Scholarship at Penn Law

Dynamic Resolution of Large Financial Institutions

Thomas H. Jackson et al. — Thu, 11 Apr 2013 05:55:49 PDT

One of the more important issues emerging out of the 2008 financial crisis concerns the proper resolution of a systemically important financial institution. In response to this, Title II of Dodd-Frank created the Orderly Liquidation Authority, or OLA, which is designed to create a resolution framework for systemically important financial institutions that is based on the resolution authority that the FDIC has held over commercial bank failures. In this article, we consider the various alternatives for resolving systemically important institutions. Among these alternatives, we discuss OLA, a European-style bail-in process, and coerced mergers, while also extensively focusing on the bankruptcy code. We argue that implementing several discrete modifications to Dodd-Frank, as well adopting an ambitious Chapter 14 proposal written by a working group at the Hoover Institution is the best way forward for establishing a strong resolution framework.

Intellectual Property Defenses

Gideon Parchomovsky et al. — Tue, 09 Apr 2013 10:52:32 PDT

In this Essay, we offer an integrated theory of intellectual property defenses. We demonstrate that all intellectual property defenses can be fitted into three conceptual categories: general, individualized and class defenses. A general defense is the inverse of a right in rem. It goes to the validity of the intellectual property right asserted by the plaintiff, and when raised successfully it relieves not only the actual defendant, but also the public at large, of the duty to comply with the plaintiff’s intellectual property right. An individualized defense, as we define it, is the inverse of an in personam right: it helps a defendant who raises it to fend off the infringement claim against her, but leaves the plaintiff’s right intact, and hence allows the plaintiff to assert it against other defendants. Class defenses form an in-between category. They can be analogized to inverse quasi-property rights in that they create an immunity zone for a certain group of users. However, group defenses do not act to invalidate the right of the plaintiff and thus the benefit to the public from a successful showing of a class defense is more limited than that arising from the vindication of general defenses.

Based on this taxonomy, we show that society has a special interest in the successful raising of class and especially general defenses, as those defenses help clear the path of invalid intellectual property rights and thereby facilitate future innovation, creativity and competition. Yet, because defendants do not capture the full social benefit associated with class and general defenses, they will not invest the socially optimal level of resources in raising and litigating such defenses. As a result, some defendants will be defeated in court, while others will agree to a settlement that will keep general and class defenses unrealized to society’s detriment. As we show, this problem is exacerbated by the fact that intellectual property owners will tend to target defendants who have no wherewithal to litigate.

To remedy this problem, we propose a procedural solution designed to achieve a better alignment between the private interest of intellectual property defendants and that of society at large: voluntary joinder of defendants. Specifically, we would allow defendants who raise class or general defenses to implead other potential defendants. Impleaded parties would be at liberty to decline the invitation to join. However, declining the invitation would subject the impleaded parties to one of two mechanisms. We dub the first the “preclusion mechanism” and the second the “restitution mechanism.” Under the “preclusion mechanism,” impleaded defendants would be able to opt out instead of joining in, but if the class or general defense asserted by the actual defendant failed, they would be precluded from asserting a general or class defense in their future litigation against the same plaintiff. The impleaded defendants would thus be incentivized to form an alliance that would face the infringement suit together. Under the “restitution mechanism”—which we ultimately endorse—impleaded parties who chose to opt out would not partake of the litigation, but should the actual defendant(s) successfully raise a class or general defense, they have to pay their fair share of the cost of raising the defense as they, too, benefit from the effort.

An Ethical Duty to Protect One’s Own Information Privacy?

