ProfessorBainbridge.com

Smith-Madrone Chardonnay (Napa Valley) 1999

Regular readers of my wine notes know that Smith-Madrone is one of my favorite boutique Napa wineries. They produce excellent wines at very fair prices. Although the wines are neither cheap nor inexpensive, they offer excellent value for wines of such exceptional quality. I picked up this 99 Chardonnay at the winery when I was in Napa last May. Unlike most California chards, which are falling apart at age 3, this wine was still going strong at age 5. I suspect it would have continued to improve for several more years. The wine is driven more by its fruit than oak, although there is a pleasing undertone of buttery oak flavors. I get pineapples and bananas on both the nose and palate. A very nice note of ripe apple also shows on the finish. If you can find it, buy it (try the winery). The dominance of the fruit over oak makes this an especially useful wine with food, whereas so many California chards really don't play well with dinner. It would go great with cracked crab, for example. Grade: A-

Work, work, work .... except in Europe

Historian Niall Ferguson ably summarizes the familiar data on how much less Europeans work than Americans and then offers a very provocative explanation:

I cannot resist suggesting another possible explanation - one that owes a debt to Weber's famous essay The Protestant Work Ethic and the Spirit of Capitalism, which he wrote almost exactly a century ago.

Weber believed he had identified a link between the rise of Protestantism and the development of what he called "the spirit of capitalism". I would like to propose a modern version of Weber's theory, namely "The Atheist Sloth Ethic and the Spirit of Collectivism".

The most remarkable thing about the transatlantic divergence in working patterns is that it has coincided almost exactly with a comparable divergence in religiosity.

It's the sort of theory tailormade for somebody with my particular set of biases, so I'm forcing myself to be very skeptical. In any event, do go read the whole thing. It's very well done.

Smoking in Taverns for Tots

A friend sent along the citation to an amusing new case: Taverns for Tots, Inc. v. City of Toledo, 320 F.Supp.2d 643 (N.D.Ohio 2004):

In summary, Taverns for Tots, ostensibly a nonprofit organization dedicated to raising money for children's charities, was formed on December 20, 2003. Two individuals--one of plaintiff's directors and a bar owner affiliated with plaintiff--testified at the preliminary injunction hearing on February 5, 2004 that Taverns for Tots was formed primarily as a means to enable smoking in bars and restaurants by taking advantage of the exemptions in the Clean Indoor Air Act for membership associations and private social functions. The City argued that plaintiff's charitable purpose--to raise money for needy children--was secondary to that primary goal of avoiding compliance with the anti-smoking ordinance; thus, the City contended, Taverns for Tots could not qualify as a membership association pursuant to the ordinance.

Bars had been holding Taverns for Tots "events" since December 20, 2003, at which smoking was permitted and to which any member of the public could gain admittance on payment of a one dollar lifetime "membership fee." According to plaintiff, because each nightly "event" was held under the aegis of Taverns for Tots and each person present possessed or had purchased a membership card, each of these "events" was sponsored by a "membership association" (namely, Taverns for Tots) under the Clean Indoor Air Act and was thus exempt from the ordinance.

Clever. And I like the name too (query though whether Toys for Tots would have a trademark infringement action). In any event, the court had no sense of humor and issued an injunction banning the organizers of Taverns for Tots events from permitting smoking at such events. Sigh. Personally, I would have liked to see such a clever defense of private property rights rewarded.

Nibbled to Death by Ducks

My latest TCS Daily column

Earlier this year, California Assemblywoman Judy Chu introduced the "Corporate Elections Fairness Act of 2004," which would have given shareholders a much greater role in board of director elections. The bill went significantly further than the SEC's pending shareholder access proposal (and arguably would be preempted by it). For example, the SEC proposal only allows investors who own 5% or more of a corporation's voting stock to nominate a director candidate, but Chu's proposal would have set the threshold at 2%. The bill also proposed requiring that corporations implement shareholder proposals that win a majority vote even if the board of directors thought the proposals to be unwise.

