In Tennessee Wine and Spirits Retailers Assn. v. Thomas, the SCOTUS affirmed decisions of the Sixth Circuit and Federal District Court of Middle Tennessee finding Tennessee’s 2-year residency requirement applicable for retail liquor store license applicants unconstitutional as a violation of the Commerce Clause that is not saved by the 21st Amendment.  Specifically, in an opinion dated June 26, 2019, Justice Alito concluded that “Tennessee’s 2-year durational-residency requirement plainly favors Tennesseans over nonresidents” and, addressing the claim that Tennessee’s regulation nevertheless is valid under Section 2 of the 21st Amendment, found that “the record is devoid of any ‘concrete evidence’ showing that the 2-year residency requirement actually promotes public health or safety; nor is there evidence that nondiscriminatory alternatives would be insufficient to further those interests.”  This is a huge win for the alcoholic beverage retail industry nationwide, even of it is a deemed loss for smaller local liquor retailers in Tennessee who were protected by the stringent residency requirements (although the Tennessee Alcoholic Beverage Commission had stopped enforcing the requirements against new applicants).

[Note: BLPB reader Tom N. predicted this result in his comment to this Josh Fershee post earlier in the year.]

A number of things about the Court’s opinion interest me and also may interest you.  First, the Petitioner, a trade association, chose to only challenge the Sixth Circuit’s opinion on only one of the two residency requirements struck down at the Sixth Circuit level.  Second, the Petitioner chose not to argue that the initial application residency requirement could be sustained under the dormant Commerce Clause as a narrowly tailored measure designed to “advance a legitimate local purpose.”  Rather, the Petitioner chose to argue that the law could be sustained under Section 2 of the 21st Amendment because the residency requirement promoted public health and safety.  And finally, the Court’s opinion includes some interesting history on alcohol regulation (including Prohibition) and the dormant Commerce Clause.

The dissent, written by Justice Gorsuch (joined by Justice Thomas), takes a states’ rights viewpoint under Section 2 of the 21st Amendment.  The concluding text (citations have been omitted for readability) is somewhat passionate.

Like it or not, those who adopted the Twenty-first Amendment took the view that reasonable people can disagree about the costs and benefits of free trade in alcohol. They left us with clear instructions that the free-trade rules this Court has devised for “cabbages and candlesticks” should not be applied to alcohol. Under the terms of the compromise they hammered out, the regulation of alcohol wasn’t left to the imagination of a committee of nine sitting in Washington, D. C., but to the judgment of the people themselves and their local elected representatives. State governments were supposed to serve as “laborator[ies]” of democracy, with “broad power to regulate liquor under §2,” If the people wish to alter this arrangement, that is their sovereign right. But until then, I would enforce the Twenty-first Amendment as they wrote and originally understood it.

Nevertheless, I am more persuaded by the majority opinion.

Regardless, the opinions both offer some fun reading for those interested in the dormant commerce clause or in alcohol regulation.

[Editorial Note: I found a few typos in this after posting–enough that it bears mention here that I corrected them.  Thanks to coblogger Ann Lipton for spotting a particularly egregious spellcheck-generated error.]

On Thursday, the Commodity Futures Trading Commission (CFTC) held an open meeting to consider:

Supplemental Proposal on Exemption from Derivatives Clearing Organization Registration

Proposed Rule on Registration with Alternative Compliance for Non-U.S. Derivatives Clearing Organizations

Proposed Rule on Customer Margin Rules relating to Security Futures

In Special Report: CFTC advances two proposals amending oversight of non-U.S. clearinghouses, the FIA noted:

…the five members of the U.S. Commodity Futures Trading Commission voted unanimously to release a proposed rulemaking designed to create a less burdensome regulatory regime for foreign clearinghouses that clear swaps for U.S. customers…

A related proposal fared less well, however.  The agency’s two Democratic commissioners strongly objected to a supplemental proposal to exempt foreign clearinghouses from U.S. regulation if they are subject to regulation in their home countries that is comparable to the U.S….Despite the objections, the supplemental proposal passed by a vote of three to two and will be published for public comment. 

As I’ve noted, the regulation of derivatives clearing has been a source of conflict between international policymakers, particularly since the financial crises of 2007-08 and the subsequent global clearing mandates.  An article in the FT, CFTC agrees to rein in rules for overseas clearing houses, suggests that one aim of the CFTC’s decisions on Thursday is to decrease tensions in this area between the U.S. and the E.U.  For now, I’m cautiously optimistic.

I just recently came across the Ninth Circuit’s decision in In re Atossa Genetics Inc Securities Litigation, 868 F.3d 78 (9th Cir. 2017), and it struck me because it highlights an ongoing tension between the reliance/materiality distinction in fraud-on-the-market cases in general, and in the Supreme Court’s jurisprudence in particular.

