Indiana University legal studies professor Abbey Stemler sent along this description of an article she co-wrote with Harvard Business School Professor Ben Edelman. They recently posted the article to SSRN and would love any feedback you may have, in the comments or via e-mail. 

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Perhaps the most beloved twenty-six words in tech law, Section 230 of the Communications Decency Act of 1996 has been heralded as a “masterpiece” and the “law that gave us the modern Internet.” While it was originally designed to protect online companies from defamation claims for third-party speech (think message boards and AOL chat rooms), over the years Section 230 has been used to protect online firms from all kinds of regulation—including civil rights and consumer protection laws.  As a result, it is now the first line of defense used by online marketplaces to shield them from state and local regulation.

In our article recently posted to SSRN, From the Digital to the Physical: Federal Limitations on Regulating Online Marketplaces, we challenge existing interpretations of Section 230 and highlight how it and other federal laws interfere with state and local government’s ability to regulate online marketplaces—particularly those that dramatically shape our physical realities such as Uber and Airbnb.  We realize that the CDA is sacred to many, but as Congress pays renewed attention to this law, we hope our paper will support a richer discussion about what the CDA should and should not be expected to do. 

The Delaware Supreme Court finally issued its decision in Cal. State Teachers Ret. Sys. v. Alvarez, and it appears we don’t have one neat trick for dealing with races to the courthouse in derivative litigation after all.

As I’ve discussed in previous blog posts, Delaware has a substance and procedure problem.  Namely, it uses its own court procedures as supplemental mechanisms to substantively police the behavior of corporate actors, but those procedures don’t apply in non-Delaware forums.  That leaves Delaware vulnerable to being undercut by other states – and encourages an unhealthy race to the courthouse in other jurisdictions. 

As I explained before, in the context of derivative cases, “Delaware’s recommendation that derivative plaintiffs seek books and records before proceeding with their claims simply invites faster filers to sue in other jurisdictions – and invites defendants to seek dismissals against the weakest plaintiffs, which will then act as res judicata against the stronger/more careful ones.” 

That’s what happened in Alvarez.  While the Delaware plaintiffs spent years litigating a books and records request, defendants won a dismissal for failure to plead demand futility against a competing plaintiff group in Arkansas.  The Chancery court then held that the dismissal was res judicata against the Delaware plaintiffs.

On appeal, the Supreme Court remanded with a curious request: to determine whether the dismissal violated the Delaware plaintiffs’ federal Due Process rights.  The reasoning, first articulated by VC Laster in In re EZCORP Inc. Consulting Agreement Deriv. Litig., 130 A.3d 934 (Del. Ch. 2016), was that until a court concludes demand is futile, the plaintiff has no right to bring suit on the corporation’s behalf, and therefore acts individually.  Laster analogized to the Supreme Court’s decision in Smith v. Bayer Corp., 564 U.S. 299 (2011), which held that a named plaintiff in a class action cannot bind the class until after certification.

On remand the Chancery court couldn’t quite bring itself to hold that federal Due Process was violated, exactly, but did suggest that the Delaware Supreme Court adopt a rule prohibiting preclusion in these circumstances, in part because such a rule would further public policy.

That decision was appealed back up to the Delaware Supreme Court, which has now rejected the recommendation.  The Supreme Court concluded that a derivative case is unlike a class action, because in a class action, pre-certification, the named plaintiff is suing on his or her own behalf, bringing a claim that he or she is entitled to bring individually.  By contrast, in a derivative action, the stockholder plaintiff never has the right to bring a claim individually; the claim always belongs to the corporation.  Thus, even absent demand futility, the plaintiff must be viewed as standing in the corporate shoes.  By this reasoning, derivative plaintiffs are in privity with each other, and there is a sufficient alignment of interests to satisfy Due Process.

In short, absent a showing of inadequate representation by the first plaintiffs, res judicata applies.

The Delaware Supreme Court did have a curious footnote though and I wonder if it provides an opening in future cases.  The Court noted that had Delaware plaintiffs attempted to intervene in the Arkansas action – or, failing grounds to intervene, at least filed a statement of interest or sought to participate as amici – they might “have a more compelling argument before this Court that the Arkansas Plaintiffs failed to adequately represent them.”  We’ll see if anyone tries to take advantage of that going forward.

On Wednesday, I spoke with Kimberly Adams, a reporter for NPR Marketplace regarding CSX’s decision to require its CEO to disclose health information to the board. I don’t have a link to post, sorry. As you may know, CSX suffered a significant stock drop in December when its former CEO died shortly after taking a medical leave of absence and after refusing to disclose information about his health issues. CSX has chosen the drastic step of requiring an annual CEO physical in response to a shareholder proposal filed on December 21st stating, “RESOLVED, that the CEO of the CSX Corporation will be required to have an annual comprehensive physical, performed by a medical provider chosen by the CSX Board, and that results of said physical(s) will be provided to the Board of Directors of the CSX Corporation by the medical provider.” Adams asked my thoughts about a Wall Street Journal article that outlined the company’s plans. 