Anita L. Allen — Mon, 08 Apr 2013 07:03:49 PDT

People freely disclose vast quantities of personal and personally identifiable information. The central question of this Meador Lecture in Morality is whether they have a moral (or ethical) obligation (or duty) to withhold information about themselves or otherwise to protect information about themselves from disclosure. Moreover, could protecting one’s own information privacy be called for by important moral virtues, as well as obligations or duties? Safeguarding others’ privacy is widely understood to be a responsibility of government, business, and individuals. The “virtue” of fairness and the “duty” or “obligation” of respect for persons arguably ground other-regarding responsibilities of confidentiality and data security. But is anyone ethically required—not just prudentially advised—to protect his or her own privacy? If so, how might a requirement to protect one’s own privacy and to display ethical virtues of reserve, modesty and temperance properly influence everyday choices, public policy, or the law? I test the idea of an ethical mandate to protect one’s own privacy, while identifying the practical and philosophical problems that bear adversely on the case. I consider “conceptual” and “libertarian” objections to the view that each individual indeed has a moral obligation to safeguard his or her own privacy. Government and industry are not off the hook if privacy is a duty of self-care and self-respect: they have responsibilities and are freshly viewed as partners in moral agents’ quest for ethical goodness.

Institutional Choice in an Economic Crisis

David A. Skeel Jr. — Thu, 04 Apr 2013 07:08:29 PDT

Neil Komesar’s work has transformed our understanding of how institutional analysis should be done. There is one very surprising omission from the breathtaking range of Komesar’s oeuvre, however: he has never directly applied his framework to crises. My aim in this Article is to advance, at least in a small way, our understanding of institutional choice during and after an economic crisis. Part I very briefly revisits the recent crisis, emphasizing its institutional dimensions. Part II identifies three puzzles posed by a crisis for standard Komesarian analysis. Part III then shows how Eric Posner and Adrian Vermeule’s executive-centered theory partially but not completely addresses these puzzles. Part IV offers an expanded institutional analysis of a crisis, focusing in particular on exogenous features of institutional interaction such as the possibility that Congress will respond to executive overreaching during a crisis by enacting legislation that ties the executive’s hands in its wake, and the effect that courts’ framing of their decisions during a crisis can have on the subsequent development of the law.

The Environmental Option

Gideon Parchomovsky et al. — Wed, 03 Apr 2013 07:47:56 PDT

We introduce an innovative market-based mechanism that may be used to advance environmental goals. Our mechanism employs option theory to give established businesses a financial stake in the success of green technologies. We show why and how green companies should be given an option to transfer a block of their shares to any corporation of their choice, incentivize them to switch to environmentally friendly technologies and to use their political clout to alleviate legal, regulatory and political barriers to the adoption of such technologies. In short, giving established corporations a stake in green companies will give them a stake in the environment. Specifically, we propose enacting legislation that will empower green companies that meet certain conditions to transfer a call option to buy a block of its shares to an established company of their choice. The option will be given for free; the established company that receives the option will not have to pay anything for it initially. The exercise price will be the price of the green company’s share at the time of the transfer and the receiving company will have a period of five years to exercise. We call this mechanism the “environmental option.” From a legal standpoint, the mechanism we propose is not unprecedented, so our proposed scheme is not overtly intrusive, nor should it be very controversial. Furthermore, we believe that this risk is worth taking given the proposal’s potential upside.

Is Bankruptcy the Answer for Troubled Cities and States?

David A. Skeel Jr. — Tue, 02 Apr 2013 11:52:10 PDT

The financial crisis that has afflicted America’s cities and states for the past decade is far from over. Under existing U.S. law, distressed municipalities can file for bankruptcy if their state permits this, as roughly half do. The states themselves do not have a bankruptcy option, however, no matter how bleak their circumstances may be. There have recently been dramatic developments in the handling of municipal distress. Several cities have filed for bankruptcy under Chapter 9, which, although adequate for sewer and water districts or a very small town, has conventionally been deemed irrelevant for real cities and municipalities. Additionally, several states have enacted or amended their laws to give the state greater control over the finances of troubled municipalities. Other recent developments that might initially seem unrelated may also have important implications for municipal and state distress: (1) the Supreme Court reinvigorated its jurisprudence on federal “commandeering” of the states and (2) the recent crisis in Europe raises questions about the internal dynamics of a federalist framework that also are highly relevant for the U.S. situation. In this 17^th Annual Frankel Lecture, Professor David Skeel proposes to take stock of each of these developments, focusing in particular on the lessons they offer about the role of formal restructuring rules in a federal system.

