A reader in Taiwan kindly sent along this translation:
"Both Sarbanes-Oxley Act and Dodd-Frank Act are devoted to making the board of a company become professional, qualified and neutral. However, [controlling] shareholders are not necessarily willing to cede board seats to [those professional, qualified and neutral directors], and independent directors do not function well. Therefore, Professor Bainbridge of UCLA and Professor Henderson of UChicago suggest that individual director should be replaced by BSP. The main reason: a company will not pay for a consultant who works several hours per month/season, so it is unreasonable, at the same or higher cost, to retain a director who works several hours per month/season either. Rather, [the directors' role] can be passed to BSP so that more experts can be hired for support. The two professors' suggestion leaves many questions unanswered, such as who shall decide to retain the BSP, the governance of BSP and whether BSP will dictate the operation of the board, etc. The reason for the two professors' revolutionary suggestion is due to the dysfunction of modern board that makes the company with limited liability, referred as the most important invention in modern history by [Nicholas Murray] Butler, ... the most serious disaster."
He also comments that:
As correctly indicated by Professor Henderson on his Facebook post, [the article's author] Mr. Chong Chen is the former prime minister in Taiwan, who is highly respected due to his expertise in the financial market.
Pope Francis set a helpful tone. When we opened, he encouraged us to be open and honest, and not to look at our conversations as debates or lobbying, where there would be winners or losers.
Then, on Saturday, he closed by observing that we were first and foremost pastors, not advocates for causes, not captives of ideologies, whether of heartless rules, or diluted ideas of mercy and a fixation on change.
In general, those reporting on the Synod did not heed the Holy Father’s counsel. They prefer the language of tension, victory, loss, conservative vs. liberal, “Pope Francis’ bishops” versus stodgy traditionalists. ...
What was refreshing ... was a warm, gracious tone, so marvelously personified in Pope Francis, (who would tell us it’s hardly his style, but that of Jesus!), that the Church is at her best when she invites, embraces, understands, welcomes, and affirms, instead of excluding, judging, or condemning.
The Extraordinary Synod on the Family that just concluded has prompted me to reread Judge John T. Noonan's wonderful book A Church That Can and Cannot Change. Here's the gist, as summarized by Amazon:
Using concrete examples, John T. Noonan, Jr., demonstrates that the moral teaching of the Catholic Church has changed and continues to change without abandoning its foundational commitment to the Gospel of Jesus Christ.
Specifically, Noonan looks at the profound changes that have occurred over the centuries in Catholic moral teaching on freedom of conscience, lending for a profit, and slavery. He also offers a close examination of the change now in progress concerning divorce.
In these changes, Noonan perceives the Catholic Church to be a vigorous, living organism, answering new questions with new answers, and enlarging the capacity of believers to learn through experience and empathy what love demands. He contends that the impetus to change comes from a variety of sources, including prayer, meditation on Scripture, new theological insights and analyses, the evolution of human institutions, and the examples and instruction given by persons of good will.
Noonan also states that the Church cannot change its commitment to preaching the Gospel of Jesus Christ. Given this absolute, how can the moral teaching of the Church change? Noonan finds this question unanswerable when asked in the abstract. But in the context of the specific facts and events he discusses in this book, an answer becomes clear. As our capacity to grasp the Gospel grows, so too, our understanding and compassion, which give life to the Gospel commandments of love, grow.
Noonan is a brilliant judge and lawyer and deploys his considerable skills as an advocate to great effect here. But he's not neutral. He has an axe to grind and does so at length. So while I recommend it very highly, I also recommend reading some of his critics. Avery Cardinal Dulle's review at First Things would be a good place to start. After reviewing each of the doctrines Noonan claims have evolved, Dulles concludes that:
Noonan has written a stimulating book dealing with questions of great importance. He shows himself to be knowledgeable about the history of the four problems here treated. He brings to bear many of the skills of a historian, a civil lawyer, a canon lawyer, and to some degree those of a theologian. Anyone who wishes to question Noonan’s conclusions must at least take account of the facts he has unearthed. He renders no small service in presenting the most powerful objections against continuity that can be raised.
The reader should be warned, however, 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.