Chu's law generated opposition from almost all quarters and appropriately so. There can be no doubt that giving shareholders access to the proxy statement to nominate directors is going to be expensive by significantly increasing the number of contested elections. Plus there are all the indirect costs. Companies are already having a hard time attracting independent directors. The shareholder access proposal likely will make that search even harder. Why would somebody be willing to serve on the board if he or she might be the one singled out to be ousted? (I've documented these costs in numerous posts at my blog, which are collected in an archive devoted to the SEC's proposal.)

The election of a shareholder representative also will disrupt the delicate internal dynamics that make boards successful. Its effect will be analogous to that of cumulative voting, which allows minority shareholders representation on the board. Experience with cumulative voting suggests that it often leads to pre-meeting caucuses by the majority and a reduction in information flows to the board as a whole. In turn, this results in adversarial relations between the majority and minority board members, which interferes with effective board governance.

In the face of opposition from such disparate groups as the Business Roundtable and CalPERS Chu has now backed way down:

"Chu ultimately decided to retreat when staff from Calpers told her the giant pension fund preferred to follow the SEC process rather than go down another road in California .... 'We felt something of this nature has to happen at the national level,' explained Calpers spokesman Brad Pacheco.

"Instead, at the suggestion of Calpers, Chu introduced a resolution in support of the SEC rules. That whereas-laden resolution won overwhelming support in both branches of the Legislature, but it was essentially just a symbolic gesture."

Speaking as a Californian, I'm of two minds with respect to this iteration of the law. On the one hand, given California's dire financial situation, I don't like seeing the legislature wasting time on mere gestures. On the other hand, given the mischief the California legislature is capable of causing when they deal with substantive issues, maybe we should have them spend more time on gestures and less on real issues.

"Chu also agreed to amend her bill to require that companies provide a process in which shareholders could merely 'recommend' candidates for election as directors and that they file the process with the secretary of state. Chu maintained that requirement still would help shareholders better understand corporate election procedures.

"In June, the bill went through yet another round of tweaking in the state Senate Judiciary Committee, which eliminated the watered-down 'recommend' clause. Those changes turned it into simply a disclosure bill, which would require publicly traded companies to file a copy of their corporate election procedures -- or those portions of the company's articles of incorporation and bylaws that related to nominating and electing directors -- with the secretary of state."

Of course, corporations already make such disclosures as the federal level. Election procedures are described in the proxy statement and annual report required by the SEC. The corporation's articles of incorporation and bylaws are already filed both with the state of incorporation and the SEC.

Granted, as finally amended the law doesn't do much harm. Corporations will just have to file one more piece of paper in one more place. But to what end? How will shareholders benefit? The information to be disclosed is already available in many places, including various places online. Indeed, most corporate investor relations web sites provide access to this sort of information.

"Well, so what," you ask? So corporations spend a few bucks filing disclosure documents nobody will read. Who cares?

Do you know the expression "nibbled to death by ducks"? California's business climate stinks. As the Sacramento Bee reported in February 2004:

"California firms find doing business here so difficult that 40 percent of those surveyed plan to move some jobs out of state and 50 percent will not add jobs within the state, according to a study released Thursday. The report, issued by the California Business Roundtable, said the cost of doing business in the state is 30 percent higher than in other Western states, with regulatory costs the biggest culprit."

Some of the costs California imposes on its businesses come in big chunks. Taxes, worker's compensation, family leave, and so on. Others come in little pieces -- like Ms. Chu's bill -- but throw in enough such laws and the aggregate costs can really add up.

If California is going to stop putting its business community through the death of a thousand cuts, it is precisely these sorts of small, seemingly innocuous laws that must be eliminated. It is time for Sacramento to get serious about cost-benefit analysis and to stop making gestures at the expense of our economy.

