Author: Jonathan Lipson

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Why is Business Law Education So Bad?  Value-Creation by Law Professors

The question posed in the title of this post—why is business law education so bad?—was first asked in a famous and provocative 1984 paper by Stanford law professor Ronald Gilson, Value Creation by Lawyers.

That paper is best known for developing a micro-economic answer to a different—but ultimately related—question: Why would anybody pay for business transactional lawyering?  And, if no one would (or should) pay for those services, why should anyone pay (or be paid) to learn (or teach) them?

The price of bad education

Although the questions are not new, they have become more important as technology and markets transform the practice and study of law.

Gilson argued that there was an economic explanation: lawyers produce and verify information that brings the deal price closer to a hypothetical “true” market value.

Although this question—and Gilson’s answer—have received the most attention, Gilson also had important observations about legal education.  Boiled down, he suggested that law schools should: (1) expose students to the actual transactions in which they were likely to participate; and (2) teach them a legal theory that would help to explain both why these transactions occurred, and why (and how) lawyers would add value by performing services in them.

When Gilson wrote this, law schools struggled with both because, among other things, most legal academics had little transactional experience.  In the more than thirty years since Value Creation, however, law schools have exploded with courses that achieve the first goal, exposure.  It would be difficult today to find a law school that did not offer some form of skills training to prepare law students for careers as business lawyers.  A large and growing literature describes in exquisite detail how to design and teach these courses.

Yet, so far as I can tell, neither the courses nor the literature engage the second half of the problem as Gilson framed it, legal theory.  Rather, they focus on “transactional skills” qua skills, such as drafting and negotiating—admittedly vital functions—without considering how legal theory might explain, explore, enhance or critique them.  They have taken half of Gilson’s recommendation and declared victory.

This is a problem for two reasons. First, it seems indifferent (perhaps hostile) to the role that legal theory and scholarship could play here.  Transactional skills literature reads as a series of “recipes,” how-to-get-to-yes-guides insensible to the possibility that, in many deals, “no” may be better the answer. Read More

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Contract (as) Social Responsibility (Part 3): Model Contract Terms

My prior posts (#1 and #2) set up the idea that contract appears to be an increasingly attractive way to do some sort of “social justice,” for example by attempting to reduce labor trafficking in supply chain contracts.  I refer to this generally as “contract (as) social responsibility” (KSR).

A contradiction in terms?

I want to turn now to a thoughtful example of KSR terms, the Model Terms (Model Terms) being developed by the Working Group to Draft Human Rights Protections in Supply Contracts of the Business Law Section of the American Bar Association (Working Group).

The Working Group is led by Professor David Snyder (American University) and attorney Susan Maslow.  Although the Model Terms have not yet been posted, they should be shortly and, in any case, are available from David (dsnyder@wcl.american.edu) and Susan (smaslow@ammlaw.com).  The Working Group’s report and the Model Terms are slated to be published in The Business Lawyer later this year.  [Disclaimer:  I am a member of the Working Group and on the editorial board of The Business Lawyer.  Nothing I say on CoOp should be imputed to them.]

While I should probably post a “spoiler alert” here, I thought it would be helpful to summarize certain aspects of the Model Terms in order to identify some of the issues they and, by inference, other KSR terms may raise.

The Model Terms have two goals that are, perhaps, in tension.

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Contract (as) Social Responsibility (Part 2): Defined Terms

An earlier post set up the month’s agenda:  explore theoretical, doctrinal, and empirical opportunities presented by “contract (as) social responsibility” (KSR).  Before going further, it may be useful to provide some examples and define what I mean by KSR.

Examples

Labor-related terms in supply chain contracts, discussed in the prior post, are a well-known example of KSR, but not the only ones.  Michael Vandenbergh, for example, has argued that supply chain agreements can also be used to advance environmental goals.

But there is a world of KSR beyond supply chain contracts.  Frances McDormand’s speech at the Academy Awards, for example, implored the A-listers in the audience to negotiate for “inclusion riders,” contract terms that would require movie productions to have a certain level of social diversity (e.g., race, gender).  “Impact investing,” according to one enthusiast, “could be one of the most important social innovations in our lifetimes, leveraging the massive power of the capital markets to a higher purpose than maximizing returns for shareholders.” The oldest example I have found so far—and I suspect there are still older ones—is the Beatles’ early performance agreement, which apparently required venues to integrate racially.