Lastly, one might ponder Cardinal Dolan's recent observation that:
A synod by its nature can hardly change the Church’s teaching. We Catholics pledge allegiance to what is called a “revealed religion” (so do Jews, other Christians, and Moslems). That simply means that we believe that God has told us (“revealed”) certain things about Himself and ourselves through the Bible, through our own nature, especially through His Son, all celebrated and taught by His Church. ...
Anyone who thought this synod could change that has not read Catholicism for Dummies. The Church does not change God’s revelation, but attempts to change us so we can live it.
Does Church teaching evolve? Adapt? It's an important and fascinating debate. Noonan and his critics provide plenty of food for thought.
The Securities and Exchange Commission is increasingly steering cases to hearings in front of the agency’s appointed administrative judges, who found in its favor in every verdict for the 12 months through September, rather than taking them to federal court.
The winning streak comes amid a marked shift at the agency toward trying cases that are more complex before its administrative law judges. Historically, the SEC had more often turned to these judges for relatively straightforward legal actions, such as barring stockbrokers who had been convicted of criminal fraud. Thanks in part to enhanced powers granted in the 2010 Dodd-Frank financial-reform bill, the SEC lately has been using the administrative judges for complicated cases, including several involving insider trading.
“It’s fair to say it’s the new normal,” Kara Brockmeyer, head of the SEC’s anti-foreign-corruption enforcement unit, told a legal conference in Washington last week. “Just like the rest of the enforcement division, we’re moving towards using administrative proceedings more frequently.”
I see this as a serious problem. Set aside the whole debate over the constitutionality (and advisability) of the independent agencies acting as a fourth branch of government just to focus on the role of ALJs.
There is a serious question of whether the SEC's ALJs are biased in favor of the agency, as suggested by the data the Journal reports:
The agency’s win rate in recent years is considerably higher in front of its administrative law judges than it is in jury trials. In the 12 months through September, the SEC won all six contested administrative hearings where verdicts were issued, but only 61%—11 out of 18—federal-court trials, according to previously unpublished figures.
There has been a similar winning rate in previous years. The agency won nine of 10 contested administrative proceedings in the 12-month period through September 2013 and seven out of seven in the 12 months through September 2012, according to SEC data. The SEC won 75% and 67%, respectively, of its trials in federal court in those years.
Concerns about the impartiality of ALJs and the fairness of the procedures they apply are not new, of course. Twenty five years ago, for example, Karen Lewis explained that:
Although judges must abide by standards of ethical conduct proscribed by the Code of Judicial Conduct (CJC), no such uniform restraint exists for administrative law judges (ALJ's). ALJ's adjudicate significant controversies between administrative agencies and the public; these proceedings resemble typical judicial court actions. … ALJ's are recognized as being functionally comparable to trial judges, and ALJ's decisions have considerable impact upon the lives of most Americans. Their powers, duties, and status have been the subject of debate on several occasions by state and federal courts. Nevertheless, due to their status as agency employees under the executive branch of government and their lack of complete independence, ALJ's are not held to the same ethical code as trial judges.
The employer-employee relationship between agencies and ALJ's gives rise to a public perception that ALJ's are not unbiased or impartial judges.
Karen S. Lewis, Administrative Law Judges and the Code of Judicial Conduct: A Need for Regulated Ethics, 94 Dick. L. Rev. 929, 929-31 (1990).
The problem persists, as Jonathan Turley observed just last year:
Under Article III of the Constitution, citizens facing charges and fines are entitled to due process in our court system. As the number of federal regulations increased, however, Congress decided to relieve the judiciary of most regulatory cases and create administrative courts tied to individual agencies. The result is that a citizen is 10 times more likely to be tried by an agency than by an actual court. In a given year, federal judges conduct roughly 95,000 adjudicatory proceedings, including trials, while federal agencies complete more than 939,000.
These agency proceedings are often mockeries of due process, with one-sided presumptions and procedural rules favoring the agency. And agencies increasingly seem to chafe at being denied their judicial authority. Just ask John E. Brennan. Brennan, a 50-year-old technology consultant, was charged with disorderly conduct and indecent exposure when he stripped at Portland International Airport last year in protest of invasive security measures by the Transportation Security Administration. He was cleared by a trial judge, who ruled that his stripping was a form of free speech. The TSA was undeterred. After the ruling, it pulled Brennan into its own agency courts under administrative charges.