Nibbled to Death by Ducks

Earlier this year, California Assemblywoman Judy Chu introduced the "Corporate Elections Fairness Act of 2004," which would have given shareholders a much greater role in board of director elections. The bill went significantly further than the SEC's pending shareholder access proposal (and arguably would be preempted by it). For example, the SEC proposal only allows investors who own 5% or more of a corporation's voting stock to nominate a director candidate, but Chu's proposal would have set the threshold at 2%. The bill also proposed requiring that corporations implement shareholder proposals that win a majority vote even if the board of directors thought the proposals to be unwise.

Chu's law generated opposition from almost all quarters and appropriately so. There can be no doubt that giving shareholders access to the proxy statement to nominate directors is going to be expensive by significantly increasing the number of contested elections. Plus there are all the indirect costs. Companies are already having a hard time attracting independent directors. The shareholder access proposal likely will make that search even harder. Why would somebody be willing to serve on the board if he or she might be the one singled out to be ousted? (I've documented these costs in numerous posts at my blog, which are collected in an archive devoted to the SEC's proposal.)

The election of a shareholder representative also will disrupt the delicate internal dynamics that make boards successful. Its effect will be analogous to that of cumulative voting, which allows minority shareholders representation on the board. Experience with cumulative voting suggests that it often leads to pre-meeting caucuses by the majority and a reduction in information flows to the board as a whole. In turn, this results in adversarial relations between the majority and minority board members, which interferes with effective board governance.

In the face of opposition from such disparate groups as the Business Roundtable and CalPERS Chu has now backed way down:

"Chu ultimately decided to retreat when staff from Calpers told her the giant pension fund preferred to follow the SEC process rather than go down another road in California .... 'We felt something of this nature has to happen at the national level,' explained Calpers spokesman Brad Pacheco.

"Instead, at the suggestion of Calpers, Chu introduced a resolution in support of the SEC rules. That whereas-laden resolution won overwhelming support in both branches of the Legislature, but it was essentially just a symbolic gesture."

Speaking as a Californian, I'm of two minds with respect to this iteration of the law. On the one hand, given California's dire financial situation, I don't like seeing the legislature wasting time on mere gestures. On the other hand, given the mischief the California legislature is capable of causing when they deal with substantive issues, maybe we should have them spend more time on gestures and less on real issues.

"Chu also agreed to amend her bill to require that companies provide a process in which shareholders could merely 'recommend' candidates for election as directors and that they file the process with the secretary of state. Chumaintained that requirement still would help shareholders better understand corporate election procedures.

"In June, the bill went through yet another round of tweaking in the state Senate Judiciary Committee, which eliminated the watered-down 'recommend' clause. Those changes turned it into simply a disclosure bill, which would require publicly traded companies to file a copy of their corporate election procedures -- or those portions of the company's articles of incorporation and bylaws that related to nominating and electing directors -- with the secretary of state."

Of course, corporations already make such disclosures as the federal level. Election procedures are described in the proxy statement and annual report required by the SEC. The corporation's articles of incorporation and bylaws are already filed both with the state of incorporation and the SEC.

Granted, as finally amended the law doesn't do much harm. Corporations will just have to file one more piece of paper in one more place. But to what end? How will shareholders benefit? The information to be disclosed is already available in many places, including various places online. Indeed, most corporate investor relations web sites provide access to this sort of information.

"Well, so what," you ask? So corporations spend a few bucks filing disclosure documents nobody will read. Who cares?

Do you know the expression "nibbled to death by ducks"? California's business climate stinks. As the Sacramento Bee reported in February 2004:

"California firms find doing business here so difficult that 40 percent of those surveyed plan to move some jobs out of state and 50 percent will not add jobs within the state, according to a study released Thursday. The report, issued by the California Business Roundtable, said the cost of doing business in the state is 30 percent higher than in other Western states, with regulatory costs the biggest culprit."

