Truth on the Market

Academic commentary on law, business, economics and more

Archive for the ‘constitutional law’ Category

« Previous Entries
Next Entries »

The First Amendment and unauthorized practice of law

Posted by Larry Ribstein on July 19, 2011

I recently discussed the policy issues regarding litigation against LegalZoom for unauthorized practice of law (as well as noting my potential interest in this litigation).  A recent paper analyzes the legal issues:  Catherine Lanctot, Does LegalZoom Have First Amendment Rights? Some Thoughts About Freedom of Speech and the Unauthorized Practice of Law.  Here’s some of the abstract:

The article first sketches some potential problems with the reflexive assumption that LegalZoom and its fellow travelers are engaged in the unauthorized practice of law. Even assuming that the practice of preparing routine legal documents for consumers runs afoul of many unauthorized practice statutes, however, there remains an open question of whether these statutes may themselves interfere with First Amendment guarantees. In particular, to the extent that these statutes broadly sweep vast amounts of law-related speech within their scope, they may infringe on free speech rights. The article sets forth some of the possible First Amendment arguments available to document preparers, without extensive elaboration, to call attention to the possibility that they may be raised in defense to an unauthorized practice prosecution. It concludes with a caution about aggressive pursuit of these online document preparers without careful consideration of the possible risks involved. A successful First Amendment challenge to an unauthorized practice statute could have repercussions far beyond the world of LegalZoom.

With respect to the “caution about aggressive pursuit of these online document preparers,” Professor Lanctot concludes:

The legal profession has deliberately left itself free to define a host of activities as “unauthorized practice” on an as-needed basis. This flexibility may have served the bar’s regulatory needs in the past, but it could prove fatal to enforcing unauthorized practice laws in the face of a serious First Amendment challenge. The broad and standardless definition of “practice of law” could then collide with the requirement of specificity and narrow tailoring that underlies many aspects of relevant First Amendment doctrine. Whether or not these First Amendment arguments may succeed ultimately in the courts is less important than the fact that they have a sufficient basis to complicate any action for unauthorized practice.

In other words, by arguing that any individualized advice about the law by a non-lawyer is illegal, the bar has exposed all of this regulation to the risk of invalidation.

Of course the bar might think this strategy is worth the risk because the alternative is the horrors of free competition.  But in the end, the bar may have little choice.  Law’s information revolution, and the general forces of competition and deregulation (particularly including the UK’s Legal Services Act) are pressing on all fronts whatever the bar does.

Waking the First Amendment bear in LegalZoom litigation could have implications not only for unauthorized practice laws but for all kinds of other regulation of commercial speech, particularly including the securities laws.  See my and Butler’s Corporate Governance Speech and the First Amendment, 43 U. Kans. L. Rev. 163 (1994) and The Corporation and the Constitution.

I would add that the majority’s broad reasoning in Citizens United has makes this a particularly good time to raise these arguments. See my recently published article, The First Amendment and Corporate Governance.

The political and market pressure to deregulate and thereby lower the costs of legal services may make this regulation a particularly inviting target for First Amendment claims.  In contrast with Citizens United, a case on the constitutionality of unauthorized practice could be portrayed not as big corporations against the little guy, but as the little guy against a powerful entrenched interest group of greedy lawyers.  This could make the claim a useful lever to bring down large chunks of regulation of truthful commercial speech.

Posted in constitutional law, First amendment, lawyers, legal profession, securities regulation | 23 Comments »

It’s baaack: The Shareholder Protection Act

Posted by Larry Ribstein on July 14, 2011

The Shareholder Protection Act been reintroduced in Congress, and Lucian Bebchuk still likes it. He and Robert Jackson wrote an article defending the basic idea, which Bebchuk describes as to “establish special corporate-governance rules for deciding when corporate resources may be spent on politics.”  He admits “the bill is unlikely to be adopted during this Congress.” However, since it seems no more likely to go away than Freddie Krueger or Michael Myers, it’s worth discussing why, like these characters, it’s a scary idea.

Bebchuk’s post is timely (for me) because it coincides with the publication of my article, The First Amendment and Corporate Governance.  This article argues generally (per the abstract)

that regulation of the corporate governance process that produces speech faces significant obstacles under the First Amendment. These include the limited efficacy of regulation of corporate governance, regulation’s potential for protecting the expressive rights of some shareholders by suppressing others, and the uncertain implications of this rationale for types of speech other than that involved in Citizens United. These problems with the corporate governance rationale for regulating corporate speech suggest that protection of shareholders’ expressive rights may be trumped by society’s interest in hearing corporate speech and the First Amendment’s central goal of preventing government censorship.

Here’s what the paper has to say about the SPA and Bebchuk & Jackson (footnotes omitted):

This Act would, among other things, require extensive quarterly and annual disclosures of corporate speech expenditures and majority shareholder authorization of “specific” expenditures a year in advance and impose damages for unauthorized expenditures.

