Archives For Jurisdictional competition

I’m very pleased to announce the George Mason Law & Economics Center is hosting a program focusing on our friend and colleague Larry Ribstein’s scholarship on the market for law.   Henry Butler and Bruce Kobayashi have put together a really wonderful program of folks coming together not to celebrate Larry’s work — but to use it as a platform for further discussion and for legal scholars to engage in these important issues.

Interested readers might want to check out the TOTM Unlocking the Law Symposium.

The announcement follows and I hope to see some of you there on Friday, November 9, 2012 at GMU Law.
The Henry G. Manne Program in Law and Regulatory Studies presents Unlocking the Law: Building on the Work of Professor Larry Ribstein to be held at George Mason University School of Law, Friday, November 9th, 2012. The conference will run from 8:00 A.M. to 4:00 P.M.

OVERVIEW: In a series of influential and provocative articles, Professor Larry Ribstein examined the forces behind the recent upheaval in the market for legal services. These forces included increased global competition, changes in the demand for legal services resulting from the expanded role of the in-house counsel, and the expanded use of technology. His analysis showed that changes in the market for legal services were not just the result of a cyclical downturn in the economy. Rather, the profound changes in the market reflected building competitive pressures that exposed the flaws in the business model used by large firms to provide legal services. His recent writings also examined the broader implications of this upheaval for legal education, the private production of law, and whether legal innovation will be hindered by or hasten the demise of the current system of professional regulation of lawyers.

Professor Ribstein passed away suddenly on December 24, 2011. In the wake of the terrible loss of their close friend and colleague, Professors Henry Butler and Bruce Kobayashi (along with several other colleagues at Mason Law) have decided to honor Larry through a conference designed to capture and expand on the spirit of Larry’s recent work. The Unlocking the Law Conference seeks to advance these goals by inviting legal scholars to present their views and engage in a vibrant discussion about the present and future of the market for legal services. The panels at this conference will showcase 14 papers written specifically for this occasion and presented to the public for the first time.

This conference is organized by Henry N. Butler, Executive Director of the Law & Economics Center and George Mason Foundation Professor of Law, and Bruce H. Kobayashi, Professor of Law, George Mason University School of Law through a new Project on Legal Services Reform – under the auspices of the Mason Law & Economics Center. The Project on Legal Services Reform seeks to continue and extend the important work on legal innovation, legal education, law firms, and legal regulation produced by Larry. We hope to encourage scholars who have not worked in these areas to read Larry’s work, critique it in the same manner in which Larry famously commented on papers, and expand (or even restrict or redirect) the thrust of Larry’s work. In essence, this project is about “Larry as Catalyst.”

For background information, you might want to visit TRUTH ON THE MARKET (http://www.truthonthemarket.com), which held an online symposium on this topic on September 19 and 20, 2011.

REGISTRATION: You must pre-register for this event. To register, please send a message with your name, affiliation, and full contact information to: Jeff Smith, Coordinator, Henry G. Manne Program in Law and Regulatory Studies, jsmithQ@gmu.edu

AGENDA:

Friday, November 9, 2012:

Panel I. The Future of Legal Services and Legal Education

How the Structure of Universities Determined the Fate of American Law Schools
- Henry G. Manne, Distinguished Visiting Professor, Ave Maria School of Law; Dean Emeritus, George Mason University School of Law

The Undergraduate Option for Legal Education
- John O. McGinnis, George C. Dix Professor in Constitutional Law, Northwestern University School of Law

Panel II. Deregulating Legal Services

The Deprofessionalization of Profession Services: What Law and Medicine Have in Common and How They Differ
- Richard A. Epstein, Laurence A. Tisch Professor of Law, New York University School of Law

The Future of Licensing Lawyers
- M. Todd Henderson, Professor of Law, University of Chicago Law School

Failing the Legal System: Why Lawyers and Judges Need to Act to Authorize the Organizational Practice of Law
- Gillian K. Hadfield, Richard L. and Antoinette Schamoi Kirtland Professor of Law and Professor of Economics, University of Southern California Gould School of Law

Globalization and Deregulation of Legal Services
- Nuno Garoupa, Professor and H. Ross and Helen Workman Research Scholar, University of Illinois College of Law; Co-Director, Illinois Program on Law, Behavior, and Social Science

