Archives For federalism

Repeating claims he made in his statement in Intel, Chairman Leibowitz in a recent interview in the Wall Street Journal has this to say about stepped-up Section 5 enforcement at the FTC:

The courts have pared back plaintiffs’ rights in antitrust cases. They’re concerned about what they believe to be the toxic combination of class actions, treble damages and a very aggressive plaintiffs’ bar. The problem for us as an agency is we come under those restrictions, [too]. So how do we do what we’re supposed to do, which is stopping anticompetitive behavior? One tool in our arsenal is using what’s known as our Section 5 authority to stop unfair methods of competition.

Leibowitz further justifies his approach to Section 5 with an appeal to what he claims to be an important intrinsic limit of Section 5:

The other advantage of this authority is, because it’s not an antitrust statute, it’s going to limit follow-on, private treble-damages law suits. I think in the end, if we use this statute effectively to stop anticompetitive behavior, the business community is going to end up supporting it very, very strongly. Because what they’re most concerned about is follow-on, private, treble-damages litigation. They’re not so much concerned about cease-and-desist [orders], which is the kind of thing we’re often looking at when we use our Section 5 authority. I don’t think big business should be worried. I think they should embrace this trend.

Yes, I’m sure business will eagerly embrace the FTC’s use of this statute, particularly as the agency defends it precisely on the ground that its use is relatively unconstrained by courts and their pesky rule of law.

Leibowitz has been making these claims for some time (see, e.g., these remarks from October 2008 and the N-Data Statement).

But admittedly, if it were true that the FTC’s use of Section 5 did not lead inexorably to costly follow-on litigation, and if it were not the case that the statute were a recipe for unprincipled, uneconomic antitrust enforcement, no doubt there would be some support for it.  But unfortunately for Leibowitz, the claim is NOT true–it is not the case that Section 5 removes the specter of costly private litigation from the equation.

The reality is that many states have “Baby FTC Acts,” modeled on the federal FTC Act and taking enforcement cues–by law–from FTC interpretation of the Act.  And these statutes do provide for private rights of action and treble damages.  So although it is technically true that there is no private right of action under the federal FTC Act, this hardly shields antitrust defendants from follow-on liability.  And even if such actions have been rare up until now (as Leibowitz claims in the remarks linked above), that may well change as the FTC’s precedent-setting enforcement decisions shift toward using the statute as an antitrust enforcement tool and as the Act is used more and more for otherwise-unwinnable Sherman Act cases.

This point isn’t new, and Commissioner Kovacic made this same point in his dissent from the N-Data settlement:

The Commission overlooks how the proposed settlement could affect the application of state statutes that are modeled on the FTC Act and prohibit unfair methods of competition (“UMC”) or unfair acts or practices (“UAP”). The federal and state UMC and UAP systems do not operate in watertight compartments. As commentators have documented, the federal and state regimes are interdependent. [Citations omitted].  By statute or judicial decision, courts in many states interpret the state UMC and UDP laws in light of FTC decisions, including orders. As a consequence, such states might incorporate the theories of liability in the settlement and order proposed here into their own UMC or UAP jurisprudence. A number of states that employ this incorporation principle have authorized private parties to enforce their UMC and UAP statutes in suits that permit the court to impose treble damages for infringements.

If the Commission desires to deny the reasoning of its approach to private treble damage litigants, the proposed settlement does not necessarily do so. If the Commission’s assumption of no spillover effects is important to its decision, a rethink of the proposed settlement and order seems unavoidable.

As far as I can tell, however, Leibowitz and other defenders of this rationale for expanded Section 5 enforcement have not addressed this point, and they continue to rely, disingenuously, in my opinion, on claims that Section 5 enforcement will not lead to follow-on, private actions.

At the same time, as I pointed out here, Leibowitz’ continued claim that courts have reined in Sherman Act jurisprudence only out of concern with the incentives and procedures of private enforcement, and not out of a concern with a more substantive balancing of error costs–errors from which the FTC is not, unfortunately immune–seems ridiculous to me.  To be sure (as I said before), the procedural background matters as do the incentives to bring cases that may prove to be inefficient.