The SPA makes clear that its purpose goes beyond merely protecting shareholders. As the bill’s “purpose and summary” notes in its opening sentences, “The [Citizens United] ruling invalidated longstanding provisions in U.S. election laws and raised fresh concerns about corporate influence in our political process. To address those concerns, the Shareholder Protection Act gives shareholders of public companies the right to vote on the company’s annual budget for political expenditures.” In other words, the proposed Act is concerned with “corporate influence.” This illustrates the tension discussed above between the concern for shareholder expression and that for corporate distortion of the political process. 

Apart from the uncertainty of the Act’s intended goal, its means of implementing this goal probably cannot survive First Amendment scrutiny under Citizens United. First, the Court suggested that, while a corporate governance regulation might pass, a remedy “based on speech, contravenes the First Amendment.” The SPA, like the restrictions at issue in Citizens United, is “based on speech.” This raises the question whether the proposed Act’s restrictions can be sustained on shareholder-protection grounds * * *.

Second, the SPA favors the expression of some stakeholders to the detriment of more passive shareholders. The provisions requiring authorization of expenditures may, depending on the applicable voting rules, empower activist shareholders, such as public pension funds, while submerging the preferences of many, perhaps a majority, of others.  

Third, the Act’s requirement that corporations get advance shareholder approval for corporate political activity sharply constrains all such speech by essentially requiring firms to lock in their political activity for a year from the close of a fiscal year. This prevents firms from dealing effectively with a dynamic political landscape. Managers’ treble damage “fiduciary” liability for unauthorized speech reinforces this inflexibility. Imposing these burdens on speech would be inconsistent with Citizens United’s emphasis on the social value of corporate speech.

Bebchuk and Jackson’s governance proposals may fare better under the First Amendment because they are more squarely aimed at corporate governance and the internal distortion problem. The authors suggest requiring the shareholders approve the firm’s overall spending budget, allowing shareholders to submit binding resolutions on corporate speech for shareholder vote, requiring that independent directors make decisions on corporate speech, and mandating more disclosure concerning corporate speech decisions. These provisions are probably less onerous than those in the SPA, depending on their specific implementation, including how they interact with the rules for shareholder voting under federal and state law. Bebchuk and Jackson also would enable shareholders to opt out of the regulation, which further mitigates the impact on corporate speech. 

The main problem with the Bebchuk-Jackson proposal is that it allows for possible super-majority shareholder authorization of corporate speech in order to protect the expressive rights of minority shareholders. * * * [P]rotecting the expressive rights of some shareholders may infringe the expression of other stakeholders and unacceptably restrict corporate speech under the Citizens United listeners’ rights rationale. These concerns increase with the level of protection for minority shareholders. Bebchuk and Jackson even suggest any level of shareholder approval is acceptable that enables “a practically meaningful opportunity to obtain the required approval.” The authors draw this standard from cases on whether state antitakeover law preempts federal law protecting shareholders’ rights. The preemption standard is based on the intent underlying federal takeover law and has little to do with determining corporations’ and corporate stakeholders’ rights regarding corporate speech.

The full article provides support for the positions underlying these criticisms, and cites to my earlier writing on these issues containing deeper background.

Posted in constitutional law, corporate governance, First amendment | 6 Comments »

The constitutional privacy rights of business entities

Posted by Larry Ribstein on March 2, 2011

The Supreme Court, in a unanimous opinion by Justice Roberts, held in FCC v. ATT, Inc.:

We reject the argument that because “person” is defined for purposes of FOIA to include a corporation, the phrase “personal privacy” in Exemption 7(C) reaches corporations as well. The protection in FOIA against disclosure of law enforcement information on the ground that it would constitute an unwarranted invasion of personal privacy does not extend to corporations. We trust that AT&T will not take it personally.

Professor Bainbridge objects:

The utterly specious word games that drive this opinion simply confirm that Chief Justice Roberts  has failed to articulate  a plausible analytical framework for this important problem.

But I’m okay with the opinion.  As I’ve said about Citizens United and corporate speech rights:

corporations, as artificial entities, cannot speak in the same sense as humans do, and . . . the First Amendment is more properly concerned with the expressive rights of the individuals who speak through corporations than with the rights of artificial entities.

Same goes for “corporate” privacy. And this approach isn’t necessarily bad for business.  As I said in the above article about locating speech rights in corporations, “[a]n implication of this move is that the speech gets less protection than non-corporate speech because the right-holder is an artificial entity.” 

Speech rights differ from privacy rights because as I argued in my article linked above, “[t]he First Amendment does not guard corporations’ expressive rights, but rather the public’s interest in hearing what corporations have to say.”

In any event, the Court saved corporate constitutional rights for another day, noting that  

[t]his case does not call upon us to pass on the scope of a corporation’s “privacy” interests as a matter of constitutional or common law. The discrete question before us is instead whether Congress used the term “personal privacy” to refer to the privacy of artificial persons in FOIA Exemption 7(C).

