ProfessorBainbridge.com

Congrats to Klee

My colleague Ken Klee has been named Bankruptcy Lawyer of the Year by the Century City Bar Association. Kudos.

Rehnquist's Legacy

Notre Dame law professor Rick Garnett offers some thoughts on Chief Justice William Rehnquist's legacy. An excerpt:

Rehnquist has significantly reshaped and reformed our constitutional law. Take, for example, the area of religious freedom. Throughout the 1970s, the court's interpretation of the Establishment Clause, which was designed to protect religious liberty by limiting government power, tended instead to be almost faith-phobic. In cases involving state aid to children in religious schools, several of the justices were often distracted by a suspicion of parochial education and by what Rehnquist correctly called "Jefferson's misleading metaphor" of a "wall of separation" between church and state. Yet over the years Rehnquist has guided the court toward a more balanced position that calls for government neutrality, not hostility, toward religious choices, institutions, and activities. These efforts paid off in Zelman v. Simmons-Harris, the 2002 decision in which a majority led by Rehnquist upheld Cleveland's school voucher program, which includes religious schools. As Rehnquist recognized, Cleveland's experiment is an evenhanded effort to expand opportunities for low-income kids, not a first step toward theocracy.

To understand Rehnquist's impact more generally requires recognizing that even the so-called swing justices invoke principles and think in terms that Rehnquist revived. He has dramatically "shifted the center of the discussion," as Duke law professor Jefferson Powell put it. According to Powell, Rehnquist "took the long view, and he has won." Time and again?for example, in cases involving the Fourth Amendment's ban on unreasonable searches and seizures, or the appropriate balance between local control and federal power?seeds that Rehnquist planted decades ago in solitary and provocative dissents have taken root and flowered. As Walter Dellinger observed, Rehnquist's achievement is to have pushed into the mainstream once idiosyncratic views of state sovereignty and limited federal power. (Link)

As the say, go read the whole thing.

Justice Posner? No Thanks!

With the New York Times raising the (somewhat indelicate) question of who will replace Chief Justice William Rehnquist, one name is notably absent from the Times' list of plausible candidates; namely, that of Seventh Circuit Court of Appeals Juidge Richard Posner. There was a time when no list of possible Supreme Court nominations by a Republican President was complete without Posner's name. Now age clearly counts against him (he's 66). Even if he were 10 or 20 years younger, however, I would argue against moving Posner up to the Supreme Court? I summarized the argument in a December '03 post, in which I opined:

Russell Kirk's classic canons of conservative thought include six elements: (1) belief in a transcendent order and natural law; (2) rejection of egalitarianism and utilitarianism; (3) support for class and order; (4) belief in the linkage between freedom and private property; (5) faith in prescription and custom; and (6) recognition that change is not necessarily salutary reform. As I read his body of work, Posner clearly fails #s 1 and 2, and likely fails #s 3 and 5. The only one I'm sure he passes is #4. I'm not going to bother defending those claims at this point, ... because Posner himself rejects the conservative label, calling himself a pragmatic classical liberal. Richard A. Posner, Overcoming Law 23 (1995). For those interested in pursuing the disconnect between Posner's jurisprudence and the strand of conservatism that comes down to us from Burke via Russell Kirk, however, I recommend James G. Wilson's article Justice Diffused: A Comparison of Edmund Burke's Conservatism with the Views of Five Conservative, Academic Judges, 40 U. Miami L. Rev. 913 (1986) (Westlaw sub. req'd) and Ernest Young's article Rediscovering Conservatism: Burkean Political Theory and Constitutional Interpretation, 72 N.C. L. Rev. 619 (1994) (same). (Of course, I do not mean to endorse everything in those articles, such as Young's arguments against judicial deference to democratic majorities.)

If judicial appointments is one of the key areas in which Bush strives to keep his conservative base happy, as many claim, nominating Posner to the Supreme Court would be a political disaster. On the other end of the political spectrum, moreover, can you imagine what Leahy and Schumer would do with his writings on a market in babies?

Simply put, Richard Posner is no conservative. On social issues, in particular, he simply cannot be trusted. For a Republican to put him on the bench invites the same sort of disappointments GOP Presidents suffered with appointments like Earl Warren, John Paul Stevens, or David Souter. Except that Posner's a lot smarter than those three, which makes him even more dangerous.