Congress has never seriosuly reconsidered the desirability of this appalling state of affairs, nor has the Supreme Court ever taken seriously the many constitutional issues raised by the emergence of the SEC and its ilk as a fourth branch of government. It is time they did so.
Lyman Johnson and David Millon have just posted a very interesting paper on Corporate Law after Hobby Lobby, THE BUSINESS LAWYER, Vol 70 - November 2014, available at SSRN: http://ssrn.com/abstract=2507406:
We evaluate the U.S. Supreme Court's controversial decision in the Hobby Lobby case from the perspective of state corporate law. We argue that the Court is correct in holding that corporate law does not mandate that business corporations limit themselves to pursuit of profit. Rather, state law allows incorporation 'for any lawful purpose.' We elaborate on this important point and also explain what it means for a corporation to 'exercise religion.' In addition, we address the larger implications of the Court's analysis for an accurate understanding both of state law's essentially agnostic stance on the question of corporate purpose and also of the broad scope of managerial discretion.
The point at which I would most strongly join issue with their argument is the claim (at 14) that:
State corporate law does not require corporations to prioritize profits over competing considerations. This fact has ramifications that extend far beyond the particular activities- religious observance — at issue in the Hobby Lobby cases. All business corporations (and non- profits too, for that matter) must generate profit in order to survive. That is simply a fact of life. But corporate law confers on them broad discretion to determine the extent to which they choose to temper the pursuit of profit by regard for other values.
I think it's critical to remember that Hobby Lobby is very explicitly a case about closely held corporations.
“As a leading commentator in the field has observed: ‘unlike the typical shareholder in the publicly held corporation, who may be simply an investor or a speculator and cares nothing for the responsibilities of management, the shareholder in a close corporation is a co-owner of the business and wants the privileges and powers that go with ownership. …’” Simms v. Exeter Architectural Products, Inc., 868 F.Supp. 677, 682 n. 1 (M.D.Pa.1994) (citing (O'Neal, Close Corporations [2d Ed.], § 1.07, at pp. 21–22 [n. omitted]).
I also refer you to Baran v. Baran, 1947 WL 2915, which held of close corporations that "It is not in violation of any rule or principle of law for stockholders, who own a majority of the stock in a corporation, to cause its affairs to be managed in such way as they may think best calculated to further the ends of the corporation, and for this purpose to appoint one or more proxies, who shall vote in such a way as will carry out their plans." In that case, the court upheld an agreement among the shareholders to elect one another to corporate office. But why should the same rule not apply to a consensus among shareholders of a close corporation to define the ends of the corporation in religious terms?
Hobby Lobby's meaning will be contested on many levels for a long time to come, but I think it is best understood as recognizing the well-established principle that shareholders of a closely held corporation can alter the default rules of corporate law, including the issue of corporate purpose. I don't think Hobby Lobby should be understood as changing the default rule, especially by why of what is arguably dicta.
OTOH, see the discussion in Lyman and David's paper at 36-37, which argues that Hobby Lobby is not so limited.
Also pertinent to this debate is my recent paper Corporate Social Responsibility in the Night Watchman State: A Comment on Strine & Walker (September 9, 2014). UCLA School of Law, Law-Econ Research Paper No. 14-12. Available at SSRN:http://ssrn.com/abstract=2494003:
Delaware Supreme Court Chief Justice Leo Strine and Nicholas Walter have recently published an article arguing that the U.S. Supreme Court’s decision in Citizens United v. FEC undermines a school of thought they call “conservative corporate law theory.” They argue that conservative corporate law theory justifies shareholder primacy on grounds that government regulation is a superior constraint on the externalities caused by corporate conduct than social responsibility norms. Because Citizens United purportedly has unleashed a torrent of corporate political campaign contributions intended to undermine regulations, they argue that the decision undermines the viability of conservative corporate law theory. As a result, they contend, Citizens United “logically supports the proposition that a corporation’s governing board must be free to think like any other citizen and put a value on things like the quality of the environment, the elimination of poverty, the alleviation of suffering among the ill, and other values that animate actual human beings.”