Bankruptcy Law as a Liquidity Provider

Kenneth M. Ayotte et al. — Mon, 01 Apr 2013 12:53:45 PDT

Since the outset of the recent financial crisis, liquidity problems have been cited as the cause behind the bankruptcies and near bankruptcies of numerous firms, ranging from Bear Stearns and Lehman Brothers in 2008 to Kodak more recently. This paper expands the prevailing normative theory of corporate bankruptcy — the Creditors’ Bargain theory — to include a role for bankruptcy as a provider of liquidity. The Creditors’ Bargain theory argues that bankruptcy law should be limited to solving problems caused by multiple, uncoordinated creditors, but focuses almost exclusively on the problem of creditor runs. We argue that two well-known problems that cause illiquidity — debt overhang and adverse selection — are also caused by multiple creditor coordination problems. As such, bankruptcy law is justified in solving these problems in addition to creditor run problems. With this insight in hand, we argue that many of bankruptcy’s existing rules, including debtor-in-possession financing, sales free and clear of liens, and coerced loans can be seen as liquidity-providing rules that target either debt overhang problems, or adverse selection problems, or both. Using bankruptcy to solve liquidity problems can create costs, however, such as the risk of continuation bias. We suggest rules of thumb for judges to use in balancing the benefits and costs of these rules. We also connect our theory to the use of bankruptcy for financial institutions, where liquidity concerns loom large.

Copyright Infringement Markets

Shyamkrishna Balganesh — Fri, 29 Mar 2013 13:07:32 PDT

Should copyright infringement claims be treated as marketable assets? Copyright law has long emphasized the free and independent alienability of its exclusive rights. Yet, the right to sue for infringement — that copyright law simultaneously grants authors in order to render its exclusive rights operational — has never been thought of as independently assignable, or indeed as the target of investments by third parties. As a result, discussions of copyright law and policy rarely ever consider the possibility of an acquisition or investment market emerging for actionable copyright claims, and the advantages that such a market might hold for copyright’s goals, objectives and functioning. This Essay analyzes the opportunities and challenges presented by an independent market for copyright claims, and argues that copyright law, policy, and practice would stand to benefit from the regulated involvement of third parties in acquiring, financing, bringing, and defending infringement claims.

Gandhi and Copyright Pragmatism

Shyamkrishna Balganesh — Tue, 26 Mar 2013 09:51:18 PDT

Mahatma Gandhi is revered the world over for his views on freedom and non-violence, ideas that he deployed with great success during India’s freedom struggle. As a thinker, he is commonly believed to have been a moral perfectionist: anti-utilitarian in mindset and deeply skeptical of market mechanisms. Yet, when he engaged with the institution of copyright law during his lifetime — as a writer, editor, and publisher — his approach routinely abjured the idealism of his abstract thinking in favor of a lawyerly pragmatism. Characterized by a nuanced, internal understanding of the institution and its conflicting normative goals, Gandhi’s thinking on copyright law reveals a reasoned, contextual, and incremental transformation over time, as the economic and political circumstances surrounding his engagement with copyright changed. In it we see a dimension of Gandhi’s thinking that has thus far been ignored, emanating from his training as a common lawyer. This Essay traces the development of Gandhi’s views on copyright to show how he anticipated several of the central debates and controversies that are today the staple of the copyright wars, and developed an approach to dealing with copyright’s various problems, best described as “copyright pragmatism.” As an approach that draws on legal and philosophical pragmatism, copyright pragmatism entails a critical engagement with copyright as a legal institution on its own terms, but contextually and with an eye towards its various costs, benefits, and normative goals at each stage of engagement. The Essay then unpacks the analytical moves that copyright pragmatism entails to show how it holds important lessons for the future of copyright thinking and reform.

Natural Law, Slavery, and the Right to Privacy Tort

Anita Allen — Tue, 26 Feb 2013 10:58:51 PST

In 1905 the Supreme Court of Georgia became the first state high court to recognize a freestanding “right to privacy” tort in the common law. The landmark case was Pavesich v. New England Life Insurance Co. Must it be a cause for deep jurisprudential concern that the common law right to privacy in wide currency today originated in Pavesich’s explicit judicial interpretation of the requirements of natural law? Must it be an additional worry that the court which originated the common law privacy right asserted that a free white man whose photograph is published without his consent in a city newspaper is like a slave in bondage?