I’m not aware of any other company that asks a CEO to provide the results of an annual physical to the board. As I informed Adams, I hope the board has good counsel to avoid running afoul of the Americans with Disabilities Act, HIPAA, the Genetic Information Nondiscrimination Act of 2008, and other state and federal health and privacy laws. While I believe that the board must ensure that it takes its role of succession planning seriously, I question whether this is the best means to achieve that. I also remarked that although a CEO would know in advance that this is a condition of employment and would negotiate with the aid of counsel what the parameters would be, I was concerned about the potential slippery slope. How often would the CEO have to update the board on his/her health condition? Who else would have access to the information? Will this deter talented executives from seeking the top spot at a corporation?

One could argue that the health of the CEO is material information. But if that’s the case, why haven’t more shareholders made similar proposals? Perhaps there haven’t been more of these proposals because the CSX situation was extreme. Shareholders were asked to bless the $84 million compensation package of a man who was so ill that he required a portable oxygen tank but who refused to disclose his condition or prognosis. Hopefully, other companies won’t take the same approach. 

 

 

If you write about regulated industries or securities and banking topics, it can be challenging to keep track of developments in the regulatory space.  There is a startup that I’ve found useful for seeing new developments. It’s called  Compliance.ai.  Mostly, I now use it to track of news from FINRA and the SEC.  They have been reaching out to law schools and offering training and access to students and faculty.  They also allow users to track news from the CFPB, DOJ, Treasury, NYSE, DOL, and a bunch of other regulators.

I haven’t yet seen anything on it that I could not find elsewhere.  Much of the material can be found in the federal register, on the websites of self-regulatory organizations, or on the SEC’s website.  Instead of constantly canvasing all these websites, Compliance.ai allows users to put together a feed from the regulators they want to follow.  It’s also made it easier for me to see things like enforcement actions as they come out.  For example, two days ago FINRA published Letter of Acceptance, Waiver, and Consent NO. 2016051672301.  This fascinating AWC details how Paul Martin Betenbaugh consented to a three month suspension for:

In September and October 2015, on three separate occasions Bettenbaugh pretended to be a competing registered representative and posted internet ads explicitly soliciting sex that included that registered representative’s business cell phone number as the contact number for responses. By doing so, Betenbaugh violated FINRA Rule 2010.

Of course, not all of the regulatory updates are as interesting. 

Compliance.ai has have not paid me anything or asked me to write this post.  It’s useful, new, and has a relatively slick interface for tracking regulatory developments.  The only benefit I’ve received from them is access.

 

        As many of this blog’s readers know, RUPA § 404 (1997) “cabins in” the duty of loyalty by stating that “[a] partner’s duty of loyalty to the partnership and the other partners is limited to the following.” The situations then described all involve harm to the partnership itself—not harm to an individual partner.  Setting forth a duty that is owed to a partner, but that is defined solely by reference to harm to the partnership, is peculiar.  https://www.businesslawprofessors.com/business_law/2016/06/is-cardozo-wrong-of-partner-to-partner-fiduciary-duties-/

        In the 2013 version of RUPA, this problem was squarely addressed.  RUPA § 409(b) (2013) eliminates the “limited to” language and instead states that the duty of loyalty simply “includes” the standard partnership-harm situations. The Official Comment explains:

This section originated as UPA (1997) § 404. The 2011 and 2013 Harmonization amendments made one major substantive change; they “un-cabined” fiduciary duty. UPA (1997) § 404 had deviated substantially from UPA (1914) by purporting to codify all fiduciary duties owed by partners. This approach had a number of problems. Most notably, the exhaustive list of fiduciary duties left no room for the fiduciary duty owed by partners to each other – i.e., “the punctilio of an honor the most sensitive”). Meinhard v. Salmon, 164 N.E. 545, 546 (N.Y. 1928). Although UPA (1997) § 404(b) purported to state “[a] partner’s duty of loyalty to the partnership and the other partners” (emphasis added), the three listed duties each protected the partnership and not the partners.

        Even before the 2013 RUPA, however, a number of states had deviated from RUPA (1997) by omitting the “limited to” language which restricted the duty of loyalty.  California’s partnership statute, for example, simply states that “[a] partner’s duty of loyalty to the partnership and the other partners includes all of the following . . . .”  Cal. Corp. Code § 16404(b).  Thus, California appears to be a state that believes, as does RUPA (2013), that the “limited to” language associated with the duty of loyalty is too restrictive.