This essay argues that Strine and Walker’s analysis is flawed in three major respects. First, “conservative corporate law theory” is a misnomer. They apply the term to such a wide range of thinkers as to make it virtually meaningless. More important, scholars who range across the political spectrum embrace shareholder primacy. Second, Strine and Walker likely overstate the extent to which Citizens United will result in significant erosion of the regulatory environment that constrains corporate conduct. Finally, the role of government regulation in controlling corporate conduct is just one of many arguments in favor of shareholder primacy. Many of those arguments would be valid even in a night watchman state in which corporate conduct is subject only to the constraints of property rights, contracts, and tort law. As such, even if Strine and Walker were right about the effect of Citizens United on the regulatory state, conservative corporate law theory would continue to favor shareholder primacy over corporate social responsibility.
A friend recently emailed, raising a question about the new Delaware Chancery Court decision in In re KKR Financial Holdings LLC Shareholder Litigation, --- A.3d ----, 2014 WL 5151285 (Del.Ch.2014). He writes:
I am confused by the relationship of [KKR Financial Holdings to] Kahn v. M&F Worldwide. As I understand Kahn, in a merger with a controlling shareholder you need both approval of a disinterested independent committee and a vote of a majority of the minority. In the KKR case the court concludes that KKR is not a "controlling" shareholder, but that even if the majority of the board is not disinterested (that is, a majority is somehow beholden to the acquirer) the BJR applies if there is approval by a majority of the minority. That seems to me to be inconsistent with Kahn. I don't see the difference between a company that is controlled by the acquirer and one whose board is not independent of the acquirer. What am I missing?
I'm puzzled also. I first note that the court found that a majority of the BOD was disinterested and independent, so the part that is puzzling us is dicta:
For the foregoing reasons, I conclude that plaintiffs have failed to allege facts that support a reasonable inference that eight of the twelve KFN directors, constituting eight of the ten who voted on the transaction, were not independent from KKR. Thus, plaintiffs have failed to rebut the presumption that the business judgment rule applies to the KFN board’s decision to approve the merger.
But that's not the interesting question. Instead, it is the court's statement that, "even if plaintiffs had alleged sufficient facts to reasonably support such an inference, business judgment review still would apply because the merger was approved by a majority of disinterested stockholders in a fully-informed vote."
I note that, oddly, plaintiffs did not challenge the defense position on the effect of approval by the shareholders:
Relying on Chancellor Strine’s decision last year in Morton’s ... and his earlier decision in Harbor Finance Partners v. Huizenga, defendants argue that, because the merger did not involve a controlling stockholder and was approved by a fully informed vote of KFN’s stockholders, the business judgment rule applies and insulates the merger from all attacks other than on the grounds of waste. Put differently, defendants argue that, even if a majority of the KFN’s directors were not independent, the business judgment presumption still would apply because of the effect of untainted stockholder approval of the merger.
Plaintiffs do not take issue with defendants’ position concerning the legal effect of a fully informed vote where a controlling stockholder is not involved.
But that would not excuse the court from considering the issue sua sponte, would it? In any case, the court nowhere discusses the Delaware Supreme Court decision in Kahn.
Obviously, if a majority of the board were disinterested and independent, shareholder approval would invoke the business judgment rule. But if a majority of the board were interested by virtue of a link to major (albeit non-controlling) shareholder, shouldn't that trigger Kahn? After all, you have a conflict of interest on the part of the board that arises out a relationship with a shareholder?
UCLA Lowell Milken Institute Fellow George Georgiev has just posted his essay Shareholder vs. Investor Primacy in Federal Corporate Governance, 62 UCLA Law Review Discourse 71 (2014). Available at SSRN: http://ssrn.com/abstract=2503300
This short essay was written in connection with the Conference on Competing Theories of Corporate Governance held at UCLA School of Law in April 2014. The essay questions the notion that recent federal corporate governance regulation reflects the shareholder primacy model of corporate governance and argues that, instead, such regulation comports more closely with the investor protection norm embedded in the federal securities laws. A key to the argument is the distinction between "shareholders" and "investors," which are overlapping but distinct groups with different functions, powers, and governance rights. Using a series of examples, the essay shows that recent federal corporate governance provisions and initiatives are best viewed as a means of ensuring that investors are able to participate in the markets for debt and equity securities on the basis of adequate and accurate information, and that these same provisions and initiatives have not accorded any unique and meaningful governance rights to shareholders alone (with say-on-pay rules proving no exception). The essay does not dispute that shareholders as a class have expanded their power and influence in corporate affairs in recent years; it simply argues that this has not been the direct result of federal corporate governance regulation which, as a descriptive matter, has prized the interests of all investors over those of shareholders alone.
