Probably not, but Alison Frankel does a nice job of parsing the State Deartment's mealy mouthed record on the issue.
Probably not, but Alison Frankel does a nice job of parsing the State Deartment's mealy mouthed record on the issue.
In a recent WSJ column, Lisa Rickard did a great job analyzing the decision Delaware's legislature will sonn face with respect to fee shifting bylaws:
Specifically, the controversy hinges on whether a company can adopt bylaws allowing it to claw back some of its legal costs if plaintiffs lawyers bring an abusive shareholder lawsuit and lose in court. ...
The debate over fee shifting was ignited in May, after ATP Tour Inc., the Delaware-incorporated company that oversees men’s professional tennis, tried to enforce a fee-shifting provision in its bylaws after it won a lawsuit brought by members challenging changes to the tour schedule and format. The Delaware Supreme Court ultimately determined that ATP was within its rights to adopt the provision under state law.
Weeks after the court’s ruling, the Delaware legislature, cheered on and supported by the powerful state plaintiffs bar, attempted to pass a law “fixing” the Delaware Supreme Court’s decision. Far from a fix, the bill would have outlawed a company’s ability to use the fee-shifting tool to protect itself against frivolous litigation.
Loud protests from national, state and local business groups, as well as individual companies caused the legislature to rethink its approach. But the legislature hit only the pause button, asking the Delaware Bar’s leadership to “study” the matter this fall before recommending to the legislature a revised provision to be considered early next year.
In an earlier post, I made the case that the Delaware legislature ought to authorize and validate fee shifting bylaws. But will it?
In this post, I view the problem through a public choice lens. As I see it, there are two questions: (1) What's in the state of Delaware's best interest? (2) What's in the best interest of the key interest group that would be affected by fee shifting bylaws? As we'll see, I think those questions have different answers. Predicting what Delaware will decide is thus quite difficult.
The Legislature's Incentives to Preserving Delaware's Dominance
Back in the nineteenth century state corporation laws gradually moved in the direction of increased liberality, making the incorporation process simpler on the one hand, while at the same time abandoning any effort to regulate the substantive conduct of corporations through the chartering process. In later years, this process became known as the “race to the bottom.” Corporate and social reformers believed that the states competed in granting corporate charters. After all, the more charters (certificates of incorporation) the state grants, the more franchise and other taxes it collects. According to this view, because it is corporate managers who decide on the state of incorporation, states compete by adopting statutes allowing corporate managers to exploit shareholders.
Many legal scholars reject the race to the bottom hypothesis. According to a standard account, investors will not purchase, or at least not pay as much for, securities of firms incorporated in states that cater too excessively to management. Lenders will not make loans to such firms without compensation for the risks posed by management’s lack of accountability. As a result, those firms’ cost of capital will rise, while their earnings will fall. Among other things, such firms thereby become more vulnerable to a hostile takeover and subsequent management purges. Corporate managers therefore have strong incentives to incorporate the business in a state offering rules preferred by investors. Competition for corporate charters thus should deter states from adopting excessively pro-management statutes. The empirical research appears to bear out this view of state competition, suggesting that efficient solutions to corporate law problems win out over time.
Whether state competition is a race to the bottom or the top, there is no question that Delaware is the runaway winner in this competition. More than half of the corporations listed for trading on the New York Stock Exchange and nearly 60% of the Fortune 500 corporations are incorporated in Delaware. Proponents of the race to the bottom hypothesis argue that Delaware is dominant because its corporate law is more pro-management than that of other states. Those who reject the race to the bottom theory ascribe Delaware’s dominance to a number of other factors: There is a considerable body of case law interpreting the Delaware corporate statute (DGCL), which allows legal questions to be answered with confidence. Delaware has a separate court, the Court of Chancery, devoted largely to corporate law cases. The Chancellors have great expertise in corporate law matters, making their court a highly sophisticated forum for resolving disputes. They also tend to render decisions quite quickly, facilitating transactions that are often time sensitive.
Whether one thinks Delaware’s dominance is because the state is winning the race to the top or the race to the bottom, there is no doubt that Delaware benefits significantly from its dominance. Delaware does get an astonishing percentage of state revenues from incorporation fees and franchise taxes. In some years, Delaware's annual revenues from these sources constitute up to 30% of the state's budget – an estimated equivalent of $3,000 for each household of four in the state. Given the importance of franchise taxes and other corporate fees to Delaware’s budget it would be surprising if such competition did not suffice to keep Delaware on its toes. If Delaware isn’t racing, it is at least fast walking.
The question thus becomes: How would banning fee shifting bylaws affect Delaware’s competitive position. In my view, Delaware’s competitive position would be adversely affected by doing so.
As I observed in an earlier post, quoting Kevin LaCroix:
… while the Delaware legislative initiative is on hold, at least one legislature has gone forward to provide for the awarding of fees against unsuccessful derivative lawsuit claimants. ...
... the “loser pays’ model that the Oklahoma legislation adopts is extraordinary — It represents a significant departure from what is general known as the American Rule, under which each party typically bears its own cost. And unlike the fee-shifting bylaws being debated in Delaware –which would in any event require each company to decide whether it was going to adopt the bylaw (and might therefore be subject to shareholder scrutiny) — the Oklahoma legislation applies to any derivative action in the state, even if the company involved is not an Oklahoma corporation.
If more states follow Oklahoma's lead, Delaware's need to remain at the forefront of corporate law may be enough to overcome the self-interested lobbying by lawyers (both defense and plaintiff) who hate loser pays.
