The FDA has determined that milk and meat from some cloned animals (cattle, swine, and goats) is safe to eat. It has therefore lifted a moratorium on such products. But don’t expect to see milk and meat from cloned animals in your local grocery store. Cloning is incredibly expensive, so cloned animals would almost certainly never be slaughtered or used for milking. Instead, they’d be used for breeding. The idea is that we’d use cloning to create exact reproductions of animals with superior qualities, and we’d then breed those cloned specimens to generate superior offspring.

Not surprisingly, lots of folks are aghast over the FDA’s decision. Animal cloning is novel and high-tech, so those who would prefer a back-to-nature approach to food production oppose it on that ground alone. Others invoke the so-called precautionary principle — a “better safe than sorry” stance — and insist that we should avoid the technology in light of its unknown risks. Still others argue that even if cloned animal products are safe to consume, the process of cloning may harm animals, and cloned food should thus be banned on animal welfare grounds.

Fortunately, the FDA rejected all these positions. With respect to the back-to-nature folks, the FDA noted that cloning “falls on a continuum of ARTs [assisted reproductive technologies] that includes artificial insemination, in vitro fertilization, embryo transfer, and embryo splitting. All of these technologies are tools that have allowed farmers to accelerate the propagation of genetically superior animals to provide the public with meat and milk that is safe, wholesome, and of consistent quality.” Thus, the position of the neo-Luddites has already been rejected and would, if accepted, diminish food quality and raise food prices, to the detriment of all–particularly the poor.

With respect to the precautionary principle, the FDA, like most American (but not European) regulatory agencies, has rejected it in favor of some version of cost-benefit balancing. That’s a good move, for it accounts for the fact that foregoing a new technology that could enhance social welfare (e.g., could give us more and better food at lower cost) is itself risky/harmful. A principle forbidding all activities that might cause harm literally forbids everything, for the act of banning an activity, just like the activity itself, might cause some harm. Thus, as Cass Sunstein argues, “The most serious problem with the precautionary principle is that it offers no guidance–not that it is wrong, but that it forbids all courses of action, including inaction.” The FDA therefore wisely chose to forego the precautionary principle and instead compare the likely costs and benefits of permitting cloned food products.

With respect to animal welfare, the FDA acknowledged that cloning enhances some animal risks such as “large offspring syndrome,” but it decided that the magnitude of those risks (which exist to a lesser degree with other assisted reproductive technologies) does not justify banning the procedure. If one is willing to concede that animals may be exploited to feed humans (as all meat-eaters and milk-drinkers must), and if the incidence of cloning-related health problems is small (as it appears to be), then this seems like a sensible decision.

Thus, I’m confident the FDA made the right decision in allowing the sale of milk and meat from cloned animals.

But guess what…not everyone shares my values. Some people have a lower tolerance for risk than I. Many are less price-sensitive (I’m pretty darn cheap at the grocery store!). Others are more concerned about animal welfare. Those people ought to be free to choose clone-free food products — that is, products that are not made from cloned animals or their offspring.

Unfettered markets, of course, can and will accommodate the preferences of people who would prefer — for whatever reason — to avoid cloned animals and their progeny. As long as a substantial number of people would prefer to stay clone-free, enterprising food sellers will respond to their desires by offering food products that include no parts or products of cloned animals or their offspring. That’s one of the many beauties of free markets: they, far better than centralized planners, can accommodate heterogeneous preferences.

But this assumes sellers will be free to market their products as clone-free. Here, they may run into some problems. Business interests that would like to develop cloning technologies and/or to market products from cloned animals and their offspring do not want to lose business to sellers of clone-free products. Those with an interest in cloning technologies may therefore seek to erect regulatory barriers that would make it difficult to market clone-free foods.

They might take a page from the playbook of Monsanto, which pushed for and attained an FDA industry guidance that makes it exceedingly difficult for sellers of non-genetically modified foods to label their products as such. Under the FDA’s guidance, sellers of non-GM foods are forced to label their products as though they were playing the boardgame Taboo. In that game, players provide clues to get their partners to identify a word but, in doing so, are forbidden to say any of the words one would most naturally say in conveying clues. When it comes to labeling non-GM foods, the FDA has made the following terms “taboo”:

Acronyms such as “GM” and “GMO” (according to FDA, saying something is “non-GM” or “non-GMO” is misleading because people don’t understand these acronyms);

The term “genetically modified” (according to FDA, saying that a non-gene-transferred organism is not genetically modified is misleading because nearly all foods have been genetically modified through cross-breeding);

References to “organisms” or “GMOs” (according to FDA, a food label touting the absence of GMOs is misleading because it implies that foods which are not GMO-free contain “organisms”–that is, living things);

Claims to be GMO “free” (according to FDA, a claim that a product is GM “free” implies a complete absence of GM material, and it’s very difficult to ensure that there are no trace amounts of GM material in a food item);

Any implication of superiority (according to FDA, any label that implies that the food product is superior because it lacks GM material misleadingly implies that non-GM is superior).

