Category: General Law

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Volume 59 February 2010 Number 5

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Volume 59      February 2010      Number 5

Article

Searching for Terrorists: Why Public Safety Is Not a Special Need

Ric Simmons

Lecture

Congressional Power over the Jurisdiction of Federal Courts: The Meaning of the Word “All” in Article III

William A. Fletcher

Notes

Wielding the Wand Without Facing the Music: Allowing Utilization Review Physicians to Trump Doctors’ Orders, but Protecting Them from the Legal Risk Ordinarily Attached to the Medical Degree

Katherine L. Record

Losing the Loss Calculation: Toward a More Just Sentencing Regime in White-Collar Criminal Cases

Derick R. Vollrath

Retrieve All Pieces

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Introducing Guest Blogger Lisa Fairfax

I’m thrilled to introduce Professor Lisa Fairfax who will be guest blogging with us this month.  No doubt, Professor Fairfax’s work is familiar to CoOp readers: We often feature her insightful posts from the Conglomerate on our blog.  Now, lucky for us, we get to welcome Professor Fairfax for the month.

Professor Fairfax is the Leroy Sorenson Merrifield Research Professor of Law at the George Washington University School of Law.  She joined the GWU faculty as a Professor of Law in the fall of 2009 where she teaches courses in the business area including Corporations, Securities Regulation, and Seminars on Securities Law and Corporate Transactions.  Professor Fairfax’s scholarly interests include corporate governance matters, shareholder activism, fiduciary obligations, securities fraud, and privatization and education, and she speaks and writes frequently on these and other corporate law topics.  Professor Fairfax is also a permanent writer for the blog, the Conglomerate.

Professor Fairfax is chair of the Business Associations Section of the Association of American Law Schools, and a member of the American Bar Association Business Law Section’s Committee on Corporate Laws, which has jurisdiction over the Model Business Corporation Act. In addition, Professor Fairfax is co-chair of the ABA Governmental Corporation Law Committee, which assists in developing guidelines and commentary for laws regulating government chartered corporations. Professor Fairfax serves on the National Adjudicatory Council and the NASDAQ Market Regulation Committee of FINRA.

Prior to joining GW, Professor Fairfax was a professor of law and director of the Business Law Program at the University of Maryland School of Law, where she was voted Teacher of the Year. Before entering academia, Professor Fairfax practiced corporate law with Ropes & Gray in Boston and the District of Columbia, and graduated from Harvard Law School and Harvard College with honors.

Her recent scholarship includes:

The Future of Shareholder Democracy, 84 Indiana Law Journal 1259 (2009).
The Rhetoric of Corporate Law: The Impact of Stakeholder Rhetoric on Corporate Norms, 31 J. Corp. L. 675 (2006).
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More Citizens United

Thanks to Danielle Citron for giving me the chance to share a few quick thoughts about Citizens United v. FEC. In that decision, as you probably know, the Supreme Court struck down federal campaign finance laws that prohibited corporations from making independent expenditures in connection with federal elections.

Justice Kennedy frames his majority opinion in Citizens United around the basic issue whether “the Government may impose restrictions on certain disfavored speakers,” namely corporations, but in so doing, Justice Kennedy asks the wrong set of questions. Corporations aren’t the relevant actors whose rights we ought to be concerned about. Corporations are not people, nor entitled to all the constitutional rights of individual citizens. But as many supporters of Citizens United argue correctly, we nonetheless invest institutions, such as corporations and political parties, with constitutional entitlements when it appropriately serves the rights of individuals who constitute those institutions. And yes, corporate expenditures would be a more efficient way for shareholders to convert treasury funds into political speech. However, there’s lots of campaign finance regulation that complicates the ability of shareholders or other individuals to direct funds to political speech. For instance, contribution limits restrict the ability of all individuals to deploy their funds to maximum advantage, but the Court (at least so far) permits the government to restrict contributions anyway. In other words, the fact that a government restriction makes shareholder speech more difficult is obviously insufficient by itself to justify a constitutional prohibition of that restriction—we need to know a lot more about how shareholders’ expressive interests are compromised, if at all, to a degree that requires the Court to intervene.

Read More

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Writing the People’s History

On Wednesday, American historian Howard Zinn died at the age of 87. Professor Zinn, a World War II bombardier who used his GI bill to attend NYU and graduate school at Columbia University, was most well-known for authoring several books that provided an alternative perspective on American history with emphasis on issues such as civil rights, civil liberties and the atrocities of war. In evaluating history, Professor Zinn raised critical questions about fairness, equity and distributive justice.

