Ideoblog

The SEC, global warming and the First Amendment

In its continuing struggle to remain relevant after Madoff, the SEC has issued an interpretive guidance on what firms have to say about the impact on them of climate-change-related business and legal developments. Steve Bainbridge has a good analysis and blogosphere wrap-up. The bottom line is that while there are no completely new disclosure requirements here, the "interpretation" could impose a world of hurt and uncertainty on firms without benefiting (and likely even hurting) investors.

Dissenting Commissioner Troy Paredes notes the potential confusion that could result from having firms speculate on the "physical effects of climate change, such as effects on the severity of weather (for example, floods or hurricanes), sea levels, the arability of farmland, and water availability and quality" and harms to their reputation because of the public perception of data relating to its greenhouse gas emissions. Paredes observes:

There is a notable risk that the interpretive release will encourage disclosures that are unlikely to improve investor decision making and may actually distract investors from focusing on more important information. Here, it is worth recalling that, in rejecting the view that a fact is "material" if an investor "might" find it important, Justice Marshall, writing for the Supreme Court in TSC Industries, warned that "management's fear of exposing itself to substantial liability may cause it simply to bury the shareholders in an avalanche of trivial information — a result that is hardly conducive to informed decisionmaking."

For other skeptical commentary, see Christine Hurt, and Geoff Manne (companies have to disclose facts about which they "know nothing, the science is utterly un-settled and speculative, and the actual physical and economic consequences of which are even less certain"). Of course, the big problems will come when litigators get hold of companies that didn't predict the weather or its effects on firms.

What particularly disturbs me here is not the fact that the SEC, which has all sorts of problems with its main mission of uncovering fraud, has unleashed another useless and costly disclosure rule on firms at a time when they struggling to make money and provide jobs. I've become inured to this.

No, what really bothers me is that firms (meaning, of course, their managers and shareholders) have been forced, upon penalty of fines and damages, to participate in the contentious global warming debate. As dissenting Commissioner Kathleen Casey says:

I can only conclude that the purpose of this release is to place the imprimatur of the Commission on the agenda of the social and environmental policy lobby, an agenda that falls outside of our expertise and beyond our fundamental mission of investor protection.

No, firms do not have to opine directly on global warming. But they do effectively have to acknowledge that it exists, or face the consequences of liability if they are hurt by bad weather that a litigator can somehow link to climate change. So the SEC has enlisted the considerable resources of thousands of firms, and the voices of their disclosure materials, for the climate change cause.

So it is appropriate that this release comes soon after the Supreme Court's Citizens United case. As I said in commenting on that case:

In the end, our best protection against erosion of economic freedom is to have a powerful business force to offset government. We've got that now.

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).

Where do old law partners go?

To court, of course, if they get expelled or de-equitized. The partnership agreement and partnership default rules normally apply, but sometimes federal age-discrimination rules step in. Then the question is whether they are "employees" under federal age discrimination law.

I mention this because of a recent age discrimination suit against Kelley, Drye and Warren. As discussed in the Law Blog, this came up a few years ago in a lawsuit against Sidley Austin that ended up costing the firm (or its insurer) $27.5 million:

Commentators in recent years have pointed to this issue as one which could really hinder law firms going forward, were the courts start to rule that partners are more akin to employees than owners. Even prior to the recession, more partners were working later in life, some well into their 70s. If the law starts cutting against them, firms might have to start either buying partners out with big packages or continuing to give them their annual equity slice

Of course, if firms can't lay off high-priced partners, they can't hire cheap associates.

Here's my earlier discussion of the legal issues in the Sidley Austin case.

Louis Auchincloss, RIP

The NYT has the usual fine obit.

Auchincloss painted the best picture of the now dying model of Big Law. Here's my analysis of his finest book The Rector of Justin, in which I praised "the ambiguities and nuances . . . [that] are so absent from the noisy self-righteousness that characterizes the modern dialog."

Auchincloss never had the respect of the literary establishment. (A long time ago, while I was in law school, I toyed with writing fiction. A writing professor told me I had to choose between the law and writing. I used Auchincloss as a counter-example, and he said something like, "exactly what I mean."). But he deserves to be read widely, especially today.

What is an iPad?

Too big for an ebook or cell phone, unusable as a laptop. Doesn't replace anything you own.

But hey, it might end up as a collector's item.

Legal entrepreneurs

Last week David Lat, writing in the NYT declared that Big Law was no longer law graduates' "golden ticket. Not exactly news to my readers.

But there is hope. Now comes a report that Duke and Colorado Law are launching LLMs in entrepreneurship.