Speaking of media introspection

When the NY Times ombudsman asked why the NY Times won't print letters to the editor that criticize reporters by name, assistant managing editor Allan M. Siegal responded:

"Public humiliation is neither appropriate discipline nor a good teaching tool."

Isn't public humiliation of others the whole point of investigative journalism? Put another way, isn't the argument for investigative journalism the old idea best expressed by Louis Brandeis: "sunlight is the best of disinfectants; electric light, the best policeman"? The MSM holds government officials, businessmen, and others up to public humiliation precisely to hold them accountable for their alleged misdeeds. Why then should the same not hold true for journalists?

Reporters versus Bloggers

Did criticism from the blogosphere really drive CNN's decision to fire Eason Jordan? While the blogosphere is divided between triumphalism and those who remain appropriately modest about our collective influence, the MSM also is increasingly split between those like Stuart Rothenberg (dismissal and disdain) and the LA Times' David Shaw (fearmongering). Shaw writes:

I'm all for the defenestration ? and perhaps even the decapitation ? of journalistic felons. Jayson Blair, Jack Kelley, Stephen Glass and their ilk are serial fabricators who betrayed their profession, their colleagues and our democratic society.

But I feel very differently about Eason Jordan, the chief CNN news executive who resigned this month amid a firestorm of criticism over remarks he made during a panel discussion at the World Economic Forum in Davos, Switzerland.

Much of the criticism of Jordan came from angry bloggers, and Jordan and his bosses at CNN caved in faster than you can say "Chicken Little."

Today, Glenn Reynolds writes of these remarks:

The funny thing ... is that the herd-mentality among media executives will probably make the "bloggers as irresistible force" idea truer, as the result of pieces like this one, than it was before.

I also suspect Shaw's views will eventually dominate within the MSM, rather than those of Rothenberg, albeit for a slightly different reason. Why? It is in the self-interest of journalists to believe that the blogosphere is a powerful lynch mob going after not only journalistic felons, but also those who commit misdemeanors, errors of judgment, or even innocent mistakes. By blaming powerful forces seeking to undercut them at every turn, rather than their own biases and incompetence when incidents occur like that involving Eason Jordan, the MSM avoids the need to engage in meaningful introspection. Instead of considering whether their problems are the result of their own conduct, they can claim that an angry mob unfairly lynched them.

Blaming others for one's misfortunes is always easier than considering whether one's own conduct may have caused them. So I expect the MSM to go right on whining about blogs, even if those of us in the blogosphere really don't have anywhere near the amount of influence we would like to think we possess.

Fannie Mae and Freddie Mac

Brad DeLong posted an excerpt of an article by the Economist on Freddie Mac and Fannie Mae, the quasi-governmental corporations that buy up mortgages from banks and bundle them together into asset-backed securities. DeLong didn't comment, but the excerpt prompted some of his readers to offer such insightful comments as:

Who cares what Alan Greenspan thinks? He's a partisan hack like any other, according to Krugman.

Well, Krugman would know a partisan hack when he sees one. (As he does in the mirror every morning.)

The near government agency status of the corporations has allowed for lower middle class mortgage for decades, and Fannie Mae has been moving to mortgage for lower income households that will shield the households from excessively priced debt. The hedging techniques used by Fannie and Freddie are fairly transparent and conservative. What then is the problem? The problem seems to be persistent lobbying by other finance corporations for more of the mortgage market. So, there is another conservative target.

Here are the problems:

1. It is simply not true that Freddie and Fannie's hedging techniques are "fairly transparent and conservative." To the contrary, as Berkeley business school professor Dwight Jaffee has demonstrated their hedging practices create "imperfect hedges and thus could impose significant costs on U.S. taxpayers in a potential future F&F bailout."
2. Investors believe that because of the quasi-governmental status of Freddie Mac and Fannie Mae, the government will never let them fail. As Clinton Administration Assistant Treasury Secretary Richard Carnell observes: "[They] tell Congress and the news media, ‘Don’t worry, the government is not on the hook’ – and then turn around and tell Wall Street, ‘Don’t worry, the government really is on the hook.’"  This enables Freddie and Fannie to achieve a lower cost of capital than competitors by selling equity at higher prices or to borrow at an interest rate below that available to potential competitors. At the same time, the implicit government guarantee apparently encourages management to take risks that firms subject to market competition and lacking a government safety net would never take. In particular, as the Economist pointed out, Freddie and Fannie increasingly hold on to mortgages rather than reselling them as asset backed securities, which exposes them to much higher repayment and other risks.
3. Freddie and Fannie have serious and well-documented corporate governance problems. Harvard law professor Lucian Bebchuk and Boalt law professor Jesse Fried, for example, have identified four problems with Fannie Mae's executive compensation arrangements:  "First, by richly rewarding executives for reporting higher earnings, without requiring return of the compensation if earnings turned out to be misstated, Fannie Mae's arrangements provided perverse incentives to inflate earnings. Second, Fannie Mae's arrangements provided soft landings to executives who were pushed out by the board for failure; expectation of such outcome adversely affected ex ante incentives. Third, even if the executives had retired after years of unblemished service, the value of their retirement packages would have been largely unrelated to their own performance while in office, weakening the link between pay and performance. Fourth, both when promising retirement payments to executives and when making these payments, Fannie Mae's disclosures obscured rather than made transparent the total values of the executives' retirement packages."
4. In an excellent overview of the issues, Fussing and Fuming over Fannie and Freddie: How Much Smoke, How Much Fire?, Fed economist W. Scott Frame and NYU economics professor Lawrence J. White argue, inter alia, that Freddie and Fannie in fact do not focus on "lower middle class mortgage[s]," as DeLong's reader opined. Instead, they argue, much of Freddie and Fannie's lending activities benefit home buyers in higher economic groups.
5. No responsible conservative (or liberal) is talking about getting rid of Freddie and Fannie. But there is an emerging consensus, that includes folks on both sides of the aisle that Freddie and Fannie need reforms in their corporate governance and investment practices.

The Class Action Fairness Act and Delaware Corporate Law

I have been trying to figure out how the recently adopted Class Action Fairness Act will impact shareholder litigation currently brought in the Delaware Chancery Court. Here's the problem: A study by Vanderbilt law professors Bob Thompson and Randall Thomas found that class actions now dominate corporate litigation in Delaware:

Our data set of all 1000 corporate fiduciary duty cases filed in Delaware in 1999 and 2000 is the largest empirical study of shareholder litigation. We find that more than 80% of these cases are class actions against public companies challenging one type of director decision - whether or not to participate in a corporate acquisition. By contrast, derivative suits, the traditional shareholder litigation that is the staple of corporate law casebooks, make up only about 14% of all fiduciary duty suits.

Because the Act gives federal courts jurisdiction over class actions in which "any member of a class of plaintiffs is a citizen of a State different from any defendant," many of these Delaware cases appear to be candidates for removal to federal court. You'd likely have non-Delaware members of the shareholder class, as well as non-Delaware individual defendants.

The Act, however, contains two exemptive provisions that appear to preclude most Delaware corporate law class actions from being removed to federal court:

[The Act] shall not apply to any class action that solely involves a claim ... (B) that relates to the internal affairs or governance of a corporation or other form of business enterprise and that arises under or by virtue of the laws of the State in which such corporation or business enterprise is incorporated or organized; or

(C) that relates to the rights, duties (including fiduciary duties), and obligations relating to or created by or pursuant to any security ....

Because most Delaware class actions involve breach of fiduciary duty claims against corporate directors, the Chancery Court's caseload is unlikely to be significantly affected by the Act. [BTW, for a nice appreciation of the political aspects of the Act, see Thomas Lifson's post.]

Fannie Mae and Freddie Mac

Brad DeLong posted an excerpt of an article by the Economist on Freddie Mac and Fannie Mae, the quasi- governmental corporations that buy up mortgages from banks and bundle them together into asset-backed securities. DeLong didn't comment, but the excerpt prompted some of his readers to offer such insightful comments as:

Who cares what Alan Greenspan thinks? He's a partisan hack like any other, according to Krugman.

Well, Krugman would know a partisan hack when he sees one. (As he does in the mirror every morning.)

The near government agency status of the corporations has allowed for lower middle class mortgage for decades, and Fannie Mae has been moving to mortgage for lower income households that will shield the households from excessively priced debt. The hedging techniques used by Fannie and Freddie are fairly transparent and conservative. What then is the problem? The problem seems to be persistent lobbying by other finance corporations for more of the mortgage market. So, there is another conservative target.