But take, for example, Twombly, mentioned by Leibowitz as one of the cases that has recently reined in Sherman Act enforcement in order to constrain over-zealous private enforcement (and thus not in a way that should apply to government enforcement).  Yes, of course, Twombly was concerned with the private incentives for bringing antitrust strike suits and the costs of such suits.  (And I note in passing that, while the specific monetary incentive at issue in the case might not apply to the government, the government, too, certainly has incentives to bring cases that may be weak–I hardly think the analysis is completely inapposite.  Meanwhile the costs of protracted litigation are just as high if the plaintiff is the government as if it is a private party.)

But the over-zealousness of private plaintiffs is not all it was about, as the Court made clear:

The inadequacy of showing parallel conduct or interdependence, without more, mirrors the ambiguity of the behavior: consistent with conspiracy, but just as much in line with a wide swath of rational and competitive business strategy unilaterally prompted by common perceptions of the market.  Accordingly, we have previously hedged against false inferences from identical behavior at a number of points in the trial sequence.

* * *

Hence, when allegations of parallel conduct are set out in order to make a §1 claim, they must be placed in a context that raises a suggestion of a preceding agreement, not merely parallel conduct that could just as well be independent action. [Citations omitted].

The Court was appropriately concerned with the ability of decision-makers to separate pro-competitive from anticompetitive conduct.  Even when the FTC brings cases, it and the court deciding the case must make these determinations.  And, while the FTC may bring fewer strike suits, it isn’t limited to challenging conduct that is simple to identify as anticompetitive.  Quite the opposite, in fact–the government has incentives to develop and bring suits proposing novel theories of anticompeitive conduct and of enforcement (as it is doing in the Intel case, for example).

I recognize that Leibowitz may believe that he is not susceptible to mistakes of this sort, or that (as Dan Crane might say), the FTC has a comparative institutional advantage over courts in making these sorts of determinations.  I disagree, but if that is the claim then Leibowitz should make it explicitly rather than suggesting that current Sherman Act jurisprudence is all about treble damages and strike suits.  I’m quite certain, however, that an explicit claim by the FTC that it never gets it wrong and thus shouldn’t be constrained by meddling courts wouldn’t be viewed very favorably by the business community.

Expanding on the themes in this post from the TOTM symposium book review of Professor Carrier’s new book on “Harnessing the Power of Intellectual Property and Antitrust Law” to encourage innovation, I’ve posted an essay co-authored with a very talented former student and research assistant, Aubrey Stuempfle. The essay expands on some of the themes we touched upon in reviewing Carrier’s analysis of standard setting issues, including the potential threat to innovation posed by invoking antitrust remedies to govern the SSO contracting process (whether under Section 2 of the Sherman Act of Section 5 of the FTC Act) in patent holdup cases. The review (along with the others from the symposium on Carrier’s book) will be published in the Alabama Law Review.

Here’s the abstract:

This essay reviews Michael Carrier’s analysis of antitrust and standard setting in his new book: Innovation for the 21st Century: Harnessing the Power of Intellectual Property and Antitrust Law. While Innovation for the 21st Century offers a balanced and informative summary on patent holdup, we find that Carrier’s treatment of antitrust and standard setting avoids too many of the critical policy questions. One critical and emerging issue in this area, and one Professor Carrier largely ignores, is the use of Section 5 of the FTC Act to govern the standard setting process, as in In re N-Data. We explore and highlight some of the critical legal and economic issues associated the use of Section 5 in the patent holdup context, the standard courts should apply to this conduct under Section 2 of the Sherman Act, and the fundamental issue of whether innovation and economic growth would be better served by relying on contract and patent law rather than antitrust. We conclude that it is highly unlikely that optimal regulation of standard setting activity includes the creation of perpetual contractual commitments backed by the threat of antitrust and state consumer protection remedies, without rigorous economic proof of substantial consumer injury that cannot be reasonably avoided. In our view, the current state of affairs described herein presents a critical threat to standard setting activity and innovation.

The essay can be downloaded here.

First, I want to join the rest of the participants in congratulating Professor Carrier on an excellent and well-written book emerging out of a thoughtful and ambitious project. The project, and the book, are provocative, important contributions to the literature, and usefully synthesize many of the most important debates in both antitrust and intellectual property.

