WSJ Law Blog offers a follow up (and the complaint!) to Keith’s post (also check out the discussion in the comments) on the antitrust suit filed by an independent coffee shop owner against Starbucks concerning the use of exclusive leases with landowners. After reviewing the complaint, I agree with Lauren Albert, the antitrust lawyer quoted in Lattman’s story who concludes that: “The facts here don’t really seem to allege a violation of antitrust law.” Indeed, they do not.

Pages 11-13 are particularly telling, i.e. the description of the handing out of free samples in response to plaintiff’s entry as “predatory and retaliatory,” and noting that “the intent and effect is to drive out independently owned coffee shops.” The alleged anticompetitive effect? While the complaint does cite an “espresso blogger” for the proposition that Starbucks intentionally over-roasts its coffee, there is very little here in terms of alleging an antitrust violation (though para. 16 alleges that market output has been increasing, and that Starbucks has been primarily responsible for the growth). As I pointed out in the comments to Keith’s excellent post:

The relevant inquiry, assuming market definition and even market power, is whether Starbucks’ leases can foreclose rivals substantially foreclose rivals from achieving minimum efficient scale. Clearly, they do not . . .. The Starbucks leases do not, and cannot possibly, “tie up� more than a trivial fraction of this real estate. Such foreclosure is a necessary condition of this type of claim and is clearly absent. Competition for favorable locations for coffee shops, even when it includes exclusivity terms in the leases for good reason, is competition on the merits.

I predict a successful motion to dismiss.

Consistent with the finding of the article described here, this article describes a Bloomberg study finding that backdating “has so far cost investors at least $7.9 billion in market value.” The analysis looks to have controlled for industry specific factors by comparing returns to applicable sector indexes. What’s not clear, and this is a point made by Steven Donegal in a comment to the post linked above, is how long the effects of backdating persist. The article notes that for some companies “the damage proved fleeting.”  The article also points out that the impact on share price of a backdating revelation may be decreasing. “The average one-day loss for the first 30 companies to disclose investigations, from March 14 to May 25, was 2.9 percent, or 2.8 percentage points worse than their peers. The last 30 disclosures as of Aug. 31 prompted an average decline of 1 percent, trailing peers by 1.2 percentage points.”

Judge Farnan dismisses AMD’s foreign commerce claims for lack of jurisdiction.
(HT: Antitrust Review, who also has the opinion).

Martin Lipton of Wachtell, Lipton, Rosen & Katz issued a short memo yesterday on “boardroom confidentiality” or “what I would have advised HP to do had they asked.” Click here for the memo.

The current SSRN top tens for corporate, corporate governance, and securities law are after the jump. (more…)

The AEI and Brookings have released a volume entitled “Antitrust Policy and Vertical Restraints.”  You can check out the contents here, and it is available for purchase here.  The volume focuses primarily on tying, and includes a well-rounded set of important contributions from Robert Hahn, Dennis Carlton & Michael Waldman, David Evans, and my colleague Bruce Kobayashi.  Check it out.

Belvi Coffee and Tea Exchange cannot be serious. The firm is suing Starbucks for exclusive dealing in the Seattle and Bellevue, Washington real estate markets.

The suit alleges that Starbucks has leased real estate at above-market prices in exchange for commitments by the landlords to exclude other coffee shops from the building.

Let’s take Belvi’s allegations at face value and assume that Starbucks has a 73% share of the U.S. coffee shop industry, even though such a narrow product market definition seems implausible, given that Starbucks and other coffee shops compete for customers with many other types of shops, lounges, and restaurants. People buy coffee (and many of the other products that Starbucks sells) in all sorts of places besides coffee shops. Dunkin’ Donuts sells coffee and cake. So does McDonald’s. So does pretty much every diner and restaurant in the country.

But as I say, let’s take Belvi’s allegation of a 73% market share at face value. So what? The issue in this case is not whether Starbucks has monopoly or market power in the coffee shop market. That’s not in the least bit relevant. What matters is whether Starbucks has market power in real estate. And there’s not even an allegation of that here, much less any evidence.

Nothing stops Belvi from opening up as many shops as it wants to in any neighborhood where Starbucks is located, and if Starbucks charges too much people could always swing on over to Belvi. Surely it isn’t necessary for Belvi to be located in the very same building as Starbucks in order for Belvi to compete. (Has there ever been an antitrust case involving a retail industry in which the relevant geographic market is defined as a single building? I’m not aware of any.) Suppose that instead of leasing Starbucks owns the building. Would antitrust law require Starbucks to lease space to its competitor? That doesn’t seem very likely. A building isn’t an “essential facility” like a railroad track whose owner may be compelled to deal with a competitor. If outright ownership would entitle Starbucks to refuse to deal, why should an exclusive lease be treated any differently? It’s hard to see what would make an exclusive lease different from an outright sale.

Note the plausible procompetitive justification for the exclusivity that Starbucks obtains through these leases. Starbucks probably does lots of market research when deciding where to locate its stores. Why must Starbucks allow Belvi to free ride on that research?