John Coffee has similarly observed that a ban by “Delaware might fuel an interjurisdictional competition, as other, more conservative states (think, Texas) might seek to lure companies to reincorporate there to exploit their tolerance for such provisions.”
The effect of banning fee shifting bylaws on Delaware’s dominance might only be marginal, but Delaware has kept its position at the top of the corporate law heap by responding to even marginal threats.
So what’s in Delaware’s best interest? If you’re a Delaware taxpayer, the answer is clear: Endorse and validate fee shifting bylaws.
The Interest Group that Matters
My late friend Larry Ribstein once observed that:
Professors Jonathan Macey and Geoffrey Miller argue that lawyers may be the group that most influences Delaware corporate law. Delaware lawyers have all of the attributes of a politically powerful interest group: they are already organized into bar associations and maintain an advantage over other groups because they continually learn about the law as a consequence of their profession; they are centered in a single city (Wilmington), in a small state and, therefore, can communicate with each other at minimal costs; and they provide an important service for legislators in drafting legislation on complex commercial and corporate matters.
Delaware lawyers, in essence, are the Delaware legislature, at least insofar as corporate law is concerned. Delaware has one of the three smallest legislatures in the country. Its legislative committees are virtually inactive. Most striking, however, is that few of Delaware's legislators are lawyers. Such legislators are likely to rely on lawyers to supply sophisticated commercial and business legislation. As a result, virtually all of Delaware corporate law is proposed by the Delaware bar, and the bar's proposals invariably pass through the legislature.
The Macey and Miller article to which Ribstein refers exhaustively reviews the various interest groups that might influence the production of Delaware law and conclude that “the bar is the most important interest group within this equilibrium. Thus, the rules that Delaware supplies often can be viewed as attempts to maximize revenues to the bar, and more particularly to an elite cadre of Wilmington lawyers who practice corporate law in the state.” They further explain that:
The Delaware bar is interested in maximizing one specific portion of the indirect costs of Delaware incorporation—fees to Delaware lawyers paid for work on behalf of Delaware corporations. These legal fees are functionally related to the number of charters in Delaware in the sense that the expected legal revenues will increase as the number of corporations chartered in the state increases. Accordingly, the bar would tend to favor low franchise fees, because keeping the fees low will tend to increase the number of Delaware corporations. But the bar could also benefit from legal rules that increase the amount of expected legal fees per corporation, even if such rules, by imposing additional costs on Delaware corporations, reduced the absolute number of firms chartered in the state. If the legal fees gained exceed the fees lost by deterring Delaware incorporation, the bar would prefer to adopt rules that did not serve the interests of the other interest groups within the state. In this respect, the bar's interests are opposed to the interests of all other groups.
How then would fee shifting bylaws affect the income of Delaware lawyers? It seems fair to assume that there will be a net reduction in shareholder litigation as a result of fee shifting bylaws becoming widespread. As Kevin LaCroix observed, quoting the Delaware Supreme Court’s ATP Tour decision:
Fee shifting provisions “by their nature, deter litigation.”
This would adversely affect not just plaintiff lawyers, but also defense lawyers. After all, fewer lawsuits mean less work for defense litigators too:
The bar … does benefit from increasing the amount of litigation and accordingly would tend to favor litigation-increasing rules …. Delaware could stimulate litigation [by making] litigation cheaper by reducing the costs to the parties, especially plaintiffs who make the initial choice of forum.
Both sides of the litigation bar thus have a strong interest in banning fee shifting bylaws. Such bylaws would raise plaintiff costs, deterring lawsuits, reducing fees for all litigators.
Widespread adoption of fee shifting bylaws could also adversely affect transactional lawyers. Litigation risk is a major driver in the level of advisory work. As Jonathan Macey observed, for example, Delaware case law has given corporate directors “significant incentives to cloak their decisions in a dense shroud of process and to take other steps that will generate high fees for lawyers, investment bankers, and other advisors (who, incidentally, are precisely the same people who advise companies to incorporate in Delaware in the first place).” Fee shifting bylaws would reduce those incentives and thus decrease the demand for advisory work by lawyers.
All corporate lawyers—litigators and transactional—have a strong incentive to oppose fee shifting bylaws. Hence, it was no surprise that the Delaware legislature—dominated in this area by the Delaware bar—leaped to ban such bylaws. The business groups that favor fee shifting bylaws were able to delay that action. But the final decision remains pending.
Update: You should check out Brett McDonnell's comment below. Also consider the point being made by Usha Rodrigues:
Certainly litigators want litigation. But deal lawyers don't want it--at least, not this particular kind of litigation. Indeterminacy over doctrinal areas like good faith is good for transactional types as well as litigators, because it gives them more nuances and risks to have to explain at length to boards as they advise on various types of action. The type of fee-shifting bylaw we're discussing, in contrast, is bad for deal lawyers--at least, if you think, as Steve does, that
There is a serious litigation crisis in American corporate law. As Lisa Rickard recently noted, “where shareholder litigation is reaching epidemic levels. Nowhere is this truer than in mergers and acquisitions. According to research conducted by the U.S. Chamber Institute for Legal Reform, lawsuits were filed in more than 90% of all corporate mergers and acquisitions valued at $100 million since 2010.” There simply is no possibility that fraud or breaches of fiduciary duty are present in 90% of M&A deals. Instead, we are faced with a world in which runaway frivolous litigation is having a major deleterious effect on U.S. capital markets.
If these suits amount to nothing more than a litigation tax on deals, then they discourage deals. And that's bad for deal lawyers.