Were this a full book review and not merely a blog post, I would spend more time identifying the many points in the book that I agree with. But it is not. Instead, I will narrow my focus to Professor Carrier’s approach to standard setting activities, and in particular, patent holdup. Chapter 14 is largely devoted to summarizing the state of affairs in antitrust and standard setting. The summary (pages 323-342) is balanced, well-written and recommended reading for anyone interested in getting up to speed on the current policy issues. After summarizing Professor Carrier’s proposal for antitrust analysis of patent holdup (and other business conduct in the standard setting process), I’ll turn to highlighting a few areas where I found myself either disagreeing with his analysis or hoping for a more complete treatment.
In my own view, the two most pressing policy issues with respect to patent holdup are:

1. What is the appropriate role of antitrust in governing patent holdup?

2. If antitrust rules should govern patent holdup, which statute(s) and what type of analysis should apply? In particular, what is the appropriate scope of Section 2 of the Sherman Act and Section 5 of the FTC Act?

While Professor Carrier’s treatment of patent holdup usefully summarizes the debate, and also recommends a policy proposal that I largely agree with, I was left hoping for a bit more in this section of the book in terms of moving the ball forward on these important questions.

Let’s begin with the policy proposal itself. Professor Carrier argues that “given SSOs significant pro-competitive justifications, courts and the antitrust agencies should consider their activity under the Rule of Reason.” Carrier carves out standard setting organization (SSO) members’ joint decisions to fix prices on the final goods sold to consumers as the only conduct deserving of per se treatment. So far I’m on board. It makes economic and legal sense to treat both standard setting activities (with the exception of cartel behavior) and IP rules of SSOs as generally procompetitive and thus falling under the rule of reason. Carrier identifies three potential areas of liability concern under the rule of reason: patent holdup (he cites Dell and Unocal as examples), boycotts, and situations in which SSOs exert buyer power to reduce prices with the effect of reducing the incentive to innovate. Carrier writes that “absent these situations, SSO activity should be upheld under the rule of reason.”

There is much I agree with here. In fact, I find myself in agreement with Professor Carrier about most of what he writes about the limited utility of per se analysis in the standard setting arena. But I will focus on some areas where I suspect that we disagree, though I’m left unsure based solely on what is in the book. Carrier identifies patent holdup involving deception as a cause for concern under a rule of reason analysis. But the treatment is cursory. Carrier writes that “such activity could demonstrate attempted monopolization under Section 2 of the Sherman Act” and notes that a plaintiff making such a claim must demonstrate, amongst other requirements, that “the deception result[ed] in a standard’s adoption or higher royalties.” (page 342).

It is helpful for my purposes to bifurcate the world of patent holdup theories into those involving deception (the stylized facts in Rambus or the allegations in Broadcom v. Qualcomm) from those that do not and merely involve the ex post modification and/or breach of contractual commitments made in good faith in the standard setting process (FTC v. N-Data). Again, with respect to each of these patent holdup theories, there are at least two critically important policy issues:

1. What is the appropriate role of antitrust in governing patent holdup?

2. If antitrust rules should govern patent holdup, which statute(s) and what type of analysis should apply? In particular, what is the appropriate scope of Section 2 of the Sherman Act and Section 5 of the FTC Act?

With respect to the first policy question, Carrier appears to presume that antitrust rules should apply to unilateral conduct in the form of patent holdup involving both deception and breach theories. I may be wrong about the breach theories. While Carrier discusses N-Data briefly, his policy proposal singles out examples such as Dell and Unocal, which involved deception. I was left wanting a more clear exposition of the details of the policy proposal in this section. More fundamentally, the relative merits of state contract law and the patent doctrine of equitable estoppels in the SSO setting as alternatives to antitrust liability are an important topic. Of course, this issue is one of special concern for me since Kobayashi and Wright (Federalism, Substantive Preemption, and Limits on Antitrust) have argued that antitrust rules layered on top of these alternative (and we argue superior) regulatory institutions threaten to chill participation in the SSO process and reduce welfare. But Kobayashi and Wright are not alone in questioning the utility of antitrust liability layered on top of these alternative bodies of state and federal law. For example, Froeb and Ganglomoir present a model in which “the threat of antitrust liability on top of simple contracts shifts bargaining rents from creators to users of intellectual property in an inefficient way.” Other contributors to this literature questioning the role of antitrust liability in “breach” style patent holdup cases such as N-Data include Anne Layne-Farrar. I will not take on the task in this blog post of repeating the various arguments making the case against antitrust liability here. But I believe that Carrier’s standard setting chapter and policy proposals would benefit from addressing them.