Here are the problems:

1. It is simply not true that Freddie and Fannie's hedging techniques are "fairly transparent and conservative." To the contrary, as Berkeley business school professor Dwight Jaffee has demonstrated their hedging practices create "imperfect hedges and thus could impose significant costs on U.S. taxpayers in a potential future F&F bailout."
2. Investors believe that because of the quasi-governmental status of Freddie Mac and Fannie Mae, the government will never let them fail. As Clinton Administration Assistant Treasury Secretary Richard Carnell observes: "[They] tell Congress and the news media, ?Don?t worry, the government is not on the hook? ? and then turn around and tell Wall Street, ?Don?t worry, the government really is on the hook.?"  This enables Freddie and Fannie to achieve a lower cost of capital than competitors by sellin g equity at higher prices or to borrow at an interest rate below that available to potential competitors. At the same time, the implicit government guarantee apparently encourages management to take risks that firms subject to market competition and lacking a government safety net would never take. In particular, as the Economist pointed out, Freddie and Fannie increasingly hold on to mortgages rather than reselling them as asset backed securities, which exposes them to much higher repayment and other risks.
3. Freddie and Fannie have serious and well-documented corporate governance problems. Harvar d law professor Lucian Bebchuk and Boalt law professor Jesse Fried, for example, have identified four problems with Fannie Mae's executive compensation arrangements:  "First, by richly rewarding executives for reporting higher earnings, without requiring return of the compensation if earnings turned out to be misstated, Fannie Mae's arrangements provided perverse incentives to inflate earnings. Second, Fannie Mae's arrangements provided soft landings to executives who were pushed out by the board for failure; expectation of such outcome adversely affected ex ante incentives. Third, even if the executives had retired after years of unblemished service, the value of their retirement packages would have been largely unrelated to their own performance while in office, weakening the link between pay and performance. Fourth, both when promising retirement payments to executives and when making these payments, Fannie Mae's disclosures obscured rather than made transparent the total values of the executives' retirement packages."
4. In an excellent overview of the issues, Fussin g and Fuming over Fannie and Freddie: How Much Smoke, How Much Fire?, Fed economist W. Scott Frame and NYU economics professor Lawrence J. White argue, inter alia, that Freddie and Fannie in fact do not focus on "lower middle class mortgage[s]," as DeLong's reader opined. Instead, they argue, much of Freddie and Fannie's lending activities benefit home buyers in higher economic groups.
5. No responsible conservative (or liberal) is talking about getting rid of Freddie and Fannie. But there is an emerging consensus, that includes folks on both sides of the aisle that Freddie and Fannie need reforms in their corporate governance and investment practices.

Waxman on Bullying

There's a spat in DC over a demand by the Senate Environment and Public Works Committee for financial and membership records of two groups that appear before it. The groups and their Democrat allies claim they're being intimidated and bullied. Wisely, the LA Times sought out an expert opinion to evaluate those claims:

Rep. Henry A. Waxman of Los Angeles, the senior Democrat on the House Government Reform Committee, said: "There is not even any subtlety about this. This is a blatant attempt at intimidation and bullying so that experts will be afraid to speak out about a bill that rolls back air pollution protections for all Americans." (Link)

Good choice. Nobody in Congress knows more about using the power of a committee chairmanship to bully and intimidate witnesses than does Henry Waxman, who did it so well for so many years until the Gingrich Revolution finally put him on the sidelines.

Were the New Mutual Fund Rules Necessary or Superficial?

Newest TCS column:

On September 3, 2003, New York Attorney General Eliot Spitzer filed a complaint against hedge fund Canary Capital Partners LLC, alleging Canary defrauded consumers by engaging in both late trading and market timing of mutual fund shares. At the same time, Spitzer charged certain mutual fund families with allowing Canary to engage in these practices, resulting in injury to the funds' long-term investors.

Spitzer's allegations rocked the mutual fund industry, setting off a series of investigations and enforcement actions by state and federal regulators. Several large fund families were implicated in the scandal, which has resulted in over $2.8 billion dollars in settlements to date.

In the wake of the fund scandal, the Securities and Exchange Commission (SEC) adopted several new rules forcing dramatic changes in the governance of mutual funds.