I argue that the jurisprudence of Pavesich need not be troubling. Pavesich’s natural law argument was supplemented by several positive law arguments. The positive law arguments were a strong enough basis for finding a right to privacy in the common law, as indeed Samuel Warren and Louis Brandeis had previously argued. The observation that the Pavesich court’s natural law argument ran alongside positivistic arguments suggests that the arresting, high-toned natural law and slavery appeals in Pavesich are inessential rhetorical throwaways. But I maintain that the natural law argument and slavery analogy features of Judge Andrew Jackson Cobb’s opinion extolling the “liberty of privacy” are (1) of critical importance to a full contextual understanding of the decision and (2) illuminate the contemporary case for recognizing invasions of privacy as civil injuries to freedom and self-determination. One can poke holes in the logic of Thomas Aquinas and John Locke as scholars have done for centuries. But one can as easily choose to celebrate the spirit of the natural law tradition. The natural law tradition represents efforts rhetorically, rationally, and intuitively to derive principles of justice and goodness from basic facts about human characteristics, needs, and desires, where otherwise binding sovereign law may fall short.

Economic and Legal Arguments in PPL v. Commissioner

Michael S. Knoll — Fri, 08 Feb 2013 11:11:20 PST

In late February 2013, the U.S. Supreme Court will hear oral argument in PPL Corp. v. Commissioner. The Court took that case, which involves a claim by a U.S. corporation for foreign tax credits for taxes paid in accordance with the 1997 U.K. Windfall Profit Tax Act, in order to resolve a conflict between the Third Circuit, which denied the credit in PPL, and the Fifth Circuit, which allowed the credit in Entergy Corp. v. Commissioner. Nominally, the U.K. Act imposed a tax on recently privatized regulated companies of 23 percent of the difference between their estimated market value and the price at which they were sold to the public. The Act calculated each company’s market value by multiplying average earnings over a period of up to four years by 9 (a multiplier described as a conservative estimate of the market capitalization rate for such companies). The Fifth Circuit allowed the credit on the grounds that the substance of the tax imposed by the Act is a tax on the four prior years’ earnings, albeit at an effective rate higher than the statutory rate. In contrast, the Third Circuit denied the credit on the ground that the Act imposed a tax on a difference in values, not on income, as required by the Code and the applicable Treasury Regulation for the foreign tax to be creditable. This essay examines the economic and legal arguments that have been raised in PPL.

Regulation by Liability Insurance: From Auto to Lawyers Professional Liability

Tom Baker et al. — Thu, 07 Feb 2013 12:41:51 PST

Liability insurers use a variety of tools to address adverse selection and moral hazard in insurance relationships. These tools can act on insureds in a manner that can be understood as regulation. We identify seven categories of such regulatory activities: risk-based pricing, underwriting, contract design, claims management, loss prevention services, research and education, and engagement with public regulators. We describe these activities in general terms and then draw upon prior literature to explore them in the context of five areas of liability and corresponding insurance: shareholder liability, auto liability, gun liability, medical professional liability, and lawyers’ professional liability. The goal is to develop a conceptual framework to guide qualitative research on liability insurance as governance.