Second, assuming that antitrust rules should apply to patent holdup (both deception and breach variants), what should the analysis look like? With respect to the Section 2 analysis in claims involving deception, Professor Carrier appears to endorse the proposition that a demonstration of either actual exclusion (e.g., the deception is the but-for cause of the adoption of the technology) or higher royalties would be sufficient to support such a claim. I’m not sure why the latter is or should be sufficient? As I’ve argued elsewhere, the Supreme Court’s decision in NYNEX applies in the patent holdup setting when (1) the patent holder has market power prior to the deception and (2) the deceptive conduct results in higher royalties but not exclusion of rival technologies. When those conditions are satisfied, NYNEX’s holding (which is consistent with much of the Supreme Court’s general jurisprudence about the monopolist’s freedom to optimal pricing, e.g., Trinko, Linkline) that deceptive or fraudulent conduct that merely results in higher prices but not exclusion cannot be the basis of a Section 2 claim. Along those lines, I’ve argued that the D.C. Circuit’s Rambus decision is best interpreted as calling the Commission to task for failure to meet its burden of demonstrating that the first of these conditions did not apply. In any event, in reading Carrier’s treatment of patent holdup issues I’m left with several questions. For instance, I’m left wondering whether he believes that Section 2 should apply to both the deception and breach variants of patent holdup? If it applies to both, what is the appropriate scope of NYNEX? For example, do plaintiffs in patent holdup claims under Section 2 have the burden of demonstrating that the patent holder did not have monopoly power prior to the deceptive conduct? If not, on what grounds is NYNEX distinguishable? Is it because it was not an SSO case? What is the appropriate rule of reason analysis in a case involving deception in the standard setting process? What about cases like N-Data where the plaintiff does not allege any “bad conduct” at the time the technology is selected by the standard but rather some renegotiation of contract terms at a later time?

Third, no discussion of patent holdup would be complete without a discussion of whether and how Section 5 of the FTC Act should apply to patent holdup theories. Here again, while Carrier discusses N-Data briefly, this question does not receive attention. So the blog symposium seems like a great place to ask questions like the following: Should Section 5 of the FTC Act apply to both the deception-based and the “pure breach” variants of patent holdup? These are some of the most pressing issues relating to antitrust analysis of standard setting. Recently, Chairman Leibowitz singled out N-Data as a paradigmatic example of the appropriate application of Section 5:

One category of potential cases [to which to apply Section 5] involves standard-setting. N-Data, our consent from last spring, is a useful example. Reasonable people can disagree over whether N-Data violated the Sherman Act because it was never clear whether N-Data’s alleged bad conduct actually caused its monopoly power. However, it was clear to the majority of the Commission that reneging on a commitment was not acceptable business behavior and that—at least in this context—it would harm American consumers. It does not require a complex analysis to see that such behavior could seriously undermine standard-setting, which is generally procompetitive, and dangerously limit the benefits that consumers now get from the wide adoption of industry standards for new technologies.

Tales from the Crypt” Episode ’08 and ’09: The Return of Section 5 (“Unfair Methods of Competition in Commerce are Hereby Declared Unlawful”).
Similarly, Commissioners Leibowitz, Rosch, and Harbour noted in the N-Data majority statement that “there is little doubt that N-Data’s conduct constitutes an unfair method of competition,” describing the renegotiation of the ex ante contractual commitment to license at $1,000 to a RAND commitment as “oppressive” and an act that threatens to “stall [the standard setting process] to the detriment of all consumers.”

I wonder whether Professor Carrier thinks the majority in N-Data was correct? And if so, on what basis?  Or are breach variant holdup claims more appropriately governed under Section 2? If the answer to either of those questions is yes, I’d like to know whether and on what basis the application of these mandatory antitrust rules is superior to contract law, which contains doctrine designed to identify and distinguish good faith modifications and renegotiations from attempts at ex post opportunism.

I should note that I do not consider it a criticism of the book that these details are largely left out of the book. The task of organizing a coherent and intellectually provocative book that moves between copyright, patent, and antitrust is monumental and comes with its own special set of breadth and depth tradeoffs. However, I ultimately found the attention to legal, economic, and policy details in the SSO section less satisfying than the treatment of other equally complex issues throughout the book. While I was left disappointed that these details were not there, I admit to being very curious after reading Professor Carrier’s views on innovation and antitrust more generally as to how he will manage the thorny details in the patent holdup context.

