Our courts and legislatures are bought and paid for — the laws they’ve made with respect to oil spills prove it.

In March, I emphasized — not for the first time — the insanity of considering corporate and other business entities as rational actors of the sort many economists consider people to be. The problem is that corporate decisions are made by individuals and are therefore driven to benefit those individuals, not the corporations (and their shareholders).”

One reason corporations focus on short-term profits is that the individuals making the decisions for a company will often take the cash made in the short term out of the company (by paying special dividends, for example) and then sell there stock, evading the long-term loss. Even if they hold onto their stock, they may have taken so much cash out of the company before the stock crashes in value that they’ve profited mightily from their holdings regardless of the company’s failures.

But still another reason is the idiocy of the regulation that is in place, regulation that instead of imposing responsibility on the companies for problems they cause limits that responsibility.

10 days ago David Leonhardt wrote about the  perversity of the federal limitations on corporate liability for oil spills and how they made BP’s oil spill, in retrospect, no great surprise:

In a little-noticed provision in a 1990 law passed after the Exxon Valdez spill, Congress capped a spiller’s liability over and above cleanup costs at $75 million for a rig spill. Even if the economic damages — to tourism, fishing and the like — stretch into the billions, the responsible party is on the hook for only $75 million. (In this instance, BP has agreed to waive the cap for claims it deems legitimate.) Michael Greenstone, an M.I.T. economist who runs the Hamilton Project in Washington, says the law fundamentally distorts a company’s decision making. Without the cap, executives would have to weigh the possible revenue from a well against the cost of drilling there and the risk of damage. With the cap, they can largely ignore the potential damage beyond cleanup costs. So they end up drilling wells even in places where the damage can be horrific, like close to a shoreline. To put it another way, human frailty helped BP’s executives underestimate the chance of a low-probability, high-cost event. Federal law helped them underestimate the costs.

We shouldn’t be surprised, then, at BP’s pathetic safety record and the retrospective inevitability of the Gulf spill:

Years before the Deepwater Horizon rig blew, BP was developing a reputation as an oil company that took safety risks to save money. An explosion at a Texas refinery killed 15 workers in 2005, and federal regulators and a panel led by James A. Baker III, the former secretary of state, said that cost cutting was partly to blame. The next year, a corroded pipeline in Alaska poured oil into Prudhoe Bay. None other than Joe Barton, a Republican congressman from Texas and a global-warming skeptic, upbraided BP managers for their “seeming indifference to safety and environmental issues.”

BP was only acting rationally!

Unsurprisingly, the Supreme Court has teamed with Congress in being an accessory to the corporate rape of the country. Even if compensatory damages are capped, conceivably courts can impose punitive damages in civil lawsuits to deter particularly egregious conduct. And, indeed, courts reacted precisely that way to the Exxon Valdez oil spill — that is, until the Supreme Court stepped in. In 1994, a jury imposed $5 billion in punitive damages on ExxonMobil for the Exxon Valdez  oil spill. 12 years later an appellate court reduced that amount to $2.5 billion, half the original amount.

2 years later, in a 5-3 vote (Sam Alito recused himself from the case because he owned Exxon stock), the Supreme Court reduced the amount to $507.5 million, about 10% of the jury’s award. The Court ruled that punitive damages (intended to punish bad behavior, not to compensate a plaintiff for his losses caused by that behavior) cannot be greater than compensatory damages (which compensate victims for their economic losses). As reported at the time, the reduced amount represented “about 12 hours of revenue for [Exxon], which reported record profits of $40.6 billion in February.” Justice Souter, writing for the Court, explained that “a penalty should be reasonably predictable in its severity, so that even Justice Holmes’s ‘bad man’ can look ahead with some ability to know what the stakes are in choosing one course of action or another. See The Path of the Law, 10 Harv. L. Rev. 457, 459 (1897). Exxon Shipping Co. v. Baker (U.S. 2008)(hyperlink added).

Of course, one might argue pretty cogently that neither the Exxon Valdez spill nor the BP Gulf spill were conceivable in the minds of the people who made the decisions that resulted in disasters and that it is precisely that failure to conceive of, much less consider, those consequences that is what the courts should retain the power to punish.

What if corporate decision makers lost money when they made bad decisions?