A mutual fund typically is organized by a registered investment adviser that retains a significant role -- indeed, de facto operating control -- in fund management. In return for its services, the investment adviser charges the fund a management fee, and various other charges, typically based on a percent of the firm's assets.

The Investment Company Act of 1940 sought to protect fund shareholders from possible abuses by the fund adviser by requiring that funds have a board of directors that is formally charged with a number of tasks, including oversight of the fund's relationship with its adviser. Although the Act allows interested individuals to serve as directors, it long has required that a certain percentage of directors be independent of fund management. The idea, of course, is that these independent directors will function as watchdogs of fund management.

Because the SEC believed that the recent scandal resulted from a failure by those watchdogs to supervise insiders of fund advisers, which allowed those insiders to use the fund for their own financial gain, the SEC adopted new rules requiring 75% of a fund's directors to be independent, a dramatic increase from the 40% previously required. In addition, the chairman of the board must be an independent director. The new rules also require the board to conduct an annual self-assessment and to hold separate quarterly meetings outside the presence of management and inside directors. In addition, the rules permit independent directors to hire employees and retain advisers to assist them in carrying out their duties.

The core problem with these new rules is that they ignore basic principles of how rational actors respond to incentives. Normally a mutual fund has no employees of its own, but is managed by its investment adviser. In turn, because the adviser is compensated by a fee based on a percentage of the fund's average annual net assets, the adviser has an incentive to maximize the fund's average net asset value, which is precisely what the fund shareholders will want.

A director who is affiliated with the fund's adviser thus has a strong incentive to enhance fund performance, since a higher net asset value means a higher advisory fee. In contrast, an independent director who has no financial stake in the fund may not have as strong a commitment to enhancing fund performance, because his compensation is not dependent on fund assets.

Granted, Spitzer's investigation turned up cases in which advisers pursued self-interest at the expense of investors. In most cases, however, those decisions were made by subordinate employees not the adviser's top management. It's hardly clear that a 75% independent board would have been any better at preventing those abuses than a 40% board. Indeed, because the abuses were mostly inconsistent with the long-term interests of the fund adviser, the argument that rational interested directors have far stronger incentives to prevent such abuses than do independent directors still holds.

Inside directors also have significant information advantages relative to independent directors. A director with knowledge of fund operations is the most qualified person to identify problems with the adviser's service, and to propose changes to improve the quality of those services. Similarly, a director affiliated with the fund is best positioned to maximize economies of scale since he is familiar with management functions and will be able to identify ways in which the adviser can consolidate certain functions to reduce costs. Granted, they have a conflict of interest, but that conflict is best dealt with by disclosure. As long as shareholders are fully informed, they can decide for themselves whether the conflict of interest is such that they are uncomfortable investing in that fund.

This observation leads to our final criticism of the new rules. In enacting them, the SEC underestimated the power of the market to correct abuses by investment companies. One of the defining characteristics of mutual fund ownership is that a shareholder may redeem his shares at anytime. This gives the shareholder power to express dissatisfaction with fund performance by cashing out and moving his money elsewhere. As a result, if a fund consistently under performs due to dishonest management, it will lose shareholders and perhaps even be forced out of business unless the abuses are corrected.

To be sure, mutual fund investments are somewhat sticky. Many funds charge back-end fees of 3-7% when investors pull their money out. Many more funds charge front-end load fees that reportedly run as much as 5.75% in the case of equity funds. In addition, many investors hold their mutual funds through brokerage accounts, which is another potential source of fees. In light of these fees, the transaction costs of switching funds may well be significant.

While we thus acknowledge transaction cost barriers to switching funds thus may somewhat impede market forces from being fully corrective, we believe that the market is not sufficiently sticky to preclude it from self-correcting. The fund families that were accused of improper market timing and late trading were negatively impacted by the accusations. For instance, when Putnam Investment Management was charged with engaging in abusive market timing practices last fall, it suffered redemptions of over $21 billion dollars within a two-week period. Similarly, soon after fund giant Janus settled its market timing suit with regulators, ING U.S. Financial Services redeemed $5 billion dollars in Janus funds held by its variable insurance products. These examples demonstrate the power of a shareholder's right of redemption. Despite the potential for investment stickiness, a fund complex that does not place the shareholder's interest above its own likely will lose enough money for insiders to be adequately incentivized to prevent abuses.