I have written on the constitutional privacy question in The Constitutional Conception of the Corporation, 4 Supreme Court Economic Review 95, 139-40 (1995) (most footnotes omitted):

The theories of the corporation have potential implications for the application of constitutional rules other than those discussed in this article. For example, consistent with the corporate person theory, the Court has limited corporations’ protection against self-incrimination under the Fourth and Fifth Amendments FN 176 on the theory that corporations are artificial entities. However, under the contract theory individuals would not lose Fourth and Fifth Amendment rights merely because they work for corporate firms. For example, the Fifth Amendment could be applied in appropriate cases to protect an individual from having to turn over documents which incriminate that individual even if she has custody of the records as a corporate agent. To be sure, this might allow corporations to escape some government control because they can choose agents who can claim privilege. But given the assumptions underlying the contract theory, owners have market incentives not to insulate their agents from the law. * * * But it follows from the contract analysis that corporate “entities” should not be entitled to Fifth Amendment rights because this might frustrate the firm’s contracts. The parties to the firm might choose to neutralize the self- incrimination privilege and facilitate legal surveillance by giving custody over documents to a custodian who could not assert a privilege in connection with proceedings against the corporation.

FN 176:  See United States v Kordel, 397 US 1 (1970); Hale v Henkel, 201 US 43 (1906) (reasoning that the corporation was a separate entity for Fifth Amendment purposes although not for purposes of applying the Fourth Amendment). By contrast, the privilege against self-incrimination is available to protect against requests for personal, as distinguished from corporate, records. See Wilson v United States, 221 US 361 (1911). The privilege has also been denied to non-corporate associations that are considered collective entities. See Bellis v United States, 417 US 85 (1974) (law firm); United States v White, 322 US 694 (1944) (labor union). * * *

Partnerships may have very limited rights under the Fourth and Fifth Amendment.  See Bromberg & Ribstein on Partnership, §3.05(b)(1) (some footnotes in brackets):

Neither the partner’s individual rights to possess partnership property nor the fact that the partner possesses such property in a representative capacity on behalf of the firm and the other partners has been determinative. * * * [I]n Bellis v. United States, [417 U.S. 85 (1974)] the Supreme Court refused to recognize the privilege in a three-partner law firm that “was not an informal association or a temporary arrangement for the undertaking of a few projects of short-lived duration . . . [but] represented a formal institutional arrangement organized for the continuing conduct of the firm’s legal practice.” The Court went on to state that “[t]his might be a different case if it involved a small family partnership [citing Slutsky and In re Subpoena Duces Tecum, n.9, above] or . . . if there were some other pre-existing relationship of confidentiality among the partners.”

In light of the Bellis holding that an “institutional arrangement” is sufficient, and its application to the very small partnership involved in Bellis, it is unclear what room is left for the “small family partnership” qualification. Indeed, in post-Bellis cases the self-incrimination privilege has been held not necessarily applicable to small, husband-wife partnerships.

In short, the Court has tended to look through the entity to individual interests.  But, as I said in a footnote to the above text: 

Despite the attenuation of the self-incrimination privilege in the partnership setting, the aggregate-entity distinction is still alive to some extent in that the Court has refused to recognize any Fifth Amendment privilege as to corporate records, even if these are owned by a sole proprietorship corporation. See Braswell v. United States, 487 U.S. 99 (1988).

I hope and suspect that the Court, when confronted with the question, will get rid of the unhelpful Braswell aggregate-entity.

Posted in constitutional law, First amendment | 1 Comment »

The First Amendment and Corporate Governance

Posted by Larry Ribstein on January 12, 2011

I have spent some time over the last year discussing the Supreme Court’s big corporate speech case, Citizens United – at Stanford and Georgia State, and in an archive full of Ideoblog posts.

Now my paper on the case, The First Amendment and Corporate Governance, is finally available on SSRN.  Here’s the abstract:

The Supreme Court’s decision in Citizens United did not end the controversy over regulating corporate speech. Although the Court broadly subjected regulation of corporate speech to the First Amendment, it did not wholly preclude regulation of corporate governance processes that produce corporate speech. The Court’s opinion therefore shifted debate concerning corporate speech from corporations’ “external” distortion of the political process to their “internal” distortion of shareholders’ self-expression. This paper shows that regulation of the corporate governance process that produces speech faces significant obstacles under the First Amendment. These include the limited efficacy of regulation of corporate governance, regulation’s potential for protecting the expressive rights of some shareholders by suppressing others, and the uncertain implications of this rationale for types of speech other than that involved in Citizens United. These problems with the corporate governance rationale for regulating corporate speech suggest that protection of shareholders’ expressive rights may be trumped by society’s interest in hearing corporate speech and the First Amendment’s central goal of preventing government censorship.

As you can see from the abstract, I have moved on from debating whether the case is rightly decided to thinking about what will happen in the post-Citizens United era, particularly regarding corporate governance regulation and commercial speech. 

