ProfessorBainbridge.com

Book Recommendations About Business and Transactional Lawyering

I frequently get questions from students for recommendations of books that will give them basics about business and finance, as well as being a transactional lawyer. Many of these students come from a non-business background and need something to get up to speed. Some of my favorite book recommendations for these students include:

I also recommend that students read general market books about business and lawyering. It gives them a feel for what the real world's like outside of textbooks. Some of my favorites are out of print, but here's a few recommendations:

And then, of course, there's my books:

Recommended reading: Ramseyer on Contracting for Compassion in Japanese Buddhism

My friend and coauthor Mark Ramseyer is a Japanese law polymath, as well as a brilliant writer. I always enjoy his stuff, even when the legal issues in question are outside my wheelhouse. In this case, however, when I spent May 199 teaching at a Japanese law school, Helen and I had occasion to visit one of the temples about which Mark writes. They were incredibly poignant and heart breaking. The gardens were filled with these little statutes with knit hats.

Abstract: In the 1960s, Japanese women began asking temples to perform commemorative ceremonies for the fetuses or children they had aborted. They still do. Physicians have been able to perform abortions legally since 1952, and many women have had them. The ceremonies do not fit within the classic rituals offered by the temples, but many Japanese women find them helpful. They ask for the services. The temples respond.

The temples charge for these memorial services. They rely on such fee-for-service arrangements for an increasingly important segment of their finances. Traditionally, priests had stood ready to offer their parishioners counseling and ritual as needed during the existentially troubling passages in their lives. In exchange, their local communities had effectively kept the temple on retainer. This no longer works. The temples stand in low levels of tension with the surrounding society (as Stark put it). As such, they cannot trust their parishioners to give voluntarily. Instead, they had counted on the constraining power of the tightly intertwined social network within the local community.

Over the course of the 20th century, Japanese migrated out of these tightly structured villages to the often anomic cities. Without a coercive village structure to enforce giving, the low-tension temples found themselves without their effective retainer. With the first-best contract unavailable, many temples have turned to fee-for-service arrangements — of which the abortion-related ritual is merely the most notorious. Ironically, the new environment presents an entirely different challenge: temples now find themselves competing with internet-based priest-dispatch services.

Ramseyer, J. Mark, Contracting for Compassion in Japanese Buddhism (September 10, 2020). Harvard Law School John M. Olin Center Discussion Paper No. 1039, 2020, Available at SSRN: https://ssrn.com/abstract=3688691 or http://dx.doi.org/10.2139/ssrn.3688691

Law and Science Fiction: The Tax Man by Stephen Robinett

I’ve been reading a bunch of old Analog Science Fiction magazines from my youth. Tonight I was reading the February 1975 Analog and a short story by Stephen Robinett entitled The Tax Man amused me. It would make a fun case study for a Law and Science Fiction seminar. There are going to be links to the story and other pertinent stuffs on my blog. So, if you want to read the story, stop here.

 

 

 

 

 

 

SPOILER WARNING 1

 

 

 

 

 

 

In the story, there is a massive wall between the USA and Mexico. But it’s not intended to keep people out. Instead, it’s intended to keep people in. (That'd trigger some class discussion, I suspect.)

 

You see, the Tax Reform Act of 1987 created a flat tax rate of 98 percent and made tax evasion a capital offense. The Supreme Court through that out as a violation of the 8th Amendment. Initially, Congress changed the penalty to life imprisonment, but that was too expensive due to the vast number of tax evaders. (There’s a law and economics subtext there.)

 

So they amended the Constitution to bring back the concept of Civil Death (with a citation to Blackstone’s Commentaries in the story, no less).

 

Our hero is visited by an IRS agent who informs Larry that he has been convicted of nonpayment of income taxes for 1998 in a trial conducted entirely by computers. There is no appeal. In three hours, Larry will declared civilly dead and anyone can kill him, after which he will buried in the middle of the road.

