I suppose that I ought to say something about the Anna Nicole Smith case that was argued today in the Supreme Court, given that I participated in the case (together with 14 other bankruptcy scholars) by filing an amicus brief on Anna Nicole’s side. For all the talk about how arcane the case is (see, e.g., Lyle Denniston’s fine account of today’s argument at SCOTUSblog.com), the issue is really quite straightforward: did the bankruptcy court have jurisdiction over a tort claim by Smith’s bankruptcy estate against Pierce Marshall (Smith’s late husband’s son)? The answer is plainly yes, and here’s why.

Title 28 confers federal bankruptcy jurisdiction over any claim that is “related to” a bankruptcy case–that is, any claim that will have an impact on the disposition of the bankruptcy estate. The Smith estate’s claim clearly meets this description, because any assets this claim recovers will directly benefit her bankruptcy estate. The claim is thus “related to” the bankruptcy case. To be sure, a bankruptcy court could always abstain from hearing a claim like this one. But the statute makes clear that abstention in this context is permissive, not mandatory. “Because the statute says so” is thus the short answer to why there’s federal jurisdiction here.

Here’s the complication. Marshall’s lawyers argue that notwithstanding the plain language of Title 28, there is a judicially-crafted “probate exception” to federal jurisdiction that applies not only in diversity cases but also in bankruptcy. But that is not so. The only Supreme Court decision ever holding that there is no bankruptcy jurisdiction over assets in probate is Harris v. Zion Savings Bank, 317 U.S. 447 (1943), a case decided under the old Bankruptcy Act that is readily distinguishable.

The reason for the result in Harris is that there the debtor and the decedent were one and the same person. Once the debtor dies, there is no longer any need for bankruptcy jurisdiction. That is why Congress in 1978 explicitly made decedents ineligible to file for bankruptcy. Here, however, we are dealing with a bankruptcy debtor who is not dead. Anna Nicole Smith is very much alive. And unlike the assets at issue in Harris, the assets comprising Smith’s bankruptcy estate are not coextensive with those of the probate estate. The creditors in Harris had standing to assert claims against the estate in probate. But Smith’s creditors did not have standing to assert claims in the Marshall probate proceeding. All they could do was assert their claims in the bankruptcy forum. The possibility of bankruptcy jurisdiction is therefore necessary to protect creditor interests that are not legally cognizable in probate.

It is nonsense to suppose that bankruptcy jurisdiction over claims like the one asserted by Smith’s estate improperly “interferes” with state probate proceedings. For one thing, the Smith estate’s claim is only against an heir, not against the probate estate. Moreover, the fact is that probate estates are hardly strangers to bankruptcy. No one, not even Marshall, suggests that a probate estate can’t be a creditor in a bankruptcy case, or that a bankruptcy estate couldn’t recover a preferential or fraudulent transfer from a probate estate. Such litigation is not an “interference” with probate; it is simply a way of sorting out some of a probate estate’s assets and liabilities. A probate court’s jurisdiction need not be exclusive. And if any state’s law so provides, federal bankruptcy law trumps it. Granted, a bankruptcy court might be well-advised to abstain with respect to issues concerning which the probate court has relatively greater expertise and competence (e.g., interpreting a will, perhaps). But the statute makes such abstention only permissive, not mandatory.

It will be interesting to see the Court’s opinion in this case. I will be very surprised if Anna Nicole Smith does not win.

While we’re on the topic of antitrust, I thought I would take this opportunity to draw our readers’ attention to a nice series of posts over at Antitrust Review. Collectively these posts make up the beginnings of an excellent primer on antitrust economics, told in Hanno Kaiser’s inimitable manner. I don’t agree with all of it, but all of it is thoughtful and well-taken. Well worth a read in your spare time.

Consumer Sovereignty: Rationally Choosing the Least Unappealing Set of Available Goods?

The Goals of Antitrust and Economic Policy: Consumer Welfare? Efficiency? Perfect Competition?

What are the Goals of Competition?