I think my paper is an important addition to the discussion of Citizens United.  It struck me at the AALS Business Associations/Con Law session on Citizens United last week that a lot of law professors do not seem to have fully internalized the fact that the Supreme Court has decided to protect corporate speech.  And the law professors who are thinking about the corporate governance implications of Citizens United haven’t fully internalized the fact that the First Amendment applies to this issue.  Thus, Bebchuk & Jackson’s recent paper devotes just a few paragraphs to the constitutionality of their proposals.

So if you want the lowdown on how the constitution now applies to corporate governance, read my paper.

Posted in constitutional law, corporate governance, corporate speech | 1 Comment »

The securities laws and the First Amendment

Posted by Larry Ribstein on December 28, 2010

Attorney John Olson has posted a discussion and copy of a brief for the Chamber of Commerce and the Business Roundtable challenging the SEC’s recent proxy access rule, Rule 14a-11.  That’s the rule that requires corporations to include in their proxy materials candidates for director election nominated by 3%/3-year shareholders.  (Here’s my discussion of some issues regarding the rule).

The brief claims the rule is ill-considered.  One argument particularly caught my attention:

By forcing public companies to carry campaign speech of certain activist investors, the Commission violated the First Amendment.

The brief relies primarily on Pac. Gas & Elec. Co. v. Pub. Util. Comm’n, 475 U.S. 1 (1986) which, as the brief notes

invalidated a state regulatory order that required a utility to carry the message of a third party in its customer billing envelope. 475 U.S. at 13 (plurality opinion). The third-party “[a]ccess” to the billing envelope was “limited to persons or groups . . . who disagree[d] with [the utility’s] views . . . and who oppose[d] [the utility] in” certain proceedings before the agency. Id. Applying strict scrutiny, the plurality concluded that the agency’s access requirement impermissibly burdened the utility’s “right to be free from government restrictions that abridge its own rights in order to ‘enhance the relative voice’ of its opponents.” Id. at 14.

The brief says the lower standard of scrutiny applicable to commercial speech (Cent. Hudson Gas & Elec. Corp. v. Public Serv. Comm’n of New York, 447 U.S. 557, 564 (1980)) is inappropriate in this case

because a company’s proxy materials do not merely “propose a commercial transaction,” id. at 409, and Rule 14a-11 would fail for the reasons stated here even under the “commercial speech” standard.

The brief argues that the proxy access rules fail the compelling interest standard.  They restrict free speech by forcing force firms to fund opposition candidates and to respond to the opposition. They reject less restrictive ways to achieve the government’s purpose, including relying solely on the amendment to Rule 14a-8(i)(8) and deferring to state law.  

PGE attempted to distinguish the billing insert in that case from the SEC’s shareholder proposal rules on the grounds that management lacked interest in corporate property, the shareholder proposal rule involves “speech by a corporation to itself,” and the rule “do[es] not limit the range of information that the corporation may contribute to the public debate.” The brief argues those distinctions don’t apply to 14a-11 because that rule gives rights to individual institutional shareholders and may operate to trump opposition even by a majority of the shareholders.

I’m not sure I agree with the brief’s attempted distinction of PGE.  In any event, there’s a more direct route to the First Amendment not discussed in the brief:  Citizens United. The majority opinion in that case noted that “[t]he First Amendment protects speech and speaker, and the ideas that flow from each” and that “[t]he First Amendment does not permit Congress to make these categorical distinctions based on the corporate identity of the speaker and the content of the political speech.” The opinion’s breadth suggests the CU majority would be impatient with details like whether the corporation was talking to itself and whether the managers own corporate property.

By the way, the PGE plurality opinion made its attempted distinction between billing inserts and shareholder proposals in response to the dissent’s argument claiming that they were comparable and both valid.  The dissent in that case, as in Citizen’s United, was written by Justice Stevens.

I noted shortly after Citizens United, discussing an SEC interpretive guidance on global warming disclosures, that

One possible implication of Citizens United is that corporations will finally be able to challenge excessive restrictions not only on their clearly political speech, but also on speech like that covered by the SEC release. For a review of the issues here, see my article with Butler, Corporate Governance Speech and the First Amendment, 43 U. Kans. L. Rev. 163 (1994).

The article just cited seems less fanciful today than it did 16 years ago.

The commercial speech rule discussed in the Olson brief is also in play.  Distinguishing ideas under the First Amendment based on whether or not they are commercial never made much sense.  It makes even less sense now that the Court has decided to protect the speech of for-profit corporations.  As the Citizens United dissent noted, even the “political” speech of such firms is essentially transactional, which would  make it “commercial,” but nevertheless protected.

Even if the Court retains some distinction between commercial and other speech, it may reject a distinction for corporate governance speech, particularly in the wake of Citizens United. After all, if corporations are to be full-fledged participants in political debates, their internal discussions concerning participation in these debates also should be protected.