 

Larry’s a long distance trucker and decides to take his rig on a run from LA to the Mexican border. The IRS agent chases him and they argue over CB radio about tax policy.

 

In case you've decided to go get the link to the story, I've put another spoiler warning to avoid springing the ending on you.

 

 

 

 

SPOILER WARNING 2

 

In which sometime guest poster J.W. Verret and I debate the relative merits of the MBCA and the ALI

1. There is no ALI Restatement of the Law of Corporate Governance (yet). There is only a set of Principles of Corporate Governance.
2. The MBCA is actually the law in about 35 states. None that matter, but still.

— Steve Bainbridge (@PrawfBainbridge) October 8, 2020

Tuch on Information Fiduciaries

I'm a big fan of Andrew Tuch's work on fiduciary law. His new article is quite interesting:

Abstract Countless high-profile abuses of user data by leading technology companies have raised a basic question: should firms that traffic in user data be held legally responsible to their users as “information fiduciaries”? Privacy legislation to impose fiduciary duties of care, confidentiality and loyalty on data collectors enjoys bipartisan support but faces strong opposition from scholars. First, critics argue that the information fiduciary concept flies in the face of fundamental corporate law principles that require firms to prioritize shareholder interests over those of users. Second, it is said that the overwhelming self-interest of digital companies makes fiduciary loyalty impossible as a practical matter from the outset.

This essay finds neither objection convincing. The first objection rests on a mischaracterization of corporate law, which in reality would require compliance with user-regarding fiduciary obligations—the opposite of what critics fear. The second objection fails to convince because fiduciary law has proven itself adaptable enough to survive such challenges in other settings, such as in the asset management industry. The second objection nevertheless reveals a need for greater specificity of the fiduciary duties that would be imposed under the information fiduciary model, but even then it is unlikely that either objection would undermine the model.

Tuch, Andrew F., A General Defense of Information Fiduciaries (September 12, 2020). Washington University in St. Louis Legal Studies Research Paper No. 20-09-01, Available at SSRN: https://ssrn.com/abstract=3696946.

One of Tuch's arguments is that it is possible for Facebook (to cite one example) to owe fiduciary duties to its users, while Facebook's directors owe duties to Facebook's shareholders. This seems obviously correct. It is a basic tenet of the corporate social responsibility debate, for example, that directors' duty to maximize shareholder fiduciary duties does not require and, arguably, (see below) does not allow directors to cause the corporation to break the law.

Second, he argues that "Never in Delaware law are shareholders’ interests equated with the corporation’s immediate profitability to the exclusion of long-term interests ...."  Accordingly, because care for users will often be consistent with the long term interest of the shareholders, directors who protect user interests at the cost of short term profits will rarely (if ever) be held liable for breaching the duty of shareholder wealth maximization (citing, inter alia, yours truly). 

Third, he argues that Delaware "case law indicates clearly that directors must act 'within the law.'" Well, yes, but. It is my longstanding view that "fiduciary obligation and the duty to act lawfully make a bad fit." See also my post Can directors of corporations be held liable to shareholders when the corporation breaks the law. 

My main concern with suggesting that Facebook and its ilk should be treated as fiduciaries of their users is that fiduciary duties, by virtue of their inherent ambiguity, are a blunt instrument as a regulatory tool. Stephen M. Bainbridge, Director Primacy: The Means and Ends of Corporate Governance, 97 Nw. U.L. Rev. 547, 591 (2003). Consider, for example, the famously vague language of Meinhard v. Salmon:

In discussing the problem with a broad conception of fiduciary duty, under which the fiduciary has “a duty to act in the best interests of the beneficiary,” Lionel Smith explains that “the indeterminacy of such a duty is such that any lawyer would agree that this cannot be its correct formulation.”

Stephen M. Bainbridge, Must Salmon Love Meinhard? Agape and Partnership Fiduciary Duties, 17 Green Bag 2d 257, 265 (2014).

 

Anyway, be sure to check it out.

