Patent Exhaustion and Private Law Goes to the Supreme Court — Patrick Goold

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Post by Patrick Goold

Sir Edward Coke’s Institutes of the Lawes of England, first published in 1628, rarely influences the direction of modern U.S. patent law. But that might be about to change. This December, the Supreme Court of the United States granted certiorari in the case of Impression Products, Inc. v. Lexmark International, Inc., Supreme Court Docket No. 15-1189, concerning the scope of the patent exhaustion doctrine. The case will interest readers of this blog because it highlights the conceptual and doctrinal relationship between IP exhaustion and common law rules regarding restraints on alienation.

The case involves the ongoing battle over refurbished printer toner cartridges. Lexmark International makes printer toner cartridges, over which it owns a number of patents. These cartridges fall into two types: “Regular Cartridges” are sold at full price; while “Return Program Cartridges” are sold at a discount but come with a “single-use/no-resale” restriction, meaning the buyer may neither reuse nor resell the cartridge after the toner has run out. Lexmark sells these cartridges both domestically in the U.S. and abroad. In 2014, Lexmark sued Impression Products for patent infringement. Impression Products had previously: (1) bought domestically-sold Return Program Cartridges, modified by third parties to allow refilling, and resold them in the U.S.; and (2) imported and resold both Regular and Return Program Cartridges from foreign markets. Lexmark maintained both of these actions infringed their U.S. patent rights under § 271 of the Patent Act. Impression argued that both of these acts were non-infringing due to the Patent Exhaustion doctrine, which holds that “the initial authorized sale of a patented item terminates all patent rights to that item.” Quanta Computer, Inc. v. LG Electronics, Inc., 553 U.S. 617, 625 (2008). John Golden has discussed the case in a prior New Private Law Blog post.

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Harvard Law School’s Private Law Workshop: Oren Bar-Gill & Ariel Porat, Disclosure Rules in Contract Law

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Post by Patrick Goold

Caveat emptor, or buyer beware, was the traditional principle of Anglo-American contract law. Today, however, many common law jurisdictions require the seller to disclose material information to the buyer prior to sale. Nevertheless, the duty to disclose is still subject to debate. Should the law obligate the seller to disclose pertinent information (a mandatory disclosure rule)? Or should disclosure be at the discretion of the seller (a voluntary disclosure rule)? In Disclosure Rules in Contract Law, Oren Bar-Gill and Ariel Porat study how mandatory and voluntary disclosure rules affect sellers’ incentives to invest in pre-sale investigation of goods. Speaking at the final installment of this year’s Private Law Workshop, Oren Bar-Gill explained their conclusion: that mandatory disclosure rules typically, but not always, provide sellers with efficient incentives to acquire socially valuable information regarding the asset.  

Imagine the following example. Having lived in a house for 10 years, the owner suspects there is water beneath the house that might damage its foundations. Before selling the property, the owner could hire a surveyor to investigate whether underground water exists. Whether hiring a surveyor is efficient depends on the value of the information investigation reveals relative to the cost of acquiring it, i.e. hiring the surveyor.

In 1994, Steven Shavell studied how mandatory (MD) and voluntary disclosure (VD) rules affected the incentives of sellers to undertake such investigations. Shavell found that MD rules create efficient incentives, while VD rules do not. If the owner knows that any information the investigation reveals must be disclosed, then he will only invest in the investigation if the expected increase in value to the asset outweighs the cost of the investigation. Conversely, voluntary disclosure rules cause owners to invest too heavily in information-acquisition, on the grounds that any favorable information can be used to demand a higher price, while unfavorable information is simply ignored.

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On Plain Meaning and Pacific Gas — Greg Klass

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Post by Greg Klass

Judge Traynor’s opinion in Pacific Gas & Electric v. Thomas Drayage & Rigging is a bête noire of textualist judges and contracts scholars. Judge Kozinski’s assessment is typical:

Pacific Gas casts a long shadow of uncertainty over all transactions negotiated and executed under the law of California. As this case illustrates, even when the transaction is very sizeable, even if it involves only sophisticated parties, even if it was negotiated with the aid of counsel, even if it results in contract language that is devoid of ambiguity, costly and protracted litigation cannot be avoided if one party has a strong enough motive for challenging the contract.

Trident Center v. Connecticut Gen. Life Ins. Co., 847 F.2d 564, 569 (9th Cir. 1988).

The objection is that permitting extrinsic evidence significantly increases the probability that a court will find ambiguity. The facts in Pacific Gas appear to illustrate the worry. Whereas the scope of the indemnification clause at issue was clear, covering “all loss, damage, expense and liability resulting from * * * injury to property, arising out of or in any way connected with the performance of this contract,” the defendant wanted to introduce extrinsic evidence that in fact the parties meant it to cover only third-party losses. Permitting that evidence in created ambiguity where none existed before.

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Harvard Law School’s Private Law Workshop: Mischkowski, Stone & Stremitzer, Promises, Expectations, and Social Cooperation

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Post by Samuel Beswick, Frank Knox Memorial Fellow, SJD candidate, Harvard Law School

At last Wednesday’s Private Law Workshop, Rebecca Stone presented new experimental evidence on whether, and under what conditions, people regard promises as generating obligations to keep them. Based on a study of some 780 subjects, Mischkowski, Stone and Stremitzer find that people regard the issuance of a promise in and of itself, and the fact of another’s reliance on a promise, as each carrying binding force. They further find an additive effect when the two conditions co-exist—i.e., when a promise is relied upon.

The authors set up a simple vignette study: imagine you are a prospective buyer and have told a seller that you will purchase a product from them for $100 when you get back into town. Depending on the version of the vignette (six versions were randomly assigned to the pool of subjects), you either promised to make the purchase or you stated an intention to buy the product but disavowed any promise to do so. You (the buyer) are told that the seller—in the spirit of Monty Python’s shopkeeper who is alternately rude and polite—either believed your promise, did not believe your promise, or was not sure (again, depending on the version of the vignette, randomly assigned). Finally