I’m sure it’s an honor just to be nominated.

A recent opinion from Judge Posner cites our very own Josh Wright (Joshua D. Wright & Todd J. Zywicki, “Three Problematic Truths About the Consumer Financial Protection Agency Act of 2009,” Lombard Street, Sept. 14, 2009, available here) (by the way, the essay has drawn a few comments, my favorite of which is definitely the one titled, “are you stupid or scumbags[?]“).

The opinion is vaguely interesting touching as it does on the propriety of short-term, high-interest loans, but the holding rests on an analysis of the commerce clause so is pretty well beyond my ken.

At issue is an Indiana statute that purports to apply Indiana’s restrictive usury laws to consumer contracts executed outside the state, but with creditors that have advertised or solicited sales within Indiana.  The Indiana usury statute at issue constrains consumer loan interest to terms under which “the ceiling is the lower of 21 percent of the entire unpaid balance, or 36 percent on the first $300 of unpaid principal, 21 percent on the next $700, and 15 percent on the remainder,” with an exception for payday loans.  Such terms would preclude payday loans if they weren’t excepted under the statute and does preclude car title loans of the sort at issue in the case.  The court rules that the restriction on out-of-state transactions is impermissible under the constitution and strikes down the Indiana law.

The interesting part (to me) of the case, and the part where Josh (and Todd) are cited, is where Posner discusses the law and economics and related scholarship of car title and payday loans.  He doesn’t really come down on one side or another in this debate except to aver that Indiana has a colorable interest in protecting its citizens from “predatory lending,” if it so chooses.  It seems to me that he gives too much credit to the behavioral-economics-based arguments on the “predatory lending is, well, predatory” side of the debate, but he really doesn’t wade into the debate.  Nevertheless, Josh and Todd get their mention (Todd actually gets a couple of mentions) in this section, and kudos to them (and to FinReg21, where their essay appears) for drawing Posner’s attention.

Predicting what antitrust enforcement regimes in the current economic environment is a tricky business.  I’ve done my best here.  One probably cannot think of a better source for such predictions than those from the soon-to-be AAG Christine Varney, who recently spoke at an American Antitrust Institute panel on Section 2 enforcement (you can hear the panel audio at the link).  I had an RA transcribe Varney’s remarks so please note that all remarks attributed as quotations here may not be exact.

Generally, Varney applauded the AAI report, noting that is “a great framework that starts it and I do endorse the conclusions.” The AAI recommendations relating to monopolization, for those who have not read the report, includes at least the following proposals:

• Embracing a generally “Post-Chicago” vision of Section 2, including Kodak-style aftermarket claims and “other consumer protection market imperfections”
• Trimming the scope of Trinko in favor of the unilateral refusal to deal jurisprudence in Aspen and Kodak 
• Revitalizing the essential facilities doctrine as an independent theory of liability
• Reject cost-based safe harbors for loyalty and bundled discounts
• Make predatory pricing law more friendly to plaintiffs
• More aggressive remedies

Here are a three comments I found the most interesting:

1.  Varney on Google as An Emerging Antitrust Threat.

For me, Microsoft is so last century.  They are not the problem.  I think we’re going to continually see a problem potentially with Google, who I think so far has acquired a monopoly in internet, online advertising lawfully.  I do not think that they have done anything other than be a spectacular and innovative company.  I am deeply troubled by their acquisition of uh, Doubleclick and I am deeply troubled by their deal with Yahoo.  I submit to you that this administration, although they may open a investigation or a review of the Google-Yahoo deal, will do nothing.  I think that this is a classic area to explore how do you apply section 2 in a highly innovative, highly networked not terribly competitive environment. …

I find this a difficult area also by the way when it comes to Google, because Google has done so much terrific work and so much of it is IP-based, but as you can see they are quickly gathering market power in what I would call an online computing environment in the clouds and as we move into that environment I think you’re going to see Google has enormous market power there, again, I’m not saying it was anything other than lawfully achieved, but I wonder what’s going to happen when all of our enterprises move to computing in the clouds and there is a single firm that is offering the comprehensive solution that’s not interoperable with other potential solutions.  Now I think you’re going to see the same repeat of Microsoft, there will be companies that will begin to allege, and Ed can tell me why I’m wrong, they will be companies that begin to allege that Google is discriminating, that it is not allowing their products to interoperate with the Google products, and I think that we ought to have learned from the Microsoft experience, what the right standards are, and the problem that we had with Microsoft, I think, as a government we went in too late.

