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April 2013 Archives


Bloomberg is reporting that SEC Commission Chair Mary Jo White is pushing to have the SEC's proposed rule, lifting the ban on general solicitation in Regulation D offerings, adopted in its present state.

The ban on general solicitation is the rule, dating from the Securities Act of 1933, that prevents public advertising relating to most private securities offerings. Lifting the ban was an important element of the JOBS Act and the JOBS Act required the SEC to implement regulations lifting the ban. The SEC's staff drafted a proposed rule in late 2012 but some Democratic members of the Commission (such as Luis Aguilar) opposed its adoption, claiming that it did not do enough to protect investors.

While lifting the ban would not immediately allow interstate crowdfunded offerings to commence, lifting the ban is a prerequisite. This is so because most crowdfunding portals would rely on their general availability to the public to draw sufficient traffic to make their crowdfunded offerings possible. (See prior post on crowdfunding).


Years after the late Andrew Breitbart called attention to the multi-billion dollar giveaway of taxpayer money to Friends of Obama under the guise of settling discrimination litigation, the New York Times notices that a political decision to settle meritless litigation that the government was winning in court as if the government had defaulted on all claims has led to an abuse of the Settlement Fund, and a lot of fraudulent claims, with no intent by the government to investigate the theft from taxpayers. (Where are the False Claim Act qui tam suits?) As the late Richard Nagareda and I noted years ago, when you have a mass-tort settlement with no checks for fraud, you will get the Field-of-Dreams problem: "If you build it, they will come," and the claims process will be overrun by fraud. But, as Paul Horwitz notes, the legal academy utterly ignored this aspect of the Pigford litigation.

One settlement of $700 million only presented $300 million of claims (itself a likely exaggerated figure), leaving a $400 million slush fund for the attorneys (Cohen Millstein) for "cy pres," again with apparently no oversight. Will anyone be checking to determine if the money is actually going to its intended purposes instead of to something affiliated with the attorneys?

More: Walter Olson; Daniel Foster; earlier on POL.

The story focuses on Department of Agriculture settlements, and thus omits the equally problematic Cobell v. Salazar settlement. There, the government had essentially won the litigation, getting the D.C. Circuit to throw out a judgment of $455 million. Yet, once Obama took office, the case settled for $3.4 billion—including $1800 a pop for hundreds of thousands of class members with absolutely no damages because they correctly had only pennies in their trust accounts. As you recall, I filed an objection on behalf of a class member who complained that class members with actual damages were being shortchanged by the settlement because of the arbitrary payments to the uninjured class members. Yet, though the D.C. Circuit had earlier held that such a distribution "would be inaccurate and unfair to an unknown number of individual trust beneficiaries," it affirmed approval of a settlement with the exact same "inaccurate and unfair" distribution. That taxpayers ended up on the hook for $3 billion more than the D.C. Circuit had already held was unreasonable has gone entirely unreported upon.

Even more remarkable is the fact that the plaintiffs used the D.C. Circuit briefing to admit that they had lied before Congress about their case. James Otis Kennerly, served as the poster child for the class because he had allegedly been cheated out of millions of dollars by poor trust accounting relating to an oil well on his land; lead plaintiff Elouise Cobell testified before Congress about that story as late as 2007. In arguing for rejection of the settlement, we noted that Kennerly was going to get the same $1800 as class members entitled to nothing. In response, plaintiffs argued that Kennerly's case couldn't be used to prove the settlement unfair because Kennerly wasn't actually entitled to anything either, because evidence the government presented years before Cobell's testimony to Congress showed that Kennerly never had a legitimate claim to the oil well. (Mother Jones hasn't run a correction to its story, and a documentary about Cobell is apparently planning to retell the bogus version of the Kennerly account; if you google Kennerly, you will find no indication from anyone other than me that plaintiffs have made this admission.) Again, no consequences: Cobell was awarded $2 million, and her heirs are asking for another $11 million as an "incentive" for her success in this case.

A hidden argument for deregulation
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A New Yorker story suggests that the federal government loses about $400 billion of taxation revenue a year to underreporting. As the story acknowledges, underreporting is encouraged not just by tax savings but by regulatory evasion. As regulatory burdens increase, and more and more employers and employees go off the books, it's "hard for businesses to play by the rules if their competitors aren't paying payroll taxes or workers' comp." One obvious solution: less regulation, and use the government resources that are no longer enforcing expensive regulation to instead enforce tax compliance. But as we add more regulation, a hidden cost of that regulation is not only the jobs destroyed, but the jobs that shift to the grey market to evade the costs of regulation, increasing the tax burden on the honest.

Helium Reserve follies
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"In 1925, the federal government decided to create a giant helium reserve, in case we needed it to fuel dirigible warfare." And it's still going 88 years later, and Congress voted to reauthorize it—because the existing program sold helium so cheaply that it still provides 42% of the national market, and that supply can't disappear without problems. [Washington Post]

This, of course, is nonsense: just auction off the federal helium supply to private industry. Or, instead of selling helium at below-market prices, sell it at above-market prices, encouraging private supply to come on line. (Heaven forfend a government interference in the market at least be run closer to profit maximization.) Astonishing that not a single Congressman or bureaucrat has proposed the obvious solution.


In a front-page story in yesterday's New York Times, Nicholas Confessore reports on the pending rulemaking petition at the Securities and Exchange Commission on corporate political spending, which was submitted in August 2011 by a group of professors led by Harvard's Lucian Bebchuk and Columbia's Robert Jackson. There's nothing really new in the report that hasn't been known to those following these issues for months; it could be the case that the SEC acts on this rather soon, now that former U.S. Attorney for the Southern District Mary Jo White has been confirmed as the Commission's Chairman.

