I’ve been waiting for The Founder to open for months.  Starring Michael Keaton as Ray Kroc, it tells the story of the founding of McDonald’s restaurants.  As business junkies and professors know, McDonald’s was an innovation: it created the modern franchise, identical restaurants run by individual entrepreneurs in locations across the country and, eventually, the world.  It also represented a critical development in the history of fast food, transferring the assembly line from the factory floor to the kitchen.  Most basic business classes talk a lot about McDonald’s, because the franchise system – and the degree of control that McDonald’s corporate exercises – raise interesting questions about agency law and the definition of employment.

[Spoilers under the cut, not very if you already know the story]

Continue Reading Saturday Movie Blogging – The Founder

A copyright lawsuit against Star Trek fan film creator Axanar Productions is going to trial this month. CBS and Paramount alleged infringement after Axanar raised over $1 million to produce a freely downloadable Star Trek movie and a previously released teaser. The case raises a host of interesting issues, which I’ll look at over a couple of posts.

I found this case notable for how it fits into the expansion of copyright protections and the influence of repeat litigants. Copyright has evolved to protect increasingly granular elements of a story (i.e., protecting discrete things in a story, not the entire work). It was once questionable if an isolated character could be protected, but now copyright extends to means of transportation (Batmobile), monsters (Godzilla), and implements of mass murder (Freddy Krueger’s glove). 

This is good for copyright holders. It is easier to prove infringement a copyrighted light saber than it is to show that someone copied the story of a farm boy who learned a mystical religion, got a light saber, found out his dad was Darth Vader, and so on. The Star Trek suit falls into the trend of increasingly granularity; CBS and Paramount assert protection of individual phrases (“beaming up”), made-up languages (Klingon), and fictional styles of architecture.

These allegations are not surprising, but they are interesting as part of a continuing trend of large-scale copyright holders attempting to protect small elements of a story. These parties will be repeat litigants, and they aim to craft beneficial precedent. It behooves them to allege granular protection, see if any assertions catch the court’s favor, and proceed with likely winners. Losing allegations are dropped or the case settled. Content owners thus secure caselaw supporting granular (easily infringed) copyright, without creating adverse precedent. This is smart business, but limits authors and filmmakers who must avoid these copyrights.

I’m also curious about the message sent by this case. Most fan fiction/films are either tacitly accepted by copyright holders or endorsed as advertising. This lawsuit will certainly chill the production of fan fiction and films—especially high-end works. Was Paramount so concerned about competition from fans that it was willing to lose the goodwill that Axanar could have generated? A million dollar fan film might have “competed” with Star Trek movies to some extent, but it almost certainly would have created significant buzz among fans. I wonder if other franchise-owners would have made the same decision. At this point, I doubt they’ll have to; I wouldn’t expect any fan to be willing to venture into “high-end” fan works anytime soon for fear of a lawsuit. 

If you were at the SEALS Conference panel on crowdfunding last summer, you heard me talk a bit about women’s athletic apparel company Oiselle and the interesting running team part of their business.

In addition to building a team of amateur runners, Oiselle sponsors a number of professional athletes. Kate Grace was the first of the sponsored athletes, signing with Oiselle in 2012. Last year Kate won the U.S. Olympic Trials in the 800m, and she made the Olympic finals in the same distance.

Kate Grace’s sponsorship contract with Oiselle expired at the end of 2016, and Oiselle recently posted a classy goodbye.

A 2011 Yale University graduate, and now an Olympian, Kate Grace is talented, promising, and instantly likeable. She has already accomplished a great deal in the running world, but she is likely to accomplish even more. Kate Grace is on record as praising Oiselle as incredibly supportive of her and full of people with whom she has strong relationships.

So why didn’t Kate Grace and Oiselle sign a sponsorship contract for 2017 and beyond? This is a question I may pose to my negotiation classes.

To be clear, everything below is pure speculation. I have no inside knowledge. I do not know anyone at Oiselle or Kate Grace personally.

