Dear friends of TOTM:

If you’re going to be attending the American Law and Economics Association annual meeting, or if you’ll be otherwise in the neighborhood (Berkeley, that is) on May 5 and 6, there are two must-attend events over the action-packed weekend.

The first is the inaugural TOTM happy hour. Join us (Josh and Geoff) Friday evening (following dinner) at the Claremont hotel for drinks and some ritual scoffing at Sarbanes-Oxley and the Merger Guidelines.

The second is “Panel VB: Antitrust and Regulation” on Saturday morning at 9:00, during which Josh will be presenting his excellent paper, Slotting Contracts and Consumer Welfare. Download it while it’s hot!

We hope to see you there.

From the Antitrust Hotch Potch, a quote from a Microsoft antitrust lawyer referencing the fact that the stripped version of Windows (without the Media Player monopolistically integrated and forced upon consumers to their detriment … ) is being ordered by stores slightly less frequently than the “full” version of Windows, i.e. 1,787 copies versus 35 million. Anyway, here is the quote:

“One cannot exclude the possibility that some consumers may have bought Windows XPN to have a souvenir of the only version of Windows designed by DG Competition.”

Funny (for an antitrust lawyer, anyway). I have commented previously about the stripped versions of Windows, and the greater implications of decisions like these for U.S. antitrust policy regarding bundling and price discrimination here.

The WSJ is reporting that the American Gaming Association is relaxing its opposition to online gambling in the wake of several bills proposing to ban Internet gambling.  The DOJ’s position has been that online gambling, and not just sports gambling, violates the Wire Act though at least one federal district court has disagreed.  The AGA now “strongly supports”  (it describes its position as “modified”) a Congressional commission to analyze whether regulation of Internet gambling in the United States is a better option than “leaving bettors to fend for themselves on illegal, unregulated offshore sites.”

From the ISS Corporate Governance Blog:

In another development in the debate over board elections, the executive council of the Corporate Law Section of the Delaware State Bar Association has issued a recommendation on the issue. On April 20, the lawyers’ group endorsed draft legislation to amend the Delaware General Corporation Law to enable shareholders to introduce an irrevocable change of bylaws on director elections, as well as provide for an irrevocable resignation of directors who fail to get a requisite number of votes.

The proposal, which must be endorsed by the full bar association and then passed by state lawmakers, is noteworthy because a majority of U.S. public companies are incorporated in Delaware. The proposal would amend paragraph 216 of Section 5 of the law to provide that a company bylaw adopted by a vote of stockholders that prescribes a required vote for director elections cannot be altered by the board without shareholder consent.

Another proposed revision seeks to get around the restrictions of Delaware’s “holdover” rule by adding a new provision that a director resignation may be made effective upon the occurrence of a future event or events, coupled with authority granted in the same section to make certain resignations irrevocable.

I haven’t been able to track down a copy of the draft legislation, but it sounds similar to the proposed amendments to the Model Business Corporation Act (see here).

GMU Law is hosting an event on Tuesday, May 2nd (at 4pm) entitled “FCC License Auctions: Lessons from a Tumultuous Twelve Years A Conversation with Vernon Smith and David Porter.” Here is the link with more information. This looks very interesting. Email Masha Khazan (mkhazan at gmu.edu) to reserve your spot.

Back in February, I criticized the SEC’s rules regarding how energy companies must disclose their oil reserves in securities filings. My main point was that the conservative way the SEC measures reserves is quite different from the measurement approach the oil companies themselves take when deciding how to invest billions of their own dollars. If the SEC is going to require disclosure of some reserve estimate, shouldn’t it be the estimate upon which managers are willing to bet the corporation’s money?

An op-ed in today’s W$J makes the same point and nicely explains what’s wrong with the SEC’s antiquated oil disclosure rules.

AFP is reporting that the British government may allow film, television, and stage actors to… brace yourself… smoke in public! Oh…but only if smoking “is integral to the plot or storyline” of the performance at issue. Announcing this little dollop of (potential) legislative grace, a Department of Health spokesman explained:

The government is considering providing a specific exemption from smoke-free legislation to ensure that smoking can take place on stage during live theatrical performances, or during film and television recording, where smoking is integral to the plot or storyline. … We will be consulting with the theatre industry on what they consider integral to the plot.