A couple of points in Confessore's piece call for clarification/correction:

  1. Professor Jackson states, "Shareholders have been demanding this information for some time." Well, some shareholders have, to be sure, but Jackson's statement, without qualification, has a Bizarro-world-type character. Dating back to 2006, not a single shareholder proposal related to political spending has received majority shareholder support among the 250 largest companies in the Manhattan Institute's Proxy Monitor database, excepting a 2006 proposal at Amgen that management backed. As I noted in my winter report, in 2012, such proposals won "on average the support of 18.3 percent of shareholders, down from 24.3 percent in 2011." And "the seven largest such investors--Vanguard, BlackRock, State Street, Fidelity, Capital World Investors, Capital Research Global Investors, and T. Rowe Price--supported only 3.6 percent of all proposals calling for increased disclosure of corporate political spending."
  2. The article states that "advocates" for the proposal analogize corporate political spending to executive compensation. While that's true, their analogy is strained. Executive compensation and related-party transactions are both directly pertinent to the classic agency-cost case for management monitoring, whereas Bebchuk and Jackson's political-spending-as-management-misappropriation hypothesis simply lacks the theoretical rigor and empirical foundation underlying management-pay and self-dealing disclosures.


In sum, the SEC rulemaking petition simply amounts to a certain group of political activists attempting to get an election-regulation regime they can't achieve through normal legislative, legal, or regulatory channels by going to an already-overtaxed agency statutorily charged with "promot[ing] efficiency, competition, and capital formation." Were the SEC to act in this area, they'd be not only outside their statutory mandate but acting against the revealed preferences of most shareholders themselves.


The McDonald's coffee case is an outlier of the tort system. In the twentieth century, the vast majority of court cases to consider restaurant liability for selling hot coffee that injured consumers threw the cases out of court. In 1994, however, a sympathetic elderly plaintiff, Stella Liebeck, spilled coffee on herself, sat in the hot puddle for ninety seconds instead of wiping herself off, and severely burned her crotch. She sued on a few theories: (1) any coffee sold above 140 degrees is capable of causing third-degree burns and is therefore unreasonably dangerous; (2) McDonald's failed to adequately warn of the danger because the warning on Liebeck's cup of coffee wasn't large enough; (3) because McDonald's knew of a few hundred previous injuries (out of billions of cups of coffee sold), they were malicious in continuing to sell coffee at a temperature consumers wanted, and merited punitive damages. The judge failed to apply the law correctly. The jury—as juries are wont to do when they see photos of third-degree burn injuries for the first time in their life, and incorrectly told by a judge that they are legally entitled to give money to the person who suffered those horrific injuries—awarded millions of dollars of punitive damages.* As Walter Olson recently noted, the case makes the American legal system a laughingstock worldwide.

When confronted with such ridiculous lawsuits as Roy Pearson's $54 million pants suit, the litigation lobby sensibly distances itself from the plaintiff—though Pearson wasn't doing anything that more competent trial lawyers did to make hundreds of millions of dollars in Arkansas over the last eight years. But somehow, instead of saying that Americans shouldn't judge the tort system on one unusual result, the litigation lobby has campaigned to argue that this absurdity is an aspirational result that all the other courts should have similarly reached. A intellectually dishonest movie was even made on the subject. And appallingly, if one is to judge by Reddit threads and most tort-law classes, the litigation lobby has succeeded in spreading enough urban legends about the case to make some people think that the result isn't absurd.

In the case of Bogle v. McDonald's, the England and Wales High Court correctly rejected the entire idea of liability for hot coffee; so did Judge Easterbrook in McMahon v. Bunn-O-Matic. I've never seen a defender of the Liebeck verdict even attempt to explain why these decisions are wrong (as they must be if Liebeck is correct); you'll never see Susan Saladoff or ATLA even admit that these cases exist.

In a recent post, I pointed out the absurdity of the theory of McDonald's liability. Another every-day object, men's pants with zippers, is responsible for thousands of emergency-room visits for zipper-related penis injuries: 17,616 men went to the emergency room between 2002 and 2010 for zipper-related penis injuries, likely over 2000 a year if we account for undercounting. Manufacturers know this or, at least, should know this because of the press coverage of the fact. By Saladoff's defense of the McDonald's coffee case, every one of these thousands of men is entitled to a jury trial over whether pants manufacturers should be subjected to punitive damages for causing injury. The proposition is obviously absurd, but so is the McDonald's coffee case.

A month later, a trial lawyer finds the post and tweets "So, Ted Frank (TORT REFORMER!) is mad he can't sue for penis zipper injuries??" Well, that's clearly not my argument. Anyone who is claiming that I was arguing that I should be able to sue pants manufacturers for penis zipper injuries is either illiterate or mendacious and can be safely ignored. (Though, as JAB joked, "If even JDs are illiterate, what good are warning labels supposed to do?")

Indeed, the fact that the illiterate-or-dishonest trial lawyer thought that the idea of zipper-lawsuits was absurd proves my point: of course you can't sue for zipper injuries, but there is no difference between the theory of coffee liability and the theory of zipper liability.

For some reason, David Sugarman decided to take up a defense of both the illiterate tweet and the McDonald's coffee case. We'll start by noting that even this trial lawyer thinks that zipper lawsuits are absurd.

But Sugarman fails to honestly address my argument. He attempts to distinguish the zipper case from the coffee case without thinking very hard about what he's writing:

And now Mr. Frank wants to talk about zipper injuries to the schlong. So let's talk. Here is how it works. If the manufacturer sells a dangerous product and the danger could be eliminated by design, then the manufacturer is responsible. After all, it is up to manufacturers who profit from selling products to take steps to avoid needlessly injuring consumers. I assume even the Manhattan Institute agrees with that basic principle, but maybe I am wrong.