Panel III. Law Firms and Competition Between Lawyers

From Big Law to Lean Law
- William D. Henderson, Professor of Law and Van Nolan Faculty Fellow, Indiana University Maurer School of Law; Director, Center on the Global Legal Profession

Glass Half Full: The Significant Upsides to the Changes in the American Legal Market
- Benjamin H. Barton, Professor of Law, University of Tennessee College of Law

An Exploration of Price Competition Among Lawyers
- Clifford Winston, Senior Fellow, Economics Studies, Brooking Institution

Panel IV. Reputation, Fiduciary Duties, and Agency Costs

Lawyers as Reputational Intermediaries: Sovereign Bond Issuances (1820-2012)
- Michael H. Bradley, F.M. Kirby Professor of Investment Banking Emeritus, Fuqua School of Business, Duke University; Professor of Law, Duke University School of Law
- Mitu Gulati, Professor of Law, Duke University School of Law
- Irving A. De Lira Salvatierra, Graduate Student, Department of Economics, Duke University

The Fiduciary Society
- Jason Scott Johnston, Henry L. and Grace Doherty Charitable Foundation Professor of Law and Nicholas E. Chimicles Research Professor in Business Law and Regulation, University of Virginia School of Law

Class Action Lawmakers and the Agency Problem
- Barry E. Adler, Bernard Petrie Professor of Law and Business and Associate Dean for Information Systems and Technology, New York University School of Law

Panel V. Private Lawmaking and Adjudication

Decentralizing the Lawmaking Function: Should There Be Intellectual Property Rights in Law?
- Robert G. Bone, G. Rollie White Teaching Excellence Chair in Law, University of Texas at Austin School of Law

Arbitration, the Law Market, and the Law of Lawyering
- Erin O’Hara O’Connor, Milton R. Underwood Chair in Law, Vanderbilt University Law School
- Peter B. Rutledge, Herman E. Talmadge Chair of Law, University of Georgia Law School

VENUE:
George Mason University School of Law
3301 Fairfax Drive
Arlington, VA 22201

FURTHER INFORMATION: For more information regarding this conference or other initiatives of the Law & Economics Center, please visit: http://www.MasonLEC.org

Call or send an email to: Tel: (703) 993-8040, Email: lec@gmu.edu

The Henry G. Manne Program in Law & Economics honors the legacy of Henry G. Manne, Dean Emeritus of George Mason Law School and founder of the Law & Economics Center. Manne was a trailblazer in the development of law and economics, not only as a prominent and influential scholar, but also as an academic entrepreneur. He spurred the development of law and economics into the most influential area of legal scholarship through his Economics Institutes for Law Professors and Law Institutes for Economics Professors. The Manne Program promotes law-and-economics scholarship by funding faculty research and hosting research roundtables and academic conferences.

http://www.MasonManne.org

Late last year, with support from the International Center for Law and Economics, I published a paper that empirically analyzed the Philadelphia civil court system. That study focused upon the Philadelphia Complex Litigation Center (PCLC) which handles large mass tort programs including asbestos cases, hormone therapy replacement cases, various prescription drug-related injuries, and other mass tort programs. The PCLC has recently come under criticism for the use of a number of controversial procedures including the consolidation of asbestos cases and the use of reverse-bifurcation methods, where a plaintiff’s damages are calculated prior to the establishment of liability. That paper considered publicly available data from the Administrative Office of Pennsylvania Courts to analyze trends in docketed and pending civil cases in Philadelphia compared to other non-Philadelphia Pennsylvania counties, cases in federal court, and a national sample of state courts.

The study highlighted some unusual trends.  Philadelphia case dockets are disproportionately larger relative to both its population and other state and federal courts.  Philadelphia plaintiffs are also relatively more likely to prefer jury trials and less likely to settle than other non-Philadelphia Pennsylvania plaintiffs.  The data appear to support the conclusion that Philadelphia courts demonstrate a meaningful preference for plaintiffs, by coaxing “business” from other courts and providing them with a unique combination of advantages; indeed, the PCLC’s own stated goals include a desire to “[take] business away from other courts.”   While these strategies have no doubt successfully increased litigation in Philadelphia, and benefit local Philadelphia attorneys, they also bring a substantial cost to Philadelphia businesses and consumers.

