There are always policy questions about the degree to which public regulation should be enforced by government actors, by private actors, or by a combination of both.  In securities law, for example, striking the right balance is a perennial debate.

Which is why I read with interest this New York Times story about efforts to combat counterfeiting in China. 

China has a serious problem with counterfeit goods.  To some extent, that kind of problem can be addressed via government enforcement actions; however, China also suffers from what one might describe as an extreme case of regulatory capture – namely, corruption at the local level that compromises enforcement efforts.

So China has turned to private enforcement, by bolstering its consumer protection laws: consumers who purchase counterfeit goods can get damages equal to several times the value of the product.  And predictably, these laws have spawned a new profession: counterfeit hunting.

That by itself would not be so bad – why not let consumers, acting like private attorneys general, ferret out counterfeit goods?  The problem is, since damages are based on the number of products purchased, hunters purchase counterfeits in large numbers, filling warehouses with them.  They also target minor labeling errors as much as serious fraud. 

In other words, they exhibit all of the problems inherent in private enforcement: failure to exercise discretion over where to direct resources, arbitraging claims/creating injuries (and failing to mitigate damage) in order to support a lawsuit.  These are precisely the accusations that have been leveled at, for example, stockholder plaintiffs and appraisal arbitrageurs. 

China is apparently considering a new law that would ban counterfeit hunting as a commercial activity – akin to PSLRA provisions that prohibit so-called professional plaintiffs.  But given the unreliability of government enforcement in China, it strikes me that to do so would throw the baby out with the bathwater.  Yet absent such measures, China’s left with an extreme version of a common problem: private plaintiffs don’t draw distinctions between serious problems and minor ones if the monetary payout is the same.  That distinction is one that has to be drawn in the substantive law.  

We do that in securities by, for example, imposing standing, reliance, and loss causation requirements on private plaintiffs that government does not have to satisfy, and allowing government to bring claims based on an expanded set of violations (e.g., aiding and abetting).  And we’ve done that, in a roundabout way, with state law fiduciary claims: there is no government enforcement in that arena, which has led to increasing limitations on private liability (exculpatory provisions, demand requirements) with no corresponding expansion of state enforcement.  But that regulatory gap has been rapidly filled at the federal level with fiduciary-like requirements (independent director requirements, books and records requirements, and so forth) that can only be enforced by regulators.

It’s an imperfect system, of course; it’ll be interesting to see how China grapples with the same problem.

Earlier, I focused on the faith and work movement in churches, and I plan to add to that post over coming weeks. In this post, I will start aggregating information on faith and work in universities. I plan to list university initiatives, scholarly articles and books, and professor presentations.

University Initiatives

Articles and Books

Presentations

I’m in the midst of grading 110 exams while traveling on an ill-timed but worthwhile weekend trip to an orphanage in Haiti. I’m sure you can feel my pain. I’ll see you next week with some possible reflections on corporate interests in developing countries. 

Many thanks to Haskell Murray and the Business Law Prof Blog editorial crew for inviting me to serve as a guest blogger during the final countdown to 2017.  For the next few weeks, I’d like to share some of my research in the areas of amateur sports and tax.

Like many, I am an avid enthusiast of the Olympics.  During the 2012 Summer Games in London which highlighted extraordinary athletic prowess from the likes of Michael Phelps, Usain Bolt, and the all-impressive gold medal beach volleyball duo Ross and Kessy, Marco Rubio introduced Bill S.3471 (The Olympic Tax Elimination Act (OTEA)) which proposed to exclude from U.S. Olympic athletes’ gross income the value of any prizes or awards won during the Games.  

This bill piqued my interest in exploring the tax issues facing U.S. Olympic medal-winning athletes.  In 2013, my Central Michigan sports law colleague Adam Epstein and I published Taxing Missy: Operation Gold and the 2012 Proposed Olympic Tax Elimination Act, which explores general tax issues within sports, investigates the U.S. Olympic Committee’s (USOC) Operation Gold program (awarding $25K for gold, $15K for silver, and $10K for bronze medals won at the Olympics by U.S. athletes), analyzes the purpose of the OTEA, and proposes ways to reduce or eliminate federal income tax on athletes’ Operation Gold earnings.