Who could possibly navigate this minefield, especially with the last “taboo”?! Since the only purpose for indicating that a food has no GM ingredients it to appeal to shoppers who believe, for one reason or another, that non-GM foods are superior, this last taboo effectively prohibits any mention of the absence of bioengineered ingredients unless the label also contains a detailed disclaimer indicating that the absence of GM ingredients is actually irrelevant. No marketer is going to use that sort of label.

Because of this stupid, industry-sponsored rule, the most obvious means of accommodating the preferences of GM-opposing and GM-preferring/neutral consumers — voluntary negative labeling of non-GM products — has never really taken off. It’s no big deal to me personally because I’m more than happy to consume GM products. I do, though, recognize that others don’t think the way I do, and I respect their desire to opt for non-GM products. Similarly, I’m fine with consuming milk and meat from cloned critters and their offspring, especially if it’s cheaper and better. At the same time, I don’t want to force my own preferences on others. If the regulators stay their hand this time and allow markets to respond to consumer preferences, we can end up with a world in which I get my cheap tasty clone meat and my back-to-nature (or more risk-averse, or less price-sensitive, or more animal welfare-respecting) friends are able to buy the foods they want. We all win if we stay free to choose.

[For more on the FDA’s stupid GM-labeling guidance, see Philip G. Peters and Thomas A. Lambert, Regulatory Barriers to Consumer Information about Genetically Modified Foods, in Labeling Genetically Modified Food: The Philosophical and Legal Debate (Paul Weirich, ed.) (Oxford Press 2007).]

Yesterday, the NCAA settled a horizontal price fixing class action case initiated by former basketball and football players (here, here, and here).  It’s nice to see the student-athletes get something, but I wish they would have received more.  The suit deals with the difference between the NCAA’s grant-in-aid (GIA) cap and the full cost of attendance (whether they were secretly trying to include the opportunity cost of attendance in their damages, I do not know).  The settlement provides $10 million over three years to cover former student-athletes’ “bona fide educational expenses” over the GIA cap and $218 million through 2012-2013 to “use the available funds for such aid to student-athletes with demonstrated financial and/or academic needs, and to include such assistance in their reports to the NCAA describing their uses of these funds.  Consistent with current practice, those reports will not be disclosed outside the NCAA.”  It will be interesting to see what exactly the latter means.

In my opinion, the NCAA has been one of the most blatant cartels in recent history, and I tend to be pretty free-market.  Colluding to lower an input’s wage is just as anti-competitive as colluding to raise the price of outputs like vitamins or lysine.  When you here NCAA President Miles Brand speak about it, you get the same ”Amateurism is what we do” quote (quoting from memory) over and over again.  I bet those vitamin and lysine guys wish they could have had a catch-phrase like that to help keep the law off their backs.

The collusion was so bad that student-athletes weren’t, at a minimum, having their full expenses covered.  It made the lame Reggie Bush story headline news (and I went to UCLA).  And then there’s this part of the settlement:

“Conditioned upon final approval of this Settlement, the NCAA Division I Board of Directors has approved adoption of a rule permitting, but not requiring, Division I member schools to provide year round, comprehensive health insurance to student-athletes.”

I’ll leave that one to the reader.  In summary, I’m happy today but I wish I could be happier.

The ABA has announced a Fellowship Award for $5,000 and travel expenses for unpaid summer employment “within approved government agencies (federal, state, or international) dedicated to the enforcement of antitrust laws, or other institutions whose primary mission is to advance the study of antitrust and competition law.”  The application packet is availabe here, and lists certain institutions that pre-qualify.

This sounds like a great opportunity for a 1L or 2L who is interested in antitrust and competition policy.  The application deadline is March 28th.

GW Lawprof Michael Abramowicz is guest blogging over at the Volokh Conspiracy on the virtues of prediction markets and his new book: Predictocracy.

Motivated by a slate of forthcoming articles, books, and various projects involving unincorporated firms, Professor Ribstein has announced his plans to begin blogging more extensively about partnership, LLCs and agency issues over at Ideoblog. This is good news to anybody interested in issues of business law and finance more generally. Two early installments in this endeavor are already up here and here. With all of Professor Ribstein’s upcoming projects, I was a bit concerned that the cost of these increased efforts might be less time dedicated to exposing the hand waving economic illiteracy of Ben Stein in the NY Times. I guess I don’t have to worry about that.

