the contract is rejected.

The treatment of franchise agreements and the rights of franchisees are common issues in franchisor chapter 11 cases. Nevertheless, the Chrysler and General Motors cases are different because, among other things, state legislatures and Congress have intervened on behalf of franchisees. At least four states have enacted or are contemplating legislation trying to preserve some of the rights of franchisees under state law, and Congress recently passed legislation (see here section 747) giving franchisees the right to seek binding arbitration as to whether or not their franchise agreements should be terminated. This legislation follows several decisions by the Bankruptcy Court not only approving the rejection of these agreements but, in the Chrysler case, also enjoining the franchisees from pursuing their state law rights.

Now, I have no doubt that legislators are trying to respond to the public outrage over the treatment of the Chrysler and General Motors dealers. This response is understandable from a purely human, as well as political perspective. But is it good policy? Other than the fact that the U.S. government owns part of these companies, is there anything that distinguishes the economic harm suffered by the dealers from that suffered by every other claimant in these and other chapter 11 cases? The federal legislation basically gives this one class of claimants in these two particular chapter 11 cases the right to challenge the decisions of the Bankruptcy Court outside of the bankruptcy process and subject to a different standard of review. (In bankruptcy, the debtor’s decision to reject a contract is reviewed under a business judgment standard. Under the federal legislation, the arbitrator is to consider and balance the economic interests of the debtor, the dealer and the public at large.) What about the state legislation purporting to preserve not only the franchisees’ state law rights but also to foreclose the franchisors’ ability to grant new franchises in the jurisdiction; should states be allowed to legislate around the results of a federal bankruptcy case (and what about federal pre-emption issues; see, e.g., last paragraph here)? And will any of this legislation help the majority of dealers; do they have the resources to keep their dealerships open and participate in the arbitration process? If not, is the potential cost to the federal bankruptcy system really worth the benefits? I do not necessarily have the answers, but I think these are important questions to consider.


Acceptable Deviance

Roscoe Pound observed more than a century ago that in “all cases of divergence between the standard of common law and the standard of the public, it goes without saying that the latter will prevail in the end.”  I suppose if one sentence could sum up my research agenda, that would be it (let us not pause to consider that my research agenda is therefore over one hundred years old).  Interestingly, it’s not necessary that the law change under those circumstances; rather, enforcement practices come, eventually, to reflect the standard of the public — what we usually now call norms.  I’ve called those gaps between law and norms ‘parameters of acceptable deviance’ or PADs.  Behavior within them is formally illegal but socially acceptable, and generally does trigger either a formal enforcement response or social sanctions.  Behavior outside of them may be either formally legal or illegal.  Behavior that is both formally illegal and socially unacceptable usually triggers a formal enforcement response; behavior that is formally legal but socially unacceptable usually triggers social sanctions. 

Roscoe Pound: great moustache, greater mind

Roscoe Pound: great moustache, greater mind

To see this phenomenon in action, go for a drive.  Chances are you’ll behave within a PAD by speeding, but not speeding too much.  Let us say, up to 77 mph in a 65 mph zone.  If you get a ticket for driving within a PAD, you’ll be upset.  But if you see someone exceeding the PAD, you’ll hope s/he gets a pulled over.  If you get stuck behind someone acting outside the PAD, but obeying the law by driving below the speed limit, you might apply social sanctions (not you, dear reader, but someone else might make rude gestures, for example).

The article I’m now finishing – errr, would be finishing, if I were not writing this instead – applies the PADs concept to property rights.  It was a delight, therefore, to see this article in last week’s New York Times.  It’s a fascinating story — regardless of how you interpret it — about the reaction of people in a small city in Russia to the privatization, and then near shuttering, of the factory that was the city’s lifeline. 

When the factory employees, used to a communist economy, asked the regional government to replace the inept and perhaps corrupt new owner, they were told it couldn’t be done because “private property was sacred.”  The owner ran the business into the ground.  But when the owner stopped paying the employees’ wages, they still came to work.  When management told them there was no more work and to go home, they still came.  When the local utility cut off electricity and heat to the factory, they still came.     Finally, at somewhat of a loss about what to do, the government took over ownership of the factory through a state-owned bank (although it insists it will be sold again to private owners) and put the employees to work.

Now, there are lots of ways to interpret this story.  Here are a few:

(1)   It demonstrates that the communist culture of worker entitlement and economic inefficiency still exists, and that Russia lacks the political will to overcome it;

(2)   It suggests that crony capitalism is eroding (or has already eroded) any popular support for post-Soviet market reforms;

(3)   It suggests that in Russia, the United States, and everywhere in between, regardless of ideology, some businesses are too important to be left to the judgment of the free market (i.e., are too big – or at least important — to fail)

There are many other possible interpretations, and I’d be curious to hear yours.  But here’s the one that interests me, and that I think would interest Pound: people tend to live their lives with reference to, but not in obedience to, the law.  People are not law-abiding; they are acceptable-deviance-abiding.  Notice that the workers in this story didn’t strip the factory of whatever they could find – that behavior would have been unacceptably deviant.  Instead, they behaved within parameters of socially acceptable deviance – insisting that they could enter private property to wait for their jobs to return.  Both acts are inconsistent with the sacredness of private property rights; one is socially unacceptably deviant, the other is not.  By simply acting within bounds of socially acceptable deviance with regard to private property rights, the people caused the state to realign itself, regardless of the strictures of formal law. 