Fast forward to 2016 – this past October President Obama signed into law the Appreciation for Olympians and Paralympians Act of 2016 that exempts from Olympic and Paralympic athletes’ income the value of medals awarded and prize money received from the USOC.  While this exclusion won’t benefit the likes of Phelps, whose adjusted gross incomes exceeds $1 million, or Joseph Schooling who trains in the U.S. but represented Singapore in 2016 when he won gold in the 100 Fly (resulting in a $1M Singapore dollar cash prize), it’s a definitely a big WIN for most of the U.S.’ top athletes.

Wharton’s Legal Studies & Business Ethics Department invites submissions for its inaugural Conference on Business Law and Ethics, to take place March 31-April 1, 2017.

This is the first meeting of what will be a recurring conference: we aim to gather together each year the most cutting-edge work on law, ethics and business. Papers are invited from scholars both senior and junior, and from diverse disciplines, on the theme of “The Ethical Lives of Corporations.” Submit an abstract of an unpublished paper to Phil Nichols (nicholsp@wharton.upenn.edu ) and Gwendolyn Gordon (gwgordon@wharton.upenn.edu). The deadline for abstract submissions is January 6th, 2017.

When it comes to regulations and economic policy, I am quite conservative.  Not a Republican-type conservative (probably more Libertarian in a political sense), but in the sense that I often advocate for less regulation, and even more often, for less changes to laws and regulations. People need to be able to count on a system and work within it. As such, whether it is related to securities law, energy and environmental law, or other areas of the law, I find myself advocating for staying the course rather than adding new laws and regulations.  

For example, a while back, co-blogger Joan Heminway quoted one of my comments about securities law, where I noted “my ever-growing sense that maybe we should just take a break from tweaking securities laws and focus on enforcing rules and sniffing out fraud. A constantly changing securities regime is increasingly costly, complex, and potentially counterproductive.” 

After the BP oil blowout of the Deepwater Horizon well in the Gulf of Mexico, I similarly argued that we should approach new laws with caution, and that we might be better served with existing law, rather than seeking new laws and regulation in a hasty manner. I explained, 

[T]here are times when new laws and regulations are necessary to handle new ways of perpetrating a fraud or to address new information about what was previously viewed as acceptable conduct. But often, new laws and regulations are not a reaction to new information or technology; they are a reaction to a unique and unfortunate set of facts that is more likely related to timing or circumstances than an emerging trend. Other times, it is a lack of enforcement of existing protections meaning the problem is not the law itself; it is the enforcement of the law that is the problem.

Choosing a Better Path: The Misguided Appeal of Increased Criminal Liability After Deepwater Horizon, 36 Wm. & Mary Envt’l L & Pol. Rev. 1, 19 (2011) (footnotes omitted). More recently, I have taken the same view with regard to hydraulic fracturing regulations:

There may well be a need for new regulations to improve oversight of hydraulic fracturing and other industries that pose environmental risks, but new regulations do not necessary lead to better oversight. . . . There is a strong argument that the problems related to hydraulic fracturing (and, for that matter, coal extraction, chemical storage, and hazardous waste operations) are more linked to a lack of enforcement and not a lack of regulation.

Facts, Fiction, and Perception in Hydraulic Fracturing: Illuminating Act 13 and Robinson Township v. Commonwealth of Pennsylvania, 116 W. Va. L. Rev. 819, 847 (2014). 

I swear I have a point, beyond just quoting myself.  Here it is: I’d like to urge the President-Elect and the 115th Congress to sit back and stay the course for a little bit to see where things are headed. I have a strong suspicion things are headed in the right direction from an economic perspective. This is not to suggest that there are not holes in the economy or people in desperate need of jobs, training, and education (there are — I live in West Virginia. I know.). But with a White House and a Congress controlled by the same party, the GOP play should be simply: we’re in charge now, and the economy is ready to move ahead.  

We have already seen it — the stock market is up and economic indicators look better.  And there has been no new legislation or regulation (or repeals of either).  It’s just consumers believing the economy will get better.  And consumer confidence is key to expansion.  Who cares that it started before the election?  What matters is whether we’re going in the right direction.  And it seems we are. The Financial Times reported today: 

A gauge of US consumer sentiment has hit a post-recession high, painting a positive outlook ahead of the key holiday shopping season as recent data point to a strengthening US economy.

The Conference Board’s consumer confidence index climbed to 107.1 in November from 100.8 in October, the highest since July 2007 and above analysts’ forecast of 101.5.

Most of the survey was conducted before the presidential election on November 8. But “it appears from the small sample of post-election responses that consumers’ optimism was not impacted by the outcome,” said Lynn Franco, director of economic indicators at the Conference Board. “With the holiday season upon us, a more confident consumer should be welcome news for retailers.”