Some of the costs California imposes on its businesses come in big chunks. Taxes, worker's compensation, family leave, and so on. Others come in little pieces -- like Ms. Chu's bill -- but throw in enough such laws and the aggregate costs can really add up.

If California is going to stop putting its business community through the death of a thousand cuts, it is precisely these sorts of small, seemingly innocuous laws that must be eliminated. It is time for Sacramento to get serious about cost-benefit analysis and to stop making gestures at the expense of our economy.

Hollinger

In his latest opinion in the ongoing Hollinger litigation, Delaware Vice Chancellor Leo Strine kindly made the following reference to my work:

On its side, International has the virtues that accompany all bright-line tests, which are considerable, in that they provide clear guidance to transactional planners and limit litigation. That approach also adheres to the director-centered nature of our law, which leaves directors with wide managerial freedom subject to the strictures of equity, including entire fairness review of interested transactions. It is through this centralized management that stockholder wealth is largely created, or so much thinking goes. [FN39] ...

FN39. One of the articulate advocates of this view of our law is Stephen Bainbridge. See, e.g., Stephen M. Bainbridge, Director Primacy in Corporate Takeovers: Preliminary Reflections, 55 STAN. L.REV. 791 (2002).

Hollinger Inc. v. Hollinger Intern., Inc., 2004 WL 1728003 (Del.Ch., Jul 29, 2004) (you must have a Westlaw subscription to get the opinion). A working paper version of the article cited by Chancellor Strine is available here. Personally, however, I think my article Director Primacy: The Means and Ends of Corporate Governance does a better job of laying out the "director-centered nature of our law."

Smith endorses First Things

Right Coast blogger Tom Smith reports being very happy with his new subscription to First Things, the mostly Catholic and mostly neoconservative opinion journal. I've been a happy subscriber for years. If you're a Christian (or a Jew or a Muslim or an atheist for that matter) with an interest in serious writing on religion and politics, this is a journal to which you should subscribe.

My Judicial Blushes

In his latest opinion in the ongoing Hollinger litigation, Delaware Vice Chancellor Leo Strine kindly made the following reference to my work:

On its side, International has the virtues that accompany all bright-line tests, which are considerable, in that they provide clear guidance to transactional planners and limit litigation. That approach also adheres to the director-centered nature of our law, which leaves directors with wide managerial freedom subject to the strictures of equity, including entire fairness review of interested transactions. It is through this centralized management that stockholder wealth is largely created, or so much thinking goes. [FN39] ...

FN39. One of the articulate advocates of this view of our law is Stephen Bainbridge. See, e.g., Stephen M. Bainbridge, Director Primacy in Corporate Takeovers: Preliminary Reflections, 55 STAN. L.REV. 791 (2002).

Hollinger Inc. v. Hollinger Intern., Inc., 2004 WL 1728003 (Del.Ch., Jul 29, 2004) (you must have a Westlaw subscription to get the opinion). A working paper version of the article cited by Chancellor Strine is available here. Personally, however, I think my article Direct or Primacy: The Means and Ends of Corporate Governance does a better job of laying out the "director-centered nature of our law."

Gil Weinrich's TCS Column on White Collar Crime

Weinrich argues:

The Fastows, Martha Stewart and her broker, Peter Bacanovic, need not suffer degradation in a dank prison cell. Their victims need not remain victims. And society need not waste its precious resources imprisoning people who are no menace to their neighbors. We don't need to build more prisons; we need white-collar criminals to repay their debt to society -- literally.

He thus proposes the following system for dealing with white collar crime:

When Andrew Fastow pleaded guilty early this year, he agreed to surrender $23.8 million in cash and property, including vacation homes in Vermont and Galveston, Texas. That's a start. He and those who shared in his crime should be apportioned the part of the losses for which a court deems them responsible, including an extra 10 percent to compensate for the unearned return on the victims' money, and an additional fine to compensate the government if the perpetrator did not cooperate in the investigation of the crime.