But this ipse dixit assertion of why zipper lawsuits are impermissible fails to make the case. Of course the danger of zipper injuries "could be eliminated by design": just make pants with a button fly or a drawstring, or an extra layer of fabric between the fly and the crotch. Indeed, the case for pants product liability is much stronger than the case for coffee liability, and not just because there are many more zipper injuries than coffee injuries, though the population of American coffee drinkers (54% drink coffee every day) is greater than the population of Americans who are males who wear pants with zippers (less than 50%). Stella Liebeck's coffee cup had a warning; I've never seen a pair of pants with a warning. And as Judge Easterbrook points out in McMahon, hot coffee has to be hot by definition; if it's not hot enough to cause third-degree burns, it's not hot enough to optimize flavor.** But pants do not require zippers to close. Liebeck argued that the coffee was "unreasonably dangerous" because it was capable of causing injury; but the same argument can be made for pants.

One can argue that both pants manufacturers and coffee vendors should be liable for injuries caused when people injure themselves; that's bad public policy that most people will instinctively reject, but it's at least intellectually honest. One can argue, as I do, that neither should be liable. One could even conceivably argue that pants manufacturers should be liable for failure to warn but coffee vendors with warnings on their cups shouldn't. But it's disingenuous to argue that Liebeck is correct but that sufferers of zipper-related penis injuries are not entitled to jury trials. (Sugarman's "Seventh Amendment" argument is bogus; nothing in the Seventh Amendment prevents judges from throwing out claims that have no legal basis, and he doesn't seem to think that the Seventh Amendment precludes a judge from throwing out a lawsuit over zippers.)

Finally, note that Sugarman was told of McMahon v. Bunn-O-Matic but made no attempt to explain why it's wrong or even inform his readers that it exists. This is a very telling omission.

Ten years after I started discussing it, I'm still waiting for a trial lawyer to give an honest defense of the Liebeck case. It hasn't happened yet.

(Update: in the comments, Sugarman now concedes that his theory of product liability requires the conclusion that zipper injuries merit jury trials. He still hasn't corrected his post asserting that I was ignorant of product liability for making the comparison between the coffee case and the zipper hypothetical. I look forward to Sugarman seeking justice for the 2000+ men injured by zippers every year. He still sidesteps addressing McMahon's and Bogle's ridicule of the Liebeck theory.)

*Even the judge who incorrectly failed to throw the case out thought that the jury had been carried away by emotion, and reduced the total jury award to $640,000. It is a remarkable fiction of the jury system that a jury so carried away by emotion to merit remittitur is entitled to a presumption of adjudicative reasonableness when the same jury determined liability, but we'll leave that issue for another day.

**Thus, every vendor of hot coffee serves coffee in the 170 to 190-degree range, tens of degrees hotter than what Liebeck claimed was "unreasonably dangerous." And, indeed, every major vendor of hot coffee—McDonald's, Burger King, Starbucks, Dunkin Donuts, etc.—has been sued for third-degree burns caused by their coffee in the last twenty years. If you have a high-quality coffeemaker, you have coffee that hot, too; if you boil water for tea, that 212-degree water you pour is even hotter than McDonald's hot coffee.

The Undirected CFPB
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Yesterday, Richard Cordray appeared before the Senate Banking Committee to present the Bureau of Consumer Financial Protection's semiannual report. His plans to appear before the House Financial Services Committee today ran into a roadblock--House Financial Services Committee Chairman Jeb Hensarling told him not to come. The letter of dis-invitation is premised on the fact that Mr. Cordray's status at the CFPB is under a legal cloud. That cloud is so big that not being permitted to testify is the least of Cordray's problems.

Two CCAF victories
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As in our successful Baby Products objection, the Center for Class Action Fairness recently represented me objecting to two similar settlements where the attorneys' fees were based on the size of the settlement fund rather than the tiny percentage of the settlement fund that would go to the attorneys' putative clients: Bayer and EA Sports Madden. Confronted with our objection in Bayer, the parties suddenly discovered that they could obtain a list of class members and send them checks directly, increasing payout more than 25-fold by millions of dollars. And the court in EA Sports strongly encouraged the parties to increase payouts and issue new notice to ensure money get distributed to the class: a tripling of payouts plus a more-than-doubling in claims rates has again resulted in millions of dollars for class members.

(The Center is not affiliated with the Manhattan Institute.)

"Family-friendly law firms"
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An Above the Law tweet suggests "If you want a hope of any work/life balance, this list matters." The list is that produced by the Yale Law Women of the supposedly top "family-friendly law firms." But it's hard to see why this list matters. One presumably goes to a law firm for more than a year, but the turnover on the Yale law list is 50% from year to year, and even more over two years. Picking a firm now because it's supposedly so family-friendly appears to be a random crapshoot whether one will end up at a firm that is "family-friendly" when one graduates law school. And that's before the paradox that the Yale Law Women list only somewhat overlaps with the one created by "Working Mother and Flex-Time Lawyers." Anyone choosing a large law firm because they're looking for a family-friendly environment is setting themselves up for disappointment. It's the rare law firm that doesn't rejigger its requirements and expectations for associates at least once in a five-year period; getting named to the Yale Law Women list is no prediction of whether an associate will be disgruntled enough to sue over lack of family-friendliness. BigLaw pays the salary that it does because it can bill the rates that it does, and it can bill the rates that it does because its clients expect the firm to jump at a moment's notice and work around the clock when needed. The associates who do that are always going to have an advantage over the 9-to-5-ers, in experience if nothing else; the associates with that experience and skillset are going to be much more able to negotiate for a good job outside of BigLaw that accommodates their desire for work-life balance years down the road.