 

And, just to reinforce that is not a post-election position, I have been making this argument on this blog since at least 2010, when I wrote, How to Fix the “Broken” Financial System: Stop Trying to Fix It. 

So, let’s stay the course for a bit and see how people respond to a little stability. Let’s see what a surge in consumer confidence can do for the U.S. and world economies. Let’s make sure it’s broken (and if so, how), before anyone tries to fix it. And maybe, in the meantime, we can spend a little time treating each other better.

Today, I share a quick teaching tip/suggestion.

I taught my last classes of the semester earlier today.  For my Business Associations class, which met at 8:00 am, I was looking for a way to end the class meeting, tying things from the past few classes up in some way.  I settled on using the facts from a case that I used to cover in a former casebook that is not in my current course text:  Coggins  et al. v. New England Patriots Football Club, Inc., et al.  Here are the facts I presented:

  • New England Patriots Football Club, Inc. (“NEPFC”), the corporation that owns the New England Patriots, has both voting and nonvoting shares of stock outstanding.
  • The former president and owner of all of the voting shares of NEPFC, Sullivan, takes out a personal loan that only can be repaid if he owns all of the NEPFC stock outstanding.
  • The board and Sullivan vote to merge NEPFC with and into a new corporation in which Sullivan would own all the shares.
  • In the merger, holders of the nonvoting shares receive $15 per share for their common stock cashed out in the merger.

From this, I noted that three legal actions are common when shareholders are discontented with a cash-out merger transaction: appraisal actions, derivative actions for breach of fiduciary duty, and securities fraud actions.  Shareholders in NEPFC brought all three types of action.  (Footnote 9 of the Coggins case and the accompanying text explain that.)  

Having just covered business combinations, including approval and appraisal rights, and wanting to address some new information about the process of derivative litigation, the facts from the case worked well.  I am sure there are other cases or materials that also could have done the job.  (Feel free to leave suggestions in the comments.)  But adding a little football and conflicting interests to the last class seemed like the right idea . . . .

 

 

KKS

For the next few weeks, we will be joined by Clemson University Legal Studies Professor Kathryn Kisska-Schulze. I met Professor Kisska-Schulze at the SEALSB Annual Conference earlier this month and enjoyed her presentation on the appropriate tax home for college athletes (if and when they are paid).

In addition to a JD, Professor Kisska-Schulze has an LLM in Taxation. She has published extensively in the tax law area, intersecting most frequently with sports law and environmental law. I look forward to her posts, and welcome her to the blog.

Okay, this post has nothing to do with the subject line; given the time of year, I just couldn’t resist.

(Maybe we’ll just characterize that episode of WKRP in Cincinnati as a demonstration of PR tactics gone wrong.  See?  There’s a business law hook).

Anyhoo, today I want to call attention to the phenomenon of the fake whistleblowing hotline. 

As compliance becomes an increasingly large part of corporate operations – and a de facto reconfiguration of corporate governance standards – it seems that companies are fond of creating “whisteblowing hotlines” to demonstrate their commitment to compliance with the law.  Public companies, in fact, are required to do so under Sarbanes-Oxley.

Which is why two recent news items are so disturbing.  First, in connection with the Wells Fargo fake account scandal – on which both Anne Tucker and Marcia Narine Weldon recently posted– it turns out that employees who offered tips on the Wells Fargo whistleblowing hotline were quickly fired; meaning that the hotline itself operated as a kind of reverse-ethics test to weed out employees most likely to object to Wells Fargo’s practices.

And it turns out that Wyndham Vacation Ownership did the same thing.  This company, which sells time shares using legally dubious tactics, also has an “integrity hotline” that it uses, apparently, to identify and fire salespeople who have integrity.

It strikes me that these incidents are particularly pernicious.  They represent traps to catch employees who might be troubled by the company’s behavior, while faking compliance with the law – a false compliance that may not easily be detected.  And they imply a certain degree of premeditation: if you set up a hotline and then misuse it, presumably, you know what you’re doing.  I realize that federal and state laws provide penalties for retaliation against whistleblowers; I do wonder if there can be especially tough scrutiny of adverse employment decisions in the wake of utilization of company-established compliance procedures – like, perhaps, a presumption that punitive damages should be awarded.  I’m not an expert in this area, though; does anything like this exist?  Could it?