You can now purchase it in hard copy, or on Kindle, and follow the action at the Conglomerate Book Club in March.  I’ll be starting it on my Kindle on an airplane this afternoon.

The Law Market

Josh Wright —  6 January 2009

The Law Market, Larry Ribstein’s new and important book with Erin O’Hara looks great and is available here from Oxford University Press.  The book description from the website sets the stage:

Today, a California resident can incorporate her shipping business in Delaware, register her ships in Panama, hire her employees from Hong Kong, place her earnings in an asset-protection trust formed in the Cayman Islands, and enter into a same-sex marriage in Massachusetts or Canada–all the while enjoying the California sunshine and potentially avoiding many facets of the state’s laws.
In this book, Erin O’Hara and Larry E. Ribstein explore a new perspective on law, viewing it as a product for which people and firms can shop, regardless of geographic borders. The authors consider the structure and operation of the market this creates, the economic, legal, and political forces influencing it, and the arguments for and against a robust market for law. Through jurisdictional competition, law markets promise to improve our laws and, by establishing certainty, streamline the operation of the legal system. But the law market also limits governments’ ability to enforce regulations and protect citizens from harmful activities. Given this tradeoff, O’Hara and Ribstein argue that simple contractual choice-of-law rules can help maximize the benefits of the law market while tempering its social costs. They extend their insights to a wide variety of legal problems, including corporate governance, securities, franchise, trust, property, marriage, living will, surrogacy, and general contract regulations. The Law Market is a wide-ranging and novel analysis for all lawyers, policymakers, legislators, and businesses who need to understand the changing role of law in an increasingly mobile world.

Larry Ribstein is organizing the upcoming AALS session of agency, partnerships and LLCs and has posted the following call for papers:

The Section on Agency, Partnerships and Limited Liability Companies is calling for papers for the 2009 AALS Annual Meeting in San Diego. We are interested in presentations on the application of modern theories and empirical methods of business associations to agency and unincorporated firms. The program has two goals: First, to show how these theories can be enriched by taking them outside the “box” of corporate law; and second, to show the relevance of agency and unincorporated firms to the mainstream of corporate theory and empirics. A non-exhaustive list of possible topics includes the nature and function of fiduciary duties, agency theory, the role and enforcement of contracts, jurisdictional competition and choice of form, the relationship of federal and state law, jurisprudence, international and institutional comparisons, and legal and economic history. Please email either a draft paper if available, or if not an abstract and outline, to Larry E. Ribstein, University of Illinois College of Law, ribstein [at] by no later than September 1, 2008.

If you’ve got a paper that falls into this category, and want to head to San Diego for the 2009 AALS meeting, send the paper, abstract or outline to Larry at the email address in the post.

I’ve posted to SSRN my new article (co-authored by my colleague Bruce Kobayashi), Federalism, Substantive Preemption, and Limits on Antitrust: An Application to Patent Holdup. We presented an earlier version of our analysis at the George Mason/ Microsoft Conference on the Law and Economics of Innovation and benefited significantly from comments from the discussants and participants. We take an approach grounded in the economics of federalism and recent Supreme Court antitrust jurisprudence in arguing for substantive limits on antitrust enforcement of patent holdup in favor of reliance on patent law as well as state common law. Along the way we discuss recent cases and enforcement actions involving patent holdup, including the D.C. Circuit’s decision in Rambus, Broadcom, and N-Data. If you’re a reader interested in patent holdup and related issues, please give the paper a read. Comments welcome (here or email me).

Here is the abstract:

In Credit Suisse v. Billing, the Court held that the securities law implicitly precludes the application of the antitrust laws to the conduct alleged in that case. The Court considered several factors, including the availability and competence of other laws to regulate unwanted behavior, and the potential that application of the antitrust laws would result in unusually serious mistakes. This paper examines whether similar considerations suggest restraint when applying the antitrust laws to conduct that is normally regulated by state and other federal laws. In particular, we examine the use of the antitrust laws to regulate the problem of patent hold up of members of standard setting organizations. While some have suggested that this conduct illustrates a gap in the current enforcement of the antitrust laws, our analysis finds that such conduct would be better evaluated under the federal patent laws and state contract laws.

