ICLE Editor-in-Chief R.J. Lehmann joined the Heard Tell Show to discuss Elon Musk’s bid to buy Twitter, shareholder rights, platform moderation, and regulatory review of the transaction. The full episode is embedded below.

https://youtu.be/6uhTJL6g9uY?t=835

Abstract

The institution of bankruptcy law seeks to facilitate economic efficiency by enabling the reorganization of economically viable but financially distressed firms and facilitating the liquidation of economically failed firms. Does the U.S. Chapter 11 bankruptcy process perform this filtering function efficiently? Using data from large public bankruptcies between 1981-2010, we find that it does not. Specifically, (1) evidence on matched performance differences between bankrupt firms and industry counterparts indicate that there is no improvement in the performance gap between bankrupt firms and industry right before and after bankruptcy, and, (2) firms emerging from bankruptcy do not exhibit financial performance catch-up behavior to their going concern industry counterparts. In addition, we find (3) judicial bias in favor of reorganization in cases involving firms with more employees and operations closer to the judge’s district, suggesting that bankruptcy judges respond to social-political considerations, when deciding whether to reorganize the firm.

Abstract

Legal rights impose concomitant legal burdens. This paper considers the valuation and disposition of legal rights, and legal burdens, when courts cannot be relied upon to perfectly enforce rights. Because courts do not perfectly enforce rights, victims suffer some loss in the value of their rights depending on the degree of underenforcement. The welfare implications of trading away and abandoning rights are examined. Victims do not necessarily trade away rights when and only when such trade is socially desirable. Relatively pessimistic victims (who believe their rights are weaker than injurers do) trade away rights too cheaply. Extremely pessimistic victims abandon their rights. Implications for the enforceability of waivers, discrimination in courts, and legal ethics are discussed.

Abstract

Collective action at impersonal scale involves losses to autonomy by definition because of the need to centralize some measure of authority. This stands as an important cost to collective action that varies in predictable ways depending on the extent of organizational choice available to members. By identifying characteristics at the fundamental institutional level linked to increases in self-determination relative to other organizational forms, I identify a structural tradeoff between exit costs and constitutional constraints with respect to the ideal of unanimity. Despite the long recognition of these institutional features as central to the processes of human social ordering, my analysis is centered in how each institutional solution to representative losses to collective decision making at scale reduces these losses relative to the other. As exit costs decrease, the losses to self-determination that collective action poses are increasingly resolved through individual choice, which makes the need for costly constitutional constraints fall in comparison. In a world of zero collective action costs, organizational choice would be infinite, and the initial distribution of organizations would always dynamically adjust to optimally reflect every individual’s preferences. But because collective action costs are never zero, some measure of constitutional constraints are therefore always optimal in the governance of impersonal organizations due to the representative losses these organizations entail.

Abstract

When parties bring claims under investor-state dispute settlement (‘ISDS’) procedures, who should serve as decision-maker? Relevant par-ties ask the question in different settings and with different criteria in mind. A party in a dispute, contemplating ISDS proceedings, whether by it or against it, likely will focus on the qualities of particular individuals available to serve as arbitrators. Party-appointed panelists charged under the applicable instrument with choosing a neutral or chair, and institutional appointing authorities charged with that task or with choosing arbitrators in default of party choice, will also turn their minds to candidate assessment. Different individuals or institutions might look for somewhat different qualities, but all who are called upon to make the choice will think about how best to assess the candidates.

Abstract

Mandatory disclosure requirements for corporate supply chains have the potential to leverage consumer and investor sensibilities to incentivize corporations to source more ethically. Despite their growing prevalence, there are few empirical studies of their effects: whether they actually put pressure on companies remains untested. This Article supplies such evidence by examining the consumer and investor responses to corporate supply chain disclosures made pursuant to Section 1502 of the Dodd-Frank Wall Street Reform and Consumer Protection Act. The act requires publicly traded companies to disclose to the Securities and Exchange Commission whether their supply chain contains “conflict minerals” (minerals important in global supply chains whose sourcing supports the conflict in the Democratic Republic of Congo and surrounding areas). The law aims to give customers and investors information about corporate supply chains, with the hope that they will support companies that source responsibly and punish those that do not. But whether this is actually accomplished is an open question.