Duke students will complete an externship with an emerging company in North Carolina's Research Triangle — where a number of high-tech companies are located — or will be placed with a law firm that advises entrepreneurs.

Entrepreneurship training is good, but what would be great is to teach law students how to be entrepreneurs in law. As discussed in my Death of Big Law, the problem with law practice today is that it lacks a business model suited to the changing business and technological environment of law practice. Nevertheless, today's Big Law lawyers have shown little incentive to get out of their rut.

But change might come from the many bright lawyers being thrown on the street with nothing much to do. Lawyers have traditionally been too risk-averse and precedent-bound to embrace innovation. Now they have no choice: if they don't do it, somebody else (business consultants, accountants, techies) will take the lead.

With the right training, law students are golden, because their legal skills give them a significant advantage over other innovators. Massive innovation is just around the corner, unleashing lawyers' dormant earning potential in an increasingly regulatory era that needs lawyers more than ever. The future's so bright, you gotta wear shades.

Why corporate speech matters

The President reacted to the Citizens United case on corporate campaign spending by railing that "[t]his ruling strikes at our democracy itself. I can't think of anything more devastating to the public interest. The last thing we need to do is hand more influence to the lobbyists in Washington, or more power to the special interests to tip the outcome of elections." He summoned the authority of Teddy Roosevelt as to the "impact of unbridled, corporate spending."

Steve Bainbridge rightly notes (quoting this paper) that corporations spend money on politics "because the ever-increasing burden of regulation requires corporations to include lobbying regulators and legislators as part of their overall business strategy." This a good thing because corporations are a voice for economic liberty:

Those whose livelihood depends on corporate enterprise cannot be neutral about political systems. Only democratic capitalist societies permit voluntary formation of private corporations and allot them a sphere of economic liberty within which to function, which gives those who value such enterprises a powerful incentive to resist both statism and socialism. Because tyranny is far more likely to come from the public sector than the private, those who for selfish reasons strive to maintain both a democratic capitalist society and, of particular relevance to the present argument, a substantial sphere of economic liberty therein serve the public interest.

This is, of course, inconvenient for the President. Today's NYT notes:

[T]he decision could . . . have a significant effect on Mr. Obama's expansive domestic agenda. The president has angered many of the big-money industries — like banks and insurers — that would be inclined to dig deep into their pockets to influence the outcome of the president's legislative proposals. Mr. Obama has repeatedly assailed the influence of "special interests" in blocking his proposed health care overhaul and tough new regulations on banks; in his address on Saturday, he warned that the Supreme Court's ruling would make enacting legislation all the more difficult.

But this inconvenience is the point.

There's another issue here. In my article, Corporate Political Speech, 49 Wash. & Lee L. Rev. 109, 152-58 (1992) I note that perhaps the strongest argument for restrictions on corporate speech is that they protect corporations from "rent extraction" by politicians, who threaten regulation in order to extort more campaign contributions from business. This phenomenon was first analyzed by Fred McChesney in Rent Extraction and Rent Creation in the Economic Theory of Regulation, 16 J.LEG.STUD. 101 (1987) and later in his book, Money for Nothing. I discussed it here in connection with the debate on taxing carry. As I note in my article:

Despite the likelihood of being net political losers, individual firms cannot afford to refuse to participate in the game because they may lose more by wealth transfers to participating firms than they save in rent-seeking costs. Prohibiting corporate political activity is a way out of this classic prisoners' dilemma problem. If winners and losers from corporate speech cannot be identified in advance, all firms would favor the prohibition. In other words, corporate speech restrictions limit speech that is, in a sense, involuntary.

I also observed that "[m]ajor legislation restricting corporate political activity followed episodes of flagrant 'shakedowns' of corporations by political fund-raisers."

However, my article shows that this argument does not stand up to the First Amendment. It's really just another shareholder protection argument. Diversified shareholders don't gain from corporations giving into the rent extraction game because the political losses in their portfolios are balanced by the political gains. For example, there are corporate winners as well as losers from ObamaCare. As with other shareholder protection arguments for speech regulation, I note that "regulation is unnecessary to solve this problem because shareholders can contract for bonding devices that ensure that managers do not incur deadweight rent-seeking costs."

My article also argues that there would be no end to this argument once made because "all political activity involves rent-seeking." Thus, the restrictions on speech, and therefore liberty, would not be worth any benefits to corporations from clamping down on rent extraction.

In any event, the campaign finance laws had so many holes in them (e.g., PACs) that they didn't stop rent-extraction.