Thom was recently invited to draft a critical response to a symposium at the Institute for Consumer Antitrust Studies on the future of single firm conduct.  The transcript from the Roundtable Discussion is available on SSRN.  Thom graciously asked me to join him in drafting a short critical piece to the symposium. It is difficult to respond to an entire symposium in under 20 pages, and we are quite sure we were not able to get to it all of it. We did our best to hit the highlights and central themes of the conversation and contrast the generally pro-interventionist views expressed by the conference panelists with our more skeptical views about the proper scope of the antitrust enterprise in our modern economy. With that said, Antitrust (Over-?)Confidence is now available on SSRN. It will be published in the Loyola Consumer Law Review. Here is the abstract:

On October 5, 2007, a group of antitrust scholars convened on Chicago’s Near North Side to discuss monopolization law. In the course of their freewheeling but fascinating conversation, a number of broad themes emerged. Those themes can best be understood in contrast to a body of antitrust scholarship that was born six miles to the south, at the University of Chicago. Most notably, the North Side discussants demonstrate a hearty confidence in the antitrust enterprise-a confidence that is not shared by Chicago School scholars, who generally advocate a more modest antitrust. As scholars who are more sympathetic to Chicago School views, we are somewhat skeptical. While we applaud many the of the insights and inquiries raised during the conversation, and certainly this sort of discussion in general, our task in this article is to draft a critical analysis of the October 5 conversation. In particular, we critique the North Side discussants’ vision of a big antitrust that would place equal emphasis on Sections 1 and 2 of the Sherman Act and would expand private enforcement of Section 2.

Download it.

I want to respond to some of the comments on my blog regarding whether part of the ideological difference between liberals and conservatives can be explained by their differing estimations of the elasticity of various curves.

First, Thom reminds us of Posner’s idea that the difference between liberals and conservatives is that liberals think that people are selfless but stupid whereas conservatives think that people selfish but smart. This idea is closely related to the one I proposed. For, if people are selfish but smart, then when the price of something rises, they will take note, seek out substitutes, and adjust their behavior accordingly—and hence the demand curve will be elastic. On the other hand, if people are selfless but stupid, when the price of something rises, either they will not notice or else they will be insufficiently self-interested to substitute other products; either way, they pay the higher price, and so the demand curve will be inelastic. Posner’s account, if true, thus plausibly explains why liberals and conservatives would systematically disagree about elasticities.

Second, the liberal-conservative divide over whether a requirement to show identification will discourage many people from voting may well be independent of questions of the elasticity of demand for voting. For example, suppose that, as liberals seem to think, the demand curve here is highly elastic (e.g., say elasticity of 2.0), but that, as the conservatives seem to think, the increase in cost to voters will actually be quite small, say .01%. Then the law requiring voters to show identification would reduce voter turnout by only .02%, i.e., one voter in 5,000. A conservative could then say that this was a reasonable price for us as a society to pay in order to deter vote fraud. I have no idea what the actual numbers are, but it would seem to make sense to lose one legitimate vote in 5,000 in order to preempt, say, one fraudulent vote in 4,000. Even if the percentage of fraudulent votes was less than the percentage of votes lost through the identification system, the gain from people being more confident in the system might make checking identification worthwhile. The defining difference between liberals and conservatives here may thus relate not to elasticities but to the perceived increase in the cost of voting on a percent basis.

Lest anyone be scandalized by the idea that it could be worthwhile to let some legitimate votes be lost, let’s remember that any system at the polling place that limits who can vote, including the present vote, deters some people from voting. It’s only a question of how many lost votes we think acceptable in this context.

Third, I agree with the many readers who said that any explanation of the difference between liberals and conservatives in terms of disagreements about elasticities is partial at best. It explains nothing, for example, about differing attitudes concerning, say, abortion. Differences on life issues, I think, go to differences on fundamental meta-ethical premises. Here, conservatives tend to think that morality is, in some sense, based on a human nature that is shared by all members of the biological species homo sapiens. Since human fetuses or embryos are members of that species as much as anyone else is, they are generally entitled to the same moral protections as anyone else. Liberals, on the other hand, tend to think that morality is, in some sense, based not on human nature per se but on the human capacity for, say, higher mental functions. Hence, members of the human species that are incapable of such functions (e.g., the very young, the severely disabled, etc.) are not generally entitled to the same moral protections that healthy adult human beings are. If some account along these lines is right, then the philosophical differences between liberals and conservatives run very deep indeed.

I am very pleased to announce the “Merger Analysis in High Technology Markets” on behalf of my colleague Tom Hazlett, myself, and the Information Economy Project of the National Center for Technology and Law. The conference will be held at George Mason University School of Law on February 1, 2008 from 8:15 am-2:30 pm. Below is the conference agenda and information about attending. We hope to see you there!

INFORMATION ECONOMY PROJECT
THOMAS W. HAZLETT, DIRECTOR
DREW CLARK, ASSOCIATE DIRECTOR
JOSHUA D. WRIGHT, CONFERENCE ORGANIZER

MERGER ANALYSIS IN HIGH TECHNOLOGY MARKETS

HAZEL HALL * GMU SCHOOL OF LAW * ROOM 121

8:15 WELCOME * THOMAS HAZLETT (GMU)

8:20 MORNING KEYNOTE

8:45 PANEL 1 * MODERATOR: KEN HEYER (DOJ)

HOWARD SHELANSKI (UC BERKELEY)
TECHNOLOGICAL INNOVATION AND MERGER POLICY’S THIRD ERA

MICHAEL BAYE (FTC)
MARKET DEFINITION IN ONLINE MARKETS

RICHARD GILBERT (UC BERKELEY)
SKY WARS: THE ATTEMPTED MERGER OF DISH/ DIRECTV

10:00 BREAK

10:15 PANEL 2 * MODERATOR: MICHAEL VITA (FTC)