Disgraced former Theranos CEO Elizabeth Holmes wants to plead mental disease or defect as a defense to the securities fraud charges against her

Reuters reports:

U.S. District Judge Edward Davila in San Jose, California overruled defense objections to letting a psychologist and psychiatrist chosen by the government examine the 36-year-old Holmes for 14 hours over two days, and having the examinations recorded on video.

Davila authorized the examinations after Holmes’ lawyers said they intended to introduce expert evidence from a clinical psychologist “relating to a mental disease or defect or any other mental condition of the defendant bearing on the issue of guilt.”

The defense expert, Mindy Mechanic, is a California State University at Fullerton professor specializing in psychosocial consequences of violence, trauma and victimization, including violence against women, and often testifies in cases involving interpersonal violence, according to her university biography.

I've been in this business for a long time and this is the first time I've heard of the mental disease or defect defense being used in a securities fraud case. A quick Westlaw search turned up about 3 or 4 similar cases, with the opinions mainly dealing with whether a defendant was competent to stand trial. In contrast, It appears from a CNN report that Holmes wants to plead mental disease or defect as a substantive defense to the charges:

This week, Judge Edward Davila of the US District Court for the Northern District of California granted federal prosecutors the ability to have Holmes examined by two experts -- a psychologist and a psychiatrist -- over two consecutive days and for no more than 14 hours combined. The ruling comes after Holmes' defense team previously notified the government of intent to "introduce expert evidence relating to a mental disease or defect or any other mental condition of the defendant bearing on ... the issue of guilt," according to the filing.

I couldn't find any precedent indicating that the defense would play out differently in a securities fraud case than it would in any other criminal case. 

The Ninth Circuit has held that the following jury instruction on the defense was proper:

A defendant is insane if, but only if, at the time of the crime charged,

1. The defendant had a severe mental disease or defect; and
2. As a result, the defendant was unable to appreciate the nature and quality or the wrongfulness of his acts.

The defendant must prove insanity at the time by clear and convincing evidence—that is, that it is highly probable that the defendant was insane.

U.S. v. Elliott, 91 F.3d 156 (9th Cir. 1996).

It's somewhat hard to predict how things will play out, especially because the court's order is redacted with respect to the scope of Dr. Mechanic's proposed testimony.

At a high level, the testimony would cover [redacted], all during the period of the alleged conspiracy. ...

Mechanic does not propose merely to speak “generally” about “the effects of a particular condition,” ... rather, she intends to offer an opinion as to whether Defendant Holmes [redacted]

UNITED STATES OF AMERICA, Pl., v. ELIZABETH A. HOLMES, Def.., 18-CR-00258-EJD-1, 2020 WL 5414786, at *3 (N.D. Cal. Sept. 9, 2020).

I'll be following this case with interest.

The Department of Labor’s Proposed Rulemaking on Financial Factors in Selecting Plan Investments

I don't spend a lot of time thinking about ERISA and investment company issues, but I recognize their importance as a body of law closely adjacent to the areas in which I am interested. So I have been sort of following the DOL's proposals to regulate plan fiduciary investments using ESG metrics.

Max Schanzenbach and Robert Sitkoff are two names I trust very much in this area, so I read with interest their comment letter on the DOL's plan, which has been posted to SSRN. 

Abstract: In June of 2020, the Department of Labor proposed a rule-making on financial factors in selecting ERISA plan investments (“Proposal”), in particular environmental, social, and governance factors (“ESG”). In general, we are supportive of the Proposal’s central purpose of subjecting ESG investing to the same fiduciary principles of loyalty and prudence that are applicable to any type or kind of investment.

We do, however, have some criticisms. Our basic point is that the law neither favors nor disfavors ESG investing. Any investment decision by an ERISA trustee or other fiduciary — whether in the context of a direct investment, shareholder engagement (including proxy voting), or menu construction, and whether reliant on ESG factors or otherwise — is subject to the same fiduciary principles embodied in the duties of loyalty and prudence. Our chief criticisms, therefore, reflect instances in which the Proposal differentiates or could be construed as differentiating ESG investing from other types or kinds of investment strategies.

