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 is the best preparation for law school? I’d suggest it is a liberal arts education.

I am often asked what type of undergraduate education best prepares a student for law school. Most of my life I’ve been completely baffled by the question. It never occurred to me that my very Classical liberal arts education — I double majored in Ancient Greek and Latin — would be something to recommend, and while I have always been a huge supporter of liberal arts education, I never felt confident in recommending it as preparation for law school. But neither was I ever persuaded that my students who had thought long and hard about choosing the “right” major to prepare for law school — and ended up thereby majoring in political science, business, or economics — were any better prepared than those students who had not chosen an undergraduate major based on a desire to “prepare” for law school.

I was reminded of this question in reading Rebecca Mead’s commentary on the views of certain economists that an undergraduate degree is not an economically wise way of earning a living. As Mead explains, this conclusion is based in part on the fact that the greatest opportunities to earn money in the near future are in fields in which a college degree is not required:

Economics majors aren’t doing badly . . . : their starting salary averages about fifty thousand a year, rising to a mid-career median of a hundred and one thousand. Special note should be taken of the fact that if you have an economics degree you can, eventually, make a living proposing that other people shouldn’t bother going to college. This, at least, is the approach of Professor Richard K. Vedder, of Ohio University, who is the founder of the Center for College Affordability and Productivity. According to the Times, eight out of the ten job categories that will add the most employees during the next decade—including home-health aide, customer-service representative, and store clerk—can be performed by someone without a college degree. “Professor Vedder likes to ask why fifteen percent of mail carriers have bachelor’s degrees,” the paper reported.

In addition, “[a]nother economist, Professor Robert I. Lerman, of American University (Ph.D., M.I.T.), told the Times that high schools, rather than readying all students for college, should focus on the acquisition of skills appropriate to the workplace. According to the Times, these include the ability to ‘solve problems and make decisions,’ ‘resolve conflict and negotiate,’ ‘coöperate with others,’ and’listen actively.’”

These opinions awoke in me a gnawing feeling that has been building in me the past couple of years — the feeling that the best educational preparation for being a lawyer is a liberal arts education.

One particular moment in the last 2 years stands out form me in considering this question. I was reviewing an exam with a student and explaining a clever argument another student had come up with in connection with the interpretation of ambiguous contract language. The contract called for the supply of sweetener to the manufacturer of a soda being marketed to the types of buyers who would be interested in “healthier” alternatives to mass market sodas. The contract provided for the supply of “sugar,” and the dispute arose when the supplier substituted high fructose corn syrup for granulated sugar as the sweetener. The other students argument was based on the greater attractiveness of granulated sugar to the buyers the soda manufacturer was targeting to argue in favor of an interpretation that would limit “sugar” to granulated sugar even though high fructose corn syrup is also, chemically, a “sugar.”  The student with whom I was meeting thought about this point, realized the argument was a good one and one she herself had not come up with, but still felt my point was objectionable because the argument was grounded in facts about the world she didn’t know. So she told me, “You’re not testing us on Contracts. You’re testing us on what we know about the world!”

I smiled, and I explained: if you don’t know about the world, you can’t understand law. Law doesn’t supply answers that exist independent of the world it answers questions about. In contract interpretation, courts are asked to determine, based on the available evidence, what they believe people  intended contracts to mean. The “rules” that govern those interpretive acts don’t work like mathematical formulas — they constitute a structured way of approaching the question of what people intended, nothing more, and therefore don’t provide any way out of answering the question; what do you think the people entering this contract intended? While the rules might limit the scope of evidence that can be considered, within that scope anything that persuades the court about the intended meaning is fair game for the court to consider. So, in the question I was considering with my student, the attractiveness of granulated sugar to the  manufacturer’s target market was a very relevant consideration — if you could show that both the supplier and the manufacturer knew and understood the marketing strategy, you could argue persuasively that they both intended “sugar” in the contract to mean only “granulated sugar” and not to include high fructose corn syrup.

And so, more and more often I have found myself telling my students that in addition to studying law they should be learning everything they possibly can about everything. I hate to be that vague, but, at the same time, I am quite serious. Would a better education in “decision making” have helped BP decision makers planning for offshore oil drilling than an education grounded in Greek Tragedy? I don’t think so.

Why would a mail carrier consider an undergraduate education worthwhile even if the tuition is economically out of balance with his earnings as a mail carrier? I hate to say it — because I hate the thought it needs to be said — but the education might make him a happier person and the money he will earn is not the only measure of his happiness.

And what should you learn to prepare for law school? Anything and everything, but learn it well.

What gives money or art its value? Ask J.S.G. Boggs.

From Suite 101:

Although the United States Treasury Department has very strict and serious laws about the counterfeiting of currency, there is one law that is above them that they seem to recognize and that is the artists freedom of expression.

J.S.G. Boggs (born Steve Litzner) is most famous for his hand drawn, one-sided United States bills that he then exchanges for goods and services just like real money. His drawings show the hand of a master draftsman so much so that he has been arrested for his counterfeiting in England and Australia. Boggs was acquitted in both cases on the grounds that he was creating art and not forging or counterfeiting currency and trying to pass it off as such.

But Boggs’ creations are as elusive as his philosophy about the art he creates. He does not consider the drawn bank notes as money and they are commonly referred to as Boggs Notes, Boggs Bills, and Boggs Dollars. Boggs considers the art part of his work when he exchanges the bills, receives change, and receipt and goods. He then is willing to sell the receipt, change and goods as the art, not the original bill. If a collector wants a hand drawn Boggs Bill they will have to track down the lucky recipient themselves.