In short, the ramifications of Citizens United may be even broader than were initially supposed.  Speech about capitalism finally may get the same protection as, say, pornography.  And one of the first casualties of this approach may be ill-considered and unnecessary SEC restrictions on truthful speech.

Posted in constitutional law, corporate governance, First amendment, securities regulation | 4 Comments »

The non-constitutional problem with a health care mandate

Posted by Geoffrey Manne on December 14, 2010

There’s been much teeth-gnashing following yesterday’s ruling by a Virginia judge that the “individual mandate” portion of Obamacare is unconstitutional.  Among many other places, see the ongoing discussion at The Volokh Conspiracy.  I have a quick, non-constitutional response.

It seems to me that there is a basic, deep problem with prohibiting citizens from opting out of economic activity.  It is well-understood that regulation is distorting and, of course, generalized across citizens, even though some of those citizens will be “inframarginal,” and others “marginal” participants in the regulated activity.  For marginal participants, by definition, the addition of certain regulations makes the activity too costly, and it seems a basic matter of efficiency as well as freedom that these participants be allowed to choose between undertaking the activity (but paying the full, regulated price) and opting out.  I get that it is not always feasible or desirable to allow regulatory price discrimination, but all the more so for that reason it seems important to permit opt out.

Examples of this idea abound, but the most current to my mind involves the TSA and flying.  Plenty of marginal flyers feel the latest round of TSA restraints increase the cost of flying too much and have opted out.  I would prefer that the TSA abandon its theatrics altogether, but at least I know I can choose not to subject myself to the high costs of the TSA’s (idiotic) regulatory decisions.

The same should be true for health insurance.  There are plenty of good reasons for many people not to purchase health insurance, all the more so when it is made more expensive by the government’s (idiotic) regulatory decisions.

The argument on the other side is presumably one of efficacy rooted in the adverse selection problem.  But if efficacy must come at the cost of freedom and efficiency, then perhaps the proposed scheme should not, in fact, be effected.  Moreover it is far from clear that the proposed system will even be effective at its stated goal.  And, of course, there are plenty of other regulatory fixes that might actually do more and not carry this defect.

Of course it is sometimes the case that, as a practical matter, one cannot easily opt out of costly regulation.  So be it.  But that doesn’t mean it is the same thing–nor that it is ok–to affirmatively mandate that citizens engage in regulated activity that they would and could otherwise opt out of.

I can’t say that I know this principle is enshrined in the Constitution (and certainly not the “Constitution in Exile“), but I’m glad if at least one judge’s interpretation of it maps onto the concept.

Posted in constitutional law, economics, health care reform debate, regulation, Supreme Court | Tagged: , , , | 2 Comments »

Arbitration and preemption

Posted by Larry Ribstein on November 16, 2010

Ok, so here’s the deal.  AT&T sells two cellular phones for nothing with a two-year contract term, and then charges $30.22 in sales tax.  Customers complain about the sales tax. The contract provides for individual arbitration where the customer resides. AT & T will pay double attorneys fees and $7,500 if the arbitrator awards the customer more than AT & T’s last written settlement offer before the arbitrator was selected and all arbitration costs and fees for non-frivolous claims.  Customers pay no attorneys’ fees to AT & T if they lose, retain full court remedies, and can choose in-person, telephonic, or no hearing at all for claims less than $10,000.

There’s just one problem:  customers do not get a right to class arbitration. 

Does this sound to you like an unconscionable contract?  A California federal court said so in Laster v. AT & T Mobility LLC, 584 F.3d 849 (9th Cir. 2009), applying California law set forth in Discover Bank v. Sup.Ct., 36 Cal.4th 148, 30 Cal.Rptr.3d 76, 113 P.3d 1100 (2005).  The court was not deterred from this result by the fact that the above rules made it cost-effective to arbitrate, or that customers could use AT&T’s informal claims process.  

According to the court, the problem is “that a person normally will not find it worth the time or the hassle to try to recover such a small amount, even if that person spends no money to hire an attorney or to invoke the arbitration process.”  The possibility of a consumer making that perfectly rational decision makes the contract unconscionable because without class actions, no one will enforce the law.

Perhaps this is a reasonable conclusion.  Why should AT&T be able to get away with a contract that lets it rip off people a little at a time? 

The answer is that a federal law lets it do so.  That law is the Federal Arbitration Act, which requires all U.S. courts to enforce arbitration provisions except on “grounds as exist at law or in equity for the revocation of any contract.” In other words, states may not develop a separate body of law to restrict the enforcement of arbitration clauses.  They can invalidate an arbitration clause only under generally applicable contract doctrine, such as fraud, duress, and unconscionability.  

Laster and other California cases say they are applying a general rule of unconscionability that invalidates a class action waiver in an arbitration clause if the agreement is a “contract of adhesion,” disputes are likely to involve small amounts of money, and “the party with superior bargaining power has carried out a scheme deliberately to cheat large numbers of consumers out of individually small sums of money.”  But this general rule forcing class actions in arbitration looks suspiciously arbitration-specific.