HAL SINGER (CRITERION) & ROBERT HAHN (AEI)
AN ANTITRUST ANALYSIS OF GOOGLE’S PROPOSED ACQUISITION OF DOUBLECLICK

MARY COLEMAN (LECG)
NICE THEORY BUT WHERE’S THE EVIDENCE?: THE USE OF ECONOMIC EVIDENCE TO EVALUATE VERTICAL AND CONGLOMERATE MERGERS IN THE US AND EU

LUKE FROEB (VANDERBILT)
MERGERS AMONG FIRMS THAT LICENSE COMMON INTELLECTUAL PROPERTY

11:30 BREAK

11:45 PANEL 3*MODERATOR: JONATHAN BAKER (AMERICAN)

BRUCE ABRAMSON (CRAI)
ARE “ONLINE MARKETS” REAL AND RELEVANT?

THOMAS HAZLETT (GMU)
ANTITRUST IN ORBIT: SOME DYNAMICS OF HORIZONTAL MERGER ANALYSIS IN THE CASE OF XM-SIRIUS

J. GREG SIDAK (GEORGETOWN)
EVALUATING MARKET POWER WITH TWO-SIDED DEMAND AND PREEMPTIVE OFFERS TO DISSIPATE MONOPOLY RENT: LESSONS FOR HIGH-TECHNOLOGY INDUSTRIES FROM THE PROPOSED MERGER OF XM AND SIRIUS SATELLITE RADIO MERGER

1:00 LUNCH

LUNCH KEYNOTE

2:30 ADJOURN

VENUE: The George Mason University School of Law, Hazel Hall, 3301 Fairfax Drive, Arlington, VA 22201 (near the Virginia Square-GMU Metro — Orange Line). Admission is free, but seating is limited. To reserve your spot, please email Drew Clark: iep.gmu@gmail.com. Parking (at market rates) is available in the GMU Foundation Bldg., 3434 Washington Boulevard. An Arlington campus map is found here: http://www.gmu.edu/departments/infoservices/ArlingtonMap07.pdf.

Courtesy of Larry Solum’s Legal Theory Blog, the following two papers have been posted on SSRN and may be of interest to our readers. First is Keith Hylton’s analysis of the Weyerhaueser decision, Weyerhaeuser, Predatory Bidding, and Error Costs.  Here is the abstract:

In Weyerhaeuser v. Ross-Simmons the Supreme Court held that the predatory pricing standard adopted in Brooke Group also applies to predatory bidding claims, because the two types of predation are “analytically similar”. I argue that predatory bidding is likely to be more harmful to consumer welfare than is predatory pricing. Successful input market predation may lead to a “dual market power” outcome in which the firm has market power in both the input and the output market. In spite of the analytical distinction, consideration of error costs leads me to conclude that Brooke Group remains the best standard to apply to predatory bidding claims.

Also, my GMU colleague Bruce Kobayashi has posted Spilled Ink or Economic Progress? The Supreme Court’s Decision in Illinois Tool Works vs. Independent Ink.  Kobayashi argues that while the rejection of the presumption market power is a positive step:

“the Court’s decision may be limited by the flawed and outdated modified per se rule used to evaluate tying arrangements generally. Moreover, while the Court undermined the underlying rationale for the modified per se rule against tying, it chose not to revisit this issue. In addition, while the Court’s opinion implicitly adopts a robust standard for market power, it failed to address its contradictory holding in Kodak v. ITS, its most recent decision evaluating a tying arrangement.”

Professor Kobayashi’s analysis is spot on and he joins a number of commentators, including myself in this Cato Supreme Court Review article, who have characterized Independent Ink as a decision that moves antitrust doctrine in the right direction but also as plagued by missed opportunities.  In my analysis, I focus on the missed opportunity to clarify the status of competitive price discrimination in antitrust analysis.  I argue that the failure to reject the view that price discrimination implies antitrust relevant market power

“is costly because it deters competitive price discrimination, which despite widely perpetuated economic myths, is not generally associated with consumer welfare losses and may benefit all consumers. While antitrust law has come a long way in terms of economic sophistication, the persistent association of anticompetitive inferences with an inherently competitive practice is evidence that it has not yet fully incorporated fundamental lessons from the economic literature.”

Professor Kobayashi explores different “missed opportunities” in the Court’s Independent Ink decision.  Specifically, he rightfully criticizes the failure of the Court to revisit its last, and highly controversial, tying decision in Kodak.

Both of these papers look very interesting and apply an error-cost framework to understand appropriate rules for predatory bidding and tying.  Both are worth reading.

The value of interdisciplinary legal education is coming up once again. This time, Brian Tamahana argues that the interdisciplinary movement is a bad idea:

the notion that interdisciplinary studies within law schools promises to improve the practice of law is an old idea backed up by little evidence. Non-elite law schools might not be serving their students well if they get caught up in this trend.