Back in January, criticizing the Supreme Court decision equating the free speech rights of corporations with those of individuals, I pointed out the insanity of considering corporate and other business entities as rational actors of the sort many economists consider people to be. The problem is that corporate decisions are made by individuals and are therefore driven to benefit those individuals, not the corporations (and their shareholders). As I wrote:

Individuals at AIG were making individual fortunes based on the income they were bringing into AIG for selling credit default swaps. Those individuals were making and would retain those fortunes even if, as turned out to be the case, AIG might not have sufficient funds to pay off the obligations those credit default swaps imposed on AIG. In other words, if one treated AIG as a rational person, one would suppose AIG would never expose itself to a real risk of obligating itself to pay more than it had in reserve. But AIG is merely a corporation, and the individuals actually making the decisions on behalf of AIG had every incentive to get what they could, subject AIG to irrational risk, and be able to walk away with their tens of millions of dollars.

I wasn’t just engaging in paranoia. I spent too many years with investment bankers to entirely forget their reality. And I have data to back me up:

In a study late last year, three Harvard Law School researchers examined public documents to assess whether one “standard narrative” of the crash was true — that “the meltdown of Bear Stearns and Lehman Brothers largely wiped out the wealth of their top executives.” It turned out to be a fairy tale. “In contrast to what has been thus far largely assumed, the executives were richly rewarded for, not financially devastated by, their leadership of their banks during this decade,” the Harvard Law team wrote. The top five executives at both Lehman and Bear collectively took home $2.4 billion in bonuses and equity sales — that’s nearly a quarter-billion dollars each — between 2000 and their 2008 demise.

Last week, William D. Cohan made much the same point in connection with the entire Wall Street ethic:

What if the biggest rewards on Wall Street went to those who thwarted dangerous and excessive risk-taking instead of to those who enabled, approved or simply ignored it?

What if every senior Wall Street executive had to worry that he could lose his entire net worth at any moment — including his mansions in Greenwich, Conn., and Palm Beach to say nothing of his job — if the revenue he was generating turned out to be unprofitable or excessively risky?

Wouldn’t that combination of potential rewards and fear of calamitous personal loss instill in every Wall Streeter a zealous desire to insist that the products his firm was peddling were safe for others to buy?

If such simple incentives had been in place on Wall Street, wouldn’t the latest crisis — as well as the multitude of others that have been perpetrated on us in the past 25 years — been largely avoided? . . .

The obvious answer to these questions is that human beings always do what they are rewarded to do and always have, especially on Wall Street. Rewarding prudent risk-taking on Wall Street while punishing recklessness would result in a new ethic on Wall Street, one not solely driven by generating as much revenue as possible in a given fiscal year with no regard to the long term.

To that end, shareholders must demand that corporate boards of directors revamp the entire compensation structure on Wall Street away from one based on revenue generation to one that rewards long-term profits. For goodness sake, what other business on the face of the earth, aside from Wall Street, pays out between 50 percent and 60 percent of each dollar of revenue generated to employees in the form of compensation!

And yet the Wall Street Journal’s stance on financial reform is the same as its stance on health care reform: “Once ObamaCare becomes law, the next big legislative rush is going to be for financial reform, but as we look at Senate Banking Chairman Chris Dodd’s latest draft we can’t help but wonder: Why the hurry?”

Indeed, why? There’s money still to be made . . .

Ronald Dworkin on Citizens United: a corporation is a legal fiction without opinions of its own.

Ronald Dworkin criticizes  the Supreme Court’s Citizens United decision — ruling that corporations are entitled under the First Amendment’s guarantee of free speech to an unlimited right to contribute money to political campaigns — for the same two reasons I have. First, the majority overturned precedent while hypocritically espousing their respect for the concept of adhering to precedent, and, second, because it is absurd to treat a corporation for First Amendment persons as the equivalent of a human being:

The opinion announces and perpetuates a shallow, simplistic understanding of the First Amendment, one that actually undermines one of the most basic purposes of free speech, which is to protect democracy. The nerve of his argument—that corporations must be treated like real people under the First Amendment—is in my view preposterous. Corporations are legal fictions. They have no opinions of their own to contribute and no rights to participate with equal voice or vote in politics.

Steven Colbert on Citizens United and Corporations as People

If a corporation is a person, why is an animal no more than a chair?

In light of the decision by the Supreme Court the other day in Citizens United regarding the rights of corporations to make campaign contributions without restriction, I felt compelled to republish a post from early last year:

Stephen M. Wise discusses the ways society shapes the development of the law in connection with the rising awareness that animals are not merely “things”:

Is it up to society to force a change in the law? Or will the law change society?

The law both leads and follows society. The legal system changes through the decision of judges or by legislatures enacting statutes. You saw this, for example, in the anti-slavery amendments to the U.S. Constitution in the 19th century and the numerous civil rights statutes of the 20th century. But the way the law changes and the way society changes are connected. People who try to change the law also depend upon changes in societal values, as well as upon scientific discoveries. In recognition of this, Rattling the Cage is crammed with reports about scientific discoveries on the nature of the cognition of chimpanzees and bonobos of the last 20 or 30 years. These discoveries form the springboard from which I can argue for their rights and personhood.