And I’ll say up front that a lot of what I’m about to discuss in this post is stuff I’ve laid out in more detail in my essay, Halliburton and the Dog that Didn’t Bark.  The Atossa case is just a nice demonstration of the issue.

And hey, this got long, so – more after the jump.

Continue Reading Anatomy of a Materiality Problem

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This picture brings me joy.  It captures the mood among all of us (me, my UT Law emeritus colleague John Sobieski, and a group of UT Law students) after my last UT Law yoga session this past spring.  I need to begin to wrestle with how I will be able to teach yoga at the College of Law this coming semester, since I will be full-time back in the classroom teaching two demanding business law courses (Business Associations and Corporate Finance).  All ideas are welcomed . . . .

My law school yoga teaching came to mind this week not because I am already deep into planning the fall semester (although that comes soon) but because of two independent health/wellness items that hit my radar screen this week.  First, I was reminded that the Knoxville Bar Association (of which I am a member) is offering a full-day continuing legal education program in September entitled “Balancing the Scales of Work and Wellness – Finding Joy through Self-Care Practical Advice & Wellness Strategies”.  Second, I learned today that my UT Law colleague Paula Schaefer penned a nifty post yesterday on the Best Practices for Legal Education blog: Examples of How Law Schools are Addressing Law Student Well-Being.  She mentions yoga, although not our UT Law classes.  It seemed that I was being focused on self-care, and that made me think about our UT Law yoga sessions (and the above picture) . . . .

All of this reminded me that I should recommit myself to my goal of learning more about mental health issues and promoting mental health awareness this year.  Health and wellness are far more than physical.  They are emotional and psychological.  I may just try to attend the Knoxville Bar Association program (or part of it).  And I plan to be attentive to the ideas mentioned by Paula in her blog post.

Enjoy the weekend!

William & Mary’s Kevin Haeberle has a new paper entitled Information Asymmetry and the Protection of Ordinary Investors.  It takes a close look at the degree to which the core securities laws designed to reduce information asymmetry actually protect ordinary investors in the stock market.  Haeberle explains how market makers adjust prices to manage the costs information asymmetry imposes on them.  He focuses on how this response creates illiquidity in the market.  But then he explains that while this illiquidity hurts many investors, it also helps others—namely, longer-term investors. Thus, reducing information asymmetry will affect different investors in different ways, turning on the time horizon of their investment. 

His  key takeaway is then that securities laws reducing information asymmetry impose a long-overlooked cost on at least buy-and-hold ordinary investors (including both those who trade directly and those who invest through mutual funds), while conferring only limited benefits to those investors. Accordingly, whatever it does for society, an excessive focus on stopping some investors from making “unfair” gains based on superior information may actually  be a bad thing for ordinary investors.

Haeberle closes out the paper by pointing out that the SEC would likely be more effective in protecting ordinary investors from stock-market information asymmetry if  it focused more on other areas of law—for example, by regulating the kinds of advice retail investors actually receive. 

 

 

A recent Tennessee court decision subtly notes that limited liability companies (LLCs) are not, in fact corporations. In a recent Tennessee federal court opinion, Judge Richardson twice notes the incorrect listing of an LLC as a “limited liability corporation.”  

First, the opinion states:

The [Second Amended Complaint] alleges that Defendant Evans is a resident of Tennessee, Defendant #AE20, LLC is a California limited liability company, and Defendant Gore Capital, LLC is a Delaware limited liability “corporation.”3

3 Gore Capital is in fact a limited liability company.

FERNANDO CAMPS, Pl., v. GORE CAPITAL, LLC, KARL JAMES, ANGELA EVANS, and #AE20, LLC, Defendants., 3:17-CV-1039, 2019 WL 2763902, at *1 and n.3 (M.D. Tenn. July 2, 2019) (emphasis in original). 

Judge Richardson later notes, in footnote 11:

Plaintiff states that he was sent documents that listed Gore’s (not #AE20’s) principal place of business as being in Chattanooga, Tennessee, although the SAC lists Gore as a “Delaware limited liability corporation (sic)[.]”
Id. 2019 WL 2763902, at *6 n.11 (M.D. Tenn. July 2, 2019). 
 
Given all the times I have complained about courts not correcting such mistakes, I figured I should give this opinion a well-deserved shout out for getting this right.  Thank you. 

Churchill'sPort

Avid BLPB readers may have noticed that I failed to post on Monday of last week.  I was traveling from Portugal to Spain that day.  I did plan to make this post then, but travel scrambles (thanks to the Porto metro) and delays (thanks to Ryanair) prevented me from getting to a computer with Internet access until late in the day.  By then, I was too exhausted to post.  So, you get last Monday’s post this Monday!  No harm done; this post is not time-sensitive.

Ever heard of Graham’s port?  The Graham’s port lodge was founded by brothers William and John Graham back at the beginning of the 18th century.  Fast-forward 150 years, and the Graham family sells the then-very-successful Graham’s port business to another family.  That second family still runs the Graham’s business today.