I’ve now conducted a preliminary supplemental analysis (available here) designed to test the proposition that the majority of plaintiffs in the PCLC are out-of-state without an apparent or substantive connection to either Philadelphia or even the State of Pennsylvania.  I considered a sample of about 1,400 of the mass-tort cases in the PCLC to determine if the plaintiff filing the case had a home address or had sustained the complained of injury either in Philadelphia or Pennsylvania. Although the findings are preliminary, the results indicate that a substantial fraction of plaintiffs with cases pending at the PCLC have no discernible or relevant connection to Philadelphia or Pennsylvania. This supplement to the original study provides strong evidence that the PCLC has succeeded in attracting a large number of out-of-state cases that comprise a substantial portion of the civil cases in Philadelphia.

The main conclusions of this supplemental analysis are as follows:

  • Of the 1,357 cases in the sample, 913 (67.2%) were brought by plaintiffs who live out-of-state without any apparent connection to Pennsylvania or Philadelphia.
  • Only 180 cases (13.3%) reveal plaintiffs who live in or allege injury in Philadelphia.
  • The most substantial case types where the plaintiffs were overwhelmingly out-of-state are hormone therapy, denture adhesive cream, and Paxil birth defect cases.
  • Although most or all of the companies involved in these cases do business in Philadelphia and a few have some sort of administrative offices there, the vast majority of defendants do not have their principal place of business in Philadelphia or even in Pennsylvania. It is unlikely that venue was moved to the PCLC in most or any of the cases.

A chart summarizing the results is available here at Table 1.

Continue Reading…

The NYT reports:

When he rejected a new European accord on Friday that would bind the continent ever closer, Prime Minister David Cameron seemingly sacrificed Britain’s place in Europe to preserve the pre-eminence of the City, London’s financial district. The question now is whether his stance will someday seem justified, even prescient.

Mr. Cameron refused to go along with the new European plan of stricter fiscal oversight and discipline hammered out in Brussels this week, in great part because of fears that the City would be strangled by regulations emanating from Brussels. * * *

But will it matter?  The article points out that:

  • Non-British banks in the UK will still be subject to EU regulation.
  • European activity might be redirected from the UK to Frankfurt.
  • Europe could prohibit its banks from dealing with UK firms that didn’t adhere to EU regulation.
  • But the UK could exit the EU, reducing the impact of EU regulation in the UK.
  • European banks would still have a powerful incentive to remain global by competing in the UK market. 
  • Even if excluded from Europe, UK banks would still compete powerfully for U.S. and Asian business.  The UK didn’t lose its edge when it stayed with the pound, and likely won’t if it opts out of EU regulation.

And of course there’s the question whether UK hedge funds and other financial institutions will be better global competitors without being saddled by more intrusive European regulation.

Cameron’s move is a reminder that the EU has a double edge:  it promotes competition within the EU, but erects a regulatory cartel for the EU against the rest of the world.  With or without the cartel, it’s still a global economy, governed by the powerful forces of jurisdictional competition.  Federal cartels can slow down that completion but not stop it.

It’s a lesson worth remembering for U.S. securities regulators.

T-R’s Alison Frankel writes (HT Pileggi) about dueling suits in Texas and Delaware challenging the El Paso/Kinder Morgan merger: Three class actions in Texas state court and two class actions and a shareholder derivative suit in Delaware Chancery.

It looks like this merger may bring to a head the “escape from Delaware” phenomenon I discussed a year ago.

I’m off to the International conference on “Regulatory Competition in Contract Law and Dispute Resolution” at Ludwig-Maximilians-University’s Center for Advanced Studies in Munich.  I’m joining an otherwise illustrious group (here’s the program) to present my and Kobayashi’s Law as a Byproduct.

Blogging may be light for the next week (but eating and drinking may be heavy). Tips on what I must see and do in Munich would be appreciated.

Alison Frankel gripes about a NJ judge’s ruling throwing out a shareholders’ derivative suit seeking to hold the J & J board accountable for problems concerning the company’s Rispardal drug. Frankel thinks the bad faith standard the court applied is not high enough.

Ted Frank responds that the fact that the company had settled criminal allegations doesn’t mean the board was irresponsible given big companies’ exposure to prosecutorial overreaching (here’s my thoughts on the problems with prosecutors).  He notes that given huge potential penalties and legal costs “even a risk-neutral set of executives would refuse to go to trial on criminal charges that they had a 95% chance of winning.”  As Ted says:

The issue is this: first, any corporate law is going to have to balance false negatives (valid suits against directors being thrown out prematurely) and false positives (invalid suits against directors costing tens of millions of dollars in time and money to resolve). Any opening up of the courtroom doors to challenge directors will reduce false negatives at the expense of more false positives; any increase in the burden to bring suit will reduce false positives at the expense of more false negatives.