That should be interesting.

This is, of course, great news for the American film industry. Films with “non-integral” smoking will now have to be produced outside of Britain — most likely in America. Perhaps the British smoking ban is to the American film industry what Sarbanes-Oxley is to foreign stock markets. (See here, here, and here.)

The fact that a western liberal democracy is having to create special exceptions to ensure that historical figures like Winston Churchill can be accurately depicted in film and theatrical productions is a testament to how out of hand these sweeping smoking bans have gotten. Perhaps we should file this one in the “life imitates art” category: One of the funnier moments in the delightful film Thank You for Smoking (discussed here) occurs when a Tobacco-hating senator tries to order Hollywood to doctor old movie star portraits so that the actors’ cigarettes are replaced with innocuous items like candy canes and chopsticks. Is it really so incredible?

For more on why government-imposed smoking bans are a bad idea, see The Case Against Smoking Bans.

As I noted in this post, there are a variety of federal securities law claims that could be alleged with respect to option backdating. The case filed against UniteHealth, however, is a derivative suit which indicates it is based on state law claims. I was curious as to what exactly the claims are so I tracked down a copy of the complaint (see here). The complaint specifies the following five counts:

Count 1: Breach of fiduciary duty (care, loyalty, reasonable inquiry, oversight, good faith and supervision).
Count 2: Gross mismanagement.
Count 3: Waste of corporate assets.
Count 4: Unjust enrichment.
Count 5: Breach of contract.

I was surprised not to see a specific reference to a breach of the duty of disclosure/candor ala Malone v. Brincat. UnitedHealth, however, is a Minnesota corporation, and perhaps Minnesota does not recognize the duty. Also, counts 2 and 3 seem redundant to me in that they constitute breach of duty of care claims.

It will be interesting to see if the case goes anywhere in light of the business judgment rule and the exculpation provision which I assume UnitedHealth has in its articles of incorporation.  However, I could see the plaintiffs arguing that the backdating resulted in an intentional misstatement of material fact in the UnitedHealth proxy statement which constitutes a knowing violation of law thereby rebutting the business judgment rule and piercing the exculpation provision.

I’d like to thank everyone at Truth on the Market for allowing me the opportunity to guest-blog over the past two weeks. I’ve really enjoyed the chance to share some of my thoughts and contribute in some way to this wonderful forum.

Before departing, I wanted to tie-up a loose end that I left dangling in my earlier post on private equity regulation (I’m sure folks have been up nights awaiting resolution of this issue). As my prior post discussed, I generally find little merit in the recent calls for subjecting the private equity industry to greater regulatory oversight. (You can read my prior post here). I suggested, however, that there are some market imperfections in the private equity industry that may merit some reform. What are these market imperfections? In general, they are the information asymmetries that result from the challenge of valuing privately-held corporations. (more…)

I am heading to Harvard tomorrow for a conference, hosted by the Harvard Negotiation Law Review, on the value of case studies and the role of lawyers in deal making. Vic at the Glom has blogged about the conference here. The conference is organized around Vic Fleischer’s case study on the MasterCard IPO, and David Millstone & Guhan Subramanian’s study of the Oracle/Peoplesoft takeover bid. I am very much looking forward to hearing the presentations. My paper discusses the antitrust implications of MasterCard’s IPO. More specifically, I attempt to pin down precisely what MasterCard’s new governance structure purchases (and at what price) in terms of reduced antitrust exposure, and touches more generally upon the role of the antitrust lawyer in and after such governance decisions. I will post my draft to SSRN shortly, and perhaps do some blogging after the conference.
While the MasterCard IPO raises some interesting antitrust issues, Vic’s post raises some tough questions about the value of case studies in legal scholarship that I hope to discuss along with the conference participants. Vic writes:

One of the challenges of using case studies is figuring out what lessons to draw from them. At a minimum, qualitative empirical work can be useful for generating hypotheses. I look for unusual cases and try to find patterns and theories that might explain what’s going on. But when we present case studies as scholarship, or use them in the classroom, aren’t we implicitly suggesting that they are representative of a broader pattern? But how do we know if these case studies are a sample of a broader phenomenon, or the universe of such cases? Should/must case studies be accompanied by proper quantitative research before they are taken seriously? If not, aren’t we encouraging our students and fellow scholars to violate the rules of inference? When one stumbles across an interesting case like MasterCard, or Google, or Ben & Jerry’s, what’s the best way to proceed? I’m looking forward to the discussion Wednesday as I try to shape my summer research agenda.