Assuming no personal fallouts, the most obvious reason for Kate Grace to move on is financial. Oiselle is still a niche brand and now that Kate is an Olympian, she is likely receiving much more lucrative offers. 

But if I were on the Oiselle management team, and I wanted to keep Kate Grace as a sponsored athlete, I would be creative with the contract offer terms. Oiselle may not be able to match the cash offers of the larger companies, but Oiselle could do something like offer significant equity in the company, which larger companies are highly unlikely to do. Oiselle could also offer Kate Grace a longer-term contract than some of the big companies that will probably only want to sponsor her at her peak. Finally, Oiselle could offer her a spot on their board of directors and/or employment in another role, which may last past her running days. All of those options would be creative ways to negotiate a contract to keep top talent.

If not Oiselle, then who will sponsor Kate Grace? It is risky to predict, but I think New Balance is the best fit, based on brand and values. That said, New Balance already sponsors quite a number of strong female distance and mid-distance runners. ASICS or Adidas probably need to sponsor someone like Kate Grace the most, so they will probably throw a lot of money at her. Nike seems to have the deepest pockets, but I would be surprised if Kate Grace signed with them after how they, allegedly, treated Boris Berian, and what her fellow Oiselle athlete Kara Goucher had to say about the Nike Oregon Project. 

Update, 1/28/17: Well, this is somewhat surprising. Kate Grace recently signed with Nike. While Nike has gotten some bad press over the past year and is seen by some as the anti-Oiselle, Nike does have a rich track & field history, is an official sponsor of the U.S. Olympic team, has amazing facilities (including a tree-lined track), and was founded by a middle distance runner and his track coach. I am willing to wager that Kate Grace entertained multiple offers. I wish I could see the terms and analyze what influenced her. As mentioned in the original post, Nike probably has the deepest pockets and they could have blown the other offers out of the water from a financial perspective. Also, Nike has focused on track & field more intensely, for a longer period of time than most, if not all, of its competitors. Regardless of the terms and the sponsor, I do wish Kate Grace the very best running going forward.   

Bernard Sharfman, a prolific author on corporate governance, has written his fourth article on the business judgment rule. The piece provides a thought-provoking look at a subject that all business law professors teach. He also received feedback from Myron Steele, former Chief Justice of the Delaware Supreme Court, and William Chandler III, former Chancellor of the Delaware Court of Chancery during the drafting process. I don’t think I will assign the article to my students, but I may take some of the insight when I get to this critical topic this semester. Sharfman has stated that he aims to change the way professors teach the BJR.

The abstract is below:

Anyone who has had the opportunity to teach corporate law understands how difficult it is to provide a compelling explanation of why the business judgment rule (Rule) is so important. To provide a better explanation of why this is so, this Article takes the approach that the Aronson formulation of the Rule is not the proper starting place. Instead, this Article begins by starting with a close read of two cases that initiated the application of the Rule under Delaware law, the Chancery and Supreme Court opinions in Bodell v. General Gas & Elec. By taking this approach, the following insights into the Rule were discovered that may not have been so readily apparent if the starting point was Aronson.

First, without the Rule, the raw power of equity could conceivably require all challenged Board decisions to undergo an entire fairness review. The Rule is the tool used by a court to restrain itself from implementing such a review. This is the most important function of the Rule. Second, as a result of equity needing to be restrained, there is no room in the Rule formulation for fairness; fairness and fiduciary duties must be mutually exclusive. Third, there are three policy drivers that underlie the use of the Rule. Protecting the Board’s statutory authority to run the company without the fear of its members being held liable for honest mistakes of judgment; respect for the private ordering of corporate governance arrangements which almost always grants extensive authority to the Board to make decisions on behalf of the corporation; and the recognition by the courts that they are not business experts, making deference to Board authority a necessity. Fourth, the Rule is an abstention doctrine not just in terms of precluding duty of care claims, but also by requiring the courts to abstain from an entire fairness review if there is no evidence of a breach in fiduciary duties or taint surrounding a Board decision. Fifth, stockholder wealth maximization (SWM) is the legal obligation of the Board and the Rule serves to support that purpose. The requirement of SWM enters into corporate law through a Board’s fiduciary duties as applied under the Rule, not statutory law. In essence, SWM is an equitable concept.