Scholars and journalists are already collecting important narratives of the recent economic crisis. After receiving $9 billion in federal aid in March 2008 and several billion in the succeeding months, in June of last year, General Motors (GM), an icon in American economic history, filed for bankruptcy. In mid-June, while bankruptcy counsel, creditors and the U.S. government orchestrated dispositions of underperforming assets and divisions at GM, the New York Times Magazine published an article examining the impact of the disappearing manufacturing industry on America’s middle class. The article followed the stories of several plant employees who had realized dreams of home ownership, secondary education for their children and an occasional vacation through well-paying jobs at automobile manufacturing companies. The article described one young father’s experience at GM in the years leading up to the credit crisis, the last straw on a high pile of issues that fueled GM’s bankruptcy.

Powell gradually settled in at Pontiac Assembly and was soon piling on as much overtime as he could. In a good week, he worked four 12-hour days and a 16-hour day. Overtime was especially abundant between the beginning of November and Christmas, when hunting season caused rampant absenteeism at the plant. Within two years, he was making $18 an hour, and he and his wife soon saved up enough to put 3 percent down on their $150,000 three-bedroom house in Southfield.

The lack of opportunity, education and training for non-manufacturing jobs presents an ominous albatross in Flint, Detroit, Southfield, Pontiac and other communities in Michigan and throughout the country. Strategies for addressing unemployment and underemployment in the U.S. will have to consider how to address quickly the shifting nature of America’s competitive advantages in the global economy.

In memory of Professor Zinn, we are bequeathed the responsibility of capturing and recording the story of General Motors and the American manufacturing industry as well as the narratives of the Powell family and others.

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J.D. Salinger and unauthorized sequels

J.D. Salinger, who died this week, was not only notoriously private but notoriously protective of his intellectual property rights.   Just last year, he obtained a preliminary injunction against the publication, advertising, or distribution in the U.S. of Sixty Years Later: coming through the rye, an unauthorized sequel to The Catcher in the Rye, by Fredrik Colting, writing under the pseudonym J.D. California.   Under current law, Salinger’s copyrights will not expire until 2080, so Colting’s novel will, perhaps, remain illicit until then.

One of my sabbatical projects (an admittedly self-indulgent one) is to read a series of novels (both in the public domain and under copyright) and their unauthorized sequels/retellings.  I am currently reading Jane Eyre, to be followed by Wide Sargasso Sea.  In honor of J.D. Salinger, though probably to his chagrin, next I will read The Catcher in the Rye and then Sixty Years Later.  I also plan to read King Lear and A Thousand Acres; Pride and Prejudice and Pride and Prejudice and Zombies; Gone With the Wind and The Wind Done Gone; Lolita and Lo’s Diary.   I welcome your suggestions as to other good pairings.

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The End of the Game?

As more and more studies are conducted showing that referees are subject to significant biases beyond their conscious awareness (and, sometimes, in quite plain view . . . yes, hello there, Mr. Donaghy), I wonder how soon we will finally see the death of the “judge as umpire” metaphor (at least in confirmation hearings).

Yesterday, I came across this article about researchers at Rotterdam School of Management, Erasmus University, who found that when faced with ambiguous foul situations, soccer referees were significantly more likely to award a foul to the taller of two involved players. The study involved analyzing over 100,000 fouls committed over a seven year period and is to be published next month in The Journal of Sport & Exercise Psychology.

The work aligns with a growing stack of papers showing that, well, referees are human—swayed by elements in their situations even when they believe they are being utterly objective. At the end of last year, for example, academics in the United States published an article in The Journal of Sports Sciences finding that college basketball referees were biased against visiting teams and that the larger the difference in fouls between two teams, the greater the likelihood that the next whistle would go against the team that had fewer fouls. Other recent studies have found similar home-team bias in the English Premiership (see here and here). And, of course, back in 2007, there was the research on NBA officiating showing that white referees were more likely to call fouls against black players than white players.

As someone who has objected to the judging/refereeing analogy on other grounds before, I, for one, am hoping that the weight of the evidence finally dissuades judges and justices from employing it.

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Conflicts and Competitive Advantage

This week, Toyota announced a massive recall of some of its most popular models, including Highlander, Corolla, Venza, Matrix and Pontiac Vibe. Specifically, “Toyota has recalled 2.3 million vehicles for sticky accelerator pedals . . . and has shut down sales and production of eight models while it works on a fix.” (See here.) Notably, “[t]he Obama administration said it pressed Toyota to protect consumers who own vehicles under recall and to stop building new cars with the problem.” (See here.) Although I understand and appreciate the administration’s concern for consumer safety, I cannot help also seeing a glaring conflict of interest in the administration’s conduct.

As you might recall, the government owns stock in General Motors and Chrysler—key competitors of Toyota. And consider the following: “GM announced today it will offer interest-free loans and other incentives. In and of itself, this is no big deal, but GM is making the offer exclusively to Toyota owners who may now want to get rid of their vehicles because of the recall involving faulty gas pedals.”  (See here.)