In the wake of learning that the two Boston bombers were Chechen immigrants, supporters of amnesty rushed to argue that that fact should not affect debate over potential legislation. After all, Dzhokar was a naturalized citizen, and his older brother Tamerlan had a green card. But while the Tsarnaev family was here legally, what I have not seen any mainstream media source mention is that they likely immigrated fraudulently. And that very much raises questions about current American immigration policy.

The Tsarnaev family were admitted to live and work here because they claimed political asylum: political asylum is only available to "refugees"—someone unable or unwilling to return to their home country because of a well-founded fear of persecution on account of forbidden grounds. To get asylum, the Tsarnaevs must have made this claim under oath. But the claim was clearly a lie: the patriarch, Anzor, got bored with America and left his bomber sons behind to seek medical treatment in his home country. His estranged wife decided that she would rather be in Dagestan than face the minor consequences of a shoplifting arrest here. And Tamerlan went back and forth, spending months in Dagestan. Nothing about the situation for Chechens or part-Chechens changed in Dagestan over the last ten years. If the Tsarnaevs had told the truth in their asylum hearing, they would have been deported.

As I've previously noted, the U.S. government used to be much more skeptical about asylum claims: acceptance rates have nearly quintupled between 1986 and 2010. If 1986 standards had been applied to the Tsarnaevs, it is more likely than not they never would have been permitted to remain in the country—though, under the Obama administration, a majority of deportation orders are simply ignored. It seems to me that both issues raise valid questions to be asking about current immigration policy, especially after four dead at the hand of two brothers from a family with multiple members arrested since arriving here.

More: Steyn.

Derivatives Diplomacy
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Yesterday, officials from nine countries sent a letter to Treasury Secretary Lew out of frustration "at the lack of progress in developing workable cross-border rules as part of reforms of the OTC derivatives market." They noted that they were "already starting to see evidence of fragmentation in this vitally important financial market, as a result of lack of regulatory coordination." This letter is just the most recent attempt by foreign government officials to rein in their American counterparts, whose regulatory appetites appear to be insatiable.

The letter sets forth a number of principles that should govern the regulation of the over-the-counter derivatives market. At the core, these principles envision a regulatory scheme in which regulators share responsibility for the derivatives market, but don't impose duplicative regulations. No one regulator is entitled to set the rules for the whole world. Instead, regulators in one country defer to regulators in another country as long as "the outcome delivered by the rules is equivalent in terms of the protections provided." In making an equivalence determination, it is unrealistic to demand "a precise rule-by-rule match up."

The Securities and Exchange Commission and the Commodity Futures Trading Commission talk a lot about "substituted compliance" and "equivalence," but when top officials elaborate, their understanding of these terms appears more limited than their foreign counterparts' understanding. Former SEC Chairman Elisse Walter, for example, called for an ambiguous "middle ground" approach in which the SEC "would reserve the right to insist upon compliance with our own regulations when necessary." The CFTC's Chairman Gensler has been more aggressive than the SEC in interpreting its Dodd-Frank authority, less willing to surrender control over entities with even the slightest U.S. connection, and unwilling to provide clear rules to govern the agency's extraterritorial reach.

As more reasonable voices at both the SEC and CFTC have argued, the U.S. should not try to be the world's OTC derivatives policeman. It should share the job with foreign regulators, who are willing and eager to do their part.


Laura Finn, web editor for BoardMember.com, and James Copland discuss the results of ProxyMonitor.org's first finding in the 2013 proxy season.

The most numerous class of proposals to have been introduced again this year are those involving corporate lobbying and political spending. - Copland

Six weeks ago the Virginia Supreme Court issued a very interesting, and in my opinion controversial, decision regarding lawyer advertising. It seems that one Horace Frazier Hunter, who practices criminal defense law in Richmond, authors a trademarked blog called This Week in Richmond Criminal Defense. The blog consists almost entirely of summaries of criminal cases won by Mr. Hunter -- though it also is sprinkled with occasional legal commentary. The summaries contained the real names of Hunter's clients and the crimes they were alleged to have committed.

As a result of Hunter's blog posts, the Virginia State Bar launched an investigation. One of Hunter's former clients complained to the Virginia State Bar that Hunter's publication of his criminal trial was embarrassing or detrimental to him, even though the trial was public, because few knew about the trial while the entire world could read Hunter's blog. [The Virginia Rules of Professional Responsibility, like rules in most states, prohibit the release of "information gained in the professional relationship ... the disclosure of which would be embarrassing or would likely be detrimental to the client unless the client consents after consultation...."]

The State Bar investigated and agreed with the complainant. In addition, the Bar found that the blog was essentially commercial advertising, and was in violation of state rules requiring appropriate disclaimers ["Advertising;" "Your results may vary"; "Each case is unique and these outcomes are not representative;" etc.]. Hunter was admonished by the state bar for violating ethics rules, and appealed its decision. Eventually the case reached Virginia's high court.

The court made two interesting rulings.

1. A 5-2 majority held that Hunter's blog was indeed commercial speech that could constitutionally be regulated by the State Bar to the extent of requiring appropriate disclaimers. [The two dissenters held that the First Amendment prohibits the requirement of disclaimers.] The majority notably rejected Hunter's claim that all legal speech is political speech, while the dissent essentially agreed that information about the criminal justice system inevitably had political implications.

2. A unanimous court held that applying Virginia's confidentiality rules violated Hunter's First Amendment rights, since the trials were over and all information released in the blog was public. The unanimous court rejected the State Bar's assertion that, though journalists could have written about the case, lawyers are restricted from massively publicizing embarrassing information about their clients if that information is technically public but little known.

Hunter has vowed to appeal the disclaimer holding to the United States Supreme Court. I hope the Bar will cross-appeal the confidentiality holding. I had always thought that being someone's lawyer imposed duties toward that client that were greater than those incumbent on a beat reporter.....