2.  On The Non-Existence of False Positives.

“My view and, you stole my thunder, I was prepared to say there is no such thing as a false positive, you know, let’s get real. I have counseled numerous incumbents who are dominant as well as numerous new entrants. I can tell you, at least in my own experience, there is not a dominant incumbent who hasn’t done something that is lawful because they were afraid that it might be reviewed by the DOJ or a state attorney general or an FTC. I just don’t see it. Ten years back in the private sector I have never once seen it, so I think that this ruse of, you know, we have to be restrained in our enforcement because false positives will chill innovation, take an economic toll on society and overall result in negative economic consequence, slowing output, increasing cost, I just think is false. I think the more people in the bars start rejecting this idea of false positives the better off we’re going to be.”

3. On Convergence with the Europeans and Global Antitrust Leadership.

“Europeans are setting rules, companies that are doing business globally cannot generally distribute two products, cannot generally compete in one manner in Europe and a different manner in the United States. So we may see ourselves, and this is a bad thing, if we don’t have influence on the development of dominant firm behavior, I think the Europeans are much more extreme than even I would be. So unless we have some credibility and can sit at the table and jointly continue to pursue the evolution of what we would call section 2, I think we’re going to cede this territory to the Europeans entirely and we’re not gonna have a whole lot to say about what abusive dominance looks like for a global firm.”

I highlight this third comment because it was an interesting contrast to the rest of the remarks favoring much more interventionist-minded application of Section 2.  Perhaps current Article 82 enforcement places an upper bound on what we can will see in the United States with respect to Section 2?  But it is difficult to know what to make of this comment when placed in the context of the assertion that false positives do not exist, which  I find quite troublesome for a number of reasons.

First, what does it mean to assert that “there is no such thing as a false positive”?  Varney’s evidence in support of the proposition is that from her vast and impressive counseling experience she is not aware of a firm that has refrained from lawful activity because they were afraid of antitrust liability.  That is comforting.  But not responsive to the concern about false positives raised by commentators in the literature.  As one who often argues that errors and their social costs not only exist but should play a central role in how we think about antitrust analysis, let me offer a basic point: false positives are not just when a firm chooses not to engage in lawful activity for fear that it will be mistakenly found to be illegal.  No.  It is not fear that a court will fail to understand the distinction between legal and illegal behavior if given clear rules.  The error need not come from courts merely misapplying clear law and concluding that activity that should be “lawful” violates the Sherman Act.  The concept is broader.  Rather, the false positives commentators are talking about involve when a firm refrains from efficient, pro-competitive behavior because it fears antitrust liability.

The reasons these errors come about is because the task of distinguishing pro-competitive conduct from that which is anticompetitive and harms consumers is incredibly difficult.  For example, does anybody really believe that LePage’s did not result in some chilling on the margin of pro-competitive bundled discount schemes?   What about the FTC’s enforcement action in N-Data?  Varney’s assertion that false positives simply do not exist is either a mistake or wrong.  Antitrust’s history is strewn with false positives, i.e. conduct that antitrust condemned before we learned far later that it was actually typically a normal part of the competitive process.  To be sure, we’ve learned something since then.  But I’ve never heard anybody argue that we’ve learned so much (especially in the single firm conduct arena) that the fear of antitrust liability does not influence business decisions. Consider a thought experiment designing an antitrust policy which takes seriously the belief that there is no such thing as error costs.  Many of my more interventionist minded Post-Chicago friends, who might disagree with me about the relative frequency of false positives, would shudder at the thought.

In either case, the view that we ought to not think about error costs when we think about designing appropriate antitrust enforcement policy (especially in the monopolization context, but also in cartels and mergers) strikes me as one of the most provocative, interventionist, and mistaken statements on this issue that I’ve read.   Error cost analysis is now a mainstream part of antitrust analysis.  It is not a tool that belongs to the Chicago School, Post-Chicagoans, or anybody else.  To be sure, an important debate can be had on the empirical question of the relative frequency and magnitude of type 1 and type 2 errors and their social costs.   Sometimes this debate has taken an oversimplistic approach by merely counting cases.  But there has at least been debate over the relevant theoretical and empirical questions.  This debate should continue.  It is my hope that Varney’s statement was an off the cuff remark in a panel setting (though it doesn’t appear it was) and not a conceptual belief that will drive policy decisions at the Antitrust Division.