The perpetrators should then spend as long as it takes, up to the rest of their lives if necessary, to repay that debt. Andrew Fastow may be a criminal but he is also a financially savvy corporate executive. Surely his vast talents can be put to some good use for some company somewhere. A court could give him an allowance (based on a percentage of his income so that he would always have an incentive to increase his earnings), with the lion's share (say, 90 percent) devoted to a restitution fund.

Excuse me? Since when is restitution the sole - or even primary - purpose of punishment? As Weinrich acknowledges:

Fastow and others concealed billions of dollars in debt in off-the-books partnerships. The crime wiped out $68 billion in market value, destroyed at least 5,600 jobs and vaporized workers' retirement savings.

Given the vast harm Fastow did, why aren't retribution and deterrence relevant to setting his punishment? As Robert Barley, no liberal weenie, observed of Fastow et al.: "The law doesn't pretend to prevent all crime, but functions through deterrence, including throwing criminals in jail."

Those Divesting Presbyterians

My latest TCS Daily column

The Presbyterian Church (USA)'s General Assembly recently adopted a resolution calling for divestment of denominational funds from "multinational corporations operating in Israel." Predictably, the decision generated protests, including charges of anti-Semitism. The questions thus raised are legitimate and important. Yet, I wish to come at the problem from a different angle.

Let's start with a basic question: Will the PC(USA)'s decision "work"? In other words, do divestment campaigns tend to achieve their proponent's goals? The clear answer from the empirical literature is "no."

A London Business School Institute of Finance and Accounting working paper called "The Effect Of Socially Activist Investment Policies On The Financial Markets: Evidence From The South African Boycott concluded:

"We find that the announcement of legislative/shareholder pressure of voluntary divestment from South Africa had little discernible effect either on the valuation of banks and corporations with South African operations or on the South African financial markets. There is weak evidence that institutional shareholdings increased when corporations divested. In sum, despite the public significance of the boycott and the multitude of divesting companies, financial markets seem to have perceived the boycott to be merely a 'sideshow.'"

Another paper, "The Stock Market Impact of Social Pressure: The South African Divestment Case," from the Quarterly Review of Economics and Finance in fact found:

"Using the South African divestment case, this study tests the hypothesis that social pressure affects stock returns. Both short-run (3-, 11-, and 77-day periods) and long-run (13-month periods) tests of stock returns surrounding U.S. corporate announcements of decisions to stay or leave South Africa were performed. Tests of the impact of institutional portfolio managers to divest stocks of U.S. firms staying in South Africa were also performed. Results indicate there was a negative wealth impact of social pressure: stock prices of firms announcing plans to stay in South Africa fared better relative to stock prices of firms announcing plans to leave."

In sum, divestment may make activists feel all warm and fuzzy, but the evidence is that (1) it has no significant effect on the target of the divestment campaign but (2) likely does harm the activists' portfolios.

As the Manhattan Institute's James Copeland explained, these results are entirely consistent with financial theory:

"Unlike a boycott in a traditional goods market, the sale of a stock or bond in a financial market in sufficient volume to affect its price makes it more attractive to a buyer who doesn't care about the divester's social cause. These buyers will bid the price back up to its equilibrium level, the risk-adjusted net present value of expected free cash flows from the instrument. So whereas a goods boycott can be effective under certain conditions, a stock divestiture never can unless there is insufficient liquidity on the other side, a highly dubious condition in our financial market. The Presbyterian Church may have $7 billion in financial assets, but that's hardly a sufficient sum to control financial market pricing."

If the PC(USA) mavens who passed this proposal were simply dealing with their own investments, who could gainsay their right to shoot their portfolios in the foot? Apparently, however, the plan encompasses divesting the retirement funds of Presbyterian pastors and workers invested in denominational pension plans. As such, their decision illustrates a perennial problem of institutional investment; namely, Quis cusotdiet ipsos custodies.