If you find it objectionable as a matter of principle, mind your speed on the drive home.


Bonuses are Back

I of course was not surprised this morning to wake up to the news that some of the large financial institutions are preparing to grant large bonuses for 2009. Specifically, “Goldman Sachs is expected to pay its employees an average of about $595,000 apiece for 2009, one of the most profitable years in its 141-year history. Workers in the investment bank of JP Morgan Chase stand to collect about $463,000 on average.” I expect that we will see more bonus announcements in the days to come. It also will be interesting to see if the firms couch these bonuses in “all-stock” deals to try to mitigate public outrage or if they will distribute all-cash or mixed packages (likely the later). I also wonder whether the increasing use of “claw-back” provisions will really change the dynamics of compensation practices or, like Goldman’s use of all-stock bonuses last year, is most likely just packaging to try to appease the public and government officials. In either case, 2010 is certain to be another interesting year on the executive compensation front. (For my recap of the 2009 executive compensation debate, see here.)


Blind Consumption

I was down in D.C. last Friday when the Anacostia River Cleanup and Protection Act first went into effect instituting a 5-cent fee on each disposable plastic or paper bag issued in the District.

The money is to go to cleaning up the Anacostia River (which badly needs it), but the main goal for the law is to change consumer behavior.

Although skeptics abound, I’m excited to see the outcome. Sure, five cents, isn’t much, but I think it’s enough to make people stop and think about their consumption.

With so much on our minds, we need a little encouragement. I happened to care a lot about clogged rivers and tributaries—and the environment more generally—but I find it hard without a little nudge to change my daily routines.

Today, on the way home from buying some books, I stopped into CVS for a half-gallon of milk and some cereal (see picture). When I got home I found that I’d been given eight bags to carry the three items (see picture)! (Somewhat ironically, the Washington CVS stores recently partnered with the D.C. Department of Environment to provide 112,000 free reusable bags to customers in the metropolitan area.  Hopefully, they haven’t been handing them out eight at a time.)

This needs to change and I, for one, would welcome the adoption of a similar law in my hometown.  Would you?


On a side note, for those art and film lovers out there, there is a tremendous short film, Next Floor, engaging the theme of overconsumption, being shown until April 11, 2010 at the Hirshhorn Gallery in D.C. The film garnered the creator and producer, Phoebe Greenberg, the award for Best Short Film at the Cannes Film Festival in 2008. I highly recommend it.


A Very Brief History of the No-Fly List

In the aftermath of the near catastrophe aboard Northwest Flight 253 on Christmas Day, Washington is clamoring for more names, faster, on the No-Fly List.  The Transportation Security Administration (TSA) checks each potential traveler’s name against this list of persons deemed too dangerous to fly.  This recent scare seems to have flipped the conventional wisdom about the No-Fly List.  Fairly or not, many used to perceive the list as too big and too prone to false positives (remember Cat Stevens?).  The new conventional wisdom seems to be different: fill ‘er up.

Have you ever wondered where this No-Fly List came from and how it came to look the way it does?  What does “dangerous” mean?  Who decides?  Media reports about the No-Fly List led me to write my article in the UCLA Law Review, which explored the constitutional questions underneath those policy ones.  Here is a very brief history of the No-Fly List to give you some perspective on the White House report scheduled for release today.  I’ll conclude with a few questions that will be covered in future posts.

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A quick update . . . .

For those who were interested in my December 26th post on whether the arrest power should have been used against Anwar Awlaki in 2002: the Yemeni government has concluded that Umar Farouk Abdulmutallab probably met with Awlaki shortly before launching his attempted attack on the Northwest airliner.  That raises the stakes in deciding whether Awlaki should have been arrested in 2002; it does not, of course, alter the complex legal and ethical issues that surround the decision not to arrest him.


Fantasy Author Writes Incomplete Contract

Pat Rothfuss, a subject of our Law and Hard Fantasy Interview Series, is running a charity raffle.  Most of the items to be raffled are of the traditional-but-fun department: signed books, selling a character name, manuscript drafts by him and others.  But on item is special: the golden ticket.  As he originally described it, the ticket (which would be allocated in a drawing), was quite flexible:

If you win this prize, I will owe you one (1) favor. You can cash it in however you like.  You want your name in book two? We can do that. You want me to read your book and give you some criticism? No problem. You want me to attend your local convention, perform your wedding ceremony, or just give you a nice backrub? Consider it done. A few stipulations:  [1] The favor has to be legal. (More or less.)[; 2] It has to be something I can actually do. (Duh)[; 3]  I can’t make anyone fall in love.”

Pat has now re-thought this radically incomplete offer. In a more recent post, he’s offered a few qualifications– though still not enough, to my risk-averse way of thinking.  Now, just to really rain on his parade, what’s your view on whether the ticket is sufficiently concrete to serve as an offer under the Restatement?