Aiding the determination of whether this is a general or arbitration-specific rule is the significant policy that is at stake. Congress enacted the Federal Arbitration Act in order to ensure that national firms could effectively contract for arbitration without fear of being hauled into a non-enforcing state court.  There is ample evidence that Congress took this step to preserve the U.S.’s international competitiveness.  While the California rule does not forbid arbitration, it undermines its efficiency by forcing firms in arbitration to contend with class actions.  Many firms might therefore choose to forego arbitration altogether and thwart Congress’s national market policy.

Some might think that this is a judgment the states ought to make.  But the Constitution, including the Commerce Clause, says that Congress can enact laws preserving a national market. The Supremacy Clause makes these laws effective by trumping inconsistent state laws.  California accordingly shouldn’t be able to defeat Congress’s national market strategy embodied in the FAA.  It follows that the FAA preempts the California law.

Of course this is only my opinion.  The Supreme Court granted cert in Laster to consider whether the FAA “preempts States from conditioning the enforcement of an arbitration agreement on the availability of particular procedures – here, class-wide arbitration – when those procedures are not necessary to ensure that the parties to the arbitration agreement are able to vindicate their claims.”  It’s unclear from oral argument how the case will come out.  But it’s worth noting that Justice Alito said that the contract is “unconscionable because it doesn’t allow the enlistment of basically private attorneys general to enforce the law. And isn’t that quite different from ordinary unconscionability analysis?”

I’ll be discussing Laster as I present a paper at a Searle Civil Justice Institute this Thursday.  The paper analyzes preemption as a mechanism for preserving national markets.

Posted in constitutional law, Jurisdictional competition | 3 Comments »

Citizens United: Friday at Georgia State

Posted by Larry Ribstein on November 10, 2010

I’ll be talking about the Citizens United case Friday at a Georgia State University College of Law symposium.  Speakers also include Gene Nichol (UNC), Richard Briffault (Columbia), Joel Gora (Brooklyn), Heather Gerken (Yale), Jamie Raskin (American), Richard Hasen (Loyola), and Michael Boos, (GC Citizens United). 

You can get a pretty good idea here of my take on the case.  Watch this space for my article, tentatively titled The First Amendment and the Wizard of Oz.

Posted in constitutional law, corporate governance | 1 Comment »

Citizens United and the shareholder protection gambit

Posted by Larry Ribstein on October 25, 2010

Last January in Citizens United the Supreme Court delivered a blow to the opponents of corporate speech by enabling corporations to spend directly on political campaigns rather than relying on PACs and lobbying. A majority of the Court concluded that public debate could be best promoted by protecting all speech, regardless of speaker. 

A sizable chunk of America thinks the Supreme Court has unleashed a corporate monster that will drown out the rest of the populace.  For example, a hysterical MarketWatch column (HT Bainbridge) asserted that “[u]nder this system, the game is over. Our democracy is dead.”  This pundit figured that corporations could use their spare cash to buy any number of elections, apparently not understanding that firms need this cash for other things.  He notes that money is flooding into “right-wing groups” but neglects to count up the union cash flowing in the opposite direction.

In any event, what can CU’s opponents do about that pesky Supreme Court opinion?  Maybe try an end-run:  limit corporate speech in the name of “shareholder protection.” And so we have the Shareholder Protection Act (SPA) currently pending in Congress.  But what I’ll call the “shareholder protection gambit” (hereafter, SPG) is unlikely to work. 

To begin with, let’s be clear that it’s not really about shareholder protection.  The “purpose and summary” supporting the SPA makes this transparent in its opening sentences: 

The [Citizens United] ruling invalidated longstanding provisions in U.S. election laws and raised fresh concerns about corporate influence in our political process. To address those concerns, the Shareholder Protection Act gives shareholders of public companies the right to vote on the company’s annual budget for political expenditures.

In other words, the bill is concerned about “corporate influence.”  Shareholders’ rights are intended “to address those concerns.”  But Citizens United explicitly rejected this “corporate influence,” or anti-distortion, rationale for corporate speech limitations.  

The shareholder protection rationale not only differs from, but is directly contrary to, the concern that activates the opposition to Citizens United.  CU opponents worry that corporate political activity will empower corporations by flooding the political marketplace with pro-corporate money.  Yet the SPA is supposedly intended to ensure that lobbying serves corporate interests.

Whether or not shareholders’ protectors are seeking to restrict corporate speech, that’s what they’re likely to accomplish.  The shareholder rights the SPA would create cut at the core of corporate efficiency.  The main point of the corporate form is to “lock in” corporate resources under strong managerial control.  Enabling shareholders to second-guess specific managerial decisions, and introducing political debate into shareholder and director meetings, is an effective way to hobble corporations. 