Like the vast majority of large institutional investors, the PC(USA)'s pension plans manage the pooled savings of small individual investors. From a governance perspective, there is little to distinguish such institutions from corporations. Plan investors have no more control over the election of company trustees than do shareholders over the election of corporate directors. Nor do the holders of such shares have greater access to information about their holdings, or ability to monitor those who manage their holdings, than do corporate shareholders. Worse yet, although an individual investor can always abide by the Wall Street Rule with respect to corporate stock (it's easier to switch than fight), he cannot do so anywhere nearly as easily with respect to investments such as these denominational pension plans.

Managers of pension plans are fiduciaries of the beneficiaries of those plans. When they pursue a social agenda nearly certain to result in poorer performance, they are disserving their beneficiaries. The activists at the PC(USA) may have gotten a warm and fuzzy feeling from taking a slap at Israel, but in doing so they injured Jewish-Christian relations, besmirched the one functioning democracy in the Middle East, and stabbed their own people in the back. All for the sake of a gesture that experience teaches will be fruitless.

Those Divesting Presbyterians

he Presbyterian Church (USA)'s General Assembly recently adopted a resolution calling for divestment of denominational funds from "multinational corporations operating in Israel." Predictably, the decision generated protests, including charges of anti-Semitism. The questions thus raised are legitimate and important. Yet, I wish to come at the problem from a different angle.

Let's start with a basic question: Will the PC(USA)'s decision "work"? In other words, do divestment campaigns tend to achieve their proponent's goals? The clear answer from the empirical literature is "no."

A London Business School Institute of Finance and Accounting working paper called "The Effect Of Socially Activist Investment Policies On The Financial Markets: Evidence From The South African Boycott concluded:

"We find that the announcement of legislative/shareholder pressure of voluntary divestment from South Africa had little discernible effect either on the valuation of banks and corporations with South African operations or on the South African financial markets. There is weak evidence that institutional shareholdings increased when corporations divested. In sum, despite the public significance of the boycott and the multitude of divesting companies, financial markets seem to have perceived the boycott to be merely a 'sideshow.'"

Another paper, "The Stock Market Impact of Social Pressure: The South African Divestment Case," from the Quarterly Review of Economics and Finance in fact found:

"Using the South African divestment case, this study tests the hypothesis that social pressure affects stock returns. Both short-run (3-, 11-, and 77-day periods) and long-run (13-month periods) tests of stock returns surrounding U.S. corporate announcements of decisions to stay or leave South Africa were performed. Tests of the impact of institutional portfolio managers to divest stocks of U.S. firms staying in South Africa were also performed. Results indicate there was a negative wealth impact of social pressure: stock prices of firms announcing plans to stay in South Africa fared better relative to stock prices of firms announcing plans to leave."

In sum, divestment may make activists feel all warm and fuzzy, but the evidence is that (1) it has no significant effect on the target of the divestment campaign but (2) likely does harm the activists' portfolios.

As the Manhattan Institute's James Copeland explained, these results are entirely consistent with financial theory:

"Unlike a boycott in a traditional goods market, the sale of a stock or bond in a financial market in sufficient volume to affect its price makes it more attractive to a buyer who doesn't care about the divester's social cause. These buyers will bid the price back up to its equilibrium level, the risk-adjusted net present value of expected free cash flows from the instrument. So whereas a goods boycott can be effective under certain conditions, a stock divestiture never can unless there is insufficient liquidity on the other side, a highly dubious condition in our financial market. The Presbyterian Church may have $7 billion in financial assets, but that's hardly a sufficient sum to control financial market pricing."

If the PC(USA) mavens who passed this proposal were simply dealing with their own investments, who could gainsay their right to shoot their portfolios in the foot? Apparently, however, the plan encompasses divesting the retirement funds of Presbyterian pastors and workers invested in denominational pension plans. As such, their decision illustrates a perennial problem of institutional investment; namely, Quis cusotdiet ipsos custodies.

