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.

Learn that government regulation can be very effective in under 2 minutes.

Next time someone tells you government regulation doesn’t do any good, ask them to watch the video below and whether they’d rather be driving a car built before the government started regulating automobile safety.

Consumer Protection: an old idea that’s new again.

It is remarkable how much times have changed, and how quickly. Since the election of Ronald Reagan the legal common wisdom has been that allowing individuals to enter into whatever agreements they wish, no matter how risky, leads us to the best of all possible worlds. Most usury laws became irrelevant. If you wanted to borrow at a ridiculously high interest rate, who was the government to say you couldn’t? I’ve been told that my opposition to that common wisdom was a belief that people are stupid. I suppose that’s one way to put it, but I certainly don’t except myeslf from the group I am judging. Saying I think people are stupid is just a way of saying I’m arrogant, paternalistic, and think I know what’s better for others than they do themselves. But give people the opportunity to take irrational risks, and they will. Give enough people enough opportunities to take irrational risks, and you put the entire society at risk. So now we’re speaking again (as we began to back in the Sixties)  in terms of consumer protection — laws limiting what terms consumers can be bound to and requring that whatever terms are agreed to are agreed to openly and plainly. Such regulation supplements the common law of contracts, which is founded on the idea of freedom of contract — precisely that individuals are free to make whatever stupid deals they wish. You want to sign up for a credit card with a 29% APR? Who am I to stop you. But there’s nothing wrong with limiting freedom of contract to some extent — it likely strengthens another core principal of contract law: that we should enforce contracts because they are agreements people consciously and intentionally enter into.

From the New York Times:

The federal consumer protection system failed the country, disastrously, in the years leading up to the mortgage crisis. One big cause was the sharing of responsibility for compliance with laws and regulations among several agencies that communicate poorly with each other and tend to put the bankers’ interests first and consumer protection second — if they pay attention to it all.

The Obama administration was right on the mark last week when it recognized this problem and proposed a solution: consolidating the far-flung responsibilities into a strong, new agency that focuses directly on consumer protection. The plan, modeled on a bill already introduced in the Senate by Richard Durbin, Democrat of Illinois, deserves broad support in Congress.

What real biking culture looks like.

As I wrote yesterday, the fact bicycling is the best and most popular way for Amsterdamers to get around their own city is one of the greatest pleasures I take in living here, even for the brief times I’ve been able to each of the last 3 years. It shouldn’t be surprising, therefore, that Amsterdam is leading the world in pursuing green urban planning. But for green Americans, the reality may not be exactly what they would conceive. Not only, as I wrote yesterday, do you ride a cheap, single-speed, fat tired, rusty and old bike and buy and use locks heavier than your backpack and more expensive than the bike itself, but you don’t wear a helmet, you carry people — often in the plural, and often of very tender ages — on whatever protrusion they fit on. And they, of course, don’t wear helmets either. You ride at any hour of the day or night, and you don’t hesitate to speak on your cell phone while you’re riding.

It’s the honest truth from one who is here. And if you don’t believe me, you can check out “82 pictures of bicycles taken during 73 minutes on 9/12/06 in Amsterdam, Netherlands.”

Bicycling is, by the way, the most energy efficient means of transportation, more efficient even than walking.

Wind of Change: new problems require new laws and new political alignments.

One consistent theme in this blog is that law is not a fixed set of rules applied to new situations as those new situations come up. Rather, as new situations arise, the law changes. This relationship between change and the law is frustrating to a lot of people. Politicians decry the activism of judges who don’t merely “apply the law as it is written.” And my students feel sometimes as if I’m trying to trick them. Most come to law school thinking that what will be really hard is that they’ll have to spend so much time learning so many rules. I tell them over and over again that it is indeed hard to spend so much time reading law. But that’s the easy part. The hard part is when you realize how open-ended and fluid the rules are and begin to understand that the really, really hard part is developing the creatvity and expressive powers necessary to effectively deal with law in an infinitely complex and ever-changing world.