Collusive and Exclusionary Effects, Conduct, Overcharges, and Lost Profits

An Attempt at Defining the Core Concepts of Antitrust

Conceptual Foundations of Antitrust Law

Conceptual Foundations of Antitrust Law; Follow-up

If I had to pick one graf to highlight, it would be this (from the last post linked above):

Against this backdrop, it is apparent that much of the traditional merger analysis involves the least direct evidence of anticompetitive effects. Delineating markets, identifying market participants, and computing market shares all contribute to establishing a market concentration measure. That measure, in turn, permits the inference of market power (Step 1). Market power permits the inference of anticompetitive effects (Step 2). The diminution of competition, finally, permits the inference of a consumer welfare loss (Step 3).

Unlike Hanno (I think), however, I find this quite problematic. Each required inference is far weaker than it might seem, and the underlying evidence — of market definition, participants and shares — weaker still. See my article, Hot Docs vs. Cold Economics, 47 Ariz. L. Rev 609 (2005) for more.

SCOTUS’ Dagher opinion is indeed good news. For those unfamiliar with the case, the Ninth Circuit held that the pricing policy of two joint ventures between Shell and Texaco were per se illegal under the Sherman Act. As it stood, the Ninth Circuit’s analysis threatened per se antitrust liability for joint ventures engaging in the unremarkable practice of setting prices for their own practices. Judge Fernandez’ dissent describes the ruling more creatively, arguing that it created a “exotic beast, no less strange than a manticore, roaming the business world.” After SCOTUS’ 8-0 reversal, the exotic beast roams no longer.

Previously, I wrote that the Ninth Circuit’s Dagher opinion erred by misapplying the ancillary restraints doctrine (pricing the products of the venture are not ancillary to the venture!) and by applying per se analysis to an agreement that did not eliminate competition in any relevant sense. With respect to the misapplication of the ancillary restraints doctrine, I wrote:

“[T]he ancillary restraints doctrine has no application here. That particular doctrine protects those restraints that restrict joint venture partners’ conduct outside the venture, but promote pro-competitive purposes of the integration, where the agreement might otherwise be construed as per se illegal. Here, the challenged restraint applies only to the joint venture’s actions in the market. In other words, the pricing decision is simply not “ancillaryâ€? to the venture.”

Justice Thomas agreed, writing that:

“We agree with the petitioners that the ancillary restraints doctrine has no application here, where the business practice challenged involves the core activity of the joint venture itself — namely, the pricing of the very goods produced and sold by Equilon.”

The crux of the Court’s analysis, however, was that per se analysis was not appropriately applied because the pricing policy simply did not eliminate competition:

“[t]he pricing policy challenged here amounts to little more than price setting by a single entity — albeit within the context of a joint venture — and not a pricing agreement between competing entities with respect to their competing products.”

This was the path of least resistance, and the route urged by the United States as Amici. Both of these points are pretty straightforward applications of longstanding antitrust doctrine, as evidenced by the 8-0 vote. Nonetheless, an error here would have been quite costly. As I wrote before the decision:

“Joint venturers would face the burden of proving that each post-formation decision is reasonably necessary to achieve some pro-competitive purpose of the joint venture or else face per se illegality. The Section 1 suit would become a favorite weapon of inefficient competitors seeking to stay afloat.”

There is still one more antitrust decision with important ramifications — Independent Ink — to come this term. Stay tuned.

UPDATE: Hanno Kaiser adds his thoughts at Antitrust Review.

To almost no one’s surprise, the Court ruled today (unanimously) in Texaco v Dagher that a pricing agreement between Shell and Texaco which was part of a lawful joint venure is not per se illegal under the Sherman Act. See this Reuter’s story here (HT: Bill). The key grafs:

Justice Clarence Thomas concluded in the seven-page opinion that it is not automatically illegal under the antitrust law for a lawful, economically integrated joint venture to set the prices at which the joint venture sells its products.

He said [the joint venture's] pricing policy may be price fixing in a literal sense, but it is not price fixing in the antitrust sense.