Like the vast majority of large institutional investors, the PC(USA)'s pension plans manage the pooled savings of small individual investors. From a governance perspective, there is little to distinguish such institutions from corporations. Plan investors have no more control over the election of company trustees than do shareholders over the election of corporate directors. Nor do the holders of such shares have greater access to information about their holdings, or ability to monitor those who manage their holdings, than do corporate shareholders. Worse yet, although an individual investor can always abide by the Wall Street Rule with respect to corporate stock (it's easier to switch than fight), he cannot do so anywhere nearly as easily with respect to investments such as these denominational pension plans.

Managers of pension plans are fiduciaries of the beneficiaries of those plans. When they pursue a social agenda nearly certain to result in poorer performance, they are disserving their beneficiaries. The activists at the PC(USA) may have gotten a warm and fuzzy feeling from taking a slap at Israel, but in doing so they injured Jewish-Christian relations, besmirched the one functioning democracy in the Middle East, and stabbed their own people in the back. All for the sake of a gesture that experience teaches will be fruitless.

Trial Lawyer/John Edwards Propaganda at Kos

In what reads like a press release from John Edwards and/or ATLA (the trial lawyer group), the Daily Kos features a ringing defense of the verdict in Stella Liebeck's suit against McDonalds. You don't remember Stella? She was the woman who successfully sued McDonalds after she spilled coffee on herself. The Kosites think it was just peachy for Stella to get paid off. After all, they argue, (1) McDonald's had received 700 previous complaints and (2) Liebeck suffered serious injuries.

Unlike the folks at Kos, the good folks at Overlawyered.com have the straight dope on Ms. Leibeck:

To say that there were 700 previous complaints of burns (ranging from scalds to real injuries) from McDonald's coffee begs the question. After all, 700 is just the numerator. What's the denominator? The answer is in the tens of billions. A product that hurts one in twenty-four million people is not "unreasonably dangerous", especially when the vast majority of the 700 incidents were not the sort of grievous injuries Ms. Liebeck had. (McDonald's had settled previous cases, but the cases were incidents where the McDonald's employees had spilled the coffee.) However, the jury took the 1-in-24 million statistic not as evidence that McDonald's coffee was not dangerous, but as evidence that McDonald's cared more about statistics than people -- when in fact the statistic should have been used to throw the case out.

That Ms. Liebeck was surely serious hurt doesn't change the underlying problem with the lawsuit: Ms. Liebeck was hurt because she spilled coffee on herself. If (as all fast-food restaurants do now) McDonald's had the obvious statement "Coffee is hot and can burn you" on the cup (a juror later complained that McDonald's warning was too small), would that have prevented her injuries? True: McDonald's could have served luke-warm coffee or even iced coffee. But at the end of the day, the proximate cause of Ms. Liebeck's injuries, as awful as they were, was Ms. Liebeck.

The argument for liability is that McDonald's chose to serve its coffee hot and should have foreseen that people would burn themselves when they spilled coffee. But, here's a question: the reason Ms. Liebeck's injuries were so terrible was because she was wearing a sweatsuit that absorbed the hot liquid and held it close to her skin. Surely, clothing manufacturers can foresee that people will spill hot liquids on themselves. If Ms. Liebeck's sweatpants had been made out of Gore-Tex or some other liquid-resistant material, she never would have been hurt. What's the principle of tort law that holds McDonald's liable, but not the clothing manufacturer?

You got me. (More at Thoughts Online.)

By the way, there are at least two factual errors in the Kos post. First, Stella was 79 when she was hurt not 81. Second, her medical costs apparently were $20,000 - the amount she originally sought - not $200,000. Support here.

By the way (#2), Stella's case prompted an internet hoax called the Stella Awards, which in turn prompted a website that gives the True Stella Awards.