Don’t let it be.

KSR can be seen as part of a longer arc of social activism through market action.  From the contested notion that African Americans could use market power to counter the pernicious effects of racism, to Cesar Chavez’s lettuce boycotts of the 1960s, to the South African divestment campaigns of the 1980s, the socially active have long believed that money can do more than talk: it may compel others to walk.  Sometimes, as in apartheid, they may have been right. In other cases, such as black banking, they may not.

Still, we (want to believe that we) can achieve social justice through the beer and coffee we choose to purchase.  Who we see in the media may affect what we believe to be possible in reality, in terms of gender and racial diversity.  Eric Posner and Glen Weyl argue that the “emancipatory force” of “radical markets” “can reawaken the dormant nineteenth-century spirit of liberal reform and lead to greater equality, prosperity, and cooperation.”  Whether or not that is true, there is little doubt that there is demand for social change through market participation.

Because contracting is an important mechanism in market function, the rise of KSR seems, from this perspective, inevitable.  Yet, not all market participation involves contract in any formal sense, and of course most contracting probably does not purport to be socially responsible in the sense that interests me.  So, KSR is at most a (small?) (very small?) subset of contract-based market activity.

Business lawyers love their defined terms–and I am at heart a business lawyer–so what might a definition of KSR look like? Read More

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Bad Bankruptcy?

Although I hope to spend most of May talking about “Contract (as) Social Responsibility,” today’s news that Cambridge Analytica is going into bankruptcy (and the English counterpart) reminds me that an important, severely undertheorized question about corporate bankruptcy is whether, or to what extent, questions of morality and ethics matter  in this context?

We know that Congress takes the morality of consumer debtors seriously.  That, Congress said, was why they amended the Bankruptcy Code in 2005 to “get tough” on consumers who wanted to walk away from their debts.  But with the Weinstein Companies and (earlier) many Catholic dioceses viewing Chapter 11 as a way to convert sins of the flesh to sins of the balance sheet, it is (again) worth asking:  should Chapter 11 be used to cash out (almost) all social problems?

The answers are not easy, and I don’t pretend to have them, but our nearly single-minded focus on the financial, rather than the ethical, aspects of corporate reorganization is, itself, interesting, especially given the very different treatment accorded consumers.  A woman who ran up unmanageable medical bills for therapy following sexual assault by Harvey would find it much harder to use bankruptcy to escape those liabilities than would the Weinstein Company for its respondeat superior debt for the underlying misconduct.

In what world is that the right normative answer:  the corporate perpetrator can walk away, but the victim can’t?  The answer, it would appear, is “ours.”

 

 

 

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Contract (as) Social Responsibility (Part 1): Revenge of the Nerds

On a sunny Saturday morning in April I found myself in an airless room in an exceptionally beige Orlando conference hotel discussing what would, to many, be the nadir of contract nerd-dom:  model supply chain terms.

Supply chain agreements set forth the rights and responsibilities of buyers and sellers of goods that lead to products that affect just about everyone who participates in the market economy.  It reportedly takes about 200 contracts to make an iPhone—a number that strikes me as pretty low.

These contracts are important, of course, but only in the same sense that contract terms on indemnification, ERISA, and choice-of-law are important: they are the province of hardcore law junkies because they are so boring no one would really want to spend time thinking about them unless paid to do so.

And, yet, the Orlando conference room was electric.  That’s because these were not the usual supply chain terms dealing with, e.g., quantity, price, delivery, etc.  Instead, this was a meeting of the Working Group to Draft Human Rights Protections in Supply Contracts of the Business Law Section of the American Bar Association (“Working Group”), and the terms we were talking about seek to solve some of the most troubling ethical problems presented by market globalization:  baseline human rights protections for those who work for or with companies in the modern global supply chain.

I will call these terms one of many examples of “Contract (as) Social Responsibility”: efforts to achieve social justice through contract as a formal, legal instrument.

I find just about every word in the preceding paragraph (including “I” and “will”) to be problematic—in an interesting sort of way—and am grateful to the keepers of Concurring Opinions for permitting me to spend the month of May trying to develop my thoughts on this.

 

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The Arc of Covenant Banking: Hill & Painter’s Better Bankers, Better Banks

banker300px

University of Minnesota law professors Claire Hill and Richard Painter do a great service in their new book, Better Bankers, Better Banks, by focusing concretely on an issue that many have discussed but few have offered to change: how to align the incentives of bankers and banks.