How do you think our view of animals will develop in the next 20 years?

It is going to develop in a complex way. First, a hierarchy of nonhuman animals will continue. Though nonhuman animals are considered legal things today, society does not view all nonhuman animals in the same way. Some we clearly value more than others. Even though chimpanzees don’t have any legal rights, we no longer euthanize them after they are no longer useful in medical experiments, as we do, say, to white mice. This fact both results from and drives the coming legal personhood of Great Apes. We’re beginning to see this not only in the U.S., but throughout the West. Westerners are also increasingly valuing their companion animals and I see increasing protection for them. The animals whom we thoughtlessly consume for food are being subjected to worse and worse conditions in the U.S. But an opposite trend is rising in [parts of] Europe. I think we will see the European trend expand even as factory farming in the U.S. increases. However, within the next 10 years, the American factory farming industry is going to learn how it has greatly overstepped and miscalculated just how much abuse of nonhuman animals used for food people are willing to accept. Stir in the environmental degradation that is its inevitable consort and there is going to be a backlash that will drive factory farming in the U.S. in the direction that Europe has taken and will, perhaps, drive at least some of it out of business.

Corporations = individuals? Confusions in economic theory and First Amendment jurisprudence

Metaphors are tricky things. Corporations are “persons” under the law in many respects, just as you and I are. And we treat corporations as rational individuals in the market. These figurative equations of legal fictions with human beings certainly have their utility, but they easily can be pushed too far. Individuals at AIG were making individual fortunes based on the income they were bringing into AIG for selling credit default swaps. Those individuals were making and would retain those fortunes even if, as turned out to be the case, AIG might not have sufficient funds to pay off the obligations those credit default swaps imposed on AIG. In other words, if one treated AIG as a rational person, one would suppose AIG would never expose itself to a real risk of obligating itself to pay more than it had in reserve. But AIG is merely a corporation, and the individuals actually making the decisions on behalf of AIG had every incentive to get what they could, subject AIG to irrational risk, and be able to walk away with their tens of millions of dollars.

And now the Supreme Court has overturned over 100 years of precedent permitting limits on corporate contributions to political campaigns because such limits constrained free speech and, according to the truism announced by Justice Kennedy’s majority opinion, ”Speech is an essential mechanism of democracy, for it is the means to hold officials accountable to the people.” But corporations don’t make decisions about how to spend money on campaign contributions — the individuals who control the corporations do. So what the Supreme Court has done is to remove any limits we might put on corporate CEOs to spend corporate money to advance the interests that indubitably are intended to redound to the benefit of those individual CEOs. I wouldn’t limit the ability of CEOs and shareholders to make individual contributions to political campaigns, but why are we treating purely legal entities like they are made of flesh and blood?

As Buzzflash pointed out recently, Thom Hartmann in his book Unequal Protection explains:

Prior to 1886, corporations were referred to in U.S. law as “artificial persons.” but in 1886, after a series of cases brought by lawyers representing the expanding railroad interests, the Supreme Court ruled that corporations were “persons” and entitled to the same rights granted to people under the Bill of Rights. Since this ruling, America has lost the legal structures that allowed for people to control corporate behavior.

Do we need to protect Exxon’s right to free speech?

There’s an interesting and largely ignored set of precedents at play in the campaign finance case the Supreme Court heard arguments in yesterday. The focus is on whether Chief Justice Roberts — after having emphasized during his confirmation hearings the importance of precedent and the extraordinary circumstances that would require it to be overturned — will vote to overturn over 100 years of limits on corporate donations to political campaigns on the grounds that limiting corporate contributions to political campaigns is an unconsitutional limitation on free speech. Here’s my bet (which I strongly recommend you don’t take): Roberts will overturn the precedent and vote to overturn the campaign finance restrictions.

But there’s an even older set of precedents that ought to be subject to review: the precedents that conclude that corporations are “persons” just like you and me; accordingly, corporations are entitled to free speech rights, protection against unreasonable searches and seizures, and all the other rights guaranteeed to individuals under the Constitution.

There’s nothing self-evident about concluding that a corporation is entitled to these protections. One reason is what the right wing of the Court identified years ago in concluding that limitations could be made on a union’s power to contribute money to political causes: an individual union member’s views might difffer from the union’s. Just so, an individual stockholder or director’s views might differ from that of the corporation’s.