What then should the SEC have done? If investors care whether their funds permit things like market timing and late trading by favored investors, honest firms could attract investors by promising to prevent such trading. If investors cannot distinguish between honest and dishonest firms, however, they may begin to perceive the whole industry as a lemons market.

Assume there are two classes of investors. One class believes the magnitude of the harm posed by insider self-dealing justifies restricting such self-dealing. Accordingly, this class is willing to pay higher fees to funds who promise not to allow self-dealing. The other class is willing to allow self-dealing by managers of its funds, so long as those funds charge lower fees. An unscrupulous fund will try to maximize its income by attracting investors in the first class while secretly self-dealing. Investors in the first class will be aware of this phenomenon, but the high detection and enforcement costs associated with self-dealing make it almost impossible for them to distinguish between honest and dishonest funds.

Accordingly, there must be a way for honest firms to provide a credible promise -- a bond -- that guarantees that the fund will abide by its stated policies. Law can facilitate private ordering by providing such a bond. Candidly, we are somewhat skeptical that one needs the full panoply of disclosure and procedural rules imposed by U.S. securities law in order to provide such a bond (see here). At the very least, however, facilitating the making of credible commitments requires an antifraud rule and enforcement regime.

A prohibition of self-dealing enforced by public law enforcement agencies thus makes the first class of investors better off, but makes the second class worse off. If one believes that most investors fall into the first class, however, a prohibition of insider trading would be efficient (so long as one is willing to use the Kaldor-Hicks definition of efficiency.) Hence, a prohibition of self-dealing may have advantages for the industry as a whole, by giving credibility to their promises not to allow self-dealing and thus reducing agency costs.

Instead of enacting arbitrary new independence requirements, the SEC therefore should have focused on enforcing the laws on the books. Indeed, it's not too late for the Commission to start over by ditching the new rules in favor of strict enforcement of the rules against fraud and self-dealing.

Blog Law Post: Group Blog Partnership Profit Allocation

In response to my earlier post noting that group blogs with revenue could be treated as general partnerships, and asking whether such partnerships ought to depart from the default rule that profits are shared equally, both Larry Ribstein and Gordon Smith argue for the KISS approach (keep it simple, stupid). As Gordon put it:

In constructing the compensation system, Steve is worried about incentives, but Larry Ribstein suspects that "the complexity of administering a precise incentive/reward scheme" might argue in favor of a simple system. I agree. Keep it simple, at least until the bucks get really big.

I agree, although apparently Eugene Volokh doesn't:

So the formula, which we cobloggers agreed to, is this ...: Each person is paid in proportion to the sum of the square roots of their post lengths, with the proviso that the post lengths are in words, exclude blockquoted text, and are capped at 900 words (so one gets no extra credit for words past 900).

Right. Sure. Uh-huh. Well, you know what they say about a lawyer who has himself for a client. (Christine Hurt puts the point more diplomatically, while raising some really tricky additional issues.)

It's their own fault: Why law review articles are so long

The announcement by a number of top law reviews that they will put a word limit on articles they are willing to accept for publication has generated a lot of talk in the blawgosphere. Until now, however, everybody has been dancing around the big question: just why are law review articles so long? My colleague Vic Fleischer is guest blogging at Conglomerate, where he offers one answer:

Over the last few days I've been editing my work in progress, an article about compensation of VCs. It's a complicated story, and as I go back and add in footnotes (for the benefit of student editors, of course) the word count keeps creeping up over 30,000. Something here has to give. In order to get your article accepted by student editors, you have to provide an extensive background section: students don't know what a venture capital fund is until you tell them. And you have to provide footnotes for facts that are common knowledge in the industry, like the fact that venture capital funds are smaller than buyout funds. All of this takes up space and makes for longer articles.

I think Vic's hit on the key point. When it comes to some issues (like most con law topics), the student editors who run the law reviews typically at least have opinions. (I mean, who doesn't have an opinion about, say, abortion.) In fields like corporate law or tax, however, the student editors rarely have a sufficient sufficient base of knowledge to know why a particular issue is important. So the first third or half of a typical article in those areas is a literature review designed to educate not the ultimate readers, who likely know the field and have at least general familiarity with the problem, but rather student editors who select articles for publication. If the top law reviews are going to be serious about word limits, their editors are going to have get a lot more serious about educating themselves as to a host of fields. Otherwise, the existing bias towards con law, jurisprudence, and other quasi-political topics in the top journals is just going to get worse. They'll look even more like heavily footnoted versions of the Washington Monthly or National Review than they already do.