They argue that “bankers [should] be personally liable from their own assets for some of their banks’ debts” for money owed due to insolvency, fines, or fraud-based liability. Thus, they propose formal, liability-creating contracts—which they call “covenants”—between banks and bankers: “Covenant banking operates directly on bankers’ monetary rewards” because, under their proposal, “highly paid bankers would bear some personal liability if their banks become insolvent, are fined by regulators, or are found liable in civil cases involving fraud. The liability would not be unlimited, but should potentially adversely affect the banker’s standard of living.”

The Hill/Painter proposal is valuable and interesting both in its own right, and for the harder questions that it raises.

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The Rule of Flaw: Ibanez and the Too-Big-to-Succeed Problem

The Massachusetts Supreme Judicial Court’s recent ruling in U.S. Bank v. Ibanez  is the latest and loudest salvo in what may be the most engaging and gruesome legal aspect of the credit crisis yet:  The day of reckoning for the staggering sloppiness that infected virtually every step of the mortgage-securitization process.

Ibanez held that, according to well-established Massachusetts precedent, a mortgagee cannot foreclose unless — surprise, surprise — it actually isthe mortgagee, or a legitimate assignee thereof.  In Ibanez,  lenders or servicers had foreclosed mortgages prior to completing (or commencing) the process of taking assignment of the note and  mortgage  on which they foreclosed.  When they later sought to clear title, Massachusetts courts balked.   “Utter carelessness,” Justice Cordy scolded the plaintiffs.

mistakes were made

This is potentially a huge problem for mortgage servicers (among others), given the long and convoluted chains of title through which mortgages may have passed in order to create mortgage-backed securities (MBS).   Not surprisingly, many observers are apoplectic, warning that this will lead to the end of the financial markets as we know them. 

How did this happen? 

There are probably several answers, but I think one is that the elite financial services sector (EFSS) that created the MBS is (or believes itself to be) a unique institutional force, unchallengeable by the ordinary legal or political mechanisms that keep institutions in check.  It is immune from the rules and norms  that apply to the rest of us.  But we know that spoilt children often lack discipline, so persistent failures of scrutiny have led inevitably to failures of competence. The drip, drip, drip of deregulation left us with firms that are not only too big to fail: they’re also too big to succeed. 

What will happen next? 

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The Numbers are REALLY In–Plus Two Modest Proposals

For those of you who had any doubts, our friends at Kaplan have just confirmed it:  Aspiring law students care more about law school rankings than anything else, including the prospects of getting a job, quality of program, or geography.

Sayeth Kaplan:

1,383 aspiring lawyers who took the October LSAT . . . [were] asked “What is most important to you when picking a law school to apply to?” According to the results, 30% say that a law school’s ranking is the most critical factor, followed by geographic location at 24%; academic programming at 19%; and affordability at 12%. Only 8% of respondents consider a law school’s job placement statistics to be the most important factor. In a related question asking, “How important a factor is a law school’s ranking in determining where you will apply?” 86% say ranking is “very important” or “somewhat important” in their application decision-making.

Mystal at ATL expresses shock–shock!–that potential law students could be so naive. Surely, he fairly observes, they should care most about job prospects.

Yes, that would be true if they were rational.  Yet, we all know from the behavioral literature that we apply a heavy discount rate to long-distance prospects.  How much can I or  should I care today about what may happen 3 (or 4) years from today?

If you think about it from the perspective of any law school applicant today, the one concrete thing they can lock onto that has present value is the school’s ranking:  It is simple, quantified, and–perhaps most important–tauntable.  No one’s face burns with shame because their enemy (or friend)  got into a law school with a better job placement rate.  Jealously and envy–the daily diet of anxious first-years–are driven by much simpler signals:  Is mine bigger (higher) than yours?

This is not to defend the students who place so much faith in numbers that have repeatedly been shown to be incredibly stupid.  It just means that Kaplan’s survey (and I have not seen the instrument or data) makes intuitive sense.

Which leads to me to offer two modest (and probably unoriginal) proposals:

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Stalking About Your Generation

Yesterday, I had the all-too-brief pleasure of sitting in on the first couple of talks at the Wisconsin Law Review’s Symposium, Intergenerational Equity and Intellectual Property, here in Madison.