If Starbucks had gotten an entire neighborhood to agree not to lease to other coffee shops, I could see Belvi’s point. But so long as Starbucks lacks the power and anyway has done nothing to prevent Belvi from locating next door, the case seems ludicrous and ought to be dismissed.

This Bloomberg article notes that 106 hedge funds have withdrawn their registrations under the Advisers Act since the SEC’s rule requiring registration was struck down in Goldstein v. SEC. According to the article:

SEC spokesman John Heine said 70 hedge fund managers told the agency they opted out because registration is no longer required. The other 36 may have withdrawn for any number of reasons, such as closing down their funds, he said. Heine declined to name any of the hedge funds.

Interestingly,

[a] total 2,479 of the roughly 7,000 U.S.-based funds remain registered with the SEC and subject to spot-checks. Those that stay probably are doing so to attract pension plans and charitable foundations, which are more concerned with regulatory compliance, said Barry Barbash, a former director of the SEC’s investment-management division.

As an aside, the article notes that Amaranth did not register. It seems unlikely, however, that registration would have prevented the billions in trading losses. As Dale Oesterle notes in his recent paper “Regulating Hedge Funds,” “registration . . .does not require an adviser to follow or avoid any particular trading strategy, does not require or prohibit any specific investments, and does not require an adviser to reveal specific trading strategies or disclose their specific portfolio holdings.”

Three Michigan B school profs have a new paper up on SSRN entitled “The Economic Impact of Backdating Executive Stock Options.� The paper adds some important data to the backdating debate. Specifically, the paper looked at 45 firms implicated in the backdating scandal and found that over a 21-day period surrounding the revelation of backdating, the average cumulative abnormal return of the stock of these firms was approximately negative 8%. It also found that the average market capitalization loss per firm during the period was $510 million. In light of these findings, I think it is now untenable to argue that backdating has caused little or no harm to investors. Yes, the monetary effects of backdating were timely disclosed and promptly incorporated into share price. However, as I noted in a comment to this post and as alluded to in the paper, the drop in price likely reflects reduced investor confidence in the firms’ management and internal controls exacerbated by the media frenzy and anticipated diversion of firm resources to deal with internal and external investigations, damage control, etc.

When Larry Solum announces that the Conference on Empirical Legal Studies is “one of those events that is likely to be remembered,” it is likely that this will be an important event in the legal academy.  I’ve already started reading a number of interesting papers from this conference, and am excited about presenting my own work.
Here is the announcement:

First Annual Conference on Empirical Legal Studies

University of Texas School of Law

27-28 October 2006

http://www.utexas.edu/law/conferences/cels2006/

 

Invitation to Attend and Preliminary Program

 

We invite you to attend the inaugural Conference on Empirical Legal Studies, which will be held at the University of Texas School of Law in Austin, Texas, on Friday 27 – Saturday 28 October 2006 (first session begins Friday 9:00, last session ends Saturday 1:15 p.m. to let attendees return home Saturday afternoon).  The conference will feature original empirical and experimental legal scholarship by leading scholars worldwide, from a diverse range of fields.  The conference will be run as five concurrent sessions covering different areas of scholarship, with a total of 90 presented papers.  There is no charge to academics and interested law student and graduate students to attend the conference.

Registration information, including a list of conference hotels and a preliminary conference program are available at the url above.  The reserved rooms at the conference hotels expire soon (exact dates are indicated on the conference site above), so if you are interested in attending, you will need to make plans soon.

The preliminary program is also available at:

http://hq.ssrn.com/conf_prelim_program=CELS-2006

The Conference is jointly organized by Cornell Law School, NYU School of Law and the University of Texas School of Law.  The 2007 and 2008 Conferences will be held at New York University School of Law and Cornell Law School, respectively.  The conference organizers are: Jennifer Arlen (NYU), Bernard Black (Texas), Theodore Eisenberg (Cornell), Michael Heise (Cornell) and Geoffrey Miller (NYU).

For more information:

General inquiries concerning the 2006 Conference and additional details regarding particular submissions should be sent to:

                Prof. Bernard Black

            University of Texas, School of Law and McCombs School of Business

            bblack@law.utexas.edu, (512) 471-4632

 Logistical inquiries should be directed to:

            Ms. Peggy Brundage, (512) 232-1387

            pbrundage@law.utexas.edu

Professor Ribstein responds to David Walker’s backdating article, which Bill highlighted here at TOTM a few weeks ago. Larry’s take?

This is a useful paper as far as it goes. The problem is that it has missed a significant chunk of the “literature” on this rapidly developing topic that has developed in our rapidly developing medium — i.e., the blogs. For example, consider my posts here and here and throughout my executive compensation archive, Josh Wright and Geoff Manne’s comprehensive post, and many many others by Bainbridge, Bodie, Fleischer, etc. This is not merely some kind of procedural problem. By missing this commentary, the article fails to pay any attention to some very important issues, particularly including whether the market looked through any accounting shenanigans. The latter issue alone would seem to be rather critical if you’re trying to explain backdating and its consequences, as Walker is.