Tamahana’s argument is largely empirical: “there is no evidence that it will make their students better lawyers.” He also argues that such a move may not be cost-effective for non-elite law schools and that students might suffer if they are taught in by an increasing fraction of JD/PhDs with little or no practice experience. There has been plently of blog commentary on this issue (see, e.g., Dan Solove, Ethan Leib, and some very interesting comments at Brian Leiter’s Law School Reports). Predictably, as one of those JD/PhDs with little practice experience teaching at a school that prides itself on interdisciplinary legal education, I tend to believe there is considerable value in interdisciplinary education — especially economics.

But I don’t want to turn this into a general defense of law and economics. Nor do I want to spend any time with the second and third aspects of Tamahana’s arguments. The commentary from Solove and others covers those issues. But what about the empirical question? Is there any evidence that such education will make students better lawyers?

What about this study from Craft & Baker (2003) in the Journal of Economic Education that we blogged about awhile back? The most pertinent finding is that undergraduate education in economics lead to higher earnings as a lawyer. I suspect that the level of interdisciplinary education in law school is similar to the subject matter that one would learn in an undergraduate program. Here’s the abstract:

Using nationally representative data, the authors examine the effects of preprofessional education on the earnings of lawyers. They specify and estimate a statistical earnings function on the basis of well-established theory and principles. Along with standard control variables, categorical variables are included to represent graduate degrees in addition to the law degree and an assortment of undergraduate major fields. Holding a Ph.D. or M.B.A. degree, with the law degree, is associated with significantly higher earnings in some sectors. Lawyers with undergraduate training in economics earn more than other lawyers, ceteris paribus, and economics is the only undergraduate field associated with earnings that differ significantly. The available evidence supports the hypothesis that economics training increases a lawyer’s human capital compared with other undergraduate majors.

Apparently, at least some employers tend to believe that there is something value in this type of education for lawyers. That’s certainly a start to answering Tamahana’s empirical challenge. Of course, there are some obvious concerns with endogeneity and selection effects here (which the authors discuss at 278-279 at the link above). But the most interesting result appears to be that neither undergraduates in other majors with high average LSATs or other majors with similar content (business, accounting) generate the same increase in lawyer earnings. The authors properly and cautiously conclude with some reservatation about whether they have identified a causal relationship here:

Although firm conclusions cannot be drawn from this analysis, the available evidence suggests that the effect of an economics bachelor’s degree on the earnings of lawyers results from more than simply self-selection effects. Hence, it appears that the development of additional human capital may be playing some role.

I’m certainly not arguing that the study is dispositive of a link between economics education and quality of legal education in terms of producing value. And perhaps there is something different about undergraduate education in economics and integrating in economics to the general legal curriculum. Though I doubt any differences in that vein are really significant to the debate here. The question of what exactly produces value in the legal education process is an incredibly important one. But if this evidence cuts in any direction, it is that economics education does indeed tend to make students better lawyers.  If further study was to support this finding, perhaps it would suggest that the more important question for legal education is not whether interdisciplinary education makes for better lawyers, but what types of programs improve legal education under what conditions?

The Supreme Court’s opinion in Stoneridge Investment Partners v. Scientific-Atlanta was issued today.  This case involved investors in Charter Communications’ common stock who sued under Section 10(b) of the Securities Exchange Act of 1934.  The investors sued Charter’s SUPPLIERS AND CUSTOMERS, including Scientific-Atlanta and Motorola, who had entered into essentially “wash” contracts with Charter for purposes of allowing Charter to inflate its earnings and mislead investors.  The contracts involving Scientific-Atlanta and Motorola obligated Charter to buy set top boxes from Scientific-Atlanta and Motorola, and, in return, both parties would buy advertising from Charter.  The effect of these agreements was technically a wash for Charter, but Charter was using these agreements – specifically the advertising agreements – to inflate its revenues and bolster its financial statements.  Both Scientific-Atlanta and Motorola knew, it is alleged, why Charter wanted to enter into these wash transactions with them.

The trial court, with the 8^th Circuit affirming, dismissed this lawsuit in favor of the defendants.  The Supreme Court today affirmed, finding that the complaining Charter investors failed to adequately plead the “reliance” element of a Section 10(b) claim.  (In order to sue in a private action under Section 10(b), a complaining party (other than the SEC) must establish that the defendant (a) made a material misstatement or omission, (b) in connection with the purchase or sale of securities, (c) with the intent to deceive, manipulate or defraud, (d) and the investor relied on this misstatement or omission, and (e)  the investor suffered losses from the misstatement or omission.)