This Article provides an empirical study of the market responses to three years of Section 1502 disclosures, whose contents were coded to create a novel dataset. Disclosures implying that a company has a higher risk of contributing to the conflict are associated with higher revenues and stock performances than those implying a lower risk. This implies there is no market discipline of bad actors in response to the disclosures; instead, bad actors are rewarded. This is consistent with the finding that the number of companies reporting a higher risk of contributing to the conflict through their supply chains did not decrease over the three years. One potential explanation is that consumers and investors may read disclosures more for signals of a corporation’s honesty or profit-maximization skills than for information about conflict-minerals exposure, and firms disclosing a higher risk of this exposure are more likely to be honest and profit seeking. Because disclosures about supply chains will generally send these signals as well, expecting investors or consumers to discipline the supply chains in response to securities disclosures is unrealistic. But scores for the due diligence procedures and forward-looking commitments in the disclosures generated by an NGO for a subset of the companies are positively correlated with revenues, suggesting how mandatory disclosure regimes might be improved. The NGO’s success in disseminating and analyzing the information suggests that the SEC may not be the best actor for implementing supply chain disclosure requirements and the criteria for the scoring suggest that disclosure requirements should focus more on the reporting of processes so that they are less likely to send a signal about honesty.

On Friday, April 17, 2020, ICLE President and Founder, Geoffrey A. Manne, submitted written testimony to the U.S. House of Representatives Committee on the Judiciary, Subcommittee on Antitrust, Commercial, and Administrative Law. Mr. Manne contends that underlying much of the contemporary antitrust debate are two visions of how an economy should work. 

One vision, which tends to favor more intervention and regulation than the status quo, sees the economy and society as being constructed from above by laws and courts. In this view, suspect business behavior must be justified to be permitted, and . . . the optimal composition of markets can be known and can be designed by well-intentioned judges and legislators.

On the other hand, there is the view of individual and company behavior as emerging from each person’s actions within a framework of property rights and the rule of law. This view sees the economy as a messy discovery process, with business behavior often being experimental in nature. This second conception often sees government intervention as risky, because it assumes a level of knowledge about the dynamics of markets that is impossible to obtain.  

In Manne’s view,

Antitrust law and enforcement policy should, above all, continue to adhere to the error-cost framework, which informs antitrust decision-making by considering the relative costs of mistaken intervention compared with mistaken non-intervention. Specific cases should be addressed as they come, with an implicit understanding that, especially in digital markets, precious few generalizable presumptions can be inferred from the previous case. The overall stance should be one of restraint, reflecting the state of our knowledge. We may well be able to identify anticompetitive harm in certain cases, and when we do, we should enforce the current laws. But dramatic new statutes that undo decades of antitrust jurisprudence or reallocate burdens of proof with the stroke of a pen are unjustified.  

Manne goes on to address several of the most important and common misperceptions that seem to be fueling the current drive for new and invigorated antitrust laws. These misperceptions are that: 

1. We can infer that antitrust enforcement is lax by looking at the number of cases enforcers bring;  
2. Concentration is rising across the economy, and, as a result of this trend, competition is declining; 
3. Digital markets must be uncompetitive because of the size of many large digital platforms; 
4. Vertical integration by dominant digital platforms is presumptively harmful; 
5. Digital platforms anticompetitively self-preference to the detriment of competition and consumers; 
6. Dominant tech platforms engage in so-called “killer acquisitions” to stave off potential competitors before they grow too large; and 
7. Access to user data confers a competitive advantage on incumbents and creates an important barrier to entry. 

See his full testimony, here.