I think the investor/shareholder dichotomy is a very interesting one and worth further exploration.
In a recent post, Columbia Law School Professor John C. Coffee Jr. argues that the Securities and Exchange Commission should take a number of steps to challenge and discourage the adoption of fee-shifting charter provisions. I disagree.
Professor Coffee does not identify any market failures that prevent investors from adequately assessing any risks associated with fee-shifting charter provisions. The existence of these provisions are fully disclosed either in the ’33 Act prospectus (and exhibits) or in ’34 Act reports filed with the SEC. What does the SEC (and Professor Coffee) know that the market doesn’t?
Companies with fee-shifting charter provisions, such as Smart & Final Stores, Inc., have been successful in completing IPOs. Why? Perhaps, these provisions actually benefit investors by mitigating the dissipation of company resources on insurance premiums, legal fees and costs of settlement.
If the SEC takes action to strangle fee-shifting charter provisions in the crib, as Professor Coffee urges, it will forestall experimentation and choice.
To ensure its voting policies take into consideration the perspectives of the corporate governance community and the views of its institutional clients, ISS gathers broad input each year from institutional investors, issuers, and other market constituents through a variety of channels and mediums. Following the release earlier this month of its 2015 policy survey results, ISS is now making available for public comment draft 2015 voting policies.
Specifically, ISS is requesting feedback from interested market constituents on new or potential changes to nine discrete voting policies, including: independent chair shareholder proposals (U.S.); former CEO cooling-off period (Canada); board independence (Portugal); board independence (Japan); factoring capital efficiency into director elections (Japan); equity plan scorecard (U.S.); share issuance limit (Singapore); advance notice provisions (Canada); and impact of Florange Act (France). Download the draft policies here.
I write to oppose the proposed changes to the ISS policy with respect to independent chair shareholder proposals. At present, the ISS policy is to recommend approval of such proposals unless the company meets an extremely restrictive set of criteria. The new policy would be even more restrictive, by adding "add new factors that are not considered under the current policy including the absence/presence of an executive chair, recent board and executive leadership transitions at the company, director/CEO tenure, and a longer (five-year) TSR performance period." The effect of this change would be to make it even more difficult for companies to obtain an ISS recommendation against such proposals.
In my view, this change moves the ISS in the wrong direction. Instead, the ISS should adopt a policy of generally opposing such proposals. Neither the empirical data nor corporate governance theory support requiring companies to have a non-executive chairman.
A study by Olubunmi Faleye finds support for the hypothesis that firms actively weigh the costs and benefits of alternative leadership structures in their unique circumstances and concludes that requiring a one size fits all model separating the CEO and Chairman positions may be counterproductive.[1] A study by James Brickley, Jeffrey Coles, and Gregg A. Jarrell found little evidence that combining or separating the two titles affected corporate performance.[2] A subsequent study by the same authors found “preliminary support for the hypothesis that the costs of separation are larger than the benefits for most firms.”[3]
As John Coates summarizes the field, the evidence is mixed, at best:
At least 34 separate studies of the differences in the performance of companies with split vs. unified chair/CEO positions have been conducted over the last 20 years, including two “meta-studies.” … The only clear lesson from these studies is that there has been no long-term trend or convergence on a split chair/CEO structure, and that variation in board leadership structure has persisted for decades, even in the UK, where a split chair/CEO structure is the norm.[4]
Although Coates concludes that splitting the CEO and Chairman positions by legislation “may well be a good idea for larger companies,” he further concludes that mandating such a split “is not clearly a good idea for all public companies.”[5]
Proponents of a mandatory non-executive Chairman of the Board thus have overstated the benefits of splitting the positions, while understating or even ignoring the costs of doing so. Michael Jensen identified the potential benefits in his 1993 Presidential Address to the American Finance Association, arguing that: “The function of the chairman is to run the board meetings and oversee the process of hiring, firing, evaluation, and compensating the CEO. … Therefore, for the board to be effective, it is important to separate the CEO and Chairman positions.”[6] In fact, however, overseeing the “hiring, firing, evaluation, and compensating the CEO,” is the job of the board of directors as a whole, not just the Chairman of the Board.