So, for example, I have tried again and again to make clear that there is nothing in our copyright laws that is a necessary and immutable part of treating creators fairly. Rather, what is fair changes as the underlying material reality of creation changes. Our copyright laws our the product of a particular time, including the technologies of creation, the means of disseminating created products, and the intellectual fashions of that time. Since we have experienced and continue to experience a revolution in information technology, our copyright laws are bound to change. So an artist who claims he has “control over any use” of her images is not only wrong; she is also fighting a fight she may not be able to win without the sacrifice of the benefits of our new technologies — benefits we never had before and that we’d really prefer not to sacrifice for the sake of her exclusive control.

So we should not be surprised that changing energy technologies are beginning to realign our entrenched expectations. Ted Kennedy, of course, has long been known as the liberals’ most effective liberal, not least because, in the words of the Nation, he has “been his remarkable capacity to form warm, genuine friendships–more than mere working alliances–with GOP senators.”

But two years ago, when Kennedy worked in the Senate to block Cape Wind, a windmill farm in Nantucket Sound, environmental groups “launched an aggressive advertising and lobbying campaign to persuade Democrats to abandon Kennedy” and called Kennedy’s maneuver a “backroom deal.” The premise of the attacks, of course, was that Kennedy’s maneuver was motivated by the location of the legendary Kennedy compound on Hyannis Port, just 8 miles from the Cape Wind project. Kennedy counter-attacked, arguing that his position was the environmentally sound one. He also asserted that the wind farm would “hurt tourism, one of the area’s key industries.”

Putting aside the merits of Kennedy’s position, it seems plain that developing wind power will create rifts between environmentalists. On the one hand, of course, wind farms are “clean,” generating no waste as a direct result of energy production. On the other hand, wind turbines of sufficient size and sufficient number to make a real impact on energy production cannot help but have effects that not everyone will accept willingly.

I would not necessarily have guessed, however, that wind farms would already and directly be coming into conflict with laws established specifically to protect the environment. But that conflict is quite real in connection with migratory birds, as detailed by John Arnold McKinsey, a lawyer in Sacramento and former nuclear power plant operator on submarines in the U.S. Navy, in “Regulating Avian Impacts under the Migratory Bird Treaty Act and Other Laws: the Wind Industry Collides with One of its Own, the Environmental Protection Movement,” 28 Energy L.J. 71 (2007) (pdf).

As McKinsey explains, his article “explores the complexity, and perhaps irony, of the avian impacts facing the wind industry.” The impact, current and potential, of wind turbines on birds (and bats) is not only “an awkward issue for the environmental protectors that promoted wind energy, but is also subject to a number of “federal laws . . . [that] have created a growing issue with no resolution in sight.” Thus, McKinsey believes, “[h]ow well the wind industry deals with avian impacts may determine the ability of the industry to continue its amazing success.”

Unfortunately, while there is a growing recognition that fatal collisions between birds and wind turbines seem inevitable, according to McKinsey, it is not “well understood how many birds or bats collide with wind turbines” and it is “[e]ven less understood how many birds or bats will collide with a future wind project that exists only on paper.” And until recently no one has even considered avian impacts in determining where to place wind farms. I’m no expert on wind farms, but I am a litigator trained to see risks where no one else does, and it never occurred to me in thinking about a wind farm in Lake Erie just off the Cleveland’s coast that such a facility might, as now seems plain, have a big effect on birds.

Thus, of course, we not only will have laws and political alignments we never expected, we will also have new jobs we never expected. It is only in the course of my professional career that the representation of waste management companies has become a major area of legal specialization. Now we have the beginnings of an “avian impact assessment industry,” as McKinsey explains:

Companies exist that are nearly exclusively studying avian impacts for wind projects. Businesses have started up solely to provide radar survey services for wind projects. Evaluating avian impact risk has become an accepted practice in developing wind energy projects. Such efforts can be very expensive, depending in part on what level of effort is required. In general, avian impact risk evaluation is people-intensive. The various activities all involve individuals watching, catching, and/or counting birds or inspecting the ground for clues as to what birds or bats might utilize the project location. Night time surveys are also costly. Radar surveys alone, must factor in the cost of radar equipment as well as the operator or operators.