Check it out.

Dammann and Schundeln have a new paper up on SSRN entitled “Where are Limited Liability Companies Formed? An Empirical Analysis” (see here) that examines the state of formation choice of 64,000+ LLCs. Here’s the abstract:

We empirically study the incorporation choices or, more accurately: formation choice, of limited liability companies. Most of the firms in our large sample of more than 64,000 limited liability companies are formed in the state where their principal place of business is located (the PPB state). As their size increases, however, firms become more likely to be formed outside that state, with Delaware emerging as the primary destination for those that are not formed in the PPB state. In particular, of those firms that have 1,000 or more employees, roughly half are formed outside their home state, and of the latter, more than 80% are formed in Delaware.

We show that substantive law matters to the formation choices of closely held limited liability companies. More specifically, limited liability companies appear to be migrating away from those states that offer lower levels of protection for minority investors: We find statistically significant evidence that firms are less likely to be formed in their PPB state if the latter offers relatively lenient rules on managerial liability or if it allows companies to be dissolved via a less than unanimous resolution of the members.

Today, Treasury Secretary Henry Paulson is set to present some comments about the Treasury’s Blueprint for Financial Regulatory Reform, released on Saturday.  (A summary of the proposal is here.)

The summary of the proposal report provides:  “In this report, Treasury presents a series of “short-term” and “intermediate-term” recommendations that could immediately improve and reform the U.S. regulatory structure. The short-term recommendations focus on taking action now to improve regulatory coordination and oversight in the wake of recent events in the credit and mortgage markets. The intermediate recommendations focus on eliminating some of the duplication of the U.S. regulatory system, but more importantly try to modernize the regulatory structure applicable to certain sectors in the financial services industry (banking, insurance, securities, and futures) within the current framework.”

I have a few comments on the proposals:

1.  The report contemplates consolidation of market regulators for the securities markets and the commodities markets.  This is a difficult issue.  Intuitively, I like the notion of consolidating regulation, as the regulatory authority dealing with commodities (the CFTC) and regulators of the general securities markets (SEC) both regulate the markets for securities.  That said, commodities regulation is (a) incrementally more sophisticated than the regulation of the generic securities markets due to the increased complexity in products, their evolution, and their likely economic/market impact and (b) different in sort than the regulation of plain vanilla securities.  Moreover, my impression – based on my experience working at the SEC and my experience as a corporate/securities/business scholar – is that the CFTC does a bit of a better job than the SEC in avoiding political pressure.  (Think about it – while we can easily recall a series of SEC Chairmen resigning under pressure, can we easily recall a series of CFTC Chairmen resigning under pressure?)  Is it sensible to combine agencies and lose that market niche insulation?

2.  The motivation for Treasury’s proposals strikes me as questionable.  The report summary says:  “Market conditions today provide a pertinent backdrop for this report’s release, reinforcing the direct relationship between strong consumer protection and market stability on the one hand and capital markets competitiveness on the other and highlighting the need for examining the U.S. regulatory structure.”  Indeed, the argument was made in connection with last spring’s Paulson report that the US capital markets are becoming less competitive, in part due to mis-regulation (and overregulation).

But the argument that the US capital markets are becoming less competitive continues to be the subject of robust academic debate.  (For example, Howell Jackson, Jack Coffe, Kate Litvak, and Don Langevoort, all very credible scholars, expressed differing views on the issue at the AALS annual meeting this past year.)  I, for one, do not believe that the US capital markets are becoming less competitive.  Instead, I believe that the overseas markets are becoming *more* competitive.  That is not a bad thing, nor is it reason to overhaul US market regulation.  In reality, maybe the increasing competitiveness of overseas capital markets counsels in favor of our holding the status quo, to see how things shake out with the fundamentals that make the overseas markets increasingly competitive in the short term.

To that end, the report summary says “[g]lobalization of the capital markets is a significant development. Foreign economies are maturing into market-based economies, contributing to global economic growth and stability and providing a deep and liquid source of capital outside the United States. Unlike the United States, these markets often benefit from recently created or newly developing regulatory structures, more adaptive to the complexity and increasing pace of innovation.”  Until we know how these more newly developed regulatory structures fare in the long term, is seems unwise to jump to action to keep up with them.    Moreover, the summary of Saturday’s report indicates that its authors looked closely at the UK, Australia, and Netherlands financial markets regulatory regimes in designing the proposals in the report.  Basing reform of the US capital markets on regulation in the UK, Australia, and the Netherlands, however, does not strike me as sound.  If we are entertaining notions of wholesale reform, why not instead pin down what the conceptual optimal model would look like, as opposed to mining for inspiration from other regulators?  That said, the report purports to so do, to a degree, as discussed below in point three.