In the end, our best protection against erosion of economic freedom is to have a powerful business force to offset government. We've got that now. The biggest problem is not the threat to the president's agenda, but that he and Congress will ramp up that agenda in order to get corporate managers to waste more shareholder money. I don't think that was the problem the President had in mind in his radio address.

Helmet laws and bicycle riding

Seems that helmet laws reduce bicycle riding, according to Carpenter & Stehr, Intended and Unintended Effects of Youth Bicycle Helmet Laws. Here's the abstract:

Over 20 states have adopted laws requiring youths to wear a helmet when riding a bicycle. We confirm previous research indicating that these laws reduced fatalities and increased helmet use, but we also show that the laws significantly reduced youth bicycling. We find this result in standard two-way fixed effects models of parental reports of youth bicycling, as well as in triple difference models of self-reported bicycling among high school youths that explicitly account for bicycling by youths just above the helmet law age threshold. Our results highlight important intended and unintended consequences of a well-intentioned public policy.

From the article:

Given that the foregone utility of riding a bicycle would seem relatively substantial, why do helmet laws lead to reduced cycling? There are several possibilities. First, the costs of helmet use are likely nontrivial for some youths. In addition to the direct monetary costs of bicycle helmets (usually between $10 and $40), there are likely to be substantial social costs (recall that survey evidence shows that youths do not like wearing helmets primarily because they are "uncool"). These costs are likely to be magnified if there are significant peer effects. Second, there is evidence that youths have suboptimally high discount rates (Gruber 2001), such that some youths might place too little weight on the expected gain in future utility from the prevention of injury or death relative to the costs of wearing helmets today. Finally, note that there are several reasonably close alternatives to bicycling (such as skateboarding and in-line skating) that are not regulated in the same way with respect to mandated helmet use. Helmet laws change the relative prices among these activities, such that the robust reduction in bicycling we observe may be at least partially offset by increases in other related activities.

Not surprising that raising the cost of doing something reduces the demand.

There's evidence that bicycle helmet laws reduce fatalities. But what if they cause kids to switch to more dangerous activities that don't require helmets?

The Supreme Court’s cult of celebrity

My discussion of Citizen United – rare space on this blog for a Supreme Court case – is a suitable occasion for discussing the Court a more generally. I was particularly interested in the emotional temperature of the argument between the dissenters and majority, and particularly the evident heat of the dissenting opinion. It almost seemed like the Court was deciding what the role of the corporation in society should be, rather than what the Constitution says. If I'm right, there are those who might be concerned. Then the question becomes what to do about it.

Craig Lerner and Nelson Lund have some interesting proposals in their Judicial Duty and the Supreme Court's Cult of Celebrity, which they're discussing on Volokh, starting on Tuesday with this introduction:

[T]he conditions under which Supreme Court Justices operate make it almost impossible for them to experience their jobs as calling for the kind of modesty and restraint that * * * Supreme Court nominees promise they will exhibit even as members of the highest Court of the land. For that reason, we believe that it would be salutary for the lives of the Justices to become more like the day-to-day lives of judges on the lower courts. This need not require an actual reduction of the Supreme Court's power, as in the case of such reforms as jurisdiction-stripping statutes. Nor need it expose the Court to other forms of external political influence, which we observe in jurisdictions where judges are elected to office or subject to recall. Nor does it require the extraordinary and practically impossible step of amending the Constitution, as in the case of various proposals for term limits. Rather, we simply propose that the Justices be given somewhat more ordinary judicial work to do, and that a little of the temptation to judicial individualism be curtailed. Our correctives are aimed at creating incentives for the Supreme Court to behave more like a court, rather than as an aggregation of celebrities, and for Supreme Court Justices to behave more like judges, rather than like peers of the realm With these changes, perhaps we might actually obtain some of what recent nominees have thought it wise to promise during their confirmation hearings.

Specific suggestions include:

• "disenclerking" the Court:

[W]e propose that Congress reassign the clerks (perhaps in reduced numbers) to the staff of the Court's Librarian. The Librarian would choose and supervise the clerks, who would not be permitted to draft legal opinions.

• Making the Court's docket less discretionary:

We propose adding a provision to 28 U.S.C. 1254 providing that each term, the number of cases taken by the Supreme Court pursuant to the first paragraph (discretionary certiorari petitions) may not exceed the number of cases taken pursuant to the second paragraph (court of appeals certifications). The Supreme Court's docket would then be driven partly by the perceived needs of the judicial system, as determined by the lower court judges themselves.