Are Group Blogs Partnerships?

Section 202(a) of the Uniform Partnership Act (1997) defines a partnership as an "association of two or more persons to carry on as co-owners a business for profit ..., whether or not the persons intend to form a partnership." With that definition in mind, consider the following excerpt from a post by my UCLA colleague Eugene Volokh on his group blog The Volokh Conspiracy:

A reader e-mailed to ask how he could put a tip in our tip jar, and I realized that we didn't have one. While we were entirely noncommercial, income would have just caused hassles (I'm thinking blood-covered knives around the monthly Volokh Co-Bloggers Campfire); but now that we've started having ads, shifted to a commercial service provider, and worked out a way of splitting the loot, I thought we might as well make it easy for people to give to us if they want to.

This would make a really good exam question for my Business Associations class: Is the Volokh Conspiracy a partnership?

Here's how I would analyze that question. (Obviously, the following is not offered as legal advice and should not be taken as such.)

1. Are there two or more persons? Yes.
2. Are they co-owners? Comment 1 to UPA (1997) § 202 makes clear that the purpose of the co-ownership language is to distinguish the partnership from the agency relationship. Hence, unless Eugene could show that the other Conspirators are mere agents, this element of the test should not be a serious barrier to finding that a partnership exists. As to that question, the Comment further explains that ownership normally connotes control, so the key issue may be whether the other Conspirators exercise joint control over blog decision making.
3. Is the blog a business? UPA (1997) § 101 defines a business to include "every trade, occupation, and profession." Just as writing an online magazine would qualify as a trade (journalism), so maintaining a web log almost certainly qualifies. As I explain in my book Agency, Partnerships & LLCs (at 102), "this definition is sufficiently sweeping to encompass just about any for profit venture." Indeed, Comment 1 to UPA (1997) § 202 characterizes a business as "a series of acts directed toward an end," which surely encompasses blogs.
4. Are they doing it for a profit? They admit that they've "started having ads, shifted to a commercial service provider, and worked out a way of splitting the loot." The emphasized language is especially critical. UPA (1997) § 202(b) provides, in pertinent part that: "A person who receives a share of the profits of a business is presumed to be a partner in the business, unless the profits were received in payment ... (ii) for services as an independent contractor or of wages or other compensation to an employee." Hence, unless Eugene can rebut that presumption by showing that he employs the other Conspirators or that they are independent contractors, they've got themselves a partnership. Suppose, for example, that Eugene collects all the money, pays all the expenses, and then compensates his fellow Conspirators according to some schedule. In that case, he'd have a pretty good argument that he's the sole proprietor and the rest of the Conspirators are independent contractors. (Again, a key issue may be the extent to which the other Conspirators have control rights.)

Of course, if they have a partnership, what they have is a general partnership. If I'm right about that, they might be well-advised to consider setting up a Limited Liability Company or Limited Liability Partnership. Why? Go buy my book.

What follows if The Volokh Conspiracy is a partnership? For one thing, they will need for file a partnership tax return. (Check out this story, which is actually an old Dave Barry column although it's hard to tell that from the website.) Because the name of the business does not include the name of all the members of the partnership, they need to file a fictitious business name statement. They all now have ownership stakes in the intellectual property, including trademarks and so on. And this just starts to scratch the surface.

Here's a related question, which is more for the transactional lawyers in the audience: How do you suppose they are "splitting the loot"? The default rule of partnership law, set out in UPA (1997) § 401 is equal shares. As a default rule, however, this is subject to contrary agreement of the parties. (In many states, the default rule is that members of LLCs split profits according to their respective capital contributions, which is essentially how corporations work too.) Did the Conspirators go with equal shares or according to capital contributions (if any) or rate of blog posts or any one of a number of other plausible solutions?

What would you do under the circumstances? It's actually a very interesting problem of designing compensation to provide the right incentives. At first blush, I would probably want some correlation to the amount of posting done. When was the last time you saw Russell Korobkin contribute? On the other hand, you wouldn't want to create an incentive for members to post any old crap.