Here’s another reason—as if you needed it—as to why getting a reasonable bailout of the mortgage-backed securities market through Congress was so difficult. Below I reproduce an analysis from Gregg Easterbrook of the Brookings Institute:

Supposing we assume the bailout is required, here is what bothers me about the plan so far: Taxpayers don’t get stock, what they get is warrants that can be exchanged for stock, and nonvoting stock to boot….  Even if the warrants are called [sic, Easterbrook means exercised], taxpayers get no voting positions…. A week ago, Warren Buffett rescued Goldman Sachs by injecting $5 billion in capital. Did Buffett bargain for warrants that can be exchanged at an unknown later date for nonvoting shares? No: He is not a fool. Buffett gave Goldman Sachs $5 billion in return for senior preferred stock, the kind that votes and also is more valuable than ordinary shares…. The United States Congress and the White House should use the public’s $700 billion to buy … senior preferred shares. Why are Congress and George W. Bush not simply following the road map laid out on this problem by the smartest investor of our era?

The problem is that this is factually mistaken from beginning to end. Easterbrook says that Buffett did not get warrants, but in fact he did—indeed, warrants to purchase $5 billion of common stock with a strike price of $115 per share and a five year term. Easterbrook says that the preferred shares Buffett received are “the kind that votes,” but they’re not. Like the six classes of preferred stock Goldman already has outstanding, Buffett’s shares do not vote in the election of directors. Like virtually all preferred shares, they have very limited voting rights that do not allow the holder any ability to control the affairs of the company. This is all set out in the press release Goldman Sachs issued to announce the transaction and in Item 303 of the Interim Report on Form 8-K it subsequently filed with the Securities and Exchange Commission.

More generally, it’s apparent from his blog that Easterbrook simply doesn’t understand what preferred stock is and how it relates to common stock. As most readers of this blog know, preferred stock is “preferred” not because it’s “more valuable than ordinary shares” but because it ranks ahead of common shares in order of payment. That makes it less risky than common shares but not generally more valuable than common stick. Indeed, since return is proportionate to risk, preferred shares generally have a lower expected return than common shares, and since control follows risk, preferred shares generally have less voting rights than common shares. The preferred shares Buffett purchased from Goldman are thus perfectly typical in these respects.

My point here is not that Easterbrook doesn’t understand what he’s talking about (though he clearly doesn’t). My point is that an intelligent person in the opinion-making class trying his honest best to inform the American public about the merits of the bailout can utterly fail to understand the issues at stake. That’s not because people like Easterbrook are fools (they certainly are not) but because the matters are so complex and technical that even informed, intelligent non-specialists can get them very badly wrong.

This is a genuine challenge for democracy. In The Federalist No. 10, Madison argued that representational republicanism is superior to direct democracy because it can “refine and enlarge the public views by passing them through the medium of a chosen body of citizens, whose wisdom may best discern the true interest of their country and whose patriotism and love of justice will be least likely to sacrifice it to temporary or partial considerations.” In other words, democratically elected representatives are on the whole likely to make better decisions than the people themselves, in part because they are better informed than the average voter. History has by and large proved Madison correct in this. Part of the problem in passing the bailout program last week, however, was that our elected representatives were dealing with issues that were often too complex and difficult even for intelligent, informed people who were trying hard to understand them. I do not for a moment suggest that anyone else should get to decide such matters except the elected representatives of the people, but I think we should realize that the world has become so complex that issues like this may begin to appear with increasing frequency.

The Irish Competition Authority releases a report offering the stunning finding that “The retail planning system limits competition among grocery retailers and as a result consumers are not getting the best possible choice or value for money.” HT: Danny Sokol. The retail planning system apparently imposes restrictions on retailer size, location, and other dimensions of competitive activities. File this one as evidence in the Two Systems of Belief About Monopoly category. If somebody has not already done so, and I suspect they have, theres an economic history volume to be written about the long and perverse history of antitrust enforcement and regulation in the grocery retail industry.

UPDATE: The UK Competition Commission reaches a similar conclusion:

10.9 We find that a combination of one or more of the following features of certain local markets for the supply of groceries by larger grocery stores prevent, restrict or distort competition in connection with the supply of groceries by larger grocery stores in those markets:

(a) A significant number of local markets have high levels of concentration, and these high levels of concentration have in many cases persisted over a number of years.