By the way (3), a comment at Kos points "out that all trial lawyers aren't the same, that Edwards had nothing to do with the frivolous lawsuits we sometimes hear about, and that he's won money for helpless kids disembowelled by known-defective products." Not quite right. As The Washington Times explained:

Mr. Edwards earned a considerable portion of his millions on cerebral palsy cases. Cerebral palsy is a set of debilitating diseases that impair movement. The muscular disorders — which can include involuntary movements and difficulties with many motor tasks, ranging from walking to writing — are caused by damage to or faulty development of the motor areas of the brain. Until the 1980s, many medical professionals believed that damage could be caused by a lack of oxygen to the brain during delivery. As a consequence, Mr. Edwards was able to successfully sue doctors who did not demand Caesarean deliveries as soon as the infant's fetal monitor suggested that it was short of oxygen.

Yet, even as Mr. Edwards was perfecting his science of suing, evidence was growing that the blame was misplaced. Studies demonstrated that most of the children who developed the disease had brain damage well before they were born. Scientists now believe that, like other brain disorders, cerebral palsy has a wide variety of causes, which likely include both genetic and environmental factors.

As a consequence of the expensive efforts made by Mr. Edwards and his fellow malpractice practitioners, doctors often rush to perform Caesarean sections, with rates rising from 6 percent of births in 1970 to 26 percent today. Yet rates of cerebral palsy have remained stable in populations, regardless of how many Caesarean sections are performed.

That led the New York Times to point out in a Jan. 31 article, "There is a growing medical debate over whether the changes have done more harm than good." More harm is likely. Ceasarean sections are major surgery, putting both mother and infant at significant risk. Mr. Edwards claims he acted on behalf of helpless victims, but the costly claims made by Mr. Edwards and other lawyers have driven doctors away from some areas of practice, taking their care and cures elsewhere.

Yet another Techincolor decision

Fritz over at Sneaking Suspicions posts re the latest Technicolor decision - the 18 year long and counting takeover lawsuit. He flags the part of the opinion that also struck me as key; i.e., Chandler's explanation of the appraisal process and accompanying slap at the Delaware supreme court:

As expected, the occasional Chandlerism also makes a very early appearance, on page 3 of the main text.

Although 8 Del. C. § 262 requires this Court to determine “the fair value” of a share of Technicolor on January 24, 1983, it is one of the conceits of our law that we purport to declare something as elusive as the fair value of an entity on a given date, especially a date more than two decades ago. Experience in the adversarial, battle of the experts’ appraisal process under Delaware law teaches one lesson very clearly: valuation decisions are impossible to make with anything approaching complete confidence. Valuing an entity is a difficult intellectual exercise, especially when business and financial experts are able to organize data in support of wildly divergent valuations for the same entity. For a judge who is not an expert in corporate finance, one can do little more than try to detect gross distortions in the experts’ opinions. This effort should, therefore, not be understood, as a matter of intellectual honesty, as resulting in the fair value of a corporation on a given date. The value of a corporation is not a point on a line, but a range of reasonable values, and the judge’s task is to assign one particular value within this range as the most reasonable value in light of all of the relevant evidence and based on considerations of fairness.

The footnote accompanying this passage makes a typically Chandlerian wry note about relative competence:

Many commentators have recognized the indeterminate nature of the search for the fair or intrinsic value of a company. Professors Allen and Kraakman have also noted the institutional disinclination of Chancery judges to engage in the valuation process in certain circumstances precisely because those judges recognize it as a “daunting task” subject to significant uncertainty. The same institutional pressures that result in this disinclination at the Chancery Court level, of course, do not apply at the appellate level and may explain why the Supreme Court exhibits more confidence in the ability to ascertain the fair value of an enterprise. See [citation to competing text struck, because that's just the kind of guy I am].

The Technicolor litigation has not been one of the Delaware supreme court's better efforts. At virtually every opportunity, the supreme court has made really bad law in this case. As a result, Technicolor crops up for criticism in at least three chapters of my Corporation Law and Economics. (See my earlier post Cinerama v. Technicolor: The Anticlimax.)