• And anonymous opinions:

[U]nable to claim credit for the opinions they write, the Justices would come to regard their reputations as inextricably linked with the work of the Court, rather than with their own personal stock of precedents. This should mean a reduction in the number of unintelligibly splintered decisions that so frustrate the bar, the lower courts, and even members of the Supreme Court itself. Furthermore, unable to claim credit for opinions, we think the Justices would have less incentive to write sophomoric philosophy or ill-disguised political commentary in a transparent effort to have their names emblazoned in casebooks and popular journals. As the Court's opinions became less frilly and more legal, the press would find it harder to extract a snappy (and often legally irrelevant) sound bite to explain the decision, and this might actually enhance the Court's reputation as something distinguishable from a body of life-tenured politicians.

These proposals are useful as well as provocative. Even if they're not adopted, they challenge us to think about why the Court does what it does, and whether it should.

The corporation and same-sex marriage

The dissenters in Citizens United relied partly on the founders' skeptical 18^th century view of the corporation. (Justice Scalia had a different view on this issue.)

I wonder if, when same sex marriage is presented to the Court, the dissenters will feel the same way about the founders' conception of marriage.

The Court unleashes the corporation

Maybe it's a stretch, but the Supreme Court's Citizens United opinion may turn out to be one of the most important business decisions in a generation. The question is which of the case's positions ultimately prevails: the majority's largely unsupported view that we don't need to worry about corporate power; or the dissent's outmoded 18^th century conception of the corporation.

I won't rehash the points made in the zillions of words that have already flowed onto the Web. Read the many posts on Bainbridge for the definitive (so far) analysis from a corporate perspective, with some nice quotes from me. See also Adler, Somin, PoL roundup.

Denniston on Scotusblog aptly summarizes I believe is the most important takeaway from the case: "There is a deep chasm of perception, between Thursday's majority and the dissenters, about the nature of the corporate personality."

Kennedy's majority opinion saw corporations and their speech as entitled, like individuals, to be heard. The majority gave short shrift to arguments for distinguishing corporate speech based on corporations' supposed special advantages ("the State cannot exact as the price of those special advantages the forfeiture of First Amendment rights"), supposed corruption by corporate speakers (emphasizing that these are independent expenditures), and the need to protect shareholders (noting that the statute in question is poorly designed for this purpose). The Court's reasoning is best encapsulated by this quote (citations omitted):

The censorship we now confront is vast in its reach. The Government has "muffle[d] the voices that best represent the most significant segments of the economy." . . . And "the electorate [has been] deprived of information, knowledge and opinion vital to its function." . . . By suppressing the speech of manifold corporations, both for-profit and nonprofit, the Government prevents their voices and viewpoints from reaching the public and advising voters on which persons or entities are hostile to their interests. Factions will necessarily form in our Republic, but the remedy of "destroying the liberty" of some factions is "worse than the disease." The Federalist No. 10, p. 130 (B.Wright ed. 1961) (J. Madison). Factions should be checked by permitting them all to speak, see ibid., and by entrusting the people to judge what is true and what is false.

The problem with the majority opinion is that it does not deign to address the dissent's view of the corporation in detail. This leaves a series of weak arguments founded in centuries'-old notions of business associations essentially unchallenged. These arguments might again rear their hoary old heads, this time in a majority opinion. It's time to shoot them down.

The dissent insists that corporations need to be restrained because corporations are a "distinctive threat to democratic integrity posed by corporate domination of politics." Permitting regulation of corporation speech "reflects a concern to facilitate First Amendment values by preserving some breathing room around the electoral "marketplace" of ideas." In particular:

• Corporations can use their special powers to amass resources for speech that do not indicate popular support.
• Although the corporation may be a fictional person, there is no real person who is clearly speaking for the corporation.
• Shareholder rights are not robust enough to protect them from managers who want to use corporate money to express views the shareholders disagree with. Because corporate speech can amplify managers' voice over the shareholders, this "bolsters the conclusion that restrictions on corporate electioneering can serve both speakers' and listeners' interests, as well as the anticorruption interest. And it supplies yet another reason why corporate expenditures merit less protection than individual expenditures."

In order to set the record straight, I'm going to add some ballast to the majority's position, with the hope of shoring it up against the attacks almost inevitably to follow in future cases. These come from my article, Corporate Political Speech, 49 Wash. & Lee L. Rev. 109 (1992) (footnotes omitted), which Prof B also quotes from. Note that these are just snippets. Read the whole thing for the full flavor. Unfortunately it's not online right now – I'd be glad to supply copies to those who are interested.