New blog: Executive Branch Review
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One of the primary arguments for limitless medical malpractice liability is the claim that it is punishes bad doctors: when bad doctors keep getting sued for injuring patients, their insurers will drop them or raise their rates so high that they won't be able to practice any more. Between that and deterrence, the quality of medicine will improve. Reformers disagree: I take the position, for example, that medical malpractice litigation does such a poor job of distinguishing good doctors from bad doctors that the quality effects are negligible and that, at the margin of the status quo, the deterrence of malpractice is outweighed by the deterrence of practice. Lawyers are interested in extracting wealth from the deep pocket, and the current system allows them to do that for generic bad results with little correlation to the quality of the defendant's work. For example, nursing homes that improve from the lowest decile of performance to the highest decile of performance reduce their chances of being sued from 47% to 40%. The incentive of lawyers to go after bad doctors isn't much more than the incentive of lawyers to go after good doctors.

Into this debate, consider the Kermit Gosnell case, which I think has resonance beyond just the politics of abortion and media bias. Leave aside the undeniable horrors of "snipping" dozens or hundreds of babies born alive and then murdered on an operating table; the weirdness of the feet being preserved. Gosnell was butchering patients: treating them with unsterilized instruments (and spreading STDs in the process), anesthesia performed by untrained teenagers, causing infections and death. From the grand jury report:

One woman "was left lying in place for hours after Gosnell tore her cervix and colon while trying, unsuccessfully, to extract the fetus," the report states. Another patient, 19, "was held for several hours after Gosnell punctured her uterus. As a result of the delay, she fell into shock from blood loss, and had to undergo a hysterectomy." A third patient "went into convulsions during an abortion, fell off the procedure table, and hit her head on the floor. Gosnell wouldn't call an ambulance, and wouldn't let the woman's companion leave the building so that he could call an ambulance."

And it's not like Gosnell was practicing in a jurisdiction where he was shielded from liability. His cat-urine-soiled offices were in the judicial hellhole of Philadelphia, where the courts are as trial-lawyer-friendly as any in the nation when it comes to transferring wealth from doctors and patients to lawyers.

Yet what did the trumpeted malpractice lawyers and liability of Philadelphia do to stop Gosnell? Nothing. Elementary discovery in a case involving a single one of his injured patients would have uncovered abuses meriting bankrupting punitive damages in even a jurisdiction using a model ATRA medical malpractice liability statute, much less Pennsylvania. But despite this deep-pocket incentive, Gosnell wasn't caught until federal agents accidentally came across his nightmarish clinic in the course of a drug investigation.

I suggest that the case of Kermit Gosnell should cause people to reevaluate their assessment of the role malpractice liability plays in sussing out bad doctors and improving the quality of medicine. If Philadelphia's judicial hellhole couldn't stop Gosnell's medical hellhole, why shouldn't Pennsylvania adopt Texas-level reforms, reduce medical malpractice expense, and costlessly eliminate the transfer of wealth from middle-class patients to lawyers in the 1%?

That said, the Gosnell case has a message for civil justice reformers, too: the public policy of reducing the role of civil liability in disciplining doctors only makes sense if the public regulators are doing their job and shutting down the bad doctors. The Pennsylvania Department of Health didn't do its job here, despite multiple opportunities to do so. It seems Pennsylvania citizens get the worst of both worlds: a liability system that benefits lawyers at the expense of doctors and patients without any offsetting improvement in healthcare results, and a regulatory bureaucracy that refused to do its job despite multiple reports of abuses.


The CrowdFund Intermediary Regulatory Association has published an open letter to the House Committee on Financial Services, Subcommittee on Oversight and Investigations, in preparation for that Committee's hearing tomorrow on the SEC's delay in adopting the crowdfunding regulations required by the JOBS Act.

CFIRA takes pains to distinguish the efforts undertaken by SEC staffers to examine the issuer and diligently meet with stakeholders from the delay caused by the Commission itself. The group writes:

"[I]t is important to understand the hard work and dedication that has been shown by the staff in creating draft rules for the Commission. The staff has been proactive in meeting with all members of the industry each time we have requested their presence, and has been extremely proactive in reaching out to us to discuss many aspects of the regulations surrounding the JOBS Act. In fact, we believe that the staff has had draft rules before the Commissioners since November 2012. As you seek information from the SEC during your hearing on April 17, 2013, we encourage you to place your frustration and concern with the party most able to respond, and that party is the Commission, rather than the staff."

Meanwhile, if you're interested in hearing more about the practical implications of crowdfunding, please join me at the Ritz Group's "Shark Attack" crowdfunding symposium this Thursday, April 18, 2013 at the City Club in Buckhead (Atlanta) where I'll be joined by Maurice Lopes (Crowdfund Professional Association) and Candace Klein (SoMoLend and Bad Girl Ventures) in an interactive webcast event on the topic hosted by Dara Albright (NowStreet).


The Manhattan Institute's Proxy Monitor project, featuring the first publicly available database cataloging shareholder proposals and Dodd-Frank-mandated executive-compensation advisory votes at America's largest companies, released its first Finding of the 2013 proxy season.

In 2013 to date, as in 2012, the most regularly introduced class of shareholder proposals seeks limits on or greater disclosures of corporate political spending and lobbying. The second-most frequently introduced type of proposal, again consistent with 2012, seeks to require companies to have an "independent chairman" separate from the company's chief executive officer.


This finding summarizes early 2013 trends in shareholder-proposal submission and voting, as well as executive-compensation advisory voting, paying special attention to proposals seeking to split the chairman and CEO roles. The finding also highlights the shareholder proposals of interest on the horizon between now and mid-May, focusing on four classes of proposals of particular interest: splitting the chairman and CEO, political spending and lobbying, board declassification, and proxy access.