These are all good questions. I certainly don’t have all the answers. But I do have some initial reactions. The dangers of generalizing too broadly from single observation case studies are well known and intuitively obvious. Researchers ought to be clear about what their case study illustrates, what it does not, and what questions it raises. But let me at least take a stab at one of the questions and give a direct answer: No, case studies need not be accompanied by proper quantitative research before they are taken seriously.

There are obvious tradeoffs to be made between what is sometimes referred to as “quantitative” empirical work (i.e. regression) and “qualitative” empirics (i.e. case studies). One advantage of case studies is that they typically allow the researcher a greater understanding of the institutional details underlying relationships of economic interest. Case studies, for example, have had significant influence on shaping modern antitrust policy, i.e. the work of Benjamin Klein and others in vertical restraints. The Federal Trade Commission makes much use of case studies in evaluating the competitive effects of restraints in particular industries, which exhibit great variance in institutional detail. The theory of the firm, including Coase’s Theory of the Firm, and Klein’s (and Klein, Crawford and Alchian) Fisher-GM work, was also greatly advanced by the case study approach. Of course, there has been much progress in these fields (to name two) both in advancing the theory and empirically testing hypotheses derived from the theory.

I do not mean to suggest that broader quantitative analysis is not useful. Of course it is. It offers many advantages (namely, general application) that detailed case studies do not. I guess that brings us back to tradeoffs. The bottom line is that New Institutional Economics (and transactions cost economics) has taught the lesson that institutions (i.e. “the rules of the game in a society,” as Douglass North defines the term) matter. If this lesson is true (of course it is), case studies can be quite valuable with or without prior quantitative research.

SEC Chairman Christopher Cox will be testifying this morning before the Senate Committee on Banking, Housing, and Urban Affairs. The hearing is titled “A Review of Current Securities Issues” and starts at 10:00 a.m. EST. Click here for the live Webcast. I wonder if they’ll ask him about the SEC’s internal controls problems?

Update:  CFO.com has some highlights from the testimony here.

Today’s Heard on the Street column in the W$J reports that utilities are moving away from low-sulfur coal in favor of the dirtier, high-sulfur variety. This might seem odd, given that the Clean Air Act operates on sort of a “ratchet” principle — i.e., when air quality improves, degradation is generally forbidden. One might expect that, absent some change in relative prices, the trend would always be toward cleaner-burning fuels.

Ah, but that hypothesis disregards the fact that the Clean Air Act is a command-and-control statute drafted by legislators with lots of special interests to satisfy. One of those special interests was the eastern (dirty) coal lobby, which went to great lengths to ensure that the Act was drafted in a manner that would not encourage switching to cleaner burning, low-sulfur coal mined out west.

Bruce Ackerman and William Hassler documented eastern coal’s rent-seeking in their book Clean Coal, Dirty Air (wonderfully subtitled, How the Clean Air Act Became a Multibillion-Dollar Bail-Out for High-Sulfur Coal Producers and What Should Be Done About It). Jonathan Adler summarizes the story as follows:

Under the 1970 Clean Air Act, the EPA established a policy whereby all coal plants were required to meet an emission standard for sulfur dioxide. The original standard of 1.2 pounds of sulfur dioxide (SO2) per million BTUs (British Thermal Units) of coal could be met in a variety of ways.

Despite its apparent flexibility, the regulation had disparate regional effects. Most of the coal in the eastern United States is relatively “dirty” due to its high sulfur content. Western coal, on the other hand, is cleaner. By using western coal, utilities and other coal-burning facilities complied with the federal standard without installing costly scrubbers. Scrubbers were so expensive that many midwestern firms found that it was cheaper to haul low-sulfur coal from the West than to use closer, “dirtier” deposits.

When the Clean Air Act was revised in 1977, eastern coal producers got even. As Bruce Ackerman and William Hassler note in Clean Coal, Dirty Air, eastern producers of high-sulfur coal elected “to abandon their campaign to weaken pollution standards and take up the cudgels for the costliest possible clean-air solution—universal scrubbing.”