Social effects of censoring corpoations. As noted above, the majority's opinion was consistent with a listener-based theory of the First Amendment. On that score, my article argues that "restricting corporate political activity could cause laws to be inefficient by permitting noncorporate groups to dominate the political process;" that "laws that restrict interest group activity tend to favor incumbents;" and that "restricting corporate speech may impose social costs by reducing the quantity and balance of information made available to voters."

Shareholder protection: The article argues that "because managers' speech rarely will be very costly, the costs to shareholders of prohibiting corporate speech probably outweigh the benefits to the shareholders of forbidding corporate political speech." In particular:

A significant difference exists between the plight of a shareholder and that of a union member who disagrees with use of his compulsory union dues. Moreover, even if the costs of voice and exit were comparable in the two situations, the shareholders' choice of investment contracts among many virtually fungible opportunities is far broader than the unionist's choice of labor contracts. Even the rare shareholder who cares about corporate speech could choose to invest only in firms that did *140 not engage in political activities or in mutual funds that monitor the political correctness of the corporations in which they invest. The availability of choice of contracts further weakens the case for a mandatory prohibition. * * *

The combined effect of encouraging corporate PACs while prohibiting direct activity by corporations may be to cause corporate speech to reflect managers' interests even more than it would if it were channelled through the corporation. Managers may choose to use their PACs to advocate laws, such as antitakeover statutes, that shift corporate power and resources from shareholders to managers. If the managers sought to use corporate treasury funds that way, they would be at least potentially subject to shareholder discipline. It is true that managers could channel all political activity through PACs even without restrictions on corporate speech. But if corporations could use treasury funds for political purposes, shareholders might be able to force managers to act politically through the corporation rather than by funding PACs. Thus, by permitting corporations to organize PACs but prohibiting them to act directly, current law reduces shareholder power over corporate political activity

More generally, the shareholder protection rationale for corporate speech restrictions

ignores the powerful market forces that discipline the terms of state corporation laws. Moreover, even if one of these conditions held, the mandatory nature of the laws would be unjustified if the laws imposed costs in excess of benefits in many of the situations in which they applied. Even if mandatory statutes might be justified on these grounds, the justifications would be suspect. The fact that the government has acted through election statutes rather than through corporation statutes indicates that the statutes are intended as direct speech restrictions rather than as shareholder protection that only indirectly impacts speech. As is generally the case with such direct viewpoint restrictions, the nature of the restriction raises serious doubts about the sincerity of a nonspeech-related justification.

Anti-distortion rationale. In a previous blog post I quoted at length from my article on this point. Here I will only briefly summarize:

• The argument also applies to non-profits and "ideological" firms that are able to use surplus from their moneymaking activities to support political action.
• For-profit firms are limited in their ability to invest in politics for the simple reason that they can't stay in business over the long run if they lose money.
• Although managers might have an incentive to spend shareholders' money improvidently, "there is no reason to believe that even imperfectly disciplined for-profit managers will systematically gain more from political investments than from nonpolitical investments given their ability to divert financial gain from nonpolitical investments to themselves through excessive compensation and the like. Indeed, managers in for-profit firms are less likely to prefer political investments for selfish reasons than those in ideological firms given the for-profit managers' significant opportunities for financial gain."
• Ideological groups have important advantages over for-profit firms, including their ability to organize at low costs, ability to coordinate with each other, and the value of members' contribution of time. Thus, "restricting corporate speech may upset or prevent a desirable equilibrium among competing interest groups that otherwise would exist." This supports one of the main points of the majority opinion discussed above.
• "Even if corporations' political strength is somewhat disproportionate to their popular support, this is a long way from showing that full participation of corporations would dominate other views. Rather, the argument reduces to one that corporate power should be distributed to other groups. Obviously the winners will prefer this outcome, but that alone does not make the laws restricting corporate speech constitutional."

In general, the important difference between the majority and the dissent is that the majority is concerned about the imbalancing effects of censorship while the minority is concerned about the imbalancing effect of corporate power. The only way to resolve this debate is through a twenty-first century understanding of how modern business associations function to restrain managerial agency costs. Neither the majority nor the dissenting opinion displays such an understanding.

Corporations (and I would say also society) won this round. But there are other rounds to come over such issues as:

• How does all this apply to unions?
• What about unincorporated firms?
• What about corporate commercial speech (see Butler & Ribstein, Corporate Governance Speech and the First Amendment, 43 U. Kans. L. Rev. 163 (1994))?
• How will the Court's attitude to corporations play out in other cases this term relating to corporate governance? Upcoming: Jones v. Harris and SOX.

The fuller analysis of the issues presented above should be helpful in answering these questions.