Whatever its intent, the SPG, including its manifestation in the Shareholder Protection Act, is dubious policy. Here it’s useful to examine recent work by prominent and bona fide defenders of the shareholder protection gambit, John Coates and Lucian Bebchuk and Robert Jackson.  Neither has a coherent agency cost theory of corporate managers’ investments in corporate political activity — that is, why they would choose to abuse their power in this particular way.  Perhaps they can’t take it all out in pay, but surely there are more satisfying perks.  Nor do these writers show how managers’ use of corporate money for political expenditures presents a more serious agency cost problem than many other exercises of management power.  The most that Bebchuk-Jackson can come up with is that corporate political speech has “expressive significance.” But the idea that shareholders generally, many of whom now invest through pension and mutual funds, care deeply about the political expenditures of individual firms in their portfolios needs far more support than B-J’s brief hypothesizing.

Coates at least has some data.  He lists a number of hypotheses regarding corporate political activity, including that it helps the corporation and constitutes efficient compensation.  However, his his tests are not strong enough to reject non-agency-cost explanations.Coates shows that the existence and amount of firms’ corporate political activity negatively correlates with (1) shareholder democracy variables and (2) corporate value as measured by Tobin’s Q.  But (1) could equally support proponents of strong management control who assert that too much shareholder democracy is inefficient.  The correlation with corporate value could mean, among other things, that firms that are hurt most by regulation need to spend more to get the government off their backs.    

There are several other problems with the shareholder protection gambit.  Its advocates can’t explain why it is so important to protect shareholders from managers running amuck with campaign expenses but not to be concerned about corporate payments to lobbyists or managers funding PACs, both of which are exempted from the Act. Perhaps Congress does not want to completely turn off the corporate spigot.  Maybe politicians would prefer to insulate themselves from corporate-funded opposition when they reneg on their promises.  But it is not clear what these distinctions have to do with shareholder protection.

And it’s odd that after all of the literature and commentary on the problems of shareholder voting, including the fundamental free-rider problem, the distinct interests of institutional investors and activist hedge funds and concerns with “empty” voting, as well as skepticism about the value of ever-increasing disclosure to already-inundated shareholders, that informed shareholder voting should be seen as the means of liberating shareholders to express themselves.

Finally, the SPG faces serious constitutional problems following CU. The Court in Citizens United rejected the “shareholder protection” argument for banning corporate speech, noting among other things that “the procedures of corporate democracy” can protect against any abuse and that “the remedy is not to restrict speech but to consider and explore other regulatory mechanisms. The regulatory mechanism here, based on speech, contravenes the First Amendment.” This language suggests any shareholder protection defense of corporate speech regulation faces a steep uphill climb. 

The SPA is unlikely to survive this climb.  Consider the restrictions on speech it seeks to impose:

  • Majority shareholder authorization of “specific” expenditures a year in advance, thereby shackling effective corporate responses to constantly shifting legislative activity.
  • Unprecedented (for the securities laws) treble damage “fiduciary duty” liability for unauthorized expenditures.  This is likely to have a significant deterrent effect on pro-shareholder political activity, since risks to managers would dwarf any potential gains from speech that serves corporate interests.
  • Extensive quarterly and annual disclosures.
  • Significant federal regulation of formerly state-controlled corporate governance issues.
  • The SPA would apply only to corporations, with no equivalent constraints on unions.

Although the Supreme Court might tolerate some shareholder-protection regulation of speech, its reasoning in CU suggests it will not be receptive to provisions like this.  CU stressed the social value of speech.  This doesn’t mean the shareholders have to subsidize anything corporate managers want to say, but it does mean that the Court will want more than just a shareholder-protection fig leaf to justify a massive increase in the burdens of corporate speech.

The SPA will not strengthen corporate governance, but rather cut corporate political activities back to the lobbying and PACs permitted under pre-Citizens United law.  In other words, it’s designed to reverse CU.  The Court is not likely to miss this fact.

Posted in constitutional law, truth on the market | 3 Comments »

Must the President Defend Don’t Ask, Don’t Tell?

Posted by Thom Lambert on October 16, 2010

Usual caveats for a Lambert weekend post: Post is off-topic for this blog and represents my own opinion only.

Well, he’s done it.  President Obama has ordered his Department of Justice to appeal the district court order abrogating Don’t Ask, Don’t Tell.  DOJ initiated the appeal on Thursday.

Mr. Obama says that he has no choice but to do this.  While he is so very deeply opposed to Don’t Ask, Don’t Tell — not opposed enough to make a solid push for legislation to repeal the highly unpopular law during the two years that his party has controlled Congress, but really, sincerely opposed – his Department of Justice is required, he says, to defend all the laws Congress passes. 

I suppose that this requirement comes from the Take Care Clause of the U.S. Constitution (Art. II, Sec. 3), which says that the Executive “shall take Care that the Laws be faithfully executed.”