Josh earlier reported on this case here. At the time he noted:

My prediction? SCOTUS will, as expected, tame the exotic beast. But how? I am doubtful, like Professor Ghosh at AntitrustProf Blog, that the Court will attempt to articulate an extension of the Copperweld doctrine (which protects wholly-owned subsidiaries from charges of intra-enterprise conspiracy under Section 1) to joint ventures. The United States Amici brief supporting Shell and Texaco urges the Court to take another route, ruling that per se analysis should not apply to this type of agreement because it “could not, and did not, itself eliminate competition.� That sounds right to me.

More when we see the opinion . . . .

Back on the first day of TOTM’s existence, I raised the question of whether the SEC has the authority to exempt small companies from SOX 404 compliance as proposed by the SEC Advisory Committee on Smaller Public Companies (see here). I stated that “[i]t’s not clear to me that [the SEC has] the legal authority to do so.â€? The committee addresses the authority issue in footnote 96 on page 44 of its latest draft report (HT: Bainbridge) and asserts that the SEC does have the authority. Specifically, it points to Section 3(a) of SOX which gives the SEC broad authority to promulgate “such rules and regulations as may be necessary or appropriate in the public interest or for protection of investors, and in furtherance of this Act.â€? I’m certainly no expert on statutory interpretation, but I have a hard time accepting that this language empowers the SEC to adopt rules that essentially negate SOX provisions. When Congress has intended to grant the SEC exemptive authority in the securities area, it has done so expressly (see, e.g., Securities Act Section 28 and Exchange Act Section 36). Regardless, how exactly would exempting small companies from SOX 404 be in furtherance of SOX? (more…)

With the blogosphere in decline, we figure we have to either eat or be eaten. We prefer the former over the latter, so we’re mulling hostile takeover attempts of ideoblog, conglomerate and/or bainbridge. We’ve also implemented various anti-takeover defenses including a non-chewable deadhand poison pill and a ten-class staggered board.

A “whisper number� once meant the consensus Wall Street unofficial and unpublished earnings-per-share forecast for a public company. Wall Street analysts historically derived a whisper number by ferreting out non-public information from company personnel. The number was then shared with top clients. Studies indicated that trading on whisper numbers could result in abnormal returns (see here). The SEC viewed the selective disclosure reflected in whisper numbers as problematic because, among other things, it “leads to a loss of investor confidence in the integrity of our capital markets.� Hence, in 2000 it adopted Regulation FD prohibiting selective disclosure and essentially putting an end to traditional whisper numbers.

However, a new type of whisper number has emerged at web sites such a WhisperNumber.com. According to the site: (more…)

H&R Block, the leading U.S. tax preparer, announced today in this press release that it will restate results for fiscal 2004 and 2005. “The restatement pertains principally to errors in determining the company’s state effective income tax rate, resulting in a cumulative understatement of its state income tax liability of approximately $32 million as of April 30, 2005.” It’s like rain on your wedding day.

A recent W$J article reports that a number of mutual funds have amended their fund investment policies to allow the funds to engage in hedge-fund-like investment strategies such as the use of derivatives, leverage and short-selling.  I think this is a favorable development because it increases the types of investment options available to everyday investors.  Others may not see it this way: 

[S]ome analysts and financial advisers caution that when traditional mutual funds adopt alternative investment strategies, it could bring added risk and higher fees.  Some advisers also fear that mutual funds may be rushing into a hot strategy just as hedge funds’ performance is beginning to cool.

The “added risk� and “higher fees� criticism seems little more than a statement of the obvious.  Alternative investments, by their nature, are more risky and involve higher fees.  What really matters though is whether a fund’s net risk-adjusted return beats the applicable benchmark.

It should be noted that even with appropriate changes to mutual fund investment policies, mutual funds cannot engage in various strategies to the same extent hedge funds can.  This is because mutual funds are subject to regulations under the 1934 Act and the Investment Company Act (ICA) (among others); hedge funds are not.  These regulations include, for example, limitations on margin borrowing and investing in restricted securities.  Interestingly, the ICA empowers the SEC to adopt limitations on short-selling and margin borrowing specifically for investment companies, but to date it has not.  Look for the SEC to do so if any of these hedge-fund-like mutual funds implode.