The debate over fee shifting bylaws will come to a head in the Delaware legislature early in 2015. It is shaping up to be a fascinating test of whether the Delaware bar’s grip on Delaware corporate law will be strong enough to overcome the incentives Delaware legislators have to remain the most attractive state of incorporation. Because endorsing fee shifting bylaws is the right answer from a policy perspective, those of us who do not have a dog in that specific fight can only hope that the latter position prevails. To end with a classic cliché, however, only time will tell.
In my seminar on Catholic Social Thought (CST) and the Law tonight’s discussion focuses on usury. Why does the Church oppose usury? What is the current teaching on usury? What is usury? Has the Church’s definition of usury and/or its position on usury changed over time? If so, what does that mean for other Church teachings?
Modern American law defines usury using a four factor test: “1) A loan, express or implied. 2) An understanding between the parties that the money loaned must be repaid. 3) In consideration of the loan, a greater rate of interest than is allowed by law is paid or agreed to be paid by the borrower. 4) A corrupt intent to take more than the legal rate for the use of the money loaned.” Kraft v. Mason, 668 So. 2d 679 (Fla. Dist. Ct. App. 1996).
How well does that definition map to CST’s understanding of usury?
Our discussion is bookended by statements from two Popes named Benedict. First, Vix Pervenit (On Usury and Other Dishonest Profit) by Pope Benedict XIV, issued in 1745. Second, Pope Benedict XVI’s Encyclical Letter Caritas in Veritate (Charity in Truth), which was issued in 2009.
Candidly, I find neither to be very helpful at first glance. Benedict XIV, for example, wrote that “it is essential for these people, also, to avoid extremes, which are always evil. For instance, there are some who judge these matters with such severity that they hold any profit derived from money to be illegal and usurious; in contrast to them, there are some so indulgent and so remiss that they hold any gain whatsoever to be free of usury.”
The implication that not all investment profit is usurious is seemingly confirmed by Benedict’s further statement that:
“We do not deny that at times together with the loan contract certain other titles-which are not at all intrinsic to the contract-may run parallel with it. From these other titles, entirely just and legitimate reasons arise to demand something over and above the amount due on the contract. Nor is it denied that it is very often possible for someone, by means of contracts differing entirely from loans, to spend and invest money legitimately either to provide oneself with an annual income or to engage in legitimate trade and business. From these types of contracts honest gain may be made.”
Likewise, Benedict XVI was careful to draw a distinction between microcredit (of which he approved) and usury (which he condemned):
“The weakest members of society should be helped to defend themselves against usury, just as poor peoples should be helped to derive real benefit from micro-credit, in order to discourage the exploitation that is possible in these two areas.”
But where then is the line between what is licit and what is not? (Or, as one of my students asked, is this ambiguity a feature or a bug?)
In An Essay on Mediaeval Economic Teaching (1920), George O’Brien explains that the origins of CST’s position on usury can be traced far back even into Scripture, but that it was Saint Thomas “Aquinas who really put the teaching on usury upon the new foundation, which was destined to support it for so many hundred years, and which even at the present day appeals to many sympathetic and impartial inquirers.” O’Brien quotes Aquinas at some length:
“… we must observe that there are certain things the use of which consists in their consumption; thus we consume wine when we use it for drink, and we consume wheat when we use it for food. Wherefore in such-like things the use of the thing must not be reckoned apart from the thing itself, and whoever is granted the use of the thing is granted the thing itself; and for this reason to lend things of this kind is to transfer the ownership. Accordingly, if a man wanted to sell wine separately from the use of the wine, he would be selling the same thing twice, or he would be selling what does not exist, wherefore he would evidently commit a sin of injustice. In like manner he commits an injustice who lends wine or wheat, and asks for double payment, viz. one, the return of the thing in equal measure, the other, the price of the use, which is called usury.
“On the other hand, there are other things the use of which does not consist in their consumption; thus to use a house is to dwell in it, not to destroy it. Wherefore in such things both may be granted; for instance, one man may hand over to another the ownership of his house, while reserving to himself the use of it for a time, or, vice versa, he may grant the use of a house while retaining the ownership. For this reason a man may lawfully make a charge for the use of his house, and, besides this, revendicate [i.e., “to bring action under civil law to enforce rights in specific property whether corporeal or incorporeal or movable or immovable’] the house from the person to whom he has granted its use, as happens in renting and letting a house.
“But money, according to the philosopher, was invented chiefly for the purpose of exchange; and consequently the proper and principal use of money is its consumption or alienation, whereby it is sunk in exchange. Hence it is by its very nature unlawful to take payment for the use of money lent, which payment is known as usury; and, just as a man is bound to restore other ill-gotten goods, so he is bound to restore the money which he has taken in usury.”
Aquinas’ analysis rests on the proposition that a loan for consumption—a so-called contract of mutuum in Roman law—is a sale. In turn, Aquinas reasoned, the essential moral and ethical requirement in any sale was “the fixing of a just price.” Because the contract of mutuum “was nothing else than a sale of fungibles,” “the just price in such a contract was the return of fungibles of the same value as those lent.” Finally, a loan of money was deemed to be a loan for consumption of the money. Accordingly, one who lent money was entitled to nothing more than “the return of the same amount of money.” O’Brien thus concludes:
“The scholastic teaching … on the subject was quite plain and unambiguous. Usury, or the payment of a price for the use of a sum lent in addition to the repayment of the sum itself, was in all cases prohibited. The fact that the payment demanded was moderate was irrelevant; there could be no question of the reasonableness of the amount of an essentially unjust payment. Nor was the payment of usury rendered just because the loan was for a productive purpose--in other words, a commercial loan.”