And now the impact on birds, even if it is not yet accurately measurable, is beginning to have an effect on the design and placement of wind turbines. Some think “newer and larger wind turbines, with their slower more visible motions, might reduce collisions.” Studies suggest “using radar to steer off birds or placing lights at selected locations to avoid impacts.” But we’re still working largely in the dark. It’s been thought that the use of echo-location by bats would allow them to avoid impacts, but “[b]ats continue to puzzle researchers. Some projects have a very large bat kill whereas others have minimal bat kill.”

There are many federal laws on the books that could affect the wind industry precisely because of bird kills. The most important of them, according to McKinsey, is the Migratory Bird Treaty Act (MBTA), which was originally enacted in 1918 and provides that “it shall be unlawful at any time, by any means or in any manner, to pursue, hunt, take, capture, kill . . . any migratory bird . . . .” The MBTA protects more than 800 species of birds. Intent to kill a bird is not required to violate the act, which imposes criminal penalties. Unknowing violations of the MBTA can receive fines up to $15,000 per violation and prison terms up to six months. Knowing violations are felonies and receive fines of $250,000 to $500,000 per violation and up to two years in prison.

Interestingly, though, McKinsey highlights the conflicts that can arise not only with respect to what the law is but with also with respect to how the law is enforced. He suggests that the MBTA’s potential impact is managed largely by “being ignored,” the approach the U.S. Fish and Wildlife Service adopted as official policy in 2003 in a policy memorandum euphemistically describing its approach as “selective enforcement.”

But the federal agencies that administer our regulatory system largely abandoned their jobs under the Bush administration. I have been unable to determine whether the Obama administration has reversed this policy in connection with enforcement of the MBTA, though it quite plainly has been called upon to do so. Already we’ve seen a shift away from “selective enforcement” of our laws governing workplace safety. But simply returning to strict enforcement of the MBTA might create conflicts no one considered before.

What seems plain, however, is that former allies in the environmental movement will be opposing one another on wind power projects. Altamount Pass, east of San Francisco, was developed as a wind farm in the early 1980′s. At the time, locating wind turbines was a function almost exclusively of wind availability. That can no longer be the case:

Altamont Pass, it turned out, while an excellent wind resource area, was also a challenging location to avoid avian impacts. Worse, this area of rolling hills was a primary hunting ground for large birds of prey, raptors. The end result was numerous dead raptors. Actual numbers have never been agreed upon by the various sides in the Altamont Pass confrontations, but a significant number of study efforts have taken place. Estimates often claim that more than 1000 eagles, hawks, and owls are killed each year.

Requiring McDonalds to disclose the calories in the Big Mac: good for consumers, or treating customers like idiots?

Today’s Wall Street Journal Law Blog has a post that nicely summarizes the varyious views on the impact of individual lawsuits on corporate behavior.  Referring to an article in the Wall Street Journal by Nathan Koppel (subscription only), the blog explains that “a surge in litigation against food companies for allegedly selling unhealthy products and for misrepresenting their products’ nutritional value” has led the food companies to adopt “a host of health-promoting steps, like reducing their use of trans fats, limiting marketing of sugary products to children, and toning down boasts about their products’ nutritional value.”

Thus, for example, in New York Restaurant Association v. New York City Board of Health (pdf), the United States Court of Appeals for the Second Circuit upheld a New York City law requiring restaurant chains to post calorie information on their menus.  In doing so, the court rejected the argument that the fact the restaurants already satisfied the federal regulations on required disclosures issued by the FDA meant that the city’s regulations were “pre-empted.”