An article in the current issue of the Economist contends that “American environmentalists could be forgiven for throwing up their hands and heading north” (to Canada). Why? Because “the Bush administration wants to sell some 300,000 acres of national forest land in 35 states, mostly out west.”

I’m afraid the normally sensible Economist (see, e.g., here) is wrong on this one.

To begin with, the lands at issue here are not exactly environmental jewels. These parcels are not contiguous to large tracts of federal land. Instead, they are bits and pieces that are, for the most part, located within townships. (For example, here’s a map of the lands proposed to be sold in the Bitterroot National Forest in Montana — the National Forest lands are green; the parcels to be sold are red; township lands are white.) It is highly unlikely that the highest and best use of these isolated lands is forest preservation, and it’s almost certainly the case that the costs associated with continued federal oversight of the lands are not justified by the negligible environmental benefits they create. In short, it makes no sense to continue to pay tax dollars to maintain these properties, whose highest and best use is probably something other than preservation.

In addition, if the highest and best use of these isolated parcels is preservation, someone besides the government should be in control. Government bureaucrats, who (like all other folks) seek to advance their own private interests, tend to be poor environmental stewards. As one of Geoff’s colleagues has argued (and as public choice theory would suggest), bureaucrats charged with managing public land are particularly vulnerable to discrete, well-organized interest groups, such as timber interests and rancher groups seeking grazing rights. They therefore tend to manage multiple-use public lands in a manner that reflects the desires of those groups. Bureaucrats also like to expand their budgets (after all, one’s prestige — and often one’s pay — rises with one’s budget), so they’ll tend to over-pursue budget-enhancing policies like intra-forest road construction. Private conservation groups do a much better job of protecting pristine lands.

So shouldn’t the environmentalists view this sale of forest land as a huge opportunity? They can now ensure permanent protection for these parcels by purchasing them outright or buying conservation easements from whoever ultimately buys them. This is certainly enhanced protection. After all, the green groups can buy the land or conservation easement; they could only rent the votes of legislators and bureaucrats charged with managing the lands. Perhaps they should spend some of their vast hordes of money on actual land preservation, rather than lobbying. (The Nature Conservancy, to its credit, takes this tack.)

Why don’t most environmental organizations want to enhance environmental protection by becoming actual landowners? Maybe it’s because they want a free lunch. Under the current system of public land management, green groups can always demand that public land be kept pristine without really considering the costs of that demand. If they succeed in their lobbying efforts, they get lots of credit (and the enhanced fundraising ability that comes therewith), and the costs of the decision to keep the land pristine are shared throughout society (i.e., among all the “owners” of the land). In short, they externalize the costs of land preservation.

If they owned the property at issue, by contrast, they couldn’t do this. The owner of a parcel of property ultimately bears the opportunity cost associated with selecting one use over another. If, for example, you could lease your backyard for wedding parties for $1,000 per month, then your decision not to do so and instead to leave it as a little oasis of solitude effectively costs you $1,000/month. Bearing the full costs and benefits of your decision regarding the use of your backyard, you’ll likely choose the usage option that creates the most value.

Take the Audubon Society, for instance. The Society opposes drilling for oil in the Arctic National Wildlife Reserve (indeed, the Society issued a flyer proclaiming, “A Refuge Is No Place for Oil Rigs!”). This makes sense: The Society does not bear the opportunity cost of the decision not to drill (or, at most, just the tiny fraction comprised of its pro rata interest in the overall cost to all Americans), and it gets lots of benefit from its public opposition to drilling (enhanced ability to raise money, etc.).

Would it act differently if it owned ANWR? Probably, for it would then have to recognize the loss of foregone drilling profits as a cost of its decision to oppose drilling. It would have to decide whether its mission would be better served by (1) continuing its complete opposition to drilling, or (2) permitting some form of drilling (regulated so as to be as environmentally friendly as possible) and using the huge profits generated thereby to achieve other worthy ends (e.g., buying up environmentally valuable property that its members might actually visit someday). What would it do?