More importantly, though, the idea of a corporation is a convenient legal “fiction” — really a metaphor — that courts employ because it is, well convenient for purposes of certain legal analysis. But when we confuse the metaphor for the reality we can get into trouble. As Buzzflash pointed out recently, Thom Hartmann in his book Unequal Protection explains:

Prior to 1886, corporations were referred to in U.S. law as “artificial persons.” but in 1886, after a series of cases brought by lawyers representing the expanding railroad interests, the Supreme Court ruled that corporations were “persons” and entitled to the same rights granted to people under the Bill of Rights. Since this ruling, America has lost the legal structures that allowed for people to control corporate behavior.

So think twice before you conclude that the campaign finance case is all about overcoming restrictions on free speech, which is the position argued on the left by the ACLU and on the right by the Wall Street Journal:

Hillary Clinton may end up the accidental heroine in the battle to reassert First Amendment rights over restrictions on political speech. Yesterday, the Supreme Court heard a historic reargument in the case of Citizens United v. Federal Election Commission, and the Justices have a chance to revisit two of their greatest offenses against the Constitution.

The case involves a political documentary made during last year’s Presidential primaries about then-Senator Clinton called “Hillary: The Movie.” It wasn’t what you’d call a glowing portrayal. Funded by a group called Citizens United, the film was intended to be shown on cable TV during the primary season, a profile that got it caught in the net of campaign finance reform laws that control political advertising.

At stake are two major precedents in the campaign-finance canon, Austin v. Michigan Chamber of Commerce (1990) and a portion of McConnell v. FEC (2003). In Austin, the Court ruled the government may ban corporations from engaging in what’s known as “express advocacy” directly from corporate treasury funds, requiring the funds to be channeled through a separate political action committee. In McConnell, the Court built on that decision to uphold most of the Bipartisan Campaign Reform Act, a.k.a.

the 2002 McCain-Feingold law, including a section that banned “electioneering communications.”

. . . The First Amendment was designed specifically to protect speech in just the kind of scenario “Hillary: The Movie” presents—the right to engage in the political process and to challenge and comment on candidates. Citizens United is the ideal opportunity to overturn a major swath of bad law.

No, the First Amendment was not “designed to specifically protect speech” by business organizations — it was intended to protect speech by individuals. It’s an amazing argument from those who would normally argue that we need to stick to the Original Intent of the Framers, but it shows too that Original Intent is merely a means to a political end, not a reasoned position.

Defamantion and Anonymity

From the Washington Post:

In a First Amendment case with implications for everything from neighborhood e-mail lists to national newspapers, an Eastern Shore businessman argued to Maryland’s highest court yesterday that the host of an online forum should be forced to reveal the identities of people who posted allegedly defamatory comments. . .

The businessman, Zebulon J. Brodie, contends that he was defamed by comments about his shop, a Dunkin’ Donuts in Centreville, posted on NewsZap.com. The shop was described as one “of the most dirty and unsanitary-looking food-service places I have seen.” . . .

For advocates of strong protections for anonymous speech and the Internet, online chat rooms are the 21st-century successors to the town square and the political pamphlet.

“There’s a long tradition in U.S. history of at least anonymous political speech, and certainly when you contemplate the Internet and the new opportunities it offers, this is the way a lot of speech happens,” Sam Bayard, assistant director of the Citizens Media Law Project at Harvard Law School, said in an interview.

At the same time, however, many argue that the First Amendment should not become a shield for those responsible for defamatory remarks. The reach of the Internet has allowed anonymous speech to potentially influence more people than ever, compounding the harm of a false claim.

This may be a far tougher and more important issue than it first appears.  We’ve lost touch with a lot of the “public square”-type of feeling that once existed.  Our newspapers are losing all capacity to cover the deeds of the corporate sphere.  The editor of the Manchester Guardian writes in the New York Review of Books of the Guardian’s struggles against one of Europe’s most powerful corporations over claims of defamation in a  story worthy of detailed attention:

News organizations in the Western world, struggling with declining audiences and revenue, are shedding journalists, closing down foreign operations, and cutting costs. But they are also increasingly inhibited by efforts-of government officials and of private corporations-to prevent them from protecting sources or from carrying out difficult investigations. Many minds are rightly focused on the regulatory, economic, technological, and legal issues that news organizations committed to serious journalism should be addressing.

We understand already that anonymous comments, because of their anonymity, are unreliable.  Yet we also know that people feel comfortable expressing themselves online particularly because of their ability to remain anonymous.  If we allow too much reach to people suing for being defamed, we will inevitably cause people to pull back from making even anonymous comments on any controversial matter involving a powerful person or company.  There’s simply too much risk and too much cost in being alleged to have defamed someone to bother.