Continue Reading...


A South Carolina class action settlement brought in$16 million for class members and $13.5 million for the attorneys. Bad enough. But the attorneys got another benefit: direction of cy pres of $3.5 million, $2 million of which is going to the alma mater of lead class counsel as a gift in his prominent wife's name. Witness how the press coverage lionizes the husband and wife. Why the attorneys get to benefit from unclaimed class-action funds rather than class members is a huge mystery to me; why this isn't so obviously a conflict-of-interest offense meriting disbarment demonstrates how little legal ethics intervenes when it interferes with the profits of well-to-do attorneys. Needless to say, the donation doesn't comply with other basic principles of cy pres. (As it is it's unclear whether the $3.5 million comes from the $16 million or from a separate fund, and another news story suggests that $10 million of the $16 million went uncollected.)


Heather Mac Donald in the Daily News and City Journal on the legal war on the war on crime—and the New York Times' bias in covering the trial.


The Wall Street Journal ($) runs an extensive story on the Citigroup Securities litigation fee request and its $465/hour average charges for contract attorneys (multiplied to $900+/hour cost to shareholders). (One can avoid the paywall with a google search.) One highlight is this Perry-Mason-moment exchange in the fairness hearing where the district court asked Citigroup's attorneys what they charged for contract attorneys:

"I believe the cost was $25 to $35 an hour," Mr. Karp told Judge Stein at the hearing. "But Citigroup is a large vendor and has enormous market power."

Of course, class counsel in a securities litigation of this size also has enormous market power when it offer to buy over 61,000 hours of contract-attorney time—or even over 45,000 hours of contract-attorney time if one excludes the 16,000+ hours billed to contract attorneys after the case settled, a second example of bill inflation that proves the bad faith of the first example.

Professor Stephen Gillers makes the best case for any markup of contract attorneys: "A law firm might charge a client more because the firm is professionally liable for the contract lawyer's work, or because it provided the temps with office space or computers, said Stephen Gillers, a law professor and legal-ethics expert at New York University School of Law. 'All of that justifies a markup,' he said. 'The question is how much.'"

Except in this case, the Second Circuit forbids class members from suing class counsel for malpractice in a settlement eventually adjudicated fair and reasonable, so class counsel faces no real risk of malpractice; and the office space and computers were provided by the third-party vendor. In such a case, the ABA ethics opinion requires the expense to billed out without a markup.

More: Reuters; Law360 ($).

More Point of Law coverage.


After celebrating the first anniversary of the passage of the JOBS Act, the SEC still has not adopted regulations to implement the law as required. (Background post).

Congress is taking notice, as the House Small Business Subcommittee on Investigations, Oversight and Regulations last week held hearings on the SEC's delay.

In testimony before the Subcommittee, SEC staffers explained the work that had been done so far to implement the JOBS Act but were curiously silent as to the reason why the SEC had missed the deadline for the adoption of rules to implement the crowdfunding provisions of the law.

In his opening statement, Chairman David Schweikert (R - Az.) noted that these regulations were "long past due." He said that "the longer we wait for action by the regulators, the more our engines of economic growth will continue to simply tread water, or worse yet starve, for lack of opportunity."

At least one witness at the hearing put the blame for the delay squarely at the feet of the SEC. Georgetown University finance Prof. James J. Angel testified that "The commission has shown a pattern of antipathy toward the idea of crowdfunding from the beginning and is in great danger of killing the idea through regulatory delay and over- regulation."

In addition, on Wednesday, April 17th the House Committee on Financial Services will be holding a hearing provocatively entitled, "Examining the SEC's Failure to Implement Title II of the JOBS Act and its Impact on Economic Growth."

In the mean time, Forbes blogger David Drake in a recent post forecast the possibility that Italy will overtake the U.S. in equity-based crowdfunding. (Apparently regulators in Italy have made more progress than their counterparts in the U.S. when it comes to implementing crowdfunding).

It goes to show how far the concerns of U.S. lawmakers and regulators have shifted when securities laws in Italy are more friendly to business than those in the U.S.

Scruggs appeal denied
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Dickie Scruggs pled guilty to a scheme to bribe a judge, but has been trying to do undo his plea. The Fifth Circuit would have none of Scruggs's attempts to shoehorn an indictment for bribery under Skilling. More at Alan Lange's blog.

Roach v. T.L. Cannon Corp.
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Just as courts sometimes improperly certify class actions, sometimes they improperly fail to certify them. In the N.D.N.Y. case of Roach v. T.L. Cannon Corp., plaintiffs who worked at Applebee's restaurants alleged a uniform policy of docking employees for rest breaks they had not taken. The district court denied certification, arguing that, after Comcast v. Behrend, one could not certify a class for damages where individual plaintiffs have individualized damages. In the absence of classwide proof of damages, the district court ruled, Comcast prevents certification. Public Citizen is appealing to the Second Circuit.

I haven't seen the briefing below, so I don't take a position on whether class certification is appropriate; there might be legitimate grounds to deny certification not discussed in the court opinion. But it's clear to me that the district court's reasoning is incorrect.

Imagine a class action by waitresses against Chotchkie's Restaurants, alleging sex discrimination because the restaurant has a policy that it will deduct $10/week from women's paychecks, but not from men's paychecks. It's quite clear that this is an appropriate class certification. Even though the damages will vary from plaintiff to plaintiff—Jennifer might have been subject to the illegality for 50 weeks, while Joanne may have quit shortly after the policy was implemented and have only $20 of damages—the common elements of the case predominate over the individualized elements. (I made a similar point in discussing Wal-Mart v. Dukes: the question isn't whether a class is large, the question is whether there are common issues, and the Dukes certification precluded a consideration of individualized defenses to the sex discrimination allegations.)