(b) The planning regime (in particular, PPS6 in England, SPP8 in Scotland, PPS5 in Northern Ireland and MIPPS 02/2005 in Wales) and its application by Local Planning Authorities in accordance with the policy objectives of the planning regime necessarily act as a barrier to entry or expansion in a significant number of local markets:

(i) by limiting construction of new larger grocery stores; and

(ii) by imposing costs and risks on smaller retailers and entrants without preexisting grocery retail operations in the UK that are not borne to the same extent by existing large grocery retailers.

A few more thoughts to supplement Josh’s fine posting on the transcript of oral argument in Leegin.

I don’t understand Justice Breyer. He recognizes that there are at least some circumstances in which RPM helps consumers. Why isn’t that enough for Dr. Miles to be overruled?

Justice Breyer regards this as a “close case” (presumably for reasons of stare decisis rather than on the merits) and asks “what has changed?”

What has changed is our state of economic understanding. When Dr. Miles was decided in 1911, the proconsumer aspects of RPM were not yet recognized. And that was largely true even in 1966, a year that Justice Breyer has focused upon, given the publication that year of an academic book criticizing RPM, which seems (so far as Justice Breyer can tell) to have made all of the same arguments against RPM that are now being made today. But it was not and could not have been argued back in 1966 that it would be inconsistent to exempt some vertical restraints from the per se rule but not others. Only once the late 1970s came, when Continental overruled Schwinn, did it become clear how foolish Dr. Miles is. Now that we allow (subject to the rule of reason) non-price vertical restraints, it seems entirely crazy not to allow RPM as well. As then-Professor Posner argued back in the 1970s, RPM is likely in many cases to be a more efficient vertical restraint than the now permissible non-price ones. So banning RPM across the board on a per se basis does not seem to make any sense. And while many of the same arguments against RPM could have been made in 1966, there are some new ones now that didn’t exist then. Anyway, Dr. Miles was decided in 1911, not 1966. It’s not as though the Court considered overruling Dr. Miles in 1966 and decided not to. The Court is now squarely addressing whether Dr. Miles should be overruled for the first time. So any post-1911 developments in economic science are fair game; there’s no basis for excluding from debate what happens to have been known in 1966!

Justice Breyer is impressed by Professor Scherer’s examples of cases where RPM has been harmful to consumers. But how can these examples justify a per se rule? If Professor Scherer can persuasively demonstrate the benefits of banning RPM in the market, say, for blue jeans, then RPM should be banned in that context under the rule of reason. But this does not come close to showing that RPM is”always or almost always” harmful to consumers such that a per se rule is justified.

But enough about Justice Breyer. I also don’t understand Justice Stevens. What on earth does a horizontal conspiracy among New York distributors have to do with this case? As Justice Scalia said, what possible procompetitive benefit could be associated with a horizontal agreement on price? It’s very hard to think of one. But if Justice Stevens can think of one, then sure: apply the rule of reason in that context too!

Predictions are hard to make. But I don’t think Shubha Ghosh is right about Dr. Miles definitely have four votes in the bag. I say it’s one, not four. Justice Breyer says it’s a close case and may well come around. Justice Souter seems altogether uncertain. Justice Ginsberg if anything seems to be leaning the other way–given her interest about what arguments would be available to the plaintiff on remand assuming (as she appears to think likely) a loss in the Supreme Court. As I read the transcript, Dr. Miles can be confident only about Justice Stevens’ vote.

Bill Henderson has a nice post on Chief Justice Roberts’ claim that judicial pay has reached the point of creating a “constitutional crisis.” Lots of bloggers (see, e.g., my colleague Ilya Somin at VC) have made the point that they are not impressed with the data the Chief has mustered in favor the assertion that the quality of the federal bench is likely to suffer as the gap between judicial pay and pay in private practice widens (or that a shift in composition of the federal bench towards fewer lawyers from private practice is a demonstrably bad thing, much less constitutional crisis). Most of this discussion has involved pointing out weaknesses in the Chief’s empirical evidence in support of his claim and some educated guesswork about the relevant elasticities of supply for high quality judicial candidates with respect to pay.  Though I think it it is very difficult to say something meaningful about these elasticities without data.

In any event, I think Bill’s post adds something new by attempting to reframe the debate a bit and raising some issues I had not thought about in relation to the Chief Justice’s plea for more compensation.  The first is that federal judges make much higher salaries than their state counterparts and so, as Bill writes, “it appears that we also have several dozen ‘constitutional cris[es]‘ at the state level.” Second, Bil notes that while Am Law 50 partner and CLO salaries have grown dramatically as of late, both federal judiciary and solo/ small firm compensation has not done nearly as well. Bill asks why this gap in pay does not trigger the same sorts of concern over the independence of lawyers more generally?