3.  The report touts a new “objectives based regulatory approach.”  This approach, however, while radically different from the current US capital markets regulatory structure in terms of how it is implemented, is nothing new in terms of goals.  (Indeed, the summary says the new structure is motivated in part by “the convergence of financial services providers and financial products has increased over the past decade.  Financial intermediaries and trading platforms are converging.   Financial products may have insurance, banking, securities, and futures components.”  But wasn’t this dealt with in the Gramm- Leach-Bliley Act?  Why now do we need to revisit what appears to have been sensible reform less than a decade ago?)

The report summary says “[l]argely incompatible with these market developments is the current system of functional regulation, which maintains separate regulatory agencies across segregated functional lines of financial services, such as banking, insurance, securities, and futures,” and the report instead argues for an objectives based regulatory scheme, based on the objectives of “[m]arket stability regulation…, [p] rudential financial regulation…, and [b]usiness conduct regulation.”  But our current functional regulatory scheme operates with a focus on these exact objectives.  A consolidation of power into one regulatory authority for each objective seems to do nothing other than allow for (a) tunnel vision by a given objective’s regulator and (b) decreased input in terms of how to regulate to the goal of meeting these objectives.  With respect to point “b,” I believe that it is useful to have the leaders at the SEC, the CFTC, and the Federal Reserve all making calls to each other, giving input to the President and Congress, and agitating for ways to secure better regulation.  Yes, there is tension and a bit of repetitive regulation, but it seems to me that that is healthy when dealing with a matter as important as the United States capital markets.

4.  I have not worked through exactly how Saturday’s report proposes, if at all, to restructure the actual Board of Governors of the Federal Reserve System.  I will note, however, that I am generally leery of restructuring the Federal Reserve, both in terms of authority and operation.  Part of what makes the Federal Rserve work is the fact that the Governors serve for 14 year terms, allowing for insulation from political pressure (to a degree) and a link between immediate decision-making and longer-term implications.  (Contrariwise, the SEC Commissioners are usually long gone before the fall-out from their decisions becomes manifest.)  The Federal Reserve System has worked well for almost 100 years.  Does it really make sense to tamper with it?

5.  To paraphrase, “regulate in haste and repent in leisure.”  I am never thrilled to see a massive proposal for overhaul and reform on the heels some major business or economic event.  Did the aftermath of the Sarbanes-Oxley Act (which is an act that I support, by the way) teach us nothing?

David Zaring and Gordon Smith have some interesting comments over on the ‘Glom, as does Larry Ribstein on his blog.

is here, over at eCCP, and differs somewhat from Thom’s.

The takeway excerpt is:

Credit Suisse has important implications for antitrust practice. The decision’s effect is to narrow the scope of antitrust law and to invite efforts by regulated industries to narrow it still further. The court’s “clearly incompatible” standard is new and (though it purports not to) seems to water down considerably the old “plain repugnancy” test of Gordon v. New York Stock Exchange, Inc. 422 U.S. 659, 682 (1975). Under the new incompatibility standard, there no longer has to be an actual conflict between antitrust and other federal law for antitrust implicitly not to apply. Even a mere regulatory overlap may now be sufficient to trigger antitrust immunity. (Recall that in Credit Suisse the Court assumed that both antitrust and the SEC disapproved of the tying and other practices in question, and yet the Court still considered the two bodies of law incompatible on account of the regulatory overlap.) ….

Going forward, the Court will need to tighten the rule in Credit Suisse if it wants antitrust to continue to operate as Congress intended it to in conjunction with the compartmentalized maze of federal regulatory law. No one thinks that securities firms should be exempt from the legal obligations that generally flow from non-securities law (antitrust aside). If we expect to hold securities and other regulated firms accountable for torts and breaches of contract, or for crimes and discrimination, then why not also hold them accountable for antitrust violations? If Congress says otherwise, that is one thing. But if Congress is silent on the question, a federal agency should not have have any more power than a state to confer antitrust immunity upon those that it regulates. Of states we require a clearly articulated policy that presents an actual conflict, not merely the possibility of future potential incompatibility. From federal agencies we should not expect any less.