 

 

The New York Times DealB%k reports today on the role women are playing in shaping corporate governance at the largest mutual funds.

 “The corporate governance heads at seven of the 10 largest institutional investors in stocks are now women, according to data compiled by The New York Times. Those investors oversee $14 trillion in assets.”  

Mutual and pension funds are some of the largest stock block holders casting crucial votes in director elections and on shareholder resolutions that will span the gamut from environmental policy to political spending to supply chain transparency.  While ISS and other proxy advisory firms have a firm hand shaping proxy votesFN1 (and have released new guidelines for the 2017 proxy season), that $14 trillion in assets are voted at the behest of women is new and noteworthy.  As the spring proxy season approaches– it’s like New York fashion week, for corporate law nerds, but strewn out over months and with less interesting pictures–these asset managers are likely to vote with management. FN2 Still, there is growing consensus that institutional investors’ corporate governance leaders are “working quietly behind the scenes to advocate for greater shareholder rights” fighting against dual class stock and fighting for gender equality on corporate boards, to name a few.

I now how a new ambition in life: get invited to the Women in Governance lunch.  

FN1:  See Choi et al, Voting Through Agents: How Mutual Funds Vote on  Director Elections (2011)  

FN2: Gregor Matvos & Michael Ostrovsky, Heterogeneity and Peer Effects in Mutual Fund Voting, 98 J. of Fin. Econ. 90 (2010).

-Anne Tucker

Here we go again. The Oregon Federal District Court has a rule with an incorrect reference to LLCs on the books: 

In diversity actions, any party that is a limited liability corporation (L.L.C.), a limited liability partnership (L.L.P.), or a partnership must, in the disclosure statement required by Fed. R. Civ. P. 7.1, list those states from which the owners/members/partners of the L.L.C., L.L.P., or partnership are citizens. If any owner/member/partner of the L.L.C., L.L.P., or partnership is another L.L.C., L.L.P., or partnership, then the disclosure statement must also list those states from which the owners/members/partners of the L.L.C., L.L.P., or partnership are citizens.
U.S. Dist. Ct. Rules D. Or., Civ LR 7.1-1 (emphasis added). This rules is designed to assist with earlier disclosure to assist in determining diversity jurisdiction and other related issues. As the Practice Tip explains, 
The certification requirements of LR 7.1-1 are broader than those established in Fed. R. Civ. P. 7.1. The Ninth Circuit has held that, “[L]ike a partnership, an LLC is a citizen of every state of which its owners/members/partners are citizens.” Johnson v. Columbia Properties Anchorage, LP, 437 F.3d 894, 899 (9th Cir. 2006). Early state citizenship disclosure will help address jurisdictional issues. Therefore, the disclosure must identify each and every state for which any owner/member/partner is a citizen. The disclosure does not need to include names of any owner/member/partner, nor does it need to indicate the number of owners/members/partners from any particular state.

The problem is that the rule defines an LLC as a limited liability corporation, while the Ninth Circuit case cited in the Practice Tip was referring to limited liability companies, which are different entities than corporations. The language from Johnson v. Columbia Properties is correct, but the Oregon District Court rule does not include traditional LLCs. It includes corporations, as per the rule’s definition of LLC.  Corporations, of course, have shareholders, not members or partners, and for diversity jurisdiction purposes, “a corporation shall be deemed to be a citizen of every State and foreign state by which it has been incorporated and of the State or foreign state where it has its principal place of business.” 28 U.S.C. § 1332 (2016).  Shareholders are not part of the equation. Cf. Hertz Corp. v. Friend, 559 U.S. 77, 88 (2010). 