The Social Context of Oncofertility

Dorothy E. Roberts — Fri, 11 Jan 2013 10:32:45 PST

A field known as oncofertility provides female cancer patients with a variety of ways to preserve their fertility so that they may bear genetically related children after successful cancer treatment. Some women delay cancer therapy so doctors can collect their eggs, which are then cryopreserved in an unfertilized state or used to create embryos through in vitro fertilization for freezing. An experimental procedure for preserving the fertility of prepubertal girls, known as ovarian tissue cryopreservation, involves surgically removing their ovarian tissue and growing the immature eggs to a mature state so they can be frozen and stored until the girls are old enough to bear a child. Ethical questions raised by fertility preservation are not confined to the clinic and bedside; rather, these questions extend to the impact of fertility preservation on society and the way social forces influence women's decisions about their fertility. Gender, class, and race inequities help determine the reproductive options available to these women, including their access to assisted reproductive technologies, and the consequences that their childbearing decisions have for them, their families, and their communities. The uses and outcomes of novel technologies like oncofertility treatment are determined by their social context at the same time that these technologies have an impact on society. Considering the role social context plays in the ethics of fertility preservation reveals several paradoxical tensions that policy makers will have to resolve. There are compelling ethical reasons to restore to women cancer survivors the capacity to have a child so easily preserved for men and for the public to support wide access to this restoration. Yet an investigation of the underlying structural injustices that place women in conditions of infertility, poor health, and inadequate access to medical care raise questions about the just distribution of public resources used to pay for oncofertility and other health care services.

Protecting Consumers from Add-On Insurance Products: New Lessons for Insurance Regulation from Behavioral Economics

Tom Baker et al. — Fri, 11 Jan 2013 10:32:42 PST

Persistently high profits on “insurance” for small value losses sold as an add-on to other products or services (such as extended warranties sold with consumer electronics, loss damage waivers sold with a car rental, and credit life insurance sold with a loan) pose a twofold challenge to the standard economic analysis of insurance. First, expected utility theory teaches that people should not buy insurance for small value losses. Second, the market should not in the long run permit sellers to charge prices that greatly exceed the cost of providing the insurance. Combining the insights of the Gabaix and Laibson shrouded pricing model with the behavioral economics of insurance, this article explains why high profits for add-on insurance persist and describes the negative distributional and welfare consequences of an unregulated market for such insurance. The article explores four potential regulatory responses: enhanced disclosure, a ban on the point of sale offer of add-on insurance, price regulation, and the creation of a new, on-line market. Drawing on theoretical, empirical, and comparative law sources, the article explains why enhanced disclosure will not work, the circumstances under which a point of sale ban is desirable, and why a new, on-line market is preferable to price regulation in circumstances in which a point of sale ban is undesirable.

Reconstruction and Resistance

Kermit Roosevelt III — Tue, 08 Jan 2013 10:46:00 PST

This review essay considers Jack Balkin’s two recent books, Living Originalism and Constitutional Redemption. It argues that Balkin’s theoretical contribution is substantial. His reconciliation of originalism and living constitutionalism is correct and should mark a real advance in constitutional theory and scholarship. Political considerations may, however, complicate its reception. Something like political considerations seem also to have complicated Balkin’s theory. He suggests that we may think of American constitutional history as an attempt to redeem the promises of the Declaration of Independence. I argue that the Reconstruction Amendments are a much more appropriate focus for redemption and speculate that Balkin chooses the Declaration instead because it has a universal appeal that the Reconstruction Amendments do not. But by making his theory consistent with our national mythology of a successful constitutional experiment—a mythology that slights the Civil War and Reconstriction—Balkin actually accedes to a political program he probably does not endorse.

The Effect of Any Willing Provider and Freedom of Choice Laws on Health Care Expenditures

Jonathan Klick et al. — Thu, 13 Dec 2012 10:59:00 PST

Any Willing Provider and Freedom of Choice laws restrict the ability of managed care entities, including pharmacy benefit managers, to selectively contract with providers. The managed care entities argue this limits their ability to generate cost savings, while proponents of the laws suggest that such selective contracts limit competition, leading to an increase in aggregate costs. We examine the effect of state adoption of such laws on total state healthcare spending, finding that any willing provider/freedom of choice laws are associated with cost increases of at least 3 percent. These results suggest that these laws are harmful from a spending perspective.