The problem identified by the Supreme Court in Comcast, as I discussed, was that the plaintiffs attempted to justify class certification with a economically irrational theory that the antitrust violations affected class members equally when, in fact, there would be different market effects in different sub-markets (depending on the effect of the Comcast accretion of market share on deterring overbuilder competition) such that the theory of liability was not subject to classwide proof; subclassing would have or a different theory of certification might have fixed that.

In Roach, though, the allegation is that there is a single policy to fail to comply with New York state law. Perhaps that allegation is true (in which case class certification is appropriate); perhaps it isn't, and the problem varies from store to store or manager to manager or even from day to day, and Applebee's isn't liable on a classwide basis. That is the question the district court should have been investigating, and should be the basis on whether class certification is granted.

Government Data Gaffes
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On Tuesday--a day early, the Fed released the minutes of its March Open Market Committee meeting to recipients on the Hill and at financial institutions and trade associations. The Fed explained that the early release was accidental and released the minutes to everybody else on Wednesday morning--earlier than it otherwise would have. There is no reason to conclude that the Tuesday release was anything other than an innocent mistake. This incident nevertheless serves as a good reminder of the dangers of assuming that sensitive nonpublic information is safe in government hands.

Another reminder came last month, when the Securities and Exchange Commission's inspector general released a report about the SEC's information controls. The report found, among other things, that there is nothing preventing SEC employees, contractors, and interns "from saving and uploading sensitive or nonpublic information on non-SEC computers." The inspector general also found that the SEC did not have proper protocols for tracking information exchanged with the Financial Stability Oversight Council, the Office of Financial Research, and other agencies. When the SEC adopted Form PF (which the SEC uses to collect data for the FSOC) in 2011, it said that "our staff is working to design controls and systems for the use and handling of Form PF data in a manner that reflects the sensitivity of this data and is consistent with the confidentiality protections established in the Dodd-Frank Act." The inspector general's report suggests that there is still work to be done.

In addition to taking tougher measures to protect nonpublic, sensitive data, regulators should think carefully about how much information they need. When they decide to collect information, they should take into account the possibility of unintentional or intentional data leaks and the potential consequences of such leaks. Sometimes, the government's need for the information will be outweighed by the harm that would occur if the information were improperly disclosed. Regulators should not simply assume that mistakes will never happen.


In the early hours of December 4, 1997, 15-year-old Joshua Daniel had the clever idea of throwing baseball-sized chunks of concrete at vehicles on Interstate 5 from the top of a canal levee. He hit three cars before he tossed a 2.5-pound chunk at a big rig driven by William Collins, going through the windshield, hitting Collins in the forehead, and leaving him in a coma. Daniel pled guilty and was sentenced to 12 years.

Collins sued a deep pocket. Guess who?

Yes, the manufacturer of the truck. A jury found for Navistar, but by a 2-1 vote, the California Court of Appeal reversed because the jury instructions permitted the jury to find Daniel an intervening cause.

Leave aside that the criminal is the culpable party here. Leave aside that the rate of serious injury or death from falling or thrown objects crashing through windshields is less than 1 per 20 billion miles, such that this never should have gone to trial in the first place. Is it even physically possible to construct a transparent windshield that will invariably survive a collision with a 2.5-pound block of concrete at highway speeds?


Richard Epstein discusses the Supreme Court's decision in Comcast v. Behrend on Point of Law Columns.

And Point of Law's own, Ted Frank, discusses the significance of the ruling and its potential impact on class action litigation in a new podcast.


In many instances, in tort law, if the defendant causes no physical harm to the plaintiff's person or property, there is no tort liability. Thus, if Danny Defendant negligently hits a bridge, damaging it, he is liable to the bridge's owner (typically a government) for repairs -- but he is not liable to Peter Plaintiff's restaurant (located 1/2 mile away "on the wrong side of the bridge"), which lost trade during bridge repairs. Similarly, in products liability, if a defectively designed car crashes, its manufacturer is liable for all injuries; but if it doesn't crash but is worth less as a trade-in, traditional doctrine holds that there is no liability for diminished resale value (a pure economic harm).

In the bridge case, as my former colleague Bill Bishop has pointed out [JSTOR access or fee], restaurant trade has likely shifted to other locales, and there is no social loss caused by the alleged tortfeasor other than the cost of repairs to the bridge. In the defective car case, this is deemed to be an issue better dealt with via contract -- and there is typically [there are notable exceptions!] no contractual guarantee of any given resale value.

A recent Florida Supreme Court decision has narrowed the boundaries of the economic loss doctrine in an interesting case, Tiara Condominium Association v. Marsh & McClennan Companies, Inc. et al.. The facts are a bit complicated, but (I think) worth understanding. In brief:

Tiara retained Marsh as its insurance broker, and Marsh secured windstorm coverage through Citizens Insurance, which issued a policy with loss limit of about $50 million. In 2004, Tiara's condos were hit by both hurricanes Frances and Jeanne. Tiara was allegedly "assured by Marsh that the loss limits coverage was per occurrence ... rather than coverage in the aggregate." Tiara thus felt that it could spend up to $100 million in repairs, and proceeded to do so. When Tiara sought payment from Citizens Property, however, Citizens claimed that the policy's loss limit was $50 million total, not per occurrence. Ultimately, Tiara and Citizens settled for approximately $89 million -- Tiara was left in the red for about $11 million. Tiara claimed it would not have made such expensive repairs had it not been told that they were covered by insurance.

Tiara sued Marsh in federal court for this amount, invoking a litany of named torts. The District court granted summary judgment to Marsh on all claims. Tiara appealed to the Eleventh Circuit, which reversed as concerned Tiara's negligence and breach of fiduciary duty claims. On those two counts, the Court certified to the Florida Supreme Court the question whether Florida's economic loss doctrine barred recovery.