Larry’s reaction to the paper has evoked reactions from Vic and Walker in the comments section. Holding aside the issue of whether Manne & Wright should be cited (as readers of this blog know, Geoff and I have elsewhere set forth our own thoughts on backdating, individually and cooperatively), I took Larry’s central criticism to be that the argument raised by some of these bloggers that “stealth compensation” is simply not a good description of backdating if it did not fool the market should be addressed in a paper purporting to explain backdating. It is a fair point and I tend to agree. To be sure, it is an excellent marketing strategy to describe the options this way. Indeed, I could describe backdated options as “alternative in-the-money compensation.” But I digress. Further, Larry offers a second post responding to Walker’s comment, and argues that any substantive explanation of backdating must address whether the market was fooled:

I continue to be puzzled how one can argue that options were “stealth compensation” without discussing whether enough information was available that the compensation was reflected in stock price. If the market knows what the executive is being paid, then I’m not sure how one can argue that it could not make the judgments that Walker is concerned about.

I agree with both Ribstein and Walker that this sort of exchange is precisely what the blogosphere needs more of. In that spirit, let me chime in with a few of my own thoughts here in response to Walker’s article.

First, the empirical contribution of this article should celebrated. In particular, in addition to documenting the fact that a good deal of backdating occurs with rank-and-file employees rather than executives, Walker conducts a descriptive analysis of backdating within the semiconductor industry and highlights differences in executive compensation for firms involved in the backdating scandal (p. 34-35). I think this sort of descriptive analysis is definitely value added and tells us more about the phenomenon which we are attempting to ultimately explain.

Second, I am left somewhat unsatisfied with Part III of the paper (which starts at p.21), which is titled “Explaining Backdating.” To be sure, Walker notes that “the aim of this part is to lay out a range of possible rationales,” and test them against the early empirical evidence. For my tastes, this paper does too much of the former and too little of the latter. Walker discusses a range of rationales including compensation concealment, share dilution limitations, cognitive biases, boosting ISO grants, and the influence of common advisors (which Walker lumps together, somewhat inexplicably, with “herd mentality”). With respect to herd mentality, the “evidence” is that a number of firms adopted the same practice in the Silicon Valley and Larry Sonsini was linked to many firms. I’m not sure what this has to do with “herd mentality,” but I can think of a number of reasons why many firms adopt the same practice which have nothing to do with psychology.

As for the other explanations, again, I find the paper a bit light on the discussion of evidence, which is odd, because I do believe that the central (and most important) contribution of Walker’s paper is his empirical work. Walker seems to be impressed with the naivete / cognitive bias explanation throughout this section, but as I have noted elsewhere, I do not find this explanation persuasive in light of the time series evidence (have compensation committee’s become more naive? Or for that matter, employees or executives?). In any event, to the extent that many of these explanations touch upon the economic explanation for the increase in executive compensation more generally, simple explanations like this one (that apparently explain much of the data) should be addressed, as should evidence of the stock price effects.

The strength of this paper, by my lights, is Walker’s empirical analysis. His contribution to our understanding of what is going on within a particular industry with a lot of backdating is an important one. In fact, I would be inclined to organize the entire paper around this analysis — which is really his unique contribution. I know, nobody asked me. Just a thought.

Matt Bodie’s “Canons” project continues over at Prawfs, and antitrust is up to bat.  I took a stab at a reading list which I believe meet’s Matt’s criteria: articles that are essential to doing antitrust scholarship.  My long, but embarrassingly underinclusive list, is below the fold.  In particular, I have left out a good deal of more technical economics scholarship (though some appears on the list): the literature on merger simulation, post-Chicago models on specific vertical practices, nothing on immunities or exemptions, federalism, etc.  But it’s a start.  By the way, Andrew Gavil’s Antitrust Anthology is an excellent collection of classic antitrust scholarship.  Please feel free to add your own entries over at Prawfs!  But here’s what I’ve got so far…
(more…)

The SEC Office of the Chief Accountant issued a letter today “summarizing the staff’s views regarding the accounting for stock options in the historical financial statements of public companies.” See here. The letter addresses a number of accounting issues concerning option backdating. It also has this to say about spring-loading and bullet-dodging:

H. Timing of Option Grants

Some companies appear to have engaged in techniques to select their award dates in coordination with the disclosure of information to the public. For example, a company may have granted stock options while it knew of material non-public information that was likely to result in an increase to the stock price [i.e., spring-loading]. Alternatively, a company may have delayed the grant of options until after material information that was expected to result in a decrease to the stock price was issued [i.e., bullet-dodging]. To the extent such practices were used, questions have been raised as to whether an adjustment would be necessary to the market price of the stock at the measurement date for the purpose of measuring compensation cost. Pursuant to paragraph 10(a) of Opinion 25, the staff believes that compensation cost must be computed on the measurement date by reference to the unadjusted market price of a share of stock of the same class that trades freely in an established market.

In other words, neither spring-loading nor bullet-dodging creates an accounting issue. Of course, the question of whether these practices constitute insider trading (my view is that they do not) or give rise to tax issues remains open.

His first two installments are already up here and here.  This promises to be an interesting series.