Anyway, Ted continues, shareholders of NJ corporations can decide to invest in firms incorporated elsewhere if they think NJ law is too lenient on directors, aptly citing my and O’Hara’s The Law Market.

Of course Frankel might argue that the business judgment rule that the court used to decide the case is ubiquitous, leaving plaintiffs with little choice. Indeed, the only significant dissent is Nevada which is, if anything, even easier on directors than NJ.   Frankel might also argue that this indicates state corporation law is rigged for managers and that we would do better under federal law.  Perhaps what we need is a super Dodd-Frank/SOX on steroids that preempts state law and exposes managers to suits like the one NJ dismissed.

I would respond that the universal acceptance of the business judgment rule represents the market’s rejection of Frankel’s position.  If Frankel wants to complain that the market for corporate law is imperfect,  she would need to persuade me that shareholders are better off in the clutches of Congress.

My new paper with Erin O’Hara O’Connor has just been posted.  The paper analyzes preemption in light of the theories presented in our book, The Law Market.  I earlier discussed our evolving ideas and their application to the Supreme Court’s recent arbitration and immigration decisions.  Here’s the abstract:

The scope of federal preemption of state law has been plagued by uncertainty and confusion. The courts have applied a set of presumptions on an ad hoc and conflicting basis. Part of the problem is that the courts purport to be interpreting legislative intent while actually making unarticulated substantive policy judgments about the outcome of specific cases. This approach frustrates development of coherent preemption doctrine. Courts should consider a conceptually obvious but as yet unexplored factor in their decisions. Specifically, where Congressional intent is unclear, preemption determinations should consider whether the states have effectively allocated sovereign authority among themselves through choice-of-law rules. Where states have achieved such “horizontal coordination,” Congress often has little need to usurp the states’ role as laboratories for experimenting with potentially diverse substantive laws. Our novel approach preserves both the benefits of local and state sovereignty and Congress’s role of coordinating US laws where necessary. It also provides a coherent policy for guiding preemption decisions where Congressional intent is unclear.

Download it while it’s hot.

I wrote last year about how the Florida Supreme Court had messed with the LLC “charging order” remedy to give the creditors of the sole member of an LLC access not just to the members’ financial rights, as the statute allows, but also to the member’s governance rights, which the statute arguably forecloses. The dissenters cited academic opposition (including from me) to the majority’s approach, its usurpation of the legislature’s role, and potential application beyond single-member LLCs.  I pointed out that

Now it’s back in the legislature’s court – and not just Florida, since this opinion is likely to be cited under any of the many statutes that resemble Florida’s. One possible fix is to change the statute to provide that creditors are not restricted to charging orders in smllcs. That might not work completely because it invites using nominal members with very small governance interests. More drastically, legislatures also might remove the temptation for asset protection by reinstating the business purpose requirement for LLCs, or at least qualifying the use of the charging order for LLCs used primarily for protecting assets from creditors.

I also discuss the law on this in Ribstein & Keatinge, §7:8, n. 17.

Now the legislative shoe has dropped in at least a couple of states:

  • Florida Stat. §608.433(6)-(8) tries to cabin the damage from Olmstead by providing special provisions for foreclosure on an interest in one-member LLCs.
  • Nevada Rev. St. §86.401 (2) clarifies that the charging order is the exclusive remedy for members’ creditors in all LLCs (thus cutting off the attachment or other route to taking over governance rights) and that foreclosure is unavailable even in one-member LLCs.

This swift legislative action indicates how state law can adjust rapidly to changes in a competitive legal environment.  Of course one might quarrel with these particular adjustments on policy grounds.  For a deeper discussion of the issues involved, see my article Reverse Liability and the Design of Business Associations.

The legislative response in these particular states highlight the bifurcated market in LLC law — the national market for formations of large LLCs dominated by Delaware, and the market for very small LLCs dominated by Florida and Nevada. See Kobayashi and Ribstein.  I suspect that these latter states may be competing for asset protection business, which is consistent with their actions here in quickly shoring up LLC members’ protection from creditors.