But wait a minute… The Take Care Clause didn’t stop Mr. Obama from ordering his Justice Department to refuse to enforce the federal marijuana laws in states that permit medical marijuana.  One would think that if a duty to “faithfully execute” the laws means you must defend them, it also means you must enforce them.  After all, ”enforcement” of a law is more clearly a component of execution than is “defense” of that law.  One could, of course, interpret the Clause to vest the enforcement prerogative in the Executive, so that he has the authority to refuse to enforce some federal laws.  If that’s the case (and I believe it is — see Heckler v. Chaney, 470 U.S. 821, 832 (1985) (“[T]he decision of a prosecutor in the Executive Branch not to indict has long been regarded as the special province of the Executive Branch, inasmuch as it is the Executive who is charged by the Constitution to ‘take Care that the Laws be faithfully executed.’ ”)), then the medical marijuana stance is appropriate.  But if the Clause permits this sort of discretion on enforcement, which lies at the very heart of execution, then it surely gives the Executive the authority to refuse to defend repugnant, constitutionally suspect statutes. 

Indeed, every modern President has decided not to defend the constitutionality of some challenged statutes.  Here are some recent examples of cases in which a President has ordered his subordinates to join lawsuits opposing federal laws or to refuse to defend such statutes (HT: John Aravosis):

  • George W. Bush (ACLU et al., v. Norman Y. Mineta – ”The U.S. Department of Justice has notified Congress that it will not defend a law prohibiting the display of marijuana policy reform ads in public transit systems.”);
  • Bill Clinton (Dickerson v. United States – “Because the Miranda decision is of constitutional dimension, Congress may not legislate a contrary rule unless this Court were to overrule Miranda…. Section 3501 cannot constitutionally authorize the admission of a statement that would be excluded under this Court’s Miranda cases.”);
  • George H. W.  Bush (Metro Broadcasting v. Federal Communications Commission);
  • Ronald Reagan (INS v. Chadha – “Chadha then filed a petition for review of the deportation order in the Court of Appeals, and the INS joined him in arguing that § 244(c)(2) is unconstitutional.”)

There are others.  See, e.g., American Federation of Government Employees v. Pierce, 697 F.2d 303 (D.C. Cir. 1982); Consumers Union v. FTC, 691 F.2d 575 (D.C. Cir. 1982); Consumer Energy Council v. FERC, 673 F.2d 425 (D.C. Cir. 1982); Clark v. Valeo, 550 F.2d 642 (D.C. Cir. 1977); McCorkle v. United States, 559 F.2d 1258 (4th Cir. 1977); Atkins v. United States, 556 F.2d 1028 (Fed. Ct. Cl. 1977); National Wildlife Federation v. Watt, 571 F. Supp. 1145 (D.D.C. 1983); Pacific Legal Foundation v. Watt, 529 F. Supp. 982 (D. Mont. 1981).

Putting aside the legal arguments, though, the most troubling thing about this situation is how easily it could have been avoided.  A huge majority of Americans (over three-quarters) oppose Don’t Ask, Don’t Tell.  The President insists that he does too, and he concedes that the policy hurts the armed forces of which he is Commander-in-Chief.  (In his own words: “’Don’t Ask, Don’t Tell’ doesn’t contribute to our national security. … [P]reventing patriotic Americans from serving their country weakens our national security. … [R]eversing this policy [is] the right thing to do [and] is essential for our national security.”  Also: “We cannot afford to cut from our ranks people with the critical skills we need to fight any more than we can afford — for our military’s integrity — to force those willing to do so into careers encumbered and compromised by having to live a lie.”)  For two years, Mr. Obama has been supported by a Democratic congressional majority that has shared his views on DADT and has been so willing to do his bidding — public opinion be damned! — that it’s about to lose its majority status.  Had the President stepped up, judicial resolution of this issue would never have been required.

My friend Patrick Guerriero, former executive director of the Log Cabin Republicans, recently emailed me the statement he released when the Don’t Ask, Don’t Tell lawsuit was filed.  The statement said:

A lawsuit should not be necessary when public opinion overwhelmingly favors gays and lesbians serving openly and honestly. A lawsuit should not be necessary when the experience of our allies in the war on terror, including Great Britain, Israel and Australia, all allow gays and lesbians to serve openly and honestly. A lawsuit should not be necessary when our military has lost thousands of needed military personnel under this policy. However, under these circumstances, where we are a nation at war fighting a global war against terrorism, we can no longer sit by and wait for our elected officials to find the political courage to do the right thing.

Patrick made that statement on October 12, 2004, during George W. Bush’s first term.  How appalling is it that the lawsuit has still proven necessary after two years of a Democratic administration and one of the largest Democratic congressional majorities in history?

More on this issue here and here.

Posted in constitutional law, politics, war | 7 Comments »

« Previous Entries
Next Entries »
 
Follow

Get every new post delivered to your Inbox.

Join 1,034 other followers