For federal law purposes, it appears that the rule has excluded LLCs, despite the intent (and likely specific purpose) of the rule. Interestingly, Oregon law, has extended “unless context requires otherwise” the concept of LLCs to apply to partnership and corporate law. Oregon law provides: 

Unless the context otherwise requires, throughout Oregon Revised Statutes:
(1) Wherever the term “person” is defined to include both a corporation and a partnership, the term “person” shall also include a limited liability company. 
(2) Wherever a section of Oregon Revised Statutes applies to both “partners” and “directors,” the section shall also apply:
(a) In a limited liability company with one or more managers, to the managers of the limited liability company.
(b) In a limited liability company without managers, to the members of the limited liability company.
 (3) Wherever a section of Oregon Revised Statutes applies to both “partners” and “shareholders,” the section shall also apply to members of a limited liability company.
Or. Rev. Stat. § 63.002 (2015). 
 
Beyond potentially leaving limited liability companies out of the disclosure requirement, the rule could have another effect. The way the rule reads, although it does not change the underlying jurisdictional law, it could be read to change disclosure requirements. Though not the only possible reading, one could certainly read “owner” to include shareholders, which would require a corporation to disclose the states of citizenship of all shareholders.  
 
This is pretty obviously an error in drafting, as the court almost certainly intended to define LLCs as “limited liability companies.” See Or. Rev. Stat. § 63.002 (2015).  And the court almost certainly did not intend to compel disclosure of all shareholders’ states of citizenship.  Nonetheless, courts generally read statutes for what they say, not for what they meant to say.  This might just get a little interesting, if anyone (besides me) is paying attention.   

Mike.schuster

Professor Mike Schuster of Oklahoma State University, Spears School of Business, will be guest blogging at BLPB for the next 4 weeks. Prior to joining Oklahoma State’s faculty, Professor Schuster was at attorney at Vinson & Elkins LLP in Houston, Texas. His research is primarily in the intellectual property space, which, as we all know, is quite important to businesses.

Professor Schuster’s most recent academic article, “Invalidity Assertion Entities and Inter Partes Review: Rent Seeking as a Tool to Discourage Patent Trolls” is forthcoming in the Wake Forest Law Review and his SSRN page is available here.

Please join me in welcoming Professor Mike Schuster to BLPB. 

Today, we again celebrate the life of a great American, Martin Luther King, Jr.  His legacy is felt in so many ways in this country every day in the year.  But today, we call him and his work out for special attention.

Many have noted that Martin Luther King, Jr. had messages for those engaged in and with business.  I have gathered some of those observations, as interpreted by a variety of folks, for today’s post.  Perhaps you have favorite quotes or stories of your own from Dr. King’s life that have touched your business law teaching or practice.  If so, please share them in the comments.  But here are some of the nifty ones I found.

It also seems significant to note that business awards (including these out in Colorado) have been named after Dr. King in that same spirit.

As I prepare to lead a faculty-staff-student discussion group on Wednesday at The University of Tennessee College of Law (an annual MLK week tradition at UT Law that I mentioned in a prior Martin Luther King Day post), I am reminded of the many aspects of life–including professional life–that Dr. King’s actions and words touch.  They represent a rich gift to us all.  Although I aspire to incorporate much of his wisdom into my daily life, I remain grateful to have a day each year made for thoughtful reflection on how his work affects my own (and the rest of my life, too).

Tulane Law School invites applications for a one-semester visiting position in the Fall of 2017. Our specific needs for the Fall 2017 semester include basic income tax and corporate tax, criminal law, and professional responsibility. Applicants must possess a J.D. from an ABA-accredited law school, strong academic credentials, and at least three years of relevant law-related experience; prior teaching experience is strongly preferred. Applicants should submit a letter of interest, CV, and the names and contact information of three references through Interfolio at https://apply.interfolio.com/40060. For additional information, please contact Onnig Dombalagian at odombala@tulane.edu.

Tulane University is an equal employment opportunity/affirmative action employer committed to excellence through diversity. All eligible candidates are invited to apply for position vacancies as appropriate.