To be sure, in many corporations, the Chairman of the Board is given unique powers to call special meetings, set the board agenda, and the like.[7] In such companies, a dual CEO-Chairman does wield powers that may impede board oversight of his or her performance. Yet, in such companies, the problem is not that one person holds both posts; the problem is that the independent members of the board of directors have delegated too much power to the Chairman. The solution is to adopt bylaws that allow the independent board members to call special meetings, require them to meet periodically outside the presence of managers, and the like.
Indeed, the influence of an executive chairman may not even be a problem. Brickley, Coles, and Jarrell concluded that the separation and combination of titles is part of the natural succession process. A successful CEO receives a variety of rewards from the company, one of which may be a fancier title. If the power that comes with the combined title came as a reward for sustained high performance, that power may actually redound to the company’s benefit.
Turning from the benefit side to the cost side of the equation, even if splitting the posts makes it easier for the board to monitor the CEO, the board now has the new problem of monitoring a powerful non-executive Chairman. The board now must expend effort to ensure that such a Chairman does not use the position to extract rents from the company and, moreover, that the Chairman expends the effort necessary to carry out the post’s duties effectively. The board also must ensure that a dysfunctional rivalry does not arise between the Chairman and the CEO, both of whom presumably will be ambitious and highly capable individuals. In other words, if the problem is “who watches the watchers?,” splitting the two posts simply creates a second watcher who also must be watched.
In addition, a non-executive Chairman inevitably will be less well informed than a CEO. Such a Chairman therefore will be less able to lead the board in performing its advisory and networking roles. Likewise, such a Chairman will be less effective in leading the board’s in monitoring top managers below the CEO, because the Chairman will not know those managers as intimately as the CEO.
Accordingly, I urge the ISS to reject the proposal changes and, in addition, to change the current policy to adopt a presumption against recommending approval of independent chairman shareholder proposals.
[1] Olubunmi Faleye, Does One Hat fit All? The Case of Corporate Leadership Structure (January 2003). [2] James A. Brickey et al., Leadership Structure: Separating the CEO and Chairman of the Board, 3 J. Corp. Fin. 189 (1997). [3] James A. Brickley et al., Corporate Leadership Structure: On the Separation of the Positions of CEO and Chairman of the Board, Simon School of Business Working Paper FR 95-02 (Aug. 29, 2000), http://ssrn.com/abstract=6124. [4] John Coates, Protecting Shareholders and Enhancing Public Confidence through Corporate Governance (July 30, 2009), http://blogs.law.harvard.edu/corpgov/2009/07/30/ protecting-shareholders-and-enhancing-public-confidence-through-corporate-governance/. [5] Id. [6] Michael C. Jensen, Presidential Address: The Modern Industrial Revolution, Exit and the Failure of Internal Control Systems, 48 J. of Fin. 831, 866 (1993). [7] James Verdonik and Kirby Happer, Role of the Chairman of the Board 2 (explaining that “one of the duties of the Chairman is to call meetings of the Board of Directors and the shareholders. … Chairmen often set the agenda for Board meetings”), www.directorsforum.com /role-of-the-chairman-verdonik-happer.pdf.
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.
As a followup to my prior post on David Hyman's argument for intellectual diversity, consider that made by Nicholas Quinn Rosenkranz:
Elite law faculties are overwhelmingly liberal. Jim Lindgren has proven the point empirically. I will just add my impressions from Georgetown Law School to reinforce the point. We are a faculty of 120, and, to my knowledge, the number of professors who are openly conservative, or libertarian, or Republican or, in any sense, to the right of the American center, is three—three out of 120. There are more conservatives on the nine-member United States Supreme Court than there are on this 120-member faculty. Moreover, the ideological median of the other 117 seems to lie not just left of center, but closer to the left edge of the Democratic Party. Many are further left than that.
But at least there are three. And the good news is that this number has tripled in the last decade. The bad news, though, is that, at Georgetown, the consensus seems to be that three is plenty—and perhaps even one or two too many.
These numbers are stark, but they are not unusual; this ratio actually seems fairly typical of most elite law schools. This lop-sidedness would be a shame in any academic department. But it is a particularly ironic sort of shame at a law school. After all, it is a fundamental axiom of American law that the best way to get to truth is through the clash of zealous advocates on both sides. All of these law professors have, in theory, dedicated their lives to the study of this axiomatically adversarial system. And yet, at most of these schools, on most of the important issues of the day, one side of the debate is dramatically underrepresented, or not represented at all.