        But . . . wait a minute.  In the 2013 version of the Uniform LLC Act, the duty of loyalty is again described without the restrictive “limited to” language.  Section 409(b) simply states that the duty of loyalty “includes the duties . . . .”  California has adopted the revised Act, but it alters the language of § 409(b) to add back the “limited to” language when describing the duty of loyalty.  Cal. Corp. Code § 17704.09.

        What am I missing?  Why does California reject the “cabining in” of the duty of loyalty for the general partnership, but it adds that language back for the LLC?  Is this a legislative goof, a purposeful change, or something else?  Thoughts from those steeped in California law?

As regular readers know, I am particular about language and meaning, especially in the business-entity space related to limited liability companies (LLCs).  I think because of that, I was drawn to a new paper from Shu-Yi Oei (Boston College), The Trouble with Gig Talk: Choice of Narrative and the Worker Classification Fights, 81 Law & Contemp. Probs. ___ (2018).  The abstract: 

The term “sharing economy” is flawed, but are the alternatives any better? This Essay evaluates the uses of competing narratives to describe the business model employed by firms like Uber, Lyft, TaskRabbit, and GrubHub. It argues that while the term “sharing economy” may be a misnomer, terms such as “gig economy,” “1099 economy,” “peer-to- peer economy” or “platform economy” are just as problematic, possibly even more so. These latter terms are more effective in exploiting existing legal rules and ambiguities to generate desired regulatory outcomes, in particular the classification of workers as independent contractors. This is because they are plausible, speak to important regulatory grey areas, and find support in existing laws and ambiguities. They can therefore be deployed to tilt outcomes in directions desired by firms in this sector.

This Essay’s analysis suggests that narratives that are at least somewhat supportable under existing law may be potent in underappreciated ways. In contrast, clearly erroneous claims may sometimes turn out to be hyperbolic yet harmless. Thus, in evaluating the role of narrative in affecting regulatory outcomes, it is not only the obviously wrong framings that should concern us but also the less obviously wrong ones.

There are several interesting points in the piece, and find this part of the conclusion especially compelling: 

I cannot prove that the deployment of gig characterization is the only reason certain legal treatments and outcomes (such as independent contractor classification for workers) seem to be sticking, at least for the moment. My narrower point is that while gig and related characterizations appear innocuous and accurate relative to the sharing characterization, this set of descriptors may actually be doing more work in terms of advancing a desired regulatory outcome. The reasons they are able to do more work are that (1) gig characterization speaks to an important and material legal ambiguity, (2) the gig characterization is plausibly accurate, even if deeply contested, and (3) the proponents of gig characterization have been able to use procedural and other tools to shore up gig characterization and defeat its competitors. These observations may be generalized beyond the gig context: While the temptation is to focus on narratives and characterizations that are clearly wrong, this Essay suggests that we should also pay attention to more subtle narratives that are less clearly wrong, because such narratives may be doing more work by virtue of being “almost right.”

This last point is one that resonates with me on the LLC front, where people insist on comparing or analogizing LLCs to corporations.  There are times when such a comparison or analogy is “almost right,” and it is in these circumstances that the perils of careless language can cause the most trouble because the same comparison or analogy can get made later when doing so is clearly wrong. 

Just over a month ago, I published a post on meal delivery kits, describing the nature of the service and noting a few points about the market, including some information about legal claims.  In that post, I promised more–specifically, a review of the kits themselves.  That review will come in two parts.  This is the first.  Today, I want to note some of the advantages and disadvantages of using meal kits, from my perspective.

First, the advantages:

  • delivery to your doorstep
  • the convenience of food and recipe in one box
  • little food waste (tailored quantities of food and fixings)
  • exposure to new recipes
  • introduction to new ingredients (most recently for us, spaghetti squash)
  • the chance to learn new cooking techniques
  • recipe cards that
    • lay out sequential steps
    • include helpful pictures and tips
    • have a glossy finish and wipe clean
    • fit in a magazine rack or storage unit

Now, the disadvantages:

  • undue packaging waste? (box, internal containers, cold packs)
  • uneven quality instructions (e.g., herbs divided . . . how–by type or by volume?)
  • expense (depending on what your household would do instead)

I have included below some pictures (click on any for full-size images) of the packaging for Hello Fresh and Plated, the two services we use most often.  

Hello Fresh:

HelloFresh1
HelloFresh1
HelloFresh1
HelloFresh1

Plated:

Plated1
Plated1
Plated1
Plated1

As for the cost, here’s what we pay for each:

Hello Fresh (4 people, 3 meals) – $129, including shipping
Plated (3 people, 2 meals) –  + shipping

In a third post, I will say more about the relative merits of the individual services.  My husband orders Blue Apron for us from time to time, and I also will try to get some information from him for my next post.  Feel free to post observations or ask questions in the comments.