Unfortunately, today is a double teaching day for me (M&A and Business Enterprises II), so I cannot spend a whole lot of time blogging on this case.  But I have several points to make quickly:

1.  Some of the media blurbs I have seen today warn that the Supreme Court’s holding in Stoneridge bodes ill for private securities fraud suits against secondary actors (such as lawyers, bankers, auditors, underwriters).  That is NOT true.  The media folks writing those inflammatory headlines either (a) have not read the Stoneridge opinion, (b) are not familiar with the Stoneridge facts, or (c) are only discussing the case with the corporate defense bar who, I am sure, will likely try to sell the Stoneridge holding as ringing the death knell for any securities fraud cases against anyone other than an issuer.  As a fan of the broad interpretation of Section 10(b), allow me to say that the facts of this case (the facts pertaining to the involvement of Scientific-Atlanta and Motorola in Charter’s securities fraud) troubled even me.  This case – Stoneridge – involved suppliers and customers of an issuer.  Those parties are even further removed from investors and the actual securities market than traditional “secondary actors” such as an issuer’s lawyers, auditors, etc.  Even with my propensity to broadly interpret and apply the elements of a 10(b) cause of action, I might have had a hard time holding S-A and Motorola liable thereunder.  So the Supreme Court opinion in Stoneridge, if anything, should stand for the notion that, the further down the fraud actor chain we go, the harder it is to pull in defendants.

2.  In a related vein, I am stunned that the Supreme Court treated this case as a “reliance” case.  Basically the Court said that the investors could not have relied on Scientific-Atlanta and Motorola b/c those parties had no “duty” to make disclosure to the investors.  Huh?  As I understand the reliance argument that could be made by the investors in this case, it is that the investors relied on the fact that the contracts with Scientific-Atlanta and Motorola were legitimate, business-justified, economically defensible contracts.  Which wasn’t true –they were wash contracts, designed to be wash contracts.  If an investor walked into court and could prove that she bought stock in Charter because she saw on Charter’s books the contracts with S-A and Motorola, and she relied on the economic value of those contracts (that they were positive contracts benefiting Charter), why *couldn’t* the investor establish reliance as it pertains to S-A and Motorola?  The fact that S-A and Motorola had no “duty” to the Charter investors is irrelevant.  “Duty” is not an element to a Section 10(b) violation.  Reliance is, and if an investor could prove that she “relied” on the true economic value of those contracts (to wit, that they weren’t sham “wash” contracts), why couldn’t she prove reliance?

3.  To that end, this opinion re-affirms that the Supreme Court is often totally confused when it tries to discuss securities fraud.  First Dura, now Stoneridge.  With due respect to the Justices who signed on to the majority opinion in this case, the law isn’t particularly challenging in this area– either a plaintiff establishes the five/six elements necessary to prove securities fraud or she does not.  Were I writing the Stoneridge opinion, and I wanted, for policy reasons, to affirm dismissal of the suit, I would have done it on the “in connection with” element.  One could argue with a straight face that S-A’s and Motorola’s “lies” (to wit, the fraudulent wash contracts) were not lies told “in connection with the purchase or sale of securities.”  Reliance, not so much.

4.  Justice Kennedy, in his majority opinion, made clear that he really *wanted* to cut off investors at the knees in terms of their ability to sue “secondary actors.”  His opinion gave us a stream of dicta regarding aiding and abetting and federalism and the problem with expansive interpretations of 10(b).  At the end of the day, he didn’t *need* to give us that monologue in order to decide the case, but he clearly wanted us to know that he’s not a big fan of broadly interpreting Section 10(b).  Duly noted.

5.  To that end, Kennedy includes some ramblings about common law fraud in his majority opinion, but he gets the story wrong.  (See point “3,” above.)  Section 10(b) was adopted on the heels of the stock market collapse in the 1920’s, and Section 10(b) was therefore specifically designed to address fraud in the securities markets that the common law was insufficient to reach.  Common law fraud doctrine was viewed as not broad enough – that’s why we needed an expansive federal scheme.  So, if anything, as we look at the elements of a 10(b) claim, we need to interpret these elements more BROADLY than they have been interpreted at common law.  With due respect to Justice Kennedy, when he says “Section 10(b) does not incorporate common-law fraud into federal law,” he should have been using that as his launching point to justify interpreting “reliance” in the 10(b) context more broadly than reliance in the plain vanilla common law context.  Instead, he used that as his launching point to have a discussion about the need to limit who we can reach under a Section 10(b) private action.  (How could Kennedy’s law clerk have missed this point about common law fraud and the history of 10(b)’s adoption?)

6.  The majority opinion makes clear that the SEC can go after S-A and Motorola for aiding and abetting securities fraud.  I have no idea if the SEC has already undertaken to so do.  If they have not, I would urge the SEC to get on that task now.  The last thing the investing public needs is an invitation like that from the Supreme Court to be ignored.