Organized by my colleague, Shubha Ghosh (and starring, among others, CoOp-erator Deven Desai), the goal is important:  How do we understand the intergenerational consequences of a legal regime—intellectual property—that is strongly determined by the present, but which has significant, but under-theorized, consequences for the future?  Fights about extending the term of the Mickey Mouse copyright—or any set of long-haul rights—don’t just affect my kids, but potentially their kids, their kids’ kids, and so on.  These are, in short, really fights about intergenerational equity.

I was only able to hear Michigan’s Peggy Radin (Property Longa, Vita Brevis) and Penn’s Matt Adler (Intergenerational Equity: Puzzles for Welfarists), but as expected, both provided awesome overviews of these sorts of problems.  As Radin pointed out, intellectual property (knowledge and information law generally) always involves two types of generational problems: One is temporal (my parents, me, my kids, their kids, etc.); the other is technological (my students barely know from videotape; I will never beat my daughter at any computer game).

Adler explained that it is easy (and perhaps imprudent) to dismiss the utility of welfare economics as a tool to make these sorts of decisions.  Certainly, we might say, Benthamite sums of utils could predict little for those not in existence (the future):  what would their utility function be, really?

Hope I die before you get old

Yet, he observed, robust and subtle analytic models and conceptual frameworks are being developed by the Sens and Arrows of the world, and they may (if the future is bright) help develop more equitable and effective decision tools for matters with a long temporal reach.

Those who follow state politics may find this all a bit ironic. Wisconsin’s recent election was a decisive victory for Republicans, who captured both houses of the legislature and the Governor’s office on a message which may strain the state’s motto, “Forward.”

If Republicans keep their word, tax breaks for the rich and elderly will replace education and healthcare spending for the young and unborn; fossil fuel (old tech) subsidies will replace biofuel (new tech) development; and the University may have to fight to continue its path-breaking stem-cell research, certainly a way to kill both jobs in the present and medical miracles in the future. This may be good for baby boomers, but isn’t likely so hot for their grandkids.

Hope you die before I get old

Wisconsin’s liberals are, of course, despondent over their loss of power and position.  Yet, forecasting and discounting long-term causation are among the things that make questions of intergenerational equity  so interesting and difficult.  I doubt Newt Gingrich thought in 1994 that the Contract with America would virtually assure Bill Clinton a second term, but today the former seems to have led to the latter.   Likewise, it is certain that neither Jeremy Bentham nor Pete Townshend could have predicted the duration of their memetic contributions to today’s discussions about tomorrow.  They probably just thought it was all rock and roll.

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Sexing the Law Firms

The Am Law Daily recently had the following lede:  “Can Bill Henderson, the one-man idea factory and Indiana law professor, do for the study of law firms what Indiana’s most famous academic, Alfred Kinsey, did for the study of sex?”

Per Am Law, Henderson and others have started Lawyer Metrics which, according to their website, will  “design and build evidence-based systems to select, develop and retain world-class lawyers and counselors.”

No beef there.  The part I didn’t understand was Am Law’s analogy to Kinsey.  At first I thought it was a typo:  They must have meant McKinsey, the management consulting gurus who brought you Enron.   But no.   That’s really a reference to the man who, according to Wiki,

Kinsey's lawyers, in lust

is generally regarded as the father of sexology, the systematic, scientific study of human sexuality. He initially became interested in the different forms of sexual practices around 1933, after discussing the topic extensively with a colleague, Robert Kroc. It is likely that Kinsey’s study of the variations in mating practices among gall wasps led him to wonder how widely varied sexual practices among humans were.

Now that’s evidence-based for you.

This leads to two questions.  First, is Henderson’s goal viable?  His work is great, so I have no doubt that if it can be done, he can do it.  But if, as my friend Claire Hill points out, career development in large law firms is as  much about social skills and judgment as technical acumen, what is the formula going to look like?  According to Am Law, Henderson is starting with expressed preferences of lawyers at large firms.   But is that really what matters?  Is it, instead, about dollars, wins, losses, closings or something else entirely?  Is the dependent variable simply “partner,” against which we regress everything we can think of (e.g., LSAT, GPA, law school, etc)?  Doubtless, Henderson & Co. have thought of these questions, so we will have to await any findings they publish.

Second,  is the analogy to Kinsey so inapt?  Given the f*cking many recent (and not-so-recent) grads have experienced in Big Law, maybe not.

Mating gall wasps courtesy of Wikimedia.