As I mentioned last month, the U.S. Supreme Court recently rejected arguments by a pharmaceutical company that having satisfied FDA labeling requirements, it should not also be subject to state law that imposed even stricter requirements on the company regarding what it must warn about in selling its drugs.  The Supreme Court in that case emphasized the important role litigation plays in supplementing federal regulation, pointing out that regulatory agencies are limited in what they can do and should not be relied upon to alone police an industry unless Congress makes it clear that the agency is supposed to have that exclusive authority:

The FDA traditionally regarded state law as a complementary form of drug regulation. The FDA has limited resources to monitor the 11,000 drugs on the market, and manufacturers have superior access to information about their drugs, especially in the postmarketing phase as new risks emerge.

A lawyer in the New York Restaurant Association case argues, though, that such lawsuits are “part of a larger ‘paternalization of society,’ adding that such litigation ‘in effect, says the masses aren’t intelligent enough to understand what they are buying.’” He is not alone in his sentiments, even if he lost his most recent case.  Michael Doyle, a reporter for McClatchy’s Washington Bureau, wrote in the aftermath of the decision that the “calorie police have won another one.”

Who should most influence the creation and intepretation of our laws?

Where did our laws go wrong and help create the current financial crisis?  My own experience over the 28 years since I began law school has been that at the intellectual level we have become more and more enamored of the idea that the free market is the best measure of all value and that at the professional level we have become more and more obeisant to the financial industry.  Markets do a lot of good, but it boggles my mind when complex legal problems involving competing values and belief systems are in facile ways reduced to a weighing of measurable quantities.  And the investment bankers I worked among during my years as a lawyer in New York City were bright, but they were no smarter than the lawyers, painters, non-profit fundraisers, contractors, social workers, doctors, nurses, teachers, writers, and engineers I knew.

As Simon Johnson, a Professor at MIT’s Sloan School of Management and former chief economist of the International Monetary Fund, points out in the Atlantic, it might precisely be our willingness to defer politically to the people we referred to as financial “wizards” that got us in this mess:

Top investment bankers and government officials like to lay the blame for the current crisis on the lowering of U.S. interest rates after the dotcom bust or, even better—in a “buck stops somewhere else” sort of way—on the flow of savings out of China. Some on the right like to complain about Fannie Mae or Freddie Mac, or even about longer-standing efforts to promote broader homeownership. And, of course, it is axiomatic to everyone that the regulators responsible for “safety and soundness” were fast asleep at the wheel.

But these various policies—lightweight regulation, cheap money, the unwritten Chinese-American economic alliance, the promotion of homeownership—had something in common. Even though some are traditionally associated with Democrats and some with Republicans, they all benefited the financial sector. Policy changes that might have forestalled the crisis but would have limited the financial sector’s profits—such as Brooksley Born’s now-famous attempts to regulate credit-default swaps at the Commodity Futures Trading Commission, in 1998—were ignored or swept aside.

The problem is that, as Joan Walsh points out, the Obama administration’s efforts to “fix” the financial industry seem to perpetuate the misplaced reliance on the financial industry that the Democratic Party started back in the Clinton administration and that continues, unabated, to this day in the actions of Tim Geithner and Charles Schumer, the Democratic senator from New York.

Perhaps, though, we’re in on the beginning of a trend in a direction other than the one we’ve taken in the 30 or so years of my professional life.  With the demise of investment banks we’ll no longer see the best and the brightest of our college graduates flowing into investment banking and financial consulting jobs.  At a recent job fair at Columbia University, Kevin Long, a recruiter for Environ, which provides international consulting services on environmental sustainability, cleanup and other issues, was quoted as follows:

We’re delighted. In the past, we have had to compete with investment banks, hedge funds people that were pulling the best engineers and scientists out of these schools. And this year, because of the conditions of the economy, we’re getting an opportunity to go after those students.

Who knows?  If the people we consider the smartest are engineers and medical providers and social workers, maybe we’ll pass laws that enrich them rather than laws that enrich investment bankers.  And maybe that will be better.  Certainly it will bring in a broader range of views.  I don’t mean we should ignore the financial industry, but we should realize when someone tells us by making laws and policy that are intended to directly enrich them we will indirectly be doing ourselves the greatest good, we should perhaps start checking our wallets.