A few weeks ago I posted a preliminary assessment of the relative antitrust risk of a Comcast vs Disney purchase of 21st Century Fox assets. (Also available in pdf as an ICLE Issue brief, here). On the eve of Judge Leon’s decision in the AT&T/Time Warner merger case, it seems worthwhile to supplement that assessment by calling attention to Assistant Attorney General Makan Delrahim’s remarks at The Deal’s Corporate Governance Conference last week. Somehow these remarks seem to have passed with little notice, but, given their timing, they deserve quite a bit more attention.

Read the full piece here.

Summary

During the past decade, academics—predominantly scholars of behavioral law and economics—have increasingly turned to the claimed insights of behavioral economics in order to craft novel policy proposals in many fields, most significantly consumer credit regulation. Over the same period, these ideas have also gained traction with policymakers, resulting in a variety of legislative efforts, such as the creation of the Consumer Financial Protection Bureau.

In 2016 the issue reached the Supreme Court, which granted certiorari in Expressions Hair Design v. New York for the October 2016 term. The case, which centers on a decades-old New York state law that prohibits merchants from imposing surcharge fees for credit card purchases, represents the first major effort to ground constitutional law (here, First Amendment law) in the claims of behavioral economics.

In this article we examine the merits of that effort. Claims about the real-world application of behavioral economic theories should not be uncritically accepted— especially when advanced to challenge a state’s commercial regulation on constitutional grounds. And courts should be especially careful before relying on such claims where the available evidence fails to support them, where the underlying theories are so poorly developed that they have actually been employed elsewhere to support precisely opposite arguments, and where alternative theories grounded in more traditional economic reasoning are consistent with both the history of the challenged laws and the evidence of actual consumer behavior. The Petitioners in the case (five New York businesses) and their amici (scholars of both behavioral law and economics and First Amendment law) argue that New York’s ban on surcharge fees but not discounts for cash payments violates the free speech clause of the First Amendment. The argument relies on a claim derived from behavioral economics: namely, that a surcharge and a discount are mathematically equivalent, but that, because of behavioral biases, a price adjustment framed as a surcharge is more effective than one framed as a discount in inducing customers to pay with cash in lieu of credit. Because, Petitioners and amici claim, the only difference between the two is how they are labeled, the prohibition on surcharging is an impermissible restriction on commercial speech (and not a permissible regulation of conduct). Assessing the merits of the underlying economic arguments (but not the ultimate First Amendment claim), we conclude that, in this case, neither the behavioral economic

The Petitioners in the case (five New York businesses) and their amici (scholars of both behavioral law and economics and First Amendment law) argue that New York’s ban on surcharge fees but not discounts for cash payments violates the free speech clause of the First Amendment. The argument relies on a claim derived from behavioral economics: namely, that a surcharge and a discount are mathematically equivalent, but that, because of behavioral biases, a price adjustment framed as a surcharge is more effective than one framed as a discount in inducing customers to pay with cash in lieu of credit. Because, Petitioners and amici claim, the only difference between the two is how they are labeled, the prohibition on surcharging is an impermissible restriction on commercial speech (and not a permissible regulation of conduct). Assessing the merits of the underlying economic arguments (but not the ultimate First Amendment claim), we conclude that, in this case, neither the behavioral economic

Assessing the merits of the underlying economic arguments (but not the ultimate First Amendment claim), we conclude that, in this case, neither the behavioral economic theory, nor the evidence adduced to support it, justifies the Petitioners’ claims. The indeterminacy of the behavioral economics underlying the claims makes for a behavioral law and economics “just-so story”—an unsupported hypothesis about the relative effect of surcharges and discounts on consumer behavior adduced to achieve a desired legal result, but that happens to lack any empirical support. And not only does the evidence not support the contention that consumer welfare is increased by permitting card surcharge fees, it strongly suggests that, in fact, consumer welfare would be harmed by such fees, as they expose consumers to potential opportunistic holdup and rent extraction.

As far as we know, this is the first time the Supreme Court has been expressly asked to consider arguments rooted in behavioral law and economics in reaching its decision. It should decline the offer.