A New Year’s Regulation?

Thank you to Daniel Solove and the other authors for the invitation to join Concurring Opinions as a guest blogger and thanks to Solangel Maldonado for her kind introduction. As Solangel noted, I am teaching and writing in the areas of business associations, corporate governance and securities regulation. In practice, I had the privilege of working on transactions for domestic and international clients. Fortunately, my professional experience has blended naturally with my scholarship, a factor that has eased my recent transition into teaching law.

Traditionally at the start of each year, we outline goals that we try our best to adopt and practice. Considering the recent financial crisis, our focus this year may be more aptly directed to setting out new regulation rather than aspirational resolutions. The financial crisis illustrates several areas that will require a substantial national and international commitment to evaluate market structures and oversight. Credit derivatives, namely the credit default swap industry, played a central role as a precipitating factor in the market’s decline and continuing tumult. Credit default swap agreements or CDS presents one kind of credit derivative contract most simply described as a guarantee contract in which one party (protection buyer) agrees to make periodic payments to another party (protection seller) in exchange for protection against a decline in value of an asset named in the contract. A debt security was usually the underlying asset named in these agreements and counterparties defined a decline in value of the underlying asset as an instance in which the debt issuer defaulted on its principal or interest payment obligations.

A common example evokes images of Happy Hedgers, a hedge fund that owns a General Motors (GM) bond, entering into a CDS agreement which requires them to pay out to, oh, let’s say AIG, a small premium over the 10 year life of the GM bond, but if GM defaults, AIG agrees to pay Happy Hedgers some portion of the value of its loss. By design, these products of financial innovation challenge our fragmented domestic regulatory framework and, as the recent financial crisis illustrates, credit default swap agreements have the potential to exert significant pressure on the global economy. I am intrigued by the innovation that led to the creation of these products and the debate over their regulation. In subsequent posts, I will describe how financial innovation motivated increasingly sophisticated and speculative uses of these products.

In a paper that I anticipate posting to SSRN early this year, I offer reflections on these instruments and a proposal for domestic and international regulatory collaboration to address systemic risk concerns engendered by credit default swaps. I am enthusiastic about sharing my musing with the Concurring Opinion community and welcome feedback.


The Month Ahead: War, Rights, Travel

Sometimes opportunity just comes knocking at your door.  That’s sure how it felt when Danielle invited me to be a guest at Concurring Opinions this month.  But I never imagined that, on my first day as a guest blogger, opportunity would come knocking again, this time with the blogging equivalent of a welcome basket.

That’s how it felt to read Michael Kinsley’s op-ed in the New York Times last night as I contemplated my first post (What’s Our Line? N.Y. Times, 1/5/10 at A21 NY edition).  His eight-paragraph pitch to stay true to America’s first principles of justice (at least, as he sees them) seemed a custom-made opportunity to lay out my blogging agenda for the month.  Kinsley’s essay was a great little read for me not because of his too broad conclusion (“We have nothing to be ashamed of, little to fear and much to be proud of in choosing to err on the side of treating captured foreign terrorists as we would treat any upstanding American who tried to blow up an airplane full of people.”), but mainly for the odd path he took to reach it.  It was opportunity knocking again because he teed up several issues that interest me.  (A mixed metaphor there?  Nevermind, that train has sailed.)

Three issues jumped out in particular:

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Practical Advice for Victims of Stalking

I am very sorry to have to miss the AALS panel on Saturday, “The First Amendment Meets Cyber-Stalking Meets Character and Fitness,” as it looks to be a fascinating discussion. (Like many readers, I have enjoyed Danielle, Kaimipono, and Dave’s past posts on the topic).

In this post, however, I’d like to broaden the focus to include classic, old, “real-life” stalking and ask a rather simple question: What is the best practical advice to give someone who is being stalked?

It’s National Stalking Awareness Month and I’d love to hear from commenters about what they tell people who come to them seeking advice for dealing with incidents of stalking. In the past, I’ve had multiple friends who have suffered harassing phone calls, threatening emails, and physical surveillance from obsessed exes and over-zealous suitors and I’ve struggled to give advice that I thought would actually be effective in bringing a swift and final end to the abuse (without exacerbating the problem).

There is some good data on the internet but it is often difficult to wade through or outdated. Stalking: A Handbook for Victims by Emily Spence-Diehl, for example, is a useful resource and offers a step-by-step guide to addressing abuse, but it is over ten years old.

Given data on the prevalence of victimization (according to a national study released last year by the U.S. Department of Justice, Bureau of Justice Statistics (BJS), during a 12-month period 3.4 million people reported being the victims of stalking), I’m guessing that there are many Co-Op denizens that might benefit from learning about the latest proven approaches.

I’ll get the ball rolling by suggesting that one of the easiest ways to take action is to talk directly to a trained professional who can help design a stalking safety plan. The National Center for Victims of Crime (NCVC) can be reached at 1-800-FYI-CALL, M-F 8:30 AM – 8:30 PM EST. The NCVC can also be contacted by email at