Category: General Law


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.


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.


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.


“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?


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.


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).


Sunshine on a Cold Winter Day

“Sunlight is said to be the best of disinfectants: electric light the most efficient policeman.” Justice Louis D. Brandeis, Other People’s Money

Neil Barofsky, special inspector general overseeing the trouble asset relief program has raised questions regarding the role of the Federal Reserve Bank of New York in American International Group, Inc.’s (AIG) efforts to conceal the identities of counterparties who received full payment for credit default swap agreements after AIG’s near collapse. The Federal Reserve has been chided for paying the full value of the agreements rather than negotiating discounted payments and accused of assisting AIG in concealing the payments in filings delivered to the SEC. Today, Secretary of the Treasury and former President of the New York Federal Reserve, Timothy Geithner will respond to Congressional inquiries regarding evidence that the Federal Reserve assisted in efforts to conceal counterparty payment details.

Last year in mid-March, AIG reported that during the period from September through December 2008, the company suffered severe valuation losses on its senior multi-sector credit default swap (CDS) portfolio. In response, the Federal Reserve provided AIG with an emergency loan of $85 billion; government aid has since grown to $182.5 billion. With the aid received from the Federal Reserve, AIG made two significant sets of payments. AIG paid its counterparties and bonuses to its executives and employees.

According to the Federal Reserve, the “special” nature and role of AIG and its counterparties in the financial system justified urgent intervention and full payment to counterparties. The funding included collateral of $22.4 billion paid to private counterparties to CDS agreements (a $2.5 billion payment to Goldman Sachs and over $6.0 billion to foreign banks, Société Generale and Deutsche Bank). In all, AIG paid over $52.0 billion to terminate outstanding CDS agreements and related arrangements.

Putting aside for another day the veracity of the allegations of conspiracy, the payments to counterparties and bonuses last March illuminate two significant issues that reform of the credit derivatives industry must address – the intricate web of financial institutions engaged in the credit derivatives market and the factors allowed to influence the enterprise and systemic risks undertaken by these types of institutions. I’ll plan to take up the latter issue in a future posting.

The systemic risk concerns that prompted the Federal Reserve’s bailout of AIG beg the question of whether financial institutions are the types of entities that ought to be allowed to engage in the origination and trading of credit derivative instruments. The Federal Reserve has argued that its decision to lend AIG discounted funds prevented its counterparties from suffering losses and a broader systemic disruption of the financial system. Few disagree that emergent intervention was necessary to prevent a domino-effect across the market if AIG failed to make payments on credit default swap agreements and secured lending arrangements. Looking back, even if we were required to act once the arrangements were in place, we must ask about the values assigned to those agreements in light of AIG’s pending collapse and perhaps more importantly, why institutions of such unique significance were permitted to engage in such risky activities.

How did banks and insurance companies become involved in trading credit derivatives like credit default swap agreements? Many point to the Gramm-Leach-Bliley Act’s deregulatory era repeal of the Glass-Steagall Act, eliminating the forced separation of banking and insurance and securities underwriting activities, as the first step in the wrong direction. Others nod toward decisions by the Office of the Comptroller of the Currency (OCC) adopting increasingly permissive standards for determining the appropriateness of banks and bank holding companies’ participation in the derivatives market. Despite the uncertain nature of the risks related to derivatives trading and the systemic risks of the opaque derivatives market, the OCC concluded that the risks related to activities undertaken in the derivatives markets were similar to the credit risks posed by banks’ traditional lending activities.  As Professor Saule Omarova notes, the OCC’s conclusions reflect either a lack of understanding of the risks and complexities associated with derivatives trading or a willfulness to ignore such concerns.

Lots of questions remain unanswered. We eagerly await testimony in today’s hearings to see if there will be bursts of sunlight on this cold winter day.


Would You Like Some Constructive Criticism?

Today’s post on the upcoming law review submission period got me thinking. If it was feasible, would law professors like to receive feedback from law review editors with their rejections?

Written feedback is probably unrealistic outside of cases where an article is rejected at the very last stage of the game (where some law reviews already provide an explanation), but it’s possible that journals (or even Expresso) might adopt a quick online checklist that they could pass on to submitters (“The article was rejected because it was judged to be [select one or more]: (1) lacking in originality / derivative of other work, (2) in a topic area recently published/accepted by the journal, (3) too long, (4) poorly supported/cited, (5) unclear / too difficult to understand, (6) out-of-date / no longer relevant, (7) . . .”).

Learning that one law review rejected your article because they thought it was “poorly supported/cited” wouldn’t tell you much, but if you got ten such rejections that might help you in the next submission cycle. I think when a piece isn’t flying off the shelves, most law professors may have an inkling why that is, but, then again, they may not. The reservation your senior colleague, wife, or grandmother had about your article isn’t necessary the same one that a law review editor has.

Maybe more information is good and, for the thin-skinned of us out there, perhaps we can opt-into an alternative checklist that softens the blow:

Ο      Congratulations, we would like to accept your article.

Ο      I think we should see other people.

×      It’s not you; it’s me.


Meet Mrs. Shipley

Is it sensible to analogize between the first decade of the War on Terror and the first decade of the Cold War?  What lessons can we draw from the comparison?  I am finishing a manuscript to be published by the University of Michigan Press with the working title International Travel, National Security, and the Constitution in War and Peace.  In the book, I plan to defend this analogy, at least when it comes to the role travel restrictions have played in the national security policies of that time and our own.

Some officials and experts whom I’ve interviewed for this project thinks that this is a bad idea!  They point to differences they perceive between terrorism, al Qaeda, and asymmetrical warfare on the one hand, and communism, the Soviet Union, and the Cold War balance of power on the other.  But I also think that their reluctance to embrace the analogy is partly driven by the disconcerting feeling that it teaches the wrong lesson.  Maybe we over-reacted then, they sometimes concede, but we are certainly not over-reacting now.  Whatever shadows we boxed during the Red Scare, terrorism today is the real deal.

I’m keeping the analogy as a core feature of my book because I think that history has a lot to teach us.  Back then, very thoughtful people were certain that communism was a clear and present danger that required extraordinary measures to defeat.  The issue isn’t the objective merit of the threat assessment, but how we react to the threats we perceive.  After the break, I’ll give you a taste of this analogy by way of introducing Mrs. Ruth Shipley, whom Time magazine described in 1951 as: “the most invulnerable, most unfirable, most feared and most admired career woman in Government.”  Not only was she powerful, she was also one of a very small cohort of women to rise to the commanding heights of power in the Washington of her day.  Here she is receiving the Distinguished Service Medal from John Foster Dulles:

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Ideas that Don’t Work

Believe it or not, some of my ideas are terrible.  Students or new scholars may have the false impression that people who write a lot never mess up or hit their heads against the wall in frustration.  So I thought I’d talk a little about why, as far as I can tell, some articles work and others do not.

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