Well, let’s look at what it has done when it’s actually owned the property it’s tried to control. Since the 1950s, the Audubon Society has permitted limited drilling on its own Paul J. Rainey Sanctuary, a 26,000-acre preserve in Louisiana. This drilling — accomplished using 37 wells designed to minimize environmental impact — has netted more than $25 million for the Society. The Society, then, has been able to use those revenues to pursue other preservation goals. Unfortunately, they’ve spent much more of it on lobbying and P.R. than on purchasing land for preservation. The point, though, is that people take very different positions on resource usage when they must bear the costs and benefits of their positions — and the decisions they make are much more likely to be welfare-enhancing.

So is there reason to oppose the Bush plan to sell off parcels of isolated public forest land? Not on grounds that privatization is bad. Indeed, privatization is the best way to ensure that the parcels at issue end up being put to their highest and best uses — which may be conservation. The problem with the Bush plan is that the revenues generated from land sales will be used to feed the habit of a government that’s addicted to spending. If the land sales result in even less fiscal discipline, that would be bad. But privatization’s not the problem.

One of my students brought to my attention this pearl of wisdom from (what appears to be this week’s forthcoming) The Ethicist column in the NYT:

I am a 13-year-old boy. My school has a monthly pizza sale. Parents buy pies from a pizzeria and sell them to us for $1 a slice. I bought a whole pie at the pizzeria and offered slices for $2 to kids at the end of the long line. A school counselor stopped me. She said that I was unethical and was “taking advantage of people.” I thought I was providing a service to people based on the principle that “time is money.” Who is right? Ben Gammage, San Diego

Time may be money, but how much, really, for an eighth grader, who is not paid to attend school? And do we really want all our interactions based on the variable-pricing airline-seat model? Were pizza a necessity of life (as many teenagers regard it) and in short supply, you would have been been guilty of profiteering, as your counselor charged. But there was plenty of pizza, so you didn’t exploit anyone. And pizza does remain a luxury, so nobody was compelled to buy your pricier slices. (Were they? I assume there was no gunplay.) Thus your actions were not unethical, but they were poor social policy — if that’s not too fancy a way to describe undermining a pizza party.

Your counselor’s concern was valid, if poorly expressed. The dollar-a-slice deal made possible a schoolwide pizza party, affordable fun for everyone. Judging by the long line, it’s something people enjoy.

You turned it into a two-tiered system — kids with money don’t wait; kids without money do — shifting it from a we’re-all-in-it-together event to something less communitarian (if more profitable).

The errors here need no pointing out in this forum, I presume. I am glad that he stopped short of condemning the kid outright (unlike the kid’s school counselor), but I’m surprised, given the extent of the truly fundamental flaws in his analysis. Maybe this will turn out to be just a rough draft and the published version will look different. But I doubt it.

This isn’t Randy Cohen’s (he’s the Ethicist) first outing on TOTM. It surely won’t be his last.

There’s been some recent (and widely disparate) posting on the nature and governance of universities. See, for example, here (Tsai on sports and higher ed), here (Oesterle on endowment spending), here (Bollier on the knowledge commons; see especially comments by me and Josh in the . . . comments section (duh)), here (Posner on tenure), here (Becker on tenure), and here (me on the education market of the future). More recently Becker and Posner wade back in with posts on for-profit universities.

Now comes news of Larry Summers resignation, on which see Larry here and here.

The unifying (if implicit) question is: For whose benefit are universities operated, and how is that benefit determined? It’s not such an easy question. Many would answer quickly, “the students,” but, even if this were true (and it sure seems not to be), the question would remain, why is it true? Students have almost no say in most university governance, and little ability to evaluate specific university decisions. What constrains faculties, administrators and trustees to act in their interest?