The amendments required coal plants to meet both an emission standard and a technology standard. In particular, the law contained “new-source performance standards” (NSPS) that forced facilities to attain a “percentage reduction in emissions.” In other words, no matter how clean the coal was, any new facility would still be required to install scrubbers. This destroyed low-sulfur coal’s comparative advantage. Since all new facilities had to invest in scrubbers, there was no longer a need to transport low-sulfur coal from the West to meet the SO2 emission standard—the cheaper, high-sulfur coal from the East would suffice.

Looks like the rent-seekers got what they were looking for. As Duke Energy Corp.’s vice-president of commercial fuels explained to the Journal, “We’re spending almost $4 billion as a company on various environmental plans, mostly for scrubbers, in the last few years, so we might as well go for” high-sulfur coal. This may be good for the high-sulfur coal industry, but it means we consumers are paying more for electricity than we would have paid had Congress permitted utilities to decide for themselves how to achieve air quality goals.

Under SEC rules, a public company is required to start expensing options commencing with its quarter one 10-Q for its fiscal year beginning after June 15, 2005. This means the time has arrived for public companies with calendar year-ends, and as a result, this month many companies have reported or will be reporting for the first time numbers that reflect option expensing. In a January post on the subject (here, and discussed by Geoff here), Rich Booth noted as follows:

In the end, it might not matter whether a company treats the grant of options as an expense. Studies show that a company’s choice of accounting convention makes no difference as to stock price. As it is, analysts can translate earnings into cash flow, while CFOs can explain away the aberrant effects of accounting rules by calculating pro forma earnings.

Based on this article in today’s W$J, however, this may not be true with respect to option expensing, at least in the short term. According to the article: (more…)

Many of the papers for the upcoming Bloggership conference are available on SSRN here. I’ve skimmed a number of them. One paper in particular I want to talk about is Eric Goldman’s paper “Co-Blogging Law.� Here’s the abstract:

Bloggers frequently combine their efforts through joint blogging and guest blogging arrangements. These combinations may be informal from a social networks perspective, but they can have significant and unexpected legal consequences. This Essay looks at some of the ownership and liability consequences of co-blogging and guest blogging. To do so, the Essay will consider different possible legal characterizations of co-blogging, such as partnership, employment and joint ownership. The Essay concludes with some recommendations to minimize the implications of unexpected legal characterizations, including encouraging bloggers to make private agreements, educating bloggers about their choices, and exercising judicial restraint.

In light of the various liability and ownership issues, the article recommends that co-bloggers either form a limited liability entity or execute a co-blogger agreement. The article does not, however, say which is the best overall option, but I will. In my opinion (and this is not legal advice as the best option for you would depend on your specific facts and circumstances), if your group blog does not sell ads, have a tip jar or otherwise generate revenues, the way to go is a co-blogger agreement. The agreement can fully deal with all the IP ownership issues, allocate liability risk, and preserve an argument that the bloggers are not partners (being classified as partners has adverse potential liability consequences) (see here for some more thoughts). Additionally, as Eric mentions and Eugene Volkh points out in this post, a blogger’s homeowner’s insurance policy may provide protection for some blog related claims.

From a vicarious liability protection standpoint, a limited liability entity is superior but forming and maintaining one means filing fees, franchise taxes, agent for service of process fees, tax filings, etc. Hence, it comes down to whether the benefit of the liability shield afforded by a limited liability entity outweighs these costs (note also that another cost may be taking your homeowner’s policy out of the picture). In my mind the benefits do not outweigh the costs at least until your blog starts generating revenues. Once the blog starts generating revenues, especially if shared among the bloggers, it is advisable to go with a limited liability entity (probably an LLC) becauses otherwise the blog will likely be considered a partnership. Thus, Eric is correct in advising that “[b]loggers should think carefully before generating revenues from the blog.� But clearly there is a tipping point. At some level of expected revenue, it makes sense to form an LLC and go commercial.

As Eric points out, “[e]ven though there are disadvantages both to forming a limited liability entity or to structuring a co-blogger agreement, co-bloggers make a significant mistake by choosing to do neither.” I agree, so maybe I’ll get around to doing a co-blogger agreement for this blog some time soon.