This would seem to render the entire edifice of modern finance morally indefensible. As one of my students noted: “When credit cards, consumer credit, student loans, home mortgages, and car payments run virtually everyone’s lives, who seriously considers what it would mean for the charging of interest to be potentially immoral, at least as usury was understood biblical and in ancient and medieval Church doctrine?”
We turn then to Judge John T. Noonan’s book A Church that Can and Cannot Change: The Development of Catholic Moral Teaching. According to Wikipedia:
“John Thomas Noonan, Jr. (born October 24, 1926) is a Senior United States federal judge on the United States Court of Appeals for the Ninth Circuit, with chambers in San Francisco, California. … Noonan was the 1984 recipient of the Laetare Medal, awarded annually since 1883 by Notre Dame University in recognition of outstanding service to the Roman Catholic Church through a distinctively Catholic contribution in the recipient's profession. Noonan has served as a consultant for several agencies in the Catholic Church, including Pope Paul VI’s Commission on Problems of the Family, and the U.S. Catholic Conference’s committees on moral values, law and public policy, law and life issues. He also has been director of the National Right to Life Committee.”
There is no doubt that Noonan is a brilliant lawyer and a devout Catholic. Yet, his view of Church history has been controversial. In its review of Noonan’s book, the NY Times wrote:
“Noonan drives home the point that some Catholic moral doctrines have changed radically. History, he concludes, does not support the comforting notion that the church simply elaborates on or expands previous teachings without contradicting them.”
In contrast, Avery Cardinal Dulles warned in a review of Noonan’s book published in First Things “that Noonan manipulates the evidence to make it seem to favor his own preconceived conclusions. For some reason, he is intent on finding ‘discontinuity’ but he fails to establish that the Church has reversed her teaching in any of the four areas he examines.” So we proceed with the proverbial grain of salt close at hand.
Noonan starts by drawing the reader’s attention to the Parable of the Talents. The power of teaching by parables is that the audience accepts the secular analogy as obviously correct. When the master praises the two servants who doubled the sums they had been given and condemns the one who simply buried (unproductively) the sum he had been given, the import was that earning a return by productively investing money was legitimate. Indeed, the point is rammed home when the master tells the bad servant that, at the bare minimum, he should have taken the talent to the moneylenders to be lent out for a return.
Yet, Noonan cautions that there are aspects of the parable that implicate ancient Hebrew teachings on usury. (The Old Testament contains many injunctions against usury. See William M. Woodyard & Chad G. Marzen, Is Greed Good? A Catholic Perspective on Modern Usury, 27 BYU J. Pub. L. 185, 192 (2012).) In addition, of course, the other famous Gospel passage in which money changers” appear is that in which Jesus drives them from the Temple, which would seem to condemn money lending. Yet, here again, Noonan is cautious, suggesting that “money changers” may not have been bankers.
Instead, Noonan identifies the key Gospel passage as being Luke 6:35:
“…love your enemies and do good to them, and lend expecting nothing back; then your reward will be great and you will be children of the Most High, for he himself is kind to the ungrateful and the wicked.”
The Church’s teaching on usury, Noonan argues, springs from the phrase “expecting nothing back.” The Early Church Fathers saw this passage as a “fulfillment of Mosaic law by way of expansion; the Christians were to love their enemies and to lend without seeking any benefit.” The Fathers thus refused to acknowledge a distinction between a creditor taking interest where the borrower made a profit from the use to which the loan proceeds were put and a creditor taking interest where the borrower used the loan proceeds to buy food to survive.
Personally, I find that distinction a valid one. The Church teaches that there is a preferential option for the poor. The relevant consideration in assessing the morality of lending thus might not be the paying and receiving of interest, but rather the impact of various lending practices on the poor. Put another way, as one of my students argued, the problem is when “a financially stronger party is exploiting a financially weaker or less financially knowledgeable party to an extent which can be said to be morally unjust.” (Note that Benedict XVI’s distinction between usury and beneficial micro-credit might be seen as reflecting this distinction. Note also the discussion below in which Cardinal Dulles embraces this distinction.)
In any case, Noonan argues that during the Middle Ages and continuing right up until the middle of the 1800s the Church’s canon lawyers developed a complex set of rules under which, for example, it was licit for a capitalist to invest money in a partnership (societas) with the expectation of earning a profit.[*] Eventually the exceptions swallowed the rule.
All of which leads us to the $64 question: If Noonan is right about usury, does that mean the entire Magisterium is up for grabs? But that is also a question for a another day.
Returning to the narrower question of usury, Avery Cardinal Dulles does not dispute Noonan’s presentation of “the interplay between moral teaching and the emergence of new economic systems.” but Cardinal Dulles argues that there was no “reversal of the original teaching but rather a nuancing of it.”
“The biblical strictures on usury were evidently motivated by a concern to prevent the rich from exploiting the destitution of the poor. But when capitalists of early modern times began to supply funds for ventures of industry and commerce, the situation became different. Moralists gradually learned to place limits on the ancient prohibition, so as to allow lenders fair compensation for the time and expenses of the banking business, the risks of loss, and the lenders’ inability to use for their own advantage what they had loaned out to others.
“These concessions do not seem to me to be a reversal of the original teaching but rather a nuancing of it. The development, while real, may be seen as homogeneous. In view of the changed economic system the magisterium clarified rather than overturned its previous teaching. Catholic moral teaching, like contemporary criminal law, still condemns usury in the sense of the exaction of unjust or exorbitant interest.”[†]
In this telling, as Woodyard and Marzen note, the key insight was that usury “was not defined as taking interest on a loan, but rather the acquiring of gain and profit in the situation where one did not undertake any effort or incur any expense or risk.” This definition allowed the development of modern finance once theologians and canon lawyers recognized that “most banks and commercial entities undertook some amount of risk in lending money in the era of Renaissance commerce.”