Collateral Consequences, Genetic Surveillance, and the New Biopolitics of Race

Dorothy E. Roberts — Wed, 12 Dec 2012 12:16:37 PST

This Article is part of a Howard Law Journal Symposium on “Collateral Consequences: Who Really Pays the Price for Criminal Justice?,” as well as my larger book project, Fatal Invention: How Science, Politics, and Big Business Re-create Race in the Twenty-First Century (The New Press, 2011). It considers state and federal government expansion of genetic surveillance as a collateral consequence of a criminal record in the context of a new biopolitics of race in America. Part I reviews the expansion of DNA data banking by states and the federal government, extending the collateral impact of a criminal record—in the form of becoming a permanent suspect—to growing categories of people. Part II argues that the benefits of this genetic surveillance in terms of crime detection, exonerations of innocent inmates, and public safety do not outweigh the unmerited collateral penalty of state invasion of individuals’ privacy and the larger harms to democracy. These harms are exacerbated by the disproportionate collection of DNA from African Americans as a result of deep racial biases in law enforcement. Part III explains why DNA databases reflect and help to perpetuate an oppressive system of criminal justice. Finally, Part IV elaborates the racial harms that are caused by genetic surveillance that targets large numbers of African Americans, putting into practice deep-seated stereotypes about blacks’ inherent criminality. Far from correcting racial bias in law enforcement, the state’s use of DNA to designate millions of permanent suspects reinforces the roots of racial injustice.

Whose Regulatory Interests? Outsourcing the Treaty Function

Stephen B. Burbank — Tue, 11 Dec 2012 11:14:41 PST

In this article I describe the status quo in the area of foreign judgment recognition, with attention to the tension between domestic interests and international cooperation. Precisely because the future of the status quo is in doubt, I then consider current proposals for change, particularly the effort to implement the Hague Choice of Court Convention in the United States. Prominent among the normative questions raised by my account is whose interests, in addition to the litigants’ interests, are at stake – those of the United States, those of the several states, or those of interest groups waving a federal or state flag. A related question is whether, if the uniformity we seek is to be found in state rather than federal law, we can be, and be seen by other countries to be, serious about international cooperation. I describe in some detail the sequence of events that led to the Uniform Law Commissioners (“ULC”) becoming involved in the process of drafting legislation to implement the Choice of Court Convention. I also explore reasons why the ULC has been successful in securing the lion’s share of attention for its preferred approach to implementation, which the ULC calls “cooperative federalism,” but which has come to resemble cooperative redundancy. Recounting how, and offering suggestions why, the ULC ultimately rejected a package of compromises proposed by the State Department’s Legal Adviser, even though almost all compromises were in favor of the ULC, I conclude with observations about the ULC’s ambitions in the international arena. My argument is that, if the ULC were successful in taking over the negotiation or implementation of private international law treaties, international cooperation would be if not a fortuity, then not a priority, because we would have regressed to a position of privileging not just federal but state law uniformity over international uniformity. And the state law we privileged would be anything but “indigenous.”

What’s Wrong with Race-Based Medicine?

Dorothy E. Roberts — Mon, 10 Dec 2012 08:16:48 PST

This article is based on the 2010 Dienard Memorial Lecture on Law and Medicine at University of Minnesota and part of a larger book project, Fatal Invention: How Science, Politics, and Big Business Re-create Race in the Twenty-first Century (The New Press, 2011). In June 2005, the Food and Drug Administration approved the first pharmaceutical indicated for a specific race. Its racial label elicited three types of criticism – scientific, commercial, and political. I discuss the first two controversies en route to what I consider the main problem with race-based medicine – its political implications. By claiming that race, a political grouping, is important to the marketing of drugs and that race-based drugs can reduce health disparities, which are caused primarily by social inequality, those who promote racialized medicine have made this a political issue. Yet, having made these political claims, these very advocates answer criticism by saying we must put aside social justice concerns in order to improve minority health. This article explains why marketing pharmaceuticals on the basis of race is more likely to worsen racial inequities than cure them.

The Proper Role of the Community in Determining Criminal Liability and Punishment

Paul H. Robinson — Thu, 06 Dec 2012 12:29:30 PST

This essay argues that community views ought to have a central role in constructing criminal law and punishment rules, for both democratic and crime-control reasons, but ought not to have a role in the adjudication of individual cases. The differences in the American and Chinese debates on these issues are examined and discussed.