GM’s decision might be good business; companies often seek to capitalize on a competitor’s misfortunes. And I suspect that the administration’s involvement in the Toyota recall was unrelated to GM’s business decision regarding the Toyota incentive plan. But it just does not look good, and it highlights the significant issues with the government intervening in and owning private businesses. (For a more detailed discussion of these issues, see here and here.)

Also, as a follow up on my prior post regarding the General Motors and Chrysler bankruptcies and the government’s decision to grant arbitration rights to dealers who are party to rejected franchise agreements, recent reports suggest that over 1,400 dealers are pursuing their arbitration rights. Chrysler also has agreed to participate in the arbitration program.

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“With All Due Deference to Separation of Powers”

As Gerard points out, of the many interesting facets of President Obama’s State of the Union last night (Biden’s choice of a purple tie to signal renewed bipartisan vigor; Justice Ginsburg nodding off, at points, in the front row; Nancy Pelosi’s cold; etc.), Justice Alito’s reaction to the Obama smack-down of Citizens United may have been among the most riveting.

What really intrigued me, however, was not Alito’s reaction, but Obama’s decision to directly criticize a recently decided case with members of the Supreme Court sitting directly below him. Indeed, when he chastised the Court, all of the members of Congress around the justices stood and clapped (see minute 46:07 here). Obama’s speech writers seemed to sense that this might not seem kosher to some observers and so they had him open his commentary on the case with the caution, “With all due deference to separation of powers . . .”

For the historians out there, I’m wondering how often other presidents have criticized the Supreme Court during State of the Union addresses or in other face-to-face interactions.

For everyone else, leaving aside your specific feelings about Citizens United, do you think that Obama’s choice to chastise the justices during the State of the Union is a threat to separation of powers?

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Making Money in a Down Economy

For the past few years, many businesses have struggled to meet payroll and keep the doors open. But such challenges are not bad news for everyone. At least one group of investors (a/k/a distressed debt investors) has found a way to capitalize on the financial troubles of businesses. In fact, recent reports (see here and here) suggest significant above-market returns for hedge funds that utilize a distressed debt investment strategy (e.g., Avenue Capital Group, Third Avenue Funds, Third Point Funds).

A distressed debt investor basically buys the debt of a troubled company and then flips the debt for a quick profit or seeks returns through a longer investment horizon. Investors that fall in the latter category may simply wait for the debt to be refinanced or cashed out, or they may seek to utilize the leverage associated with the debt instrument upon a default or potential default by the company. In fact, “activist” distressed debt investors may use their distressed debt holdings to influence management decisions (think of Carl Icahn’s letter to CIT bondholders) or gain control of the company through a debt-for-equity exchange or credit bid at an asset sale (think of Carl Icahn’s recent acquisition of Tropicana Entertainment and bid for Trump Entertainment).

The existence of an activist investor in a company’s debt holdings can swiftly change the dynamics of the company’s restructuring negotiations. These investors typically want to achieve their objective at the lowest cost (thereby maximizing their upside), which often conflicts with the objectives of other stakeholders. Conflict can lead to delay, expense, litigation and even liquidation. Many companies, such as Adelphia, Aleris, Foamex, Fairpoint, Lyondell and Tropicana Entertainment, have experienced this type of conflict firsthand.

That being said, hedge funds and private equity firms that typically invest in distressed debt may be a good (or the only) source of funding for troubled companies. And their investment objective (maximizing their upside) is understandable given their obligations to their own fund investors and, let’s be honest, the typical fund fee structure.  So the question then becomes who is or should be protecting the interests of other stakeholders to mitigate conflict and obtain a fair deal for the company? Is management, particularly in a distressed situation, up to the task? Even if it is, management typically does not learn about the presence of a distressed debt investor in the company’s capital structure until it is too late. Notably, this issue is beyond the scope of the proposed Hedge Fund Transparency Act of 2009 and the Financial Regulatory Reform: A New Foundation proposal submitted by the Group of 30. Moreover, proposed revisions to Bankruptcy Rule 2019 (requiring some disclosure of holdings) may help some companies and other stakeholders in the bankruptcy context, but again the information may come too late and only for bankrupt companies. And whether you focus on disclosure, representation or accountability in considering the creditor control issue, you certainly need to target more players than just hedge funds and private equity firms.

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A Debate about Connecting the Dots and the Christmas Plot

The last major news story of 2009 was the near-catastrophe on Christmas Day on Northwest Airlines Flight 253.  Debate about the lessons learned from this failed attack continues, and will continue for some time.  

This weekend, I was glad to be invited to join this debate as a participant in the new “Forum” feature over at the online Harvard National Security Law Journal.  Paul Rosenzweig, a former deputy assistant secretary for policy at the Department of Homeland Security, started us off with a short, op-ed style piece: Connecting the Dots and the Christmas Plot.  Two short responses followed yesterday and today.  The first response is by Nathan Sales, now a law professor at the George Mason School of Law and also a former deputy assistant secretary for policy at DHS (accessible here).  The second response is by me (accessible here).