What then are we to make of Benedict VXI’s seeming revival of the condemnation of usury? Woodyard and Marzen argue that Benedict’s major point in fact was that:
“… in today's modern economic world, regulation of the financial industry is essential to protect the weakest and most vulnerable in society. It is, in essence, a reaffirmation of contemporary Catholic teaching of the preferential option for the poor, which dictates that the greatest of care must be taken for the most vulnerable in society.”
Note, however, that this does not mean one must embrace Elizabeth Warren’s view of financial regulation. Recall that, insofar as prudential judgments about the economy are concerned, Pope John Paul II emphasized that the “church has no models to present.” (Centesimus Annus ¶ 13) As the Catechism (¶ 899) thus teaches, the Church especially encourages lay initiative “when the matter involves discovering or inventing the means for permeating social, political, and economic realities with the demands of Christian doctrine and life.” There thus is a space in which those of us who are both Christians and fans of free markets may work to develop regulatory schemes that optimally protect the poor and stimulate economic growth and vitality.
I thus do not read Caritas in Veritate as changing our understanding of usury as being focused on excessive interest rates, especially “the acquiring of gain and profit in the situation where one did not undertake any effort or incur any expense or risk.”
The problem in operationalizing that insight, of course, is the difficulty of determining what is an “excessive” rate:
“When contracts appear to have very high price terms, a court could determine only with great difficulty whether the high price is due to market power or fluctuations in the costs of inputs. A high interest rate, for example, could result from the creditor's judgment about the risk of default posed by a particular debtor, and generally courts should defer to such judgments. A determination that the creditor has market power requires an evaluation of the structure of the market, a notoriously difficult enterprise usually reserved for antitrust litigation. A seller or creditor with temporary market power as a result of a patent, or some innovation that other market participants have not had a chance to imitate, should (arguably) be permitted to reap above-market returns, for that is how innovation is encouraged in a market economy.
“When contracts appear to have harsh nonprice terms, there is another reason for thinking that these terms are unobjectionable. Even if the seller or creditor has market power, it has the right incentive to supply the terms that parties desire. For example, a debtor might be willing to consent to a harsh remedial term in return for a low interest rate.”
Eric A. Posner, Economic Analysis of Contract Law After Three Decades: Success or Failure?, 112 Yale L.J. 829, 843 (2003).
Given that reality, as one of my students asked, “What can be gained by continuing to talk about usury and how it should influence individual moral decisions, even when it will only have a marginal influence on the broader society?” His answer was that “it may lead individuals as Christians to approach their business affairs with more a grain of salt, shattering what is all too often a complacency with which Christians engage in the affairs of the world and the assumptions the demands of justice do not conflict with our behaviors as workers, business people, and consumers in a capitalist economy.” He also noted that “A return to a traditional understanding on usury might provide an impetus to restore Catholic charitable civic institutions, which can provide a more Christian alternative to the corrupt institutions of a secular society.” Indeed.
[*] One of my students argued that:
The principal practical difference between a loan and an investment into a capitalist venture is the parties who are likely to be involved in such transactions. The parties making and receiving the investment are almost certainly to be relatively sophisticated businessman with some degree of financial literacy. Additionally, those investing in a business or seeking an investment are more likely to have the financial means so that the loss of an investment will not result in abject poverty.
If find that a plausible justification for the distinction, but I am not sure that that is how the Church justified the difference. In the passage from Aquinas quoted above, for example, we see a distinction being drawn between a loan—which is regarded as a transfer of ownership of the money in question—and a temporary lease of a house—in which ownership does not change hands. “For this reason a man may lawfully make a charge for the use of his house, and, besides this, revendicate the house from the person to whom he has granted its use, as happens in renting and letting a house.”
[†] This understanding of usury as the “exaction of … exorbinant interest” may also be reflected in Pope Leo XIII’s condemnation of “Rapacious usury” in Rerum Novarum (1891). As has been noted elsewhere, “To condemn ‘rapacious usury’ is perhaps to indicate that there may be usury that is not ‘rapacious.’ Perhaps, given new economic conditions, there could be interest rates on loans that are not motivated by greed or excess.” The same commentator further notes that:
Leo XIII gives a clearer idea later on in the encyclical about what he might mean by rapacious usury: "The rich must religiously refrain from cutting down the workman's earnings… by usurious dealing." In this paragraph, he lays down the principle that makes usury evil. He writes, "To make one's profit out of the need of another, is condemned by all laws, human and divine.” He makes clear that rich employers must refrain from "usurious dealing" against their poor workers "because the poor man is weak and unprotected, and because his slender means should be sacred in proportion to their scantiness." Usury, then, is an evil because it deprives the poor of even the little they have earned – thus keeping them poor and beholden to their creditors. The poor must be given aid and opportunity to overcome their poverty, not loans designed to keep them bereft even of the little they could otherwise accumulate. The Church always opposed usury due to its tendency to oppress the poor.
Pope Leo XIII thus appears to be articulating a version of the distinction I advanced above between a creditor taking interest where the borrower made a profit from the use to which the loan proceeds were put and, for example, a creditor taking interest where the borrower used the loan proceeds to buy food to survive.