The problem is endemic to nonprofits, but especially universities. Among the (interrelated) problems in sorting all this out are these:

1. Residual claimants are not well-defined, meaning something of a free-for-all (rent seeking) and imperfect (to say the least) fiduciary relationships.
2. There’s nothing approaching unity of interest among the potential residual claimants and other stakeholders.
3. There’s no control market (a function of the above and the legal inalienability of profits).
4. “Maximization” is generally ambiguous, no matter whose preferences prevail (where the maximand isn’t profits).
5. Other markets are weak, as well, because the products on offer (ranging from education to research to a “marriage market” and beyond) are hard to observe and measure.

As I said in the post linked above, I think in particular that faculties have little accountability to students and other stakeholders, much to the detriment of students (and probably the broader society). So how should we start to talk about the merits of sports on campus, tenure and “knowledge commons”? Or how should we take Summer’s forced resignation at the hands of, as Larry points out, “segments of the Arts and Sciences faculty”? Are these “good”? How can you tell? By what standard do you judge? Is there any basis for inferring value from persistence?

For example, tenure might be an efficient solution to the problem of the “high commitment” academic workplace, as Posner suggests. But how would you know? There’s not much of a market to punish relative failure and reward relative success in teaching quality (and even research, although this market is a little better). Tenure may encourage the creation and operation of “good” norms, but it also opens the door to bad ones. Which effect prevails? And even if there were a market (if students paid directly for professors’ teaching services) how well do students’ narrow, perceived interests track their real interest or social welfare?

It’s hard for any reasonable observer to be other than disgusted at the situation at Harvard (although perhaps not surprised). What, if anything, is to be done, and by whom? Anyone have any answers?

UPDATE: Becker and Posner weigh in on the Summers debacle. I would just add that, as Posner echoes, l’Affair Étés (get it?) points up the problem with de facto residual claimancy by faculty members within the university organization, strengthening Becker’s plea for more powerful administrators. But the real problem is the relative absence of markets — and, especially with tenure, who will effectively challenge the faculty for control of the organization?

UPDATE 2:  David Friedman reminds us again that Adam Smith said it all before.  A point I also made (quoting the same excerpt) here.

This CFO.com article describes a new Deloitte & Touche/CPM Group survey on business continuity management programs.  The survey finds that “[m]ore than 83 percent of companies have developed business continuity management programs, compared with only 30 percent of companies just six years ago.�  Deloitte and CPM attribute the increase to the fact “that executive management remains primarily concerned with regulatory compliance, and with fulfilling fiduciary responsibilities by addressing operational resilience in response to a broad array of disruptive events.� 

I don’t know offhand what regulations require or encourage a company to adopt a business continuity program, but I don’t doubt that there are some.  What I find curious is the reference to “fulfilling fiduciary responsibilities� which seems to imply there is a fiduciary duty to adopt such a program.  There is no such specific duty.  A decision on whether a business should put a program in place is just like any other business decision.  Absent a conflict of interest, as long as the decision is made on an informed basis, in good faith and in the honest belief that the decision is in the best interests of the corporation, the board has fulfilled its fiduciary responsibilities regardless if the decision is to adopt or not to adopt a continuity program.  Ultimately, if the board takes up the issue, it should consider the probability and magnitude of various business disruption risks and make a judgment as to whether it believes it is in the best interest of the corporation to put a program in place. 

Maybe I’m reading too much into the article, but this looks like another example, in addition to the one Gordon Smith points out here, of business people having a more expansive notion of fiduciary duty than is the case under corporate law, which seems to me is not a good thing because it leads to suboptimal risk taking by the board.

According to this FT article, Stephen Schwarzman, the head of the buy-out firm Blackstone (a firm that will soon close on a record $13.5 billion buy-out fund), warned that prices being paid in buy-outs are in “nose bleed territory� and that “seeds of excess� are being sown.  As Schwarzman put it:  “[W]hen it ends, it always ends badly.  One of those signs is when the dummies can get money and that’s where we are now.�  This is consistent with the position I took in this post that market forces will prevent buy-out funds from continuing to reap easy profits.