These are both interesting points. With respect to state court judges, I presume that Chief Justice Roberts (if confronted with the data) would be more than happy to advocate for higher salaries in state court as well. But Bill is certainly right that if a gap in judicial / private pay creates constitutional crisis, we may be in the middle of more crises than we knew!  With respect to the plight of the solo/small firm practitioner, however, I’m not sure I follow what Bill is getting at. One obvious difference between judicial pay and practitioner pay is that the latter is set in the market in response to economic forces rather than by Congress in response to political forces. In other words, if the market sets much higher compensation levels for big law lawyers than solo practitioners — this is a valuable signal about the best use of lawyerly resources. In that setting, it is difficult to understand the sense in which these attorneys are underpaid, or why the gap would be problematic at all.
Third, Bill writes that:

“district and appellate judges working in large metropolitan areas will likely live in smaller homes or endure longer commutes. And the Judge’s kids may have to apply for loans to pay for college or law school, including federal Stafford loans, which are the lifeblood of higher education. In other words, their problems will be more like 98% of the American electorate, albeit still very much at the high end. Why is this a “constitutional crisis”? Some of us might call it “sensible policy.”"

While I think that my prior is to agree with Bill’s punchline (and the position taken by most bloggers I’ve read) that this is not a constitutional crisis, I’m not quite sure that I agree with this third point. It depends who is on the margin doesn’t it?  And that depends, again, on the relevant elasticities. One possibility is that in expensive metropolitan areas the marginal candidate will be the one Bill describes. It is also quite possible that the marginal candidate in such areas is sufficiently wealthy such that the pay cut in going to the federal bench has little effect on the family’s financial well-being (though the Luttig examples suggests the former certainly does occur).  In any event, my point is only that it is really hard to talk about prospective changes in the composition of the pool of candidates without better data than we have (and are likely to have given the nature of these decisions) on candidates.

GMU will celebrate Constitution Day today with a debate between Professors Neomi Rao and Todd Zywicki (of VC fame). Here are the details:

Worth Wining About!  Should You Have a Constitutional Right to be Your Own Wine Importer?

A lively discussion of Granholm v. Heald.

Featuring Professors Neomi Rao and Todd Zywicki.
Moderated by Professor Ron Rotunda.
Friday, September 15
4:00 -5:00 p.m.
Room 121

For those who missed last year’s Constitution Day at GMU, a discussion between Professors Rotunda and Nelson Lund as to “whether it is constitutional for Congress to use its spending power to reach down into the curriculum and culture of every school in the country and dictate what shall be taught, celebrated, or memorialized — and when,” I leave you with my colleague Nelson Lund’s Green Bag essay on the topic, “Is Constitution Day Constitutional?”

Here’s a taste:

If the Internet Gambling Prohibition Act is approved, it will become a precedent for congressional control over other aspects of the Internet and an important loss in our liberty. Let’s follow the money and ask who benefits should the law be passed. What about legal gambling establishments in Las Vegas, Atlantic City and elsewhere? From their revenue point of view, they’d be happy to see less online gambling competition.

What about federal, state and local governments? Online gambling, most of which is offshore, doesn’t create any tax revenue for them. The bill focuses on online games such as poker, blackjack and sports betting but exempts taxable state-regulated gambling such as lotteries and horse racing.

If people want to gamble online, they are going to gamble online. The only thing the act will accomplish is, like Prohibition, make criminals out of otherwise law-abiding people. It will turn banks and other financial institutions into government snoops. Rep. Barney Frank, D-Mass., said, “If an adult in this country, with his own money, wants to engage in an activity that harms no one, how dare we bar it.” I second that and add, since protection of “the children” often serves as an excuse to restrict our liberties, that if children get involved, let their parents, not Congress, deal with it.

Check it out. Christine Hurt also offers some thoughts here and here.

A few weeks ago, I predicted here that Anna Nicole Smith would win her case in the Supreme Court. That prediction has now come true. Justice Ginsberg’s opinion for a unanimous court holds that state probate law cannot divest federal bankruptcy courts of jurisdiction over the claims of a bankruptcy estate against a probate estate beneficiary.

It will be interesting to see how this result will be spun by the lawyers and legal commentators who earlier suggested that this was a close case (see here).

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.