7.  One more thing:  Justice Kennedy writes in his opinion that, if the Court is too broad with its interpretation of Section 10(b), “[o]verseas firms with no other exposure to our securities laws could be deterred from doing business here.”  In the margin of the opinion next to that language, I wrote “huh?”  For the love of all things good and holy, why would Kennedy include that kind of needless hyperbolic dicta in an opinion that is already anti-investor?  I will bet you $12 that that line becomes one of the most-quoted Stoneridge lines within the next two years.  The reality is that overseas firms aren’t going to be deterred from doing business here, because they KNOW that the sort of facts we see in Stoneridge usually don’t make it to court due to problems with the “in connection with” element of Section 10(b).  Kennedy’s “overseas firms” comment strikes me as a bizarre attempt to get on the “capital is going overseas” band wagon some anti-regulation wonks have recently been driving around blindly.  The “capital is going overseas” cry, even if we assume its truth, is not a reason to stop enforcing Section 10(b).  Reading Justice Kennedy’s nod to the overseas market hysteria made me feel so… cheap and dirty.  Trendy doomsday rhetoric from the Supreme Court is, in my mind, equivalent to the Justices ending an opinion with “woot” or something.

We’ve been following presidential statements on antitrust here at TOTM — mostly through press releases to the AAI (e.g. our analysis of statements from Obama and Edwards).  I’ve been largely disappointed at the lack of attention to antitrust thus far from the candidates, with virtually no statements at all from the Republican side and only a few from the Dems.  This Reuters story (HT: Antitrust Review) offers a little bit of information from the perspective of antitrust practitioners on the predicted policies from various candidates.  Noticeably, there was nothing directly from the candidates’ camps.

The themes of the story are fairly predictable: (1) Edwards is the only “progressive” who would offer more than incremental change, (2) Clinton and Obama would offer roughly the same antitrust policy which, we are told, would be more active than the current administration without any specifics (see our critical discussion of the “more is better” view of antitrust here, here and here), and (3) its really hard to predict what any of the Republicans would do.  The Edwards and Obama statements are consistent with the characterizations in (1) and (2).  And (3) is certainly fair given the lack of attention to antitrust issues (at least publicly) from the conservative candidates.  

There was at least one excerpt from the story that raised my eyebrows.  Here it is:

Clinton and Obama likely hold similar views on enforcing anti-monopoly statutes, opposing price-fixing and other competition issues, according to several lawyers.  Obama’s time teaching law at the University of Chicago, where pro-market emphasis is strong, would affect his antitrust views, Sharp said.  But Hamilton Loeb of Paul, Hastings LLP disagreed, saying Obama had studied law at Harvard Law School, where “the prevalent antitrust theory was more moderate.”

Geoff, Thom or Keith will likely have a more insider perspective on this than I, but I am very skeptical about the assertion that Obama teaching at the University of Chicago would likely to lead to pro-market or “Chicago School” antitrust views.  Or for that matter, that Chicago economics is still a dominant component of the law and economics at University of Chicago (though there is still plently of law and economics there).  Here are a few reasons why I’m skeptical about the claim about Obama.  First, the connection between where you teach and your views on substantive areas outside your expertise seems fairly weak to me.  Second, is the University of Chicago Law School still associated with views of the “Chicago School” of antitrust analysis?  Was it in the 90’s when Obama taught there?   Third, Obama’s statements on Walmart and his reported but questionable association with behavioral economics don’t appear to betray any pro-market bias.  Fourth, a look at Obama’s own published statements about antitrust don’t reveal any Chicago School influence.  I might be willing to buy that Obama might be influenced by his antitrust teachers at Harvard.  But I’d need some more evidence or a mores specific statement from the Obama camp about the details of an Obama antitrust regime.

But to be clear, Obama is one of the only candidates to issue something on the issue and should be congratulated.  Where are the statements on antitrust from the rest of the candidates?  I understand that there are plenty of other important issues to go around this election cycle.  I don’t pretend that the average voter is as interested in antitrust as I am.  But it is my view that U.S. antitrust policy, and its role in the global antitrust environment, is more important than ever.  But do any of the Republican candidates think antitrust is an important enough issue to release a statement with some details?  Does anybody associated with any of the candidates know of statements on antitrust by the candidates that I’ve missed?

New York Attorney General Andrew Cuomo has issued a subpoena to Intel Corp. as part of an investigation into whether Intel’s discounting practices violate federal or state antitrust laws. According to Cuomo’s press release, the subpoena

seeks documents and information concerning Intel’s pricing practices and possible attempt to exclude competitors through its market domination. The information sought is relevant to whether Intel, among other things:

Penalized its customers, primarily computer manufacturers, for purchasing x86 computer processing units (CPU) from competitors;

Improperly paid customers for exclusivity;

Illegally cut off competitors from distribution channels.

This is not very specific, but, given that the press release refers favorably to Intel investigations by the European Commission and Korean and Japanese antitrust regulators, we can assume Cuomo is concerned about the behavior that troubled those foreign regulators. That purportedly troubling conduct is really just loyalty discounts — giving computer manufacturers a price-break, either an up-front discount or a rebate, if they agree to take the bulk of their requirements from Intel rather than from its competitors.