So, should we allow someone to defame a particular Dunkin’ Donuts anonymously online, or should we allow a Dunkin’ Donuts to sue someone who might be correct in what they say but unable to defend the truth of their position?  That seems to me the choice: to either allow unjustified and unreliable speech or to shut down reliable and damaging speech.

Is Wal-Mart a person? Kind of, but not really.

One of the odder and more influential innovations in law was the 19th Century “recognition” of corporations as “persons,” a notion that has begun to have a profound impact on our law in the last 30 years. That a corporation is a person is something you learn early in law school, and for the most part the notion is not a disturbing one. I teach contracts, and there seems nothing odd to me that corporations are parties to contracts and thus have rights and duties under those contracts.

That an abstract entity (albeit one with concrete assets) has the same legal status as you and I do becomes weird, however, when you start considering constitutional implications. How can a corporation have the right to free speech? Well, they argue they do, and the argument has profound implications, particularly in the area of campaign contributions. The principal argument against regulating campaign contributions is that doing so limits free speech. If one limits what a person can give to a candidate or a party, the argument goes, then one is limiting the extent to which that person can express his political beliefs. Limiting money, in other words, is limiting speech. But when speaks of limits on corporate contributions, you’re talking not only of limiting money, not speech, but of limiting money from something that isn’t really a person (but that, after all, only is expressing the views of people who have their own rights to free speech).

In an interview with BuzzFlash from 3 years ago, “Is Wal-Mart a Person?,” Thom Hartmann tells “why it is — kind of — but not really:

Nike asserted before the Supreme Court last year, as Sinclair Broadcasting did in a press release last month, that these corporations have First Amendment rights of free speech. Dow Chemical in a case it took to the Supreme Court asserted it has Fourth Amendment privacy rights and could refuse to allow the EPA to do surprise inspections of its facilities. J.C. Penney asserted before the Supreme Court that it had a Fourteenth Amendment right to be free from discrimination – the Fourteenth Amendment was passed to free the slaves after the Civil War – and that communities that were trying to keep out chain stores were practicing illegal discrimination. Tobacco and asbestos companies asserted that they had Fifth Amendment rights to keep secret what they knew about the dangers of their products. With the exception of the Nike case, all of these attempts to obtain human rights for corporations were successful, and now they wield this huge club against government that was meant to protect relatively helpless and fragile human beings.

If a corporation is a person, why is an animal no more than a chair?

Stephen M. Wise discusses the ways society shapes the development of the law in connection with the rising awareness that animals are not merely “things”:

Is it up to society to force a change in the law? Or will the law change society?

The law both leads and follows society. The legal system changes through the decision of judges or by legislatures enacting statutes. You saw this, for example, in the anti-slavery amendments to the U.S. Constitution in the 19th century and the numerous civil rights statutes of the 20th century. But the way the law changes and the way society changes are connected. People who try to change the law also depend upon changes in societal values, as well as upon scientific discoveries. In recognition of this, Rattling the Cage is crammed with reports about scientific discoveries on the nature of the cognition of chimpanzees and bonobos of the last 20 or 30 years. These discoveries form the springboard from which I can argue for their rights and personhood.

How do you think our view of animals will develop in the next 20 years?

It is going to develop in a complex way. First, a hierarchy of nonhuman animals will continue. Though nonhuman animals are considered legal things today, society does not view all nonhuman animals in the same way. Some we clearly value more than others. Even though chimpanzees don’t have any legal rights, we no longer euthanize them after they are no longer useful in medical experiments, as we do, say, to white mice. This fact both results from and drives the coming legal personhood of Great Apes. We’re beginning to see this not only in the U.S., but throughout the West. Westerners are also increasingly valuing their companion animals and I see increasing protection for them. The animals whom we thoughtlessly consume for food are being subjected to worse and worse conditions in the U.S. But an opposite trend is rising in [parts of] Europe. I think we will see the European trend expand even as factory farming in the U.S. increases. However, within the next 10 years, the American factory farming industry is going to learn how it has greatly overstepped and miscalculated just how much abuse of nonhuman animals used for food people are willing to accept. Stir in the environmental degradation that is its inevitable consort and there is going to be a backlash that will drive factory farming in the U.S. in the direction that Europe has taken and will, perhaps, drive at least some of it out of business.

There’s nothing radical about Wise’s position. The law already recognizes that artificial entities such as corporations are legal “persons” and are therefore, among other things, entitled to the protections accorded people under the Bill of Rights.