My thanks to Daniel Sokol for calling this paper to my attention:
Is There a Vatican School for Competition Policy? - Tihamer Toth (Competition Law Research Centre, Hungary ; Peter Pazmany Catholic University - Faculty of Law)
ABSTRACT: This paper examines whether the Catholic Church’s social teaching has something to tell to antitrust scholars and masters of competition policy. Although papal encyclical letters and other documents are not meant to provide an analytical framework giving clear answers to complex competition questions, this does not mean that these thoughts cannot benefit businessmen, scholars and policy makers. The Vatican teaching helps us remember that business and morality do not belong to two different worlds and that markets should serve the whole Man. It acknowledges the positive role of free markets, the exercise of economic freedom being an important part of human dignity, yet warns that competition can be preserved only if it is curbed both by moral and statutory rules. It is certainly not easy to find a balance between the commandments to ‘love your neighbor’ and ‘you shall not collect treasure on earth.’ I argue that market conduct that undermines business virtues should be prohibited, either by antitrust or other forms of self- or government-regulation.
The University of California, Los Angeles (UCLA) invites inquiries, nominations and applications for the position of Dean of the UCLA School of Law.
Founded in 1949, the UCLA School of Law is the youngest of the top 20 law schools in the country and is committed to advancing the field of law through strong traditions of progressive teaching, influential scholarship and innovation. One of UCLA’s 11 professional schools, the school has approximately 180 full-time and part-time faculty (of whom 65 are tenure track) who teach approximately 1,100 students enrolled in Juris Doctor (J.D.), Master of Laws (LL.M.) and Doctor of Juridical Science (S.J.D.) programs. The school houses many research centers in such areas as business law; climate change; international and comparative law; food law; real estate; and sexual orientation and gender identity law; and it offers academic specializations in business law and policy; critical race studies; entertainment, media, and intellectual property law; law and philosophy; and public interest law and policy. Eight concurrent degree programs allow students to pursue a J.D. along with a degree in African American Studies, American Indian Studies, Management, Philosophy, Public Health, Public Policy, Social Welfare and Urban Planning. UCLA law faculty are recognized worldwide for their contributions to scholarship, teaching and law reform in a broad spectrum of fields that have significant societal impact – including constitutional law, civil rights and critical race studies, environmental law and policy, criminal law, corporate law, public interest law, employment law, international law and intellectual property.
As the chief executive and academic officer for the school, the dean sets the standard for intellectual engagement and accomplishment by providing strategic vision for and operational leadership of the academic programs. The dean works to advance legal scholarship and education – promoting initiatives within and outside UCLA; enhancing excellence through diversity in educational programs and faculty and student recruitment; and linking the work of law faculty and students to other disciplines, communities and interests within and outside the academy. He/she serves as the school’s public voice, articulating its contributions to local, state, regional, national and international communities and pursuing an aggressive development program to build the school’s resources. Reporting to the executive vice chancellor and provost, he/she serves on the deans council and the council of professional school deans, collaborating with the chancellor, executive vice chancellor and provost, vice chancellors and vice provosts, deans and department chairs at UCLA and across the University of California system.
Ideal candidates will be nationally recognized with demonstrated leadership and administrative experience and a strong commitment to legal education and scholarship. Minimum requirements include a record of distinguished scholarly accomplishment and intellectual leadership in the field of law; substantial administrative leadership; success in external and alumni relations and development; an established record of advancing diversity; and credentials that merit appointment at the rank of full professor.
Situated on 419 acres, five miles from the Pacific Ocean, UCLA is enriched by the cultural diversity of the dynamic greater Los Angeles area, as well as the geographic advantages of Southern California. One of the world’s preeminent public research universities, UCLA is an international leader in breadth and quality of academic, research, health care, cultural, continuing education and athletic programs, with more than 4,000 faculty members who teach approximately 40,000 students in the College of Letters and Science and 11 professional schools. UCLA is consistently ranked among the top institutions nationally for research funding, having generated an average of $1 billion in research grants and contracts annually over the past four years.
Confidential review of applications, nominations and expressions of interest will begin immediately and will continue until an appointment is made. To be ensured full consideration, please email a letter of interest and curriculum vitae to LawDeanSearch@conet.ucla.edu by January 16, 2015. Address inquiries to Traci Considine, manager of executive recruitment in the Office of the Chancellor (310-206-8003).
The University of California is an affirmative action/equal opportunity employer committed to excellence through diversity, and seeks candidates committed to a campus climate that supports equity and inclusion.
The Chamber of Commerce thinks so and I'm inclined to agree.
Kevin Drum poses the titular question, noting that:
We all learned recently that sandwich shop Jimmy John's forces its workers to sign a noncompete agreement before they're hired. This has prompted a lengthy round of blogospheric mockery, and rightfully so. But here's the most interesting question about this whole affair: What's the point?
Laws vary from state to state, but generally speaking a noncompete agreement can't be required just for the hell of it. It has to protect trade secrets or critical business interests. The former makes them common in the software business, and the latter makes them common in businesses where clients become attached to specific employees (doctors, lawyers, agents) who are likely to take them with them if they move to a new practice. But none of this seems to apply to a sandwich shop.
Indeed. There is general agreement that "when you seek to enforce [a] boilerplate noncompete, will a Virginia court uphold the agreement? Probably not." Hillary J. Collyer, FAIRFAX COURT ISSUES SPLIT DECISION ON EMPLOYMENT CONTRACT, 22 No. 10 Va. Emp. L. Letter 2 (2010). Indeed, that can be true even in industries like IT where noncompetes can make sense.