One result, unfortunately, is a certain lack of rigor. To be blunt, a kind of intellectual laziness can set in when everyone agrees. Faculty workshops fail to challenge basic premises. Scholarship becomes unreflective and imprecise.
Worse yet, this intellectual homogeneity impairs analysis of law in progress—law as it unfolds out in the world. Analyzing and predicting actual American law would seem to be an important aspect of the job. After all, the country would like to be able to turn to these elite faculties for wisdom and insight about contemporary legal controversies. But because elite American faculties are so far to the left of the American judiciary, these faculties can be startlingly poor at analyzing the actual practice of American law.
You really need to go read the whole thing to understand why law schools desperately need reform in this area.
Almost without exception, elite law professors dismissed the possibility that the Patient Protection and Affordable Care Act (variously called “PPACA,” “Obamacare,” and the “Affordable Care Act,”) might be unconstitutional—but something went wrong on the way to the courthouse. What explains the epic failure of elite law professors to accurately predict how Article III judges would handle the case? ...
[1.] Most law professors have little practical experience. ... Thus, law professors unduly discounted the practical difficulties associated with defending PPACA, in no small part because they failed to notice that a majority of the Supreme Court no longer shared their views on the Commerce Clause. ...
[2] Did constitutional law professors have a strong emotional stake in the outcome of the litigation over PPACA, sufficient to trigger motivated reasoning on the part of those opining? There is good reason to think so. The law represented the signature domestic policy achievement of the Obama Administration—and the culmination of decades of effort by the Democratic Party. Previous research has demonstrated that law professors skew heavily Democratic, with massive underrepresentation of Republicans, conservatives, and evangelical or fundamentalist Christians. ...
[3] Law professors are not known for their modesty. But even among this group, those who teach and write about constitutional law stand out. ...
[4] Making predictions is hard. ...
[5] The preceding factors may help explain how elite constitutional law professors got it so wrong prior to oral argument before the Supreme Court. But, what explains their conduct after oral argument, when it became clear that the constitutionality of PPACA was in serious jeopardy? Rather than admit error, or rethink their original assessment of the probabilities, many of the nation’s elite law professors participated in an extraordinary campaign threatening the Supreme Court (more specifically, threatening Justices Kennedy and Roberts, the plausible swing justices), with de-legitimization if they didn’t rule the “right” way. ...
This strategy substantially raised the political stakes of the dispute, which were high to begin with. For elite constitutional law professors, already inclined to view the Supreme Court as both a political and legal institution, and, as a group, generally committed to an expansive view of federal power, such measures were perfectly reasonable. This was an explicitly bare-knuckles political campaign, waged by a group of elite law professors convinced that they were right and the Supreme Court was about to be wrong. By pursuing politics through other means, the campaign was effectively a declaration of war on those who did not share the academic consensus on the scope of federal power.
To summarize, our nation’s elite law professors organized the aca- demic equivalent of a vigilance committee to enforce what they had defined for themselves as the range of acceptable, mainstream views when it came to the Constitution—just as they had done several decades previously when Robert Bork was nominated to the Supreme Court.
Personally, I've always thought Hyman's second and fifth points were the most plausible explanations. Indeed, if you a sixth factor-aggressive secularism and, in particular, anti-Catholicism among the legal academy--they also explain the legal academy's remarkable harsh reaction to the Hobby Lobby decision. (See, e.g., the over- the-top corporate law professors brief in that case.)
In any case, my friend and co-author Mark Ramseyer has a response piece out that is very much worth reading, because it is written with Mark's typical verve and intelligence:
Is dear reader shocked that our colleagues could so uniformly “misunderestimate” the constitutional problems in the Act? Is he shocked that the 130 signers of an amicus brief supporting this hyperpartisan Democratic statute included no one who had donated to a Republican campaign? Is he shocked that the twenty-two constitutional law scholars surveyed gave ninety-eight percent of their political contributions to Democratic campaigns?
Is dear reader shocked? Captain Renault may have been “shocked, shocked to find that gambling is going on” at the Cafe Americain, but the politics of the constitutional law guild is no secret. One need not down many drinks to learn Ilsa Lund’s politics, and one need not eat many faculty-club sandwiches to learn the politics of the constitutional law crowd. Of intellectual diversity, only feminist jurisprudence and critical race theory have less.