But a Graham descendant still wanted to be in the port business.  He thought he had a “better way.”  So, 11 years after the Graham family sold Graham’s, John Graham (not the same one, obviously!) established the Churchill port lodge.  Here’s what the Churchill’s website says about its formation as a business:

Churchill’s was founded in 1981 by John Graham, making it the first Port Wine Company to be established in 50 years. The Founder wanted to continue his family’s long Port tradition but at the same time create his own individual style of Port. He named the Company after his wife, Caroline Churchill.

I went to a port wine tasting at the Churchill’s lodge in Vila Nova de Gaia, Portugal last Monday with my husband and daughter.  We tasted the uniqueness of the Churchill’s product.  (My daughter, who is not a port wine fan, actually enjoyed what she tasted at Churchill’s.)  The wine is less sweet than one would expect from a port wine.  John Graham himself explains why:

My Ports are made with as much natural fermentation, and with as little fortification brandy, as possible. I like to make wines in the most natural way. Above all I look for balance. I believe I brought this balance to Churchill’s Ports. There is a consensus around the characteristics that define our house style which are easily identified.

While we were at the tasting, we took a tour and learned the basic facts I relate here.

I was enchanted by the business story!  Headline: A Graham founds Churchill’s after the Graham family sells Graham’s.  A bit confusing, but a great narrative involving family business, M&A (and corporate finance more generally), intellectual property, business formation, and more.  We learned, for example, that the grapes are foot-treaded (stomped on by human feet).  Imagine the interesting employment questions.  (The shifts are twelve hours and there are stems and seeds in with the grapes . . . .)  And the tasting is still done by John Graham himself, raising questions about key man insurance and business succession planning.   (We were told that John Graham has chosen a successor taster–not a member of the family.  But we did not ask about management.)  Finally, a major real estate acquisition–buying a vineyard (Quinta da Gricha) with a special terroir–is part of the tale.

I am scheming to find ways to integrate what I learned into my teaching this year.  I know I will find places to work aspects of the story in–particularly in Advanced Business Associations and Corporate Finance.  Because I teach on a dry campus, no wine tasting will take place during the lessons.  But maybe an optional out-of-class session could be planned.  Hmmm . . . .

In reading Izabella Kaminska’s Why dealing with fintechs is a bit like dealing with pirates [FT Alphaville is free, but registration is required], I thought of two points from past blogs.  First, the critical, controversial issue of who should have access to an account at a central bank.  The article notes China’s decision to require “domestic fintechs like Alipay and WeChat…[to] hold their customer deposits on a full reserve basis at the central bank directly,” and also points to Governor Mark Carney’s recent discussion of permitting fintech companies to deposit funds at the Bank of England.  Second, the strategic point of recognizing when change is inevitable, and proactively helping to shape it.  Kaminska seems to suggest that a potential reason for this expansion in central bank account access is recent power shifts in the area, and central bankers’ desire to proactively shape the inevitable changes on the horizon in financial markets.  As is generally the case, Kaminska’s piece is a worthwhile read.      

When I was in practice, I worked on a number of cases alleging violations of Section 11 of the Securities Act, but none that had been filed in state court.  (For which I was profoundly grateful; I was always bemused by the fact that I needed to get pro hac’d into federal courts around the country but I was vastly more familiar with their rules and practices than with those of the New York State courts, notwithstanding my admission to the New York State bar).

So, to be honest, I never had any strong feelings about whether plaintiffs should have the right to pursue Section 11 class actions in state court, or whether the Securities Litigation Uniform Standards Act should be interpreted to permit defendants to remove such cases.  And I didn’t spare much attention when the Supreme Court recently held in Cyan, Inc. v. Beaver County Employees Retirement Fund that defendants cannot remove them.

But Michael Klausner, Jason Hegland, Carin LeVine, and Sarah Leonard just posted a short empirical analysis of state Section 11 class actions, and the results have captured my interest.  First, they find – unsurprisingly – there has been an increase in state Section 11 filings since Cyan was decided, and very often, state litigation is accompanied by a parallel federal case filed by a competing set of plaintiffs.  Second, they conclude that the state cases are dismissed on the pleadings at far lower rates than federal cases (though the data is a bit muddy; they exclude from analysis any federal cases with a simultaneous Section 10(b) component, which means they may be excluding cases that appear more fraudulent and thus are – perhaps – stronger).  They also analyze settlement sizes and find little difference between federal and state cases, with the caveat that Cyan may have effects further down the road (they also exclude cases filed prior to 2014 to avoid the effects of the financial crisis, which may also distort results).

So this is definitely a fruitful area to keep an eye on – especially with the looming battle over whether the PSLRA discovery stay applies in state court proceedings. See Wendy Gerwick Couture, Cyan, Reverse-Erie, and the PSLRA Discovery Stay in State Court, 47 Sec. Reg. L.J. 21 (2019); see also Post-Cyan Ruling on Discovery Stay.