Just yesterday, in its historic decision in Leegin, the Court strongly reaffirmed its confidence in the Rule of Reason’s workability by overturning Dr. Miles and extending the rule’s reach to vertical RPM. That workability should make us equally confident that antitrust can peacefully coexist with the reguatory state.

The governor of North Dakota recently signed into law the North Dakota Publicly Traded Corporation Act (ht: Broc Romanek). The Act resembles a shareholder activist wish list including majority voting for the election of directors, elimination of staggered boards, advisory shareholder votes on executive compensation, shareholder proxy access, proxy contest reimbursement, poison pill restrictions, etc.

While the Act is certainly groundbreaking, my view is that it was enacted as a publicity stunt. The practical effect of it is likely to be zilch. The Act only applies to public companies incorporated in North Dakota that affirmatively opt-in through provisions in their articles of incorporation. Hence, shareholders cannot unilaterally opt-in a company since an articles amendment requires board and shareholder approval. Additionally, a grand total of two public companies are incorporated in North Dakota (Dakota Growers Pasta and Integrity Mutual Funds of Minot), and there is no reason to suspect that they will opt-in.

Even if a corporation wanted to grant shareholders the rights provided for in the Act, it seems highly unlikely it would do so by reincorporating in North Dakota and opting-in. Instead, it could simply tailor its governing documents to strike what it believes to be the appropriate balance between board and shareholder power for its particular business and continue to enjoy the benefits of Delaware incorporation (business savvy judiciary, responsive legislature, etc.).

Of course, the genius of American corporate law may ultimately prove me wrong, but I doubt it.

Larry Ribstein has an interesting post responding to Professor Warren’s discussion of her own classroom experiences teaching Carnival Cruise Lines, Inc. v. Shute, 499 U.S. 585, 593-94 (1991). Professor Warren describes a discussion with her students involving the notion raised by Justice Blackmun that “passengers who purchase tickets containing a forum clause like that at issue in this case benefit in the form of reduced fares reflecting the savings that the cruise line enjoys.” Specifically, the discussion was aimed at eliciting student reactions as to whether Blackmun’s line of reasoning was fact or mere theory.

Long story short: Given this choice Warren’s students answered “fact” and Warren worries about what this response says about what we are teaching our law students. She asks “is it all all about deduction, with nothing left over for reality?” Larry’s post makes the case that the students were correct:

Justice Blackmum was responding to the Court of Appeals conclusion that such clauses should never be enforced because they’re not negotiated. In other words, the availability of a market means that direct negotiation should not be an absolute prerequisite to enforcement. This paragraph contains Justice Blackmun’s reasoning against the Court of Appeals’ conclusion. Recall that, according to Professor Warren’s report, she asked the students whether this was “fact” or “law.” Given only that choice, the students responded that it was “fact,” which seems logical since it was reasoning in support of a legal conclusion, and not the legal conclusion itself.

But then Professor Warren appears, again from her post, to have changed the question: was it “fact” or “theory.” That’s a different and somewhat more difficult question. She was concerned that the students “resisted.” But even as an aged law professor, I’m not familiar with this distinction, so it’s not surprising the students were confused. Perhaps the professor means to distinguish between something that does, and something that does not, require additional proof. Is she referring to the distinctions discussed in Imre Lakatos’ Proofs and Refutations? Or what?

Professor Warren clearly wants to contrast some correct method of reasoning with the erroneous “deductions” of the economic model. But it’s not clear who exactly is engaging in this erroneous reasoning. Not Justice Blackmun, who as just noted was only suggesting reasons why bargaining should not be an absolute prerequisite to enforcement. Not the students, at least from Professor Warren’s description, because they were apparently making the fact-law distinction, and seemed quite willing to recognize the qualifications necessary to make the leap to economic proof of some sort.

Read both posts. While I agree with the spirit of Warren’s post that economic logic should be subjected to empirical testing and we ought to be teaching our students how to think critically (about economic arguments and otherwise), I want to take this discussion in a different direction. What are we teaching law students about economics in various law schools? My thoughts on this subject appear below the fold.

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