Mark goes on to demonstrate in exquisite detail the left-liberal and secular bias of the academy. He concludes:
Hyman brilliantly details the way constitutional law scholars missed the unconstitutionality of the PPACA. They missed it because they so badly wanted the Act—because they so badly wanted to believe a national health insurance program was possible. They missed it because they let political loyalties trump their judgment—because they let their “moral engagement” block analysis.
And so, once again, the take home lesson is that law schools desperately need intellectual diversity, because right now they are a Democrat /secular humanist monoculture. Time for some affirmative action for "Republicans, conservatives, and evangelical or fundamentalist Christians," not to mention Catholic conservatives.
In re Omnicare, Inc. Sec. Litig., 13-5597, 2014 WL 5066826 (6th Cir. Oct. 10, 2014):
The purpose of “the materiality requirement is not to ‘attribute to investors a child-like simplicity, an inability to grasp the probabilistic significance of [opinion statements],’ but to filter out essentially useless information that a reasonable investor would not consider significant, even as part of a larger ‘mix’ of factors to consider in making his investment decision.” Basic, Inc. v. Levinson, 485 U.S. 224, 234 (1988) (quoting Flamm v. Eberstadt, 814 F.2d 1169, 1175 (7th Cir.1987)). To this end, we have said before that “[m]isrepresented or omitted facts are material only if a reasonable investor would have viewed the misrepresentation or omission as ‘having significantly altered the total mix of information made available.’ “ Sofamor Danek, 123 F.3d 394, 400 (6th Cir.1997) (quoting Basic, Inc., 485 U.S. at 232). Put another way, a “ ‘fact is material if there is a substantial likelihood that a reasonable shareholder would consider it important in deciding how to vote.’ “ Basic, Inc., 485 U.S. at 231 (quoting TSC Indus., Inc. v. Northway, Inc., 426 U.S. 438, 449 (1976)). “ ‘Immaterial statements include vague, soft, puffing statements or obvious hyperbole’ upon which a reasonable investor would not rely.” Public Sch. Teachers' Pension & Ret. Fund of Chi. v. Ford Motor Co. (In re Ford Motor Co. Sec. Litig.), 381 F.3d 563, 570 (6th Cir.2004) (quoting In re K-tel Int'l, Inc. Sec. Litig., 300 F.3d 881, 897 (8th Cir.2002)).
This standard and these examples, however, are vague and provide little guidance in close cases. At first glance, this doctrine might appear “both clever and intuitively sensible,” but it has the potential to “look more like a heuristic rather than an entirely legitimate doctrine” when used too often “at the motion to dismiss stage (where materiality, being a fact question, typically should not be decided)....” Stephen M. Bainbridge & G. Mitu Gulati, How Do Judges Maximize? (The Same Way Everybody Else Does—Boundedly): Rules of Thumb in Securities Fraud Opinions, 51 Emory L.J. 83, 115 (2002). In general, the federal judiciary has a limited understanding of investor behavior and the actual economic consequences of certain statements. Thus, we must tread lightly at the motion-to-dismiss stage, engaging carefully with the facts of a given case and considering them in their full context. See Jennifer O'Hare, The Resurrection of the Dodo: The Unfortunate Re-emergence of the Puffery Defense in Private Securities Fraud Actions, 59 Ohio St. L.J. 1697, 1727–1731 (1998) (illuminating the importance of context to materiality determinations). Otherwise, we risk prematurely dismissing suits on the basis of our intuition.
This study investigates the market impact of Section 1502 of the Dodd-Frank Wall Street Reform and Consumer Protection Act of 2010, which applies public disclosure law to Tin, Tantalum, Tungsten and Gold (3TG) – so-called conflict minerals. ...
The study’s findings reveal that issuers mobilized substantial in-house and external resources, an aggregate total of 709.7 million, to set up conflict mineral programs in order to furnish the required information by June 2, 2014, as per the disclosure law and rule. Issuers each invested an average of $545,962 worth of time and effort to comply with the law, the value of each company’s conflict mineral program largely comprised of in-house corporate time, external human resources, an IT evaluation and IT system expenses. Small issuers, with less than $100 million in revenue, spent $190,330 worth of resources on average – roughly 1/3rd as much as their large issuer counterparts.
That's a huge expense. To what discernible effect, one must ask.