War is Peace, or They can sue, but you can’t.

There is wisdom and responsible citizenship, and then there is mindless use of law to advance whatever selfish interests one has when one has them.  May my students know the difference, and may they not serve clients who want the latter at the cost of the former.

In November 2006,  the Committee on Capital Markets Regulation issued a report arguing for cutting back on regulation of financial markets, for limitations on private lawsuits and on lawsuits by state attorneys general, and for increased restrictions on the ability of the Securities and Exchange Commission to issue new rules. The Committee on Capital Markets Regulation was a private group, but it had prominence.   Its co-chairs were R. Glenn Hubbard, the dean of the Columbia University Graduate School of Business, and John L. Thornton, the chairman of the Brookings Institution, its formation was endorsed by then-Treasury Secretary Henry M. Paulson Jr., and a significant part of its funding came from the Starr Foundation, started by Maurice R. Greenberg, who had in 2006 recently been deposed as Chairman of AIG.

Greenberg and AIG were notoroius for their hostility to lawsuits.  It figures — AIG is (was?) an insurance company, and liabilities are what insurance companies are supposed to pay for.  As the founder of one law firm I worked for, Gene Anderson, always says, “Insurance companies are in the business of collecting premiums and denying claims.”

Now, though, Greenberg no longer heads AIG and AIG showed itself incapable of paying for the liabilities it had collected premiums to insure.  So their minds seem to have changed.  Greenberg has become a lawsuit enthusiast, most recently suing AIG for for securities fraud based on alleged “‘material misrepresentations and omissions’” that  caused him to acquire New York-based AIG shares in his deferred compensation profit-participation plan at an ‘artificially inflated price.’”

And I just read that AIG commenced a lawsuit last month against the federal government seeking a return of $306 million in taxes it claims it should not have paid.  The claims include taxes paid in connection with AIG’s financial products unit (“the once high-flying division that has been singled out for its role in A.I.G.’s financial crisis last fall”), and “AIG offshore entities whose function centers on executive compensation and include C. V. Starr & Company, a closely held concern controlled by Maurice R. Greenberg and the Starr International Company.”

As the New York Times puts it:

A.I.G. is effectively suing its majority owner, the government, which has an 80 percent stake and has poured nearly $200 billion into the insurer in a bid to avert its collapse and avoid troubling the global financial markets. The company is in effect asking for even more money, in the form of tax refunds. The suit also suggests that A.I.G. is spending taxpayer money to pursue its case, something it is legally entitled to do. Its initial claim was denied by the Internal Revenue Service last year.

And if you think corporations should be liable to individuals for damages their products cause, that taxes should be raised on the people who earn more than 95% of our citizens, and that we should tax the inheritances of heirs who have done nothing to earn that money, you’re accused of engaging in “class warfare”?  I’ve got news for you: they struck first.

Don’t be fooled again.

One way we’ve been bamboozled by the myth that regulating financial markets is bad is by allowing ourselves to be convinced that “hedge funds” and the like are just too sophisticated for simple folks like us to understand. So we don’t even try to understand them. What happens? They steal us blind.

In 2005, law professor David Skeel, in “Behind the Hedge,” simply explained what hedge funds are, why and how they are unregulated, and their pernicious effects on our economy. I wish I could say now, three years later, that his conclusions showed him to be hysteric:

[T]here is a cost greater than lost dollars for all these practices . . . . It is the danger that investors will lose confidence in the markets because the markets are rigged. “People will not entrust their resources to a marketplace they don’t believe is fair,” an American Bar Association task force said 20 years ago in a study of insider trading, “any more than a card player will put his chips on the table in a poker game that may be fixed.” The same holds true today. If investors’ faith in the integrity of the markets is shaken, some will pull their money out, meaning less money will be available for American corporations to invest in ways essential to the nation’s prosperity. Investors will also be unwilling to pay as much for stocks or bonds in initial or subsequent public offerings, making it more difficult for companies to raise money for expansion or the creation of new technologies and products. The effect on the markets, and on the American economy, would be devastating.