The majority decision in the Florida Supreme Court noted that its economic loss doctrine was initially a products liability rule designed to limit an undue incursion by tort on what were traditionally contract law damages. [p.4] Thus, if a product is so poorly designed that its life span is less than expected, there is no tort recovery -- only warranty law in contract will apply. But the court ruled that prior caselaw expansion of the economic loss rule to cases of malpractice by insurance agents had been an overextension of the rule. [pp. 16, 18] Two Justices, including the Chief Justice, dissented, bemoaning that tort had again cannibalized contract law, and that Florida precedent had been too cavalierly overturned by the majority (to the detriment of legal certainty). [pp. 26, 28].

I won't comment much on the Common Law precedent issue here (I'll just say that I am sympathetic to the dissenters' general viewpoint -- among other things, liability insurance premiums obviously rely on stability in legal expectations). On the substantive issue, I think it clear that when the parties are in contractual privity liability should be determined by contract law, at least when there is no bodily injury or property damage.

Note that Tiara apparently spent ONE HUNDRED MILLION DOLLARS without getting legal advice about the extent of its insurance coverage. [Lawyers' advice, by the way, would have been excepted from the economic loss rule in Florida due to a "professional services" exception -- insurance salesmen had previously been held to not be covered by this exception, but that caselaw was overturned in the Tiara case.] Instead, Tiara relied on the word of an independent insurance broker (who was not the insurer's agent). Was that prudent? What did Tiara's contract with Marsh provide as regards any damage limitation (the decision is not clear on this, and rightly so, since the Supreme Court was merely answering a referral from the federal circuit court, not deciding a case)? And in closing I cannot resist asking: was Marsh engaged in the illegal practice of law when it allegedly gave its advice to Tiara? :)


The Securities and Exchange Commission issued long-awaited guidance yesterday about companies' use of social media in a manner that comports with Reg FD, the SEC's regulation governing companies' disclosures of material nonpublic information. The guidance came in the form of a Section 21(a) Report announcing the SEC's decision not to bring an enforcement action against Netflix CEO Reed Hastings. The SEC had contemplated taking action against Mr. Hastings for a posting he made on Facebook announcing to his more than 200,000 friends that Netflix users had watched a record one billion hours of content in a month. To the SEC's dismay, he did so without "input from Netflix's chief financial officer, the legal department, or investor relations department."

The SEC gave Mr. Hastings a pass, but warned other CEOs--even those with "a large number of friends or other social media contacts"--not to count on getting similar mercy unless investors are told in advance that they need to friend the CEO to keep apprised of corporate developments.

The SEC's guidance provides some helpful clarity, but the unfortunate reality is that, even with such guidance, the SEC's rules make it difficult and legally treacherous for companies and their executives to communicate with investors and the public. As the SEC cautioned in the 21(a) Report, there are no bright lines; each case will be reviewed according to its facts. Fear of a possible SEC enforcement action will continue to dampen companies' ability to use new--and more traditional--media effectively. It might be time for legislators and regulators to take another look at whether the rules governing corporate communications are actually good for investors.





What if Congress passed a law but no one listened?

That seems to be what happened with the JOBS Act passed by Congress and signed by the President last year.

The "Jumpstart Our Business Startups Act" (H.R. 3606) was passed by the House of Representatives in March 2012 with an overwhelming vote of 380 to 41. The measure had previously passed the Senate with a bipartisan majority.

President Obama signed the Act a few days later calling it a "game-changer" and that the measure "represents exactly the kind of bipartisan action we should be taking in Washington to help our economy."

The Act amended the Securities Act of 1933 in several respects, including by creating a new exemption from registration to allow small business to raise funds via sales of securities directly to the public through a "crowd-fund portal". This new entity - the crowd-fund portal - was to be defined by regulations promulgated by the SEC. According to the President, "Because of this bill, start-ups and small business will now have access to a big, new pool of potential investors -- namely, the American people. For the first time, ordinary Americans will be able to go online and invest in entrepreneurs that they believe in." (For a crowdfunding backgrounder, see Dara Albright's site).

Among other changes to securities laws, the Act opened the door for private companies to publicly advertise the availability of investment opportunities in their securities (a practice known as "solicitation" and previously banned under the Securities Act of 1933). Removing the ban on solicitation was intended to make it easier for private companies to locate potential "accredited investors" who would be qualified to invest in exempt offerings of their securities under Regulation D.

Knowing that it would be necessary for the SEC to promulgate regulations to implement these changes, Congress specifically obligated the SEC to adopt rules promptly. In Section 201 of the Act Congress required the SEC to "revise its rules" with respect to the ban on Regulation D solicitations "not later than 90 days after the enactment of this Act."

Also, in Section 301 of the Act, Congress required the SEC "not later than 180 days after the enactment of this Act" to issue such rules as may be necessary to carry out the amendments contained in Section 301 of the Act.

Despite these clear instructions, nearly a year after passage of the law, the SEC has failed to implement these regulations. When pushed for an explanation, SEC appointees have suggested that they disagree with the law's aims and fear that it will harm their "legacy." (WSJ; Wired).

Does it bother anyone else that the SEC believes it is entitled to pick and choose which laws it has to follow and that it does so on the basis of the perceived "legacy" that its political appointees believe they have?

 

 


Isaac Gorodetski
Project Manager,
Center for Legal Policy at the
Manhattan Institute
igorodetski@manhattan-institute.org

Katherine Lazarski
Press Officer,
Manhattan Institute
klazarski@manhattan-institute.org

 

Published by the Manhattan Institute

The Manhattan Insitute's Center for Legal Policy.