As a result, the usual advice is that one "should not use the same 'boilerplate' noncompete agreement for everyone. For example, with respect to key employees, the agreement should be drafted to reflect that employee's individual job duties and circumstances." William G. Porter II & Michael C. Griffaton, Using Noncompete Agreements to Protect Legitimate Business Interests, 69 Def. Couns. J. 194, 199 (2002).
So why bother? Cynthia Estlund explains that:
Even a manifestly invalid non-compete may have in terrorem value against an employee without counsel. Some employers insert non-compete covenants as near-boilerplate in employment agreements for a wide variety of positions, with little regard to the particulars of the position or to whether employees are privy to protectible information. As far as the law is concerned, employers risk nothing with that sort of overreaching (though the market might sometimes exact a price), and they might succeed in keeping employees from leaving and moving to competitors when they are entitled to do so.
Cynthia L. Estlund, Between Rights and Contract: Arbitration Agreements and Non-Compete Covenants As A Hybrid Form of Employment Law, 155 U. Pa. L. Rev. 379, 423 (2006). She also notes (fn. 32) that "I recently heard of two law students who were required to sign non-compete agreements in pre-law-school jobs (not as high-level executives!). They did so either reluctantly or with little thought because they wanted the jobs, and then later felt compelled to reject attractive job opportunities that they feared might violate the terms of the non-compete agreement."
In sum, my guess is that somebody at Jimmy Johns figured "it can't hurt, it won't cost anything, and there might be some cases where it'll deter employees for leaving for a better paying job." Whether that is desirable and/or sensible is a question I'll leave for the reader.
My dear friend, Georgetown University Professor Anthony Arend interviewed on the legality of USA's strikes against ISIS (or ISIL or IS, as you prefer):
As always, clear and cogent.
Howard Wasserman blogs:
Many sites are talking about Wednesday's Seventh Circuit arguments in challenges to same-sex marriage bans in Indiana and Wisconsin. Judge Posner was in rare form in shredding the states' arguments in support of the bans, particularly in the Wisconsin case (several of the links have either the full audio or audio clips). As usual, there is the debate about whether this is Posner being a bully (Josh Blackman says yes) or Posner being Posner and attacking bad legal arguments and bad lawyering (in fairness to Josh's viewpoint, Posner does not give the lawyers room to answer in real detail).
But the argument highlights Posner's uniqueness as a conservative-but-iconoclastic judge. And sparks this question: What if Posner had been the nominee for the late Reagan/Bush I openings--Scalia, Kennedy (after Bork and Ginsburg both went down), or Souter (replacing Brennan, a fitting seat, since Posner famously clerked for Brennan)?
Perish the thought. I for one am very glad he didn't make it to the SCOTUS for reasons I've blogged several times over the years:
Who runs the world’s most lucrative shakedown operation? The Sicilian mafia? The People’s Liberation Army in China? The kleptocracy in the Kremlin? If you are a big business, all these are less grasping than America’s regulatory system. The formula is simple: find a large company that may (or may not) have done something wrong; threaten its managers with commercial ruin, preferably with criminal charges; force them to use their shareholders’ money to pay an enormous fine to drop the charges in a secret settlement (so nobody can check the details). Then repeat with another large company. ...
... The public never finds out the full facts of the case, nor discovers which specific people—with souls and bodies—were to blame. Since the cases never go to court, precedent is not established, so it is unclear what exactly is illegal. That enables future shakedowns, but hurts the rule of law and imposes enormous costs. Nor is it clear how the regulatory booty is being carved up. Andrew Cuomo, the governor of New York, who is up for re-election, reportedly intervened to increase the state coffers’ share of BNP’s settlement by $1 billion, threatening to wield his powers to withdraw the French bank’s licence to operate on Wall Street. Why a state government should get any share at all of a French firm’s fine for defying the federal government’s foreign policy is not clear. ...
... When America was founded, there were only three specified federal crimes—treason, counterfeiting and piracy. Now there are too many to count. In the most recent estimate, in the early 1990s, a law professor reckoned there were perhaps 300,000 regulatory statutes carrying criminal penalties—a number that can only have grown since then. For financial firms especially, there are now so many laws, and they are so complex (witness the thousands of pages of new rules resulting from the Dodd-Frank reforms), that enforcing them is becoming discretionary.
This undermines the predictability and clarity that serve as the foundations for the rule of law, and risks the prospect of a selective—and potentially corrupt—system of justice in which everybody is guilty of something and punishment is determined by political deals . America can hardly tut-tut at the way China’s justice system applies the law to companies in such an arbitrary manner when at times it seems almost as bad itself.
The article goes on to offer an excellent analysis of the issue of corporate versus individual liability, which I highly commend to your attention.
In the meanwhile, it strikes me that this analysis is apt to the discussion I've been having about Leo Strine's new law review article. You will recall (I trust) that Leo Strine and Nicholas Walter's new article, Conservative Collision Course?: The Tension between Conservative Corporate Law Theory and Citizens United (August 1, 2014), available at SSRN: http://ssrn.com/abstract=2481061, argues that:
Because Citizens United unleashes corporate wealth to influence who gets elected to regulate corporate conduct and because conservative corporate theory holds that such spending may only be motivated by a desire to increase corporate profits, the result is that corporations are likely to engage in political spending solely to elect or defeat candidates who favor industry-friendly regulatory policies, even though human investors have far broader concerns, including a desire to be protected from externalities generated by corporate profit-seeking. Citizens United thus undercuts conservative corporate theory’s reliance upon regulation as an answer to corporate externality risk, and strengthens the argument of its rival theory that corporate managers must consider the best interests of employees, consumers, communities, the environment, and society — and not just stockholders — when making business decisions.