Cuomo’s characterization of these discounts is dysphemistic: computer manufacturers are “penalized” for purchasing competitors’ products only in the sense that doing so deprives them of a cheaper price from Intel; customers are “paid for exclusivity” only in the sense that Intel is giving discounts and rebates conditioned on loyalty and will thus end up charging the lowest per-unit prices to customers who buy from it exclusively; competitors are “cut off from distribution channels” only to the extent they can’t or won’t match Intel’s discounts and thereby maintain or expand their customer bases. Assuming Intel’s discounted prices are above its costs of production, any equally efficient producer could match Intel’s discounted pricing, so the only competitors destined to lose business because of Intel’s discounts are those that are either less efficient than Intel or unwilling to compete as aggressively on price.

[Note that there have been some accusations that Intel’s discounted prices are below-cost. That would change the competitive dynamic and might justify government intervention here (an equally efficient rival cannot meet a below-cost price and thus could be excluded by such pricing). But below-cost pricing is not the focus of Attorney General Cuomo’s investigation. Moreover, it is highly unlikely that Intel’s discounted prices are below its marginal or average variable cost of production; the variable costs of producing the sort of high-tech devices Intel sells are incredibly low.]

Any antitrust intervention that sought to protect a discounter’s less efficient or less price-aggressive competitors at the expense of consumers, who reap immediate benefits from loyalty discounts, would be perverse. Antitrust should not sacrifice the bird-in-the-hand of lower prices in order to protect laggard competitors. Thus, as I’ve previously argued, the FTC’s decision not to pursue this matter is entirely appropriate.

So why is Attorney General Cuomo pursuing this European-style, competitor-focused antitrust inquiry? Perhaps he is, as he claims, just looking out for the interests of New Yorkers. But not in their status as computer buyers (where they’d be helped by aggressive price competition). Instead, he’s looking out for their prospects of employment and for his state’s coffers. It seems that Intel’s chief competitor, Advanced Micro Devices (AMD), has promised to build a $3 billion plant in upstate New York. Thus, it makes sense that Mr. Cuomo would jump on the bandwagon led by Senator Charles Schumer and Representative Kirsten Gillibrand (D-NY), both of whom have pushed for a federal inquiry into Intel’s loyalty discounts.

So what we have here is really a protectionist move that may benefit New York’s workers (who may land sweet AMD jobs) and politicians (who’ll have more tax revenue to spend), but at the expense of computer consumers generally. What’s more, other potential discounters will know they might face inquiries from aggressive states like New York, and they may therefore forego consumer-friendly discount arrangements.

It’s bad enough that American businesses have to worry about competitor-focused European regulators. We’re in real trouble if rogue states start acting like antitrust bullies.

One of my favorite intellectual puzzles is figuring out what deep conceptual presuppositions cause some people to be conservatives, others to be liberals. That is, on a range of issues that would seem largely unrelated—say, abortion, affirmative action, and gun control—it turns that people’s positions are highly correlated. For instance, people who are pro-life tend also to be against affirmative action and against gun control, whereas people who are pro-choice tend also to be in favor of affirmative action and in favor of gun control. Why is this?

I’m still working on a general solution, but one thing is pretty clear. Conservatives tend to think that demand curves are elastic, liberals that they’re inelastic. Economists talk about demand for a product or service as being elastic if a 1% increase in price produces more than 1% decrease in quantity sold, inelastic if a 1% increase in price produces less than a 1% decrease in quantity sold. Elasticity is a precisely defined concept, but the basic idea is easy enough to understand: roughly, demand is inelastic if, when you raise the price, people keep buying the product at the higher price, but elastic if, when you raise the price, people cut back on their purchases of the product and do something else with their money.

So, for example, conservatives think the demand for crime is elastic: if you raise the price of crime to the criminal by increasing prison sentences, you’ll get a lot less crime. Liberals, on the other hand, tend to think that increasing prison sentences will have little effect on crime rates: in other words, they think the demand for crime is inelastic relative to prison sentences. Similarly for taxes. Conservatives tend to think that if you raise income taxes, people will work a lot less, whereas liberals tend to think that if you can raise income taxes, people will generally work as much as they did before the tax increase.

A fascinating role-reversal is thus at work in the voting rights cases that the United States Supreme Court heard earlier this week. As this story in the Legal Times explains, the Court is considering a constitutional challenge to an Indiana statute that requires citizens who want to vote to show at the polling place a state-issued photo identification such as a drivers license. Conservatives generally favor the law, and liberals generally oppose it, perhaps because the law is generally perceived as helping Republicans and hurting Democrats.

Whatever may be the real motives on either side, the Indiana Democratic Party and the ACLU say that the law is unconstitutional because it will deter people—especially old people, the poor, and minorities—from voting. They are thus in effect saying that the demand for voting is very elastic: make it even a little more difficult for people to vote, and many people will stay away from the polls. The conservative supporters of the law, on the other hand, are saying just the opposite: raising the effective cost of voting will not affect how many people vote because the demand for voting is inelastic.

Where does the truth lie? As a political conservative, I usually think that demand curves are pretty elastic. Nevertheless, all my intuitions run in favor of the view that the Indiana statute would not deter many people from voting. If I ask myself why my intuitions run in this direction, however, and if I’m being completely honest, I would have to say that I don’t really know.