So if you're a member of a group blog that has ads or other revenue sources, you might want to ponder these and many related questions. Whatever you do, however, do NOT email me for advice. Seriously. Don't even think about it. (Feel free, however, to go buy my book.)

The WSJ's Apologia for Eason Jordan

The WSJ editorial page jumps into Easongate with a defense of the ex-CNN executive (yes, really!), available for free at OpinionJournal.com:

As for Mr. Jordan, he initially claimed that U.S. forces in Iraq had targeted and killed 12 journalists. Perhaps he intended to offer no further specifics in order to leave an impression of American malfeasance in the minds of his audience, but there is no way of knowing for sure. What we do know is that when fellow panelist Representative Barney Frank pressed Mr. Jordan to be specific, the CNN executive said he did not believe it was deliberate U.S. government policy to target journalists. Pressed further, Mr. Jordan could only offer that "there are people who believe there are people in the military who have it out" for journalists, and cite two examples of non-lethal abuse of journalists by ordinary GIs.

None of this does Mr. Jordan credit. Yet the worst that can reasonably be said about his performance is that he made an indefensible remark from which he ineptly tried to climb down at first prompting. This may have been dumb but it wasn't a journalistic felony.

I think the Journal's editorial staff is way off base here.

1. Remember what they said about Watergate: It wasn't the crime, it was the cover up? Why did Jordan and CNN refuses to release a video or transcript of the event? Why did Jordan and CNN stonewall until the story got so big that they had to act?
2. Jordan spread a malicious lie about the US armed forces while they were in combat, giving aid and comfort to the enemy. Then his attempt to "ineptly ... climb down at first prompting" was a non- apology that invoked the ravings of whacked out conspiracy theorists to justify his remarks. Is that the conduct of a credible journalist?
3. Even if he did "ineptly ... climb down at first prompting," how do we know what his true views are or whether they would continue to color his reporting?
4. Cumulative damage. Eason Jordan is the same guy who admitted that CNN pulled its punches for years with respect to Saddam Hussein so that it could keep its Baghdad bureau open. Perhaps, like most employers, CNN's decision to let Jordan go was based not just on a single screw-up but on a pattern of problems.
5. Finally, what employer has to wait until an employee commits a "felony" in order to fire that employee? Eason Jordan badly and publicly embarrassed CNN twice in the space of less than 2 years. In the corporate world, which is where CNN has to function, that's plenty of grounds for firing.

All told, the Journal's usual good sense seems to have deserted it on this occasion.

CalPERS and Shareholder Activism

In response to my post The Right's Attack on Public Pension Funds, University of Minnesota law professor Brett McDonnell (guest blogging at Conglomerate) writes:

I am also interested in a more edgy response that most American corporate law scholars would probably shy away from. As I mentioned in my first post, I am interested in criteria such as redistribution and holding those in power accountable. This suggests something of a civic republican justification for shareholder capitalism: widespread ownership as a way of democratizing ownership of the means of production and of equalizing power within society. More than pure economic interests are at stake in the control of corporations.

Thus, when Phil Angelides or the AFSCME go after powerful, over-paid CEOs, part of their explicit point is a populist attack on privilege. That's cool with me, and I suspect it's cool with a lot of their constituents as well. Of course, taken to the point where it threatens their retirement security, there's a problem. But I think it's rarely if ever taken to that point. Is the loss of a fraction of a percentage point of return tolerable as a cost to holding accountable some of the most influential people and institutions in our society?

The problem I have with Brett's argument is that I don't want Angelides using my money to advance a left-liberal poltical agenda. Unless Brett convinces me that all CalPERS and CalSTRS beneficiaries are left-liberal Democrats, why should Angelides be allowed to use their money to advance his personal political policies and career? Indeed, even if all those beneficiaries are commie pinkos (like Brett?, heh), they still might complain that the CalPERS and CalSTRS boards are largely unaccountable to the beneficiaries. Plan participants get to elect only one-quarter of the board, the rest being hacks appointed by various politicos. As such, my point was not only that CalPERS and CalSTRS have different interests than shareholders at large, my point also was that the people who run those funds have conflicts of interest vis-a-vis their beneficiaries.

It strikes me as odd that Brett would want to achieve corporate accountability via unaccountable hacks. Especially since a lot of those hacks are planning on running for governor and thus are also among what Brett calls "the most influential people ... in our society"?