In an initial post, I suggested that:
... it seems entirely plausible that corporate political spending does not erode labor and environmental protections but simply slows the rate at which new regulations are piled onto the mountain of laws to which corporations are already subject. Indeed, maybe such expenditures provide a pro-social service by creating incentives for regulators to take the costs of their rules into account.
In other words, corporate political spending may be purely defensive, as a response to the over-criminalization of business. If so, it seems to me that Strine and Walker's argument is significantly weaker. Their argument depends on corporate political spending being offensive rather than defensive (I think).
BTW, I have decided to write that article entitled "Corporate Social Responsibility in the Night Watchman State" as a response to Strine and Walker. So no swiping my title!
There are a lot of problems with big-ticket settlements like the one the DoJ recently enetered into with Bank of America. First and foremost, they punish the wrong people; namely, BoA's shareholders. BoA shareholders did not make the decisions for which the government prosecuted BoA, but the fine comes out of the company's bottom line and thus out of the shareholders' return. It's unfair and plain bad policy, for reasons we have frequently discussed on this blog before.
But another key problem is that liberal prosecutors frequently divert substantial parts of such settlements to left-wing activist groups. Eliot Spitzer was notorious for doing so (when he wasn't screwing escorts) back when GuvLuv was NY attorney general:
[T]o a host of Empire State charities and well-connected law-school deans, the crusading New York attorney general is acting a lot ... like Santa Claus.
We apparently can add Eric Holder to the list of liberal Santa Clauses:
Radical Democrat activist groups stand to collect millions from Attorney General Eric Holder's record $17 billion deal to settle alleged mortgage abuse charges against Bank of America.
Buried in the fine print of the deal, which includes $7 billion in soft-dollar consumer relief, are a raft of political payoffs to Obama constituency groups. In effect, the government has ordered the nation's largest bank to create a massive slush fund for Democrat special interests. ...
The more we learn about this settlement, the more it stinks.
I recommend a new paper:
Davidoff, Solomon and [Zarig] have put together a paper on the litigation between the government and the preferred shareholders of Fannie Mae and Freddie Mac. Do give it a look and let us know what you think. Here's the abstract:
The dramatic events of the financial crisis led the government to respond with a new form of regulation. Regulation by deal bent the rule of law to rescue financial institutions through transactions and forced investments; it may have helped to save the economy, but it failed to observe a laundry list of basic principles of corporate and administrative law. We examine the aftermath of this kind of regulation through the lens of the current litigation between shareholders and the government over the future of Fannie Mae and Freddie Mac. We conclude that while regulation by deal has a place in the government’s financial crisis toolkit, there must come a time when the law again takes firm hold. The shareholders of Fannie Mae and Freddie Mac, who have sought damages from the government because its decision to eliminate dividends paid by the institutions, should be entitled to review of their claims for entire fairness under the Administrative Procedure Act – a solution that blends corporate law and administrative law. Our approach will discipline the government’s use of regulation by deal in future economic crises, and provide some ground rules for its exercise at the end of this one – without providing activist investors, whom we contend are becoming increasingly important players in regulation, with an unwarranted windfall.
Very interesting new paper by Friedman, Hershey H., The Art of Constructive Arguing: Lessons from the Talmud (July 27, 2014). Available at SSRN: http://ssrn.com/abstract=2472735:
In the highly competitive age of the Internet and globalization, an organization has to be creative to prosper. This means that people have to work together and learn how to have productive meetings. Today’s U.S. Congress is a prime example of what happens when people have lost the ability to argue in a productive manner. The American public has no respect for Congress and refers to it as being worthless and dysfunctional. It is interesting to note that the Talmud which took shape after the destruction of the Temple in 70 CE consists of thousands of disagreements regarding Jewish law yet served as a device to keep the Jewish people united. For example, Abaye and Rava had hundreds of arguments about law in the Talmud yet were the best of friends; they are even buried together in the same cave. Talmudic arguments did not lead to ugly battles but were seen as the way to clarify the law as well as answer philosophical questions. This paper will explore the lessons we can learn from the Talmud about constructive arguing. Nine rules that can be used to ensure that arguments are productive are provided
Naturally, I find myself unable to resist adding this bell and whistle:
My friend and colleague Sung Hui Kim has a very interesting new paper on the parri passu clause in sovereign debt deals (which has featured prominently in the Argentinean debt litigation):
As the ongoing court battle between the Republic of Argentina and NML Capital, Ltd. illustrates, the meaning of pari passu in sovereign debt contracts remains highly contested. This article presents what might be the clearest historical evidence of what the pari passu clause was understood to mean in the pre-war period. It examines Nazi Germany’s defaults of the Dawes and Young Loans during the 1930s. According to this historical evidence, the parties believed that the clause promised parity in payment across different creditor groups (in this context, the various tranches representing nationals of different countries) considered to be part of the same general undertaking. This article reports no evidence to support what may be the most commonly offered interpretation for the clause today — that the pari passu clause was intended to prohibit the sovereign from passing laws that would have the effect of involuntarily subordinating certain creditors. This article also finds no evidence to suggest that the pari passu clause was understood as entitling the aggrieved creditor to a unilateral right to block payments to bondholders who assented to a government’s restructuring proposal.
Kim, Sung Hui, Pari Passu: The Nazi Gambit (April 28, 2014). Forthcoming, Cap. Mkts. L. J. (2014); UCLA School of Law, Law-Econ Research Paper No. 14-09. Available at SSRN: http://ssrn.com/abstract=2430588