When the debate about the debt ceiling and spending gets past name-calling to real issues, it’s about the best path to growth and jobs.  An example of the pro-spending view is James Surowiecki in the current New Yorker:

[T]he spending cuts * * * will likely hit precisely the kind of public spending—on infrastructure, basic research, and defense—from which corporate America reaps great, if often unacknowledged, benefits.

But here’s an alternative take from Andy Kessler in today’s WSJ:

Now that the debt-ceiling gyrations are over, the Obama administration is “pivoting” to its biggest problem—jobs. Unemployment ticked down to 9.1% in July, but the real unemployment rate, including discouraged workers, is still 16.1%. The stock market is not pleased. * * *

Can we agree that throwing money at the problem doesn’t work? The 2009-10 stimulus package wasted more than $800 billion. The Federal Reserve’s frantic quantitative easing, QE1 and QE2, printed money and bought mortgage paper on the street, helping banks and financial institutions recapitalize, but it hardly created jobs—not lasting ones anyway. Sadly, the economy grew at a subpar 1.3% rate in the second quarter instead of the typical 5% rocket out of a recession. What’s missing is not capital, it’s opportunity.

As Otter famously said in “Animal House,” this situation “absolutely requires a really futile and stupid gesture be done on somebody’s part.” Well, at least a gesture that might appear stupid and futile but in reality kick-starts whole new industries and massive job growth. And all it will take is the stroke of a pen.

The idea that some government spending could help the economy at critical junctures is certainly not nonsense.  But the idea that we should continue to look to massive government spending as the only solution, particularly after observing the futility of the massive spending that helped get us into our current fix, approaches the reasoning of a cargo cult:  praying for the great God of government to rain goods on us to make our crops grow.

As Kessler points out, there is an alternative:  less, or at least different, forms of regulation to encourage the private sector.  I disagree with some of Kessler’s specific suggestions (read the article), but he’s definitely got the right idea: that there are legal fixes that could get us more, and more long-lasting, growth and jobs than can billions more of government spending.

Want some specific ideas?  Read Rules for Growth, and especially my and Henry Butler’s contribution on jurisdictional competition as a path to growth (and of course my and Erin O’Hara’s book on this).  Laws encouraging efficient jurisdictional competition could, among other things, ease the regulatory burden on new businesses.  Keep in mind that incumbent firms exercise significant control over political processes.  Exit via jurisdictional choice is a way around that stranglehold.

Want another idea? How about deregulating the practice of law (here’s one approach).  This could not only reduce the significant tax that high-priced legal services impose on business, and particularly on entrepreneurs, but also could open the way to a huge new industry in law-related products and services.

Of course these are just the ideas that one person (me) happens to be researching.  There are many others in such areas as intellectual property that others are looking at.  Common sense suggests that there must be a better way than just dumping more government money on the problem.

Barbara Black has suggested that the time may have come to reconsider arbitration of federal securities claims against issuers (and not just brokers).  And that’s only the beginning.  Here’s the abstract:

Ever since the U.S. Supreme Court held that arbitration provisions contained in brokerage customers’ agreements were enforceable with respect to federal securities claims, proposals have been floated to include in an issuer’s governance documents a provision that would require arbitration of investors’ claims against the issuer. To date, however, publicly traded domestic issuers and their counsel have not seriously pursued these proposals, probably because of several legal obstacles to implementation. In addition to these legal obstacles, publicly traded issuers may not have perceived significant advantages to arbitration. Recent legal developments, however, make inclusion of an arbitration provision in a publicly traded issuer’s governance documents a proposal worthy of serious consideration. In particular, because of the Supreme Court’s recent opinion in AT&T Mobility LLC v. Concepcion, issuers may be able to achieve an advantage through adoption of an arbitration provision in their governance documents that they were not able to achieve through PSLRA and the Securities Litigation Uniform Standards Act. They could finally achieve the demise of securities class claims.

And from the conclusion (footnotes omitted):

The overarching policy issue is the future of the securities class actions. Respected academics have previously called for the SEC to take an active role in assessing the strengths and weaknesses of the federal securities class action.  There have been similar calls for reform of state securities class actions. Currently there are numerous securities class actions working their way through the judicial system in the wake of the 2008 financial crisis. In short, the time is right for a re-examination of the costs and benefits of securities class actions.

I argued when it was decided that the AT&T case “could end up being one of the most important pro-business cases of the last several years.”  That may be an understatment.