While Boggs art work could be considered hard to collect and esoteric he is taken seriously by the art world. The proof? His work is in the collections of the British Museum, the Art Institute of Chicago, the Museum of Modern Art, and the Smithsonian Institution.

One of my favorite books on the “value” of money is Lawrence Wechsler’s Boggs: A Comedy of Values.

Courts are supposed to do justice even if doing so costs individuals a lot of money.

Joe Nocera writes in the New York Times that to even suggest “that maybe, just maybe, deals that stop making sense ought to be called off, or at least rejiggered, especially in the middle of a once-in-a-lifetime financial crisis – invites withering scorn, especially if you say it to someone on Wall Street or in the legal profession.”

I’ve worked in the legal profession on Wall Street, and I like to think that when what the law seems to compel makes no sense the law has the capacity to adjust, to do justice instead of nonsense.  My thinking isn’t purely the product of naivete and idealism.  There really  is a legal (or,  rather, for the lawyers among my readers, an equitable) argument to stop the particular deal Nocera is writing about.  Moreover, that argument is precisely that the deal makes no sense to an interest — the public — much more important than the individuals who would profit mightily from the deal.

Here’s the deal:  “Last summer, the Dow Chemical Company won a heated auction for a well-run, highly valued specialty chemical company called Rohm & Haas. . . . The price it agreed to pay was high: $78 a share in cash, a 74 percent premium, for a total of about $15.3 billion.”  The problem is that in light of the global financial crisis and a collapse of the chemical business, if the deal goes through the resulting Dow/Rohm & Haas entity “could be badly damaged, saddled with high-priced debt in a horrible business environment, and a junk bond credit rating.”

What does that mean? It means that if the deal goes through Dow would need to strip itself to the bare bones to survive or would collapse altogether.  This while “Dow Chemical employs around 45,000 people; Rohm & Haas employs more than 15,000.”  This while “the American chemical industry – which was suffering even before the financial crisis because of the rise of commodity chemical companies in China and elsewhere – is going to be in a bad place for the foreseeable future.”   This “[a]t a time when every job matters, and when the economy is holding on for dear life . . .”

In return, the shareholders of Rohm & Haas will get $15.3 billion.  According to Answers.com, ‘the Haas family, descendants of one of the company’s two founders, continue to control a substantial ownership interest of nearly 30 percent” of those shares. So the the Haas family and the other Rohm & Haas shareholders are suing for “specific performance” of the contract with Dow; that is, they are asking a Delaware court to order Dow to go through with the deal to buy Rohm & Haas for $15.3 billion.

I’m not sure why there’s “withering scorn” for the suggestion that a court might refuse to enforce a deal that threatens 60,000 jobs and, as Nocera writes,  would probably destroy “billions of dollars of value.”  It’s no stretch to suggest that at a time of global economic collapse and at a time when President Obama is fighting to inject billions of dollars into the economy, the deal is not in the public interest.

Why am I willing to defy the withering scorn of the Wall Street experts?  Because specific performance, the remedy Rohm & Haas is asking the court to grant, is an what is known as an “equitable” remedy.  In order to show it is entitled to equitable relief, Rohm & Haas must show that the outcome makes sense even after the court balances “all the equities” involved.  In other words, the court must determine whether, considering all of the interests at stake in the lawsuit, ordering the deal to go through would be more fair than unfair.  The public interest plainly is one of those interests the court must consider. Because the deal poses such a great threat to the public interest, the equities do not favor the deal; the equities, in fact, weigh heavily against enforcing the contract between Dow and Rohm & Haas.

In legalese, Corporate and Commercial Practice in Delaware confirms that this is the law in Delaware:

[I]f specific performance of a contract would cause significant public harm, then the Court has discretion to deny such relief, even where a breach of contract and substantial harm to plaintiff have been established . . .

1-12 Corp & Commercial Practice in DE Court of Chancery § 12.03 (Matthew Bender 2008), citing Alro Assoc., L.P. v. Hayward, CA 19544 (Del. Ch. Oct. 31, 2003), mem. op. at 22-26 (holding that where plaintiff had established breach of contract by Delaware Department of Transportation and where Court had assumed irreparable harm to plaintiff, specific performance was not appropriate  due to a balance of equities weighing strongly in favor of public interest).

Courts really are supposed to do justice notwithstanding the fact Wall Street expresses withering scorn at the thought.

Money’s value is at bottom dependent on our belief in its value, and art that illustrates this point is not counterfeiting

From Suite 101

Although the United States Treasury Department has very strict and serious laws about the counterfeiting of currency, there is one law that is above them that they seem to recognize and that is the artists freedom of expression.

J.S.G. Boggs (born Steve Litzner) is most famous for his hand drawn, one-sided United States bills that he then exchanges for goods and services just like real money. His drawings show the hand of a master draftsman so much so that he has been arrested for his counterfeiting in England and Australia. Boggs was acquitted in both cases on the grounds that he was creating art and not forging or counterfeiting currency and trying to pass it off as such.

But Boggs’ creations are as elusive as his philosophy about the art he creates. He does not consider the drawn bank notes as money and they are commonly referred to as Boggs Notes, Boggs Bills, and Boggs Dollars. Boggs considers the art part of his work when he exchanges the bills, receives change, and receipt and goods. He then is willing to sell the receipt, change and goods as the art, not the original bill. If a collector wants a hand drawn Boggs Bill they will have to track down the lucky recipient themselves.

While Boggs art work could be considered hard to collect and esoteric he is taken seriously by the art world. The proof? His work is in the collections of the British Museum, the Art Institute of Chicago, the Museum of Modern Art, and the Smithsonian Institution.

One of my favorite books on the “value” of money is Lawrence Wechsler’s Boggs: A Comedy of Values.