First, the Proposal and accompanying commentary could be read to suggest that all manner of ESG investing is inherently suspect, presumably on fiduciary loyalty grounds, and therefore that ESG investing by an ERISA trustee or other fiduciary is always subject to enhanced scrutiny that requires extra process relative to other types of kinds of investment strategies. Such a position is inconsistent with law and sound policy. To be sure, an ERISA trustee or other fiduciary violates the duty of loyalty if she uses ESG factors to provide benefits for third parties (what we call “collateral benefits ESG”). However, use of ESG factors in pursuit of enhanced risk-adjusted returns (what we call “risk-return ESG”) is not suspect under the duty of loyalty. Instead, risk-return ESG is analyzed under the duty of prudence, which applies in the same manner to risk-return ESG as to any other type or kind of investment strategy. Departure from neutral application of fiduciary principles also requires drawing distinctions between ESG investing and other investing, a definitional morass that would create uncertainty and invite litigation.

Second, portions of the commentary are unclear or phrased in a manner that could be construed as taking positions, such as with respect to active versus passive investing, that are not consistent with neutral application of the principles of fiduciary investment law. The commentary is also notable for not addressing certain other relevant matters, such as the use of ESG factors in shareholder engagement (sometimes called “stewardship” or “active shareholding”). We identify material instances of such language or omissions and urge appropriate clarification, particularly regarding the “tiebreaker” rule for purportedly economically equivalent investments.

Their analysis strikes me as eminently sensible.

Keith Paul Bishop: "California Poised To Enact Wacky Successor Liability Statute"

Keith writes:

I have previously written about California Assembly Member Lorena Gonzalez's bill, AB 3075, that would would make successor employers liable for their predecessors' unpaid wage judgments.  Last week, Assembly Member Gonzalez amended the bill to provide that successorship is established when someone "[o]perates a business in the same industry and the business has an owner, partner, officer, or director who is an immediate family member of any owner, partner, officer, or director of the judgment debtor" (emphasis added).  

Family Ties That Bind?

The breadth of this provision is truly breathtaking.  ...

Matt Finkin on what employers can do if employees refuse covid-19 vaccinations

My former UIUC colleague Matthew Finkin has an interesting article on workplace law with respect to vaccinations. He writes:

Employers may be liable under state law to employees and customers who are infected by workers when legally adequate precautions against infection have not been taken.

Moreover, under federal law, employees can refuse to perform work if they have a reasonable apprehension of death or serious injury when there is a reasonable belief that no less drastic alternative to refusing to perform that work is available. ...

To the extent the communication of a disease can be eliminated or much reduced by inoculation by a safe and effective vaccine, it follows that employers would adopt policies requiring employees be vaccinated. Employers may also wish to reduce their medical insurance cost and to reduce the possibility of lost work time and sick leave. This, too, could entail a mandatory vaccination.

Even so, such actions may confront legal challenges on the part of applicants and incumbent employees based on:

• •  religious objection,

  •  objection due to the applicant or employee’s specific medical condition, or

  •  objection based on ethical or ideological grounds.

It makes a good read.

Can a corporation be insane?

Mihailis Diamantis has posted an article to SSRN entitled The Corporate Insanity Defense and also posted a summary to the Oxford corporate governance law blog:

... there are some criminal corporations whose deep or unpredictable disfunction presents a special challenge. These corporations are much less likely to respond constructively to criminal sanctions. In a forthcoming article—The Corporate Insanity Defense—I argue that criminal law needs a different approach for these corporations, one that emphasizes compulsory expert treatment rather than standard forms of punishment. 

It's an interesting article, but I start from a premise founded on the aphorism famously attributed to Edmund, First Baron Thurlow: "Corporations have neither bodies to be punished, nor souls to be condemned." Applying the criminal law to corporate entities fits poorly with most of the basic purposes of criminal law.

• Deterrence: Corporations can act only through persons. It is those corporate agents who must be deterred. Entity level punishment will be less effective as a deterrent than direct punishment of the responsible corporate actors.
• Retribution: You can't send a corporation to jail. But you can send the responsible corporate actors to jail.
• Rehabilitation. Lacking a body and soul, the corporation has nothing that can be rehabilitated. But bad human actors can be rehabilitated.
• Restitution: Obviously, the corporation can provide restitution to those it harmed. But that would require directing corporate fines and penalties to the victims of wrongdoing rather than the government.

We should seriously rethink corporate criminal liability, which effectively amounts to vicarious liability, and replace it with direct liability for the individuals who are responsible for the wrongdoing.

What exactly is a "a community-oriented, non-violent public safety and outreach capacity" and can it replace police?

I fully accept the need for significant reform in policing. We need to reverse the trend towards ever-increasing militarization of the police. We need to replace the qualified immunity doctrine that insulates cops from being held accountable when they break the law and violate civil rights with a system that does a better job of balancing the need for accountability with the need to prevent strike suits and legal abuse. We need a more diverse police force and a better trained force.

But let's not throw the baby out with the bath water. In Time, Minneapolis City Councilman Steve Fletcher advocates replacing the police force with "a community-oriented, non-violent public safety and outreach capacity":

We had already pushed for pilot programs to dispatch county mental health professionals to mental health calls, and fire department EMTs to opioid overdose calls, without police officers. We have similarly experimented with unarmed, community-oriented street teams on weekend nights downtown to focus on de-escalation. We could similarly turn traffic enforcement over to cameras and, potentially, our parking enforcement staff, rather than our police department.

You can read the editorial as closely as you want and as many times as you want and you won't see a word about how to deal with violent crime. So I was left to wonder how "a community-oriented, non-violent public safety and outreach capacity" would deal with murder, rape, armed robbery, home invasion, and so on. In 2019, Minneapolis experienced 4,323 violent crimes, which was neither unusually high nor unusually low:

Here's what Fetcher said back in 2019 when asked about violent crime:

As for how the city could address violence downtown, he said that the city had learned that much of the violence wasn’t from people targeting strangers, but rather between groups or individuals who already knew each other and were in conflict. He said the city had invested in an Office of Violence Prevention to help “disrupt those cycles” of violence through outreach and social work.

Obviously, this is not my field. But I have a very hard time believing that a social work outreach program can replace cops when dealing with violent offenses. Very hard.

A Public Health Framework for COVID-19 Business Liability

New article by Daniel Hemel and Daniel Rodriguez:

Businesses that reopen amid the COVID-19 pandemic face possible legal liability to customers and workers who contract the novel coronavirus as a result of those enterprises’ operations. Federal and state lawmakers are actively considering proposals to narrow or expand the scope of such liability. These proposals have important implications not only for economic activity but also for public health. This article presents an analytical framework for evaluating liability regimes in the context of a communicable and deadly disease. The framework highlights the contrasting public-health consequences of liability before and after a customer or worker is exposed to the virus. Ex ante (before an exposure), the specter of liability generates incentives for businesses to take precautions that reduce the risk of virus transmission. Ex post (after an exposure), fear of liability may deter businesses from proactively informing customers and workers that they have been exposed to the virus through the business’s operations. The desire on the part of businesses to spare themselves from litigation may interfere with comprehensive contact-tracing efforts. To minimize the potentially perverse ex-post consequences of liability without sacrificing significant ex-ante benefits, the article proposes a limited safe harbor from liability for businesses that promptly contact customers and workers after learning about a possible exposure. The article also suggests changes to workers’ compensation rules that are designed to strike a balance between ex-ante benefits and ex-post costs.

Recommended.

The COVID-19 Pandemic and Business Law

Oxford Business Law Blog had a mini-symposium on coronavirus issues in business law, which they've now collected into a single document on SSRN:

The COVID-19 Pandemic is the biggest challenge for the world since World War Two, warned UN Secretary General, António Guterres, on 1 April 2020. Millions of lives may be lost. The threat to our livelihoods is extreme as well. Job losses worldwide may exceed 25 million.

Legal systems are under extreme stress too. Contracts are disrupted, judicial services suspended, and insolvency procedures tested. Quarantine regulations threaten constitutional liberties. However, laws can also be a powerful tool to contain the effects of the pandemic on our lives and reduce its economic fallout. To achieve this goal, rules designed for normal times might need to be adapted to ‘crisis-mode’, at least temporarily. Business Laws in particular fulfil an important function in this context. Our livelihoods depend on how well businesses are able to navigate through the current crisis.

Beginning in early February 2020, the Oxford Business Law Blog has published posts on how Business Laws could contribute to containing the effects of the COVID-19 Pandemic, and on how they need (or need not) to be adapted to achieve the desired effect. This working paper collects the posts published throughout March in chronological order. Thematically, the focus is on finance, financial regulation and insolvency laws. This is not surprising as the most pressing problem businesses face right now is to manage their cash flow. We hope that the contributions in this paper inspire more work by scholars and help policymakers worldwide to adopt the right measures to reduce the damage caused by the Pandemic.

Boon, Gert-Jan and Brunnermeier, Markus Konrad and Eidenmueller, Horst G. M. and Enriques, Luca and Gurrea-Martínez, Aurelio and Judge, Kathryn and Landau, Jean-Pierre and Pagano, Marco and Reis, Ricardo A.M.R. and van Zwieten, Kristin, The COVID-19 Pandemic and Business Law: A Series of Posts from the Oxford Business Law Blog (April 11, 2020). Oxford Legal Studies Research Paper No. 15/2020. Available at SSRN: https://ssrn.com/abstract=3573419 or http://dx.doi.org/10.2139/ssrn.3573419

What to do about chatty woke judges?

Over the weekend Associate Justice Sonia Sotomayor issued a dissent in which she basically accused her 5 more conservative justices of being biased in favor of the Trump administration:

... the Court’s recent behavior on stay applications has benefited one litigant over all others. This Court often permits executions—where the risk of irreparable harm is the loss of life—to proceed, justifying many of those decisions on purported failures “to raise any potentially meritorious claims in a timely manner.” ... Yet the Court’s concerns over quick decisions wither when prodded by the Government in far less compelling circumstances— where the Government itself chose to wait to seek relief, and where its claimed harm is continuation of a 20-year status quo in one State. I fear that this disparity in treatment erodes the fair and balanced decisionmaking process that this Court must strive to protect.

This comes on top, of course, of RBG's routine anti-Trump/Republican political pronouncements. 

Closer to home, the LA Times gave voice to a bunch of 9th Circuit judges who are outraged that Trump has appointed conservatives to their liberal bastion, albeit most of them were either not so outraged as to allow their names to be revealed (or perhaps too lacking in courage), as Josh Blackman points out:

[Article author Maura] Dolan noted that "some" of the judges "declined to discuss their colleagues or inner deliberations." That "some" should have been "all." Why would any judges discuss their "colleagues" or opine on "internal deliberations"?

Alas, some judges "refused to be quoted by name, saying they were not authorized to speak about what goes on behind the scenes." In other words they spoke on background, not for attribution. Judges cannot speak on background. Ever. Generally, when a source says, "I am not authorized to speak publicly," that statement suggests that, given the proper authorization, she could speak publicly. But judges can never speak publicly about internal deliberations. No authorization can be given by any superior authority. Shame on those judges who spoke on background to the press.

 

Changes in the Delaware Judiciary

From Bloomberg: Two new chancery court appointees bringing the total to eight. Collin J. Seitz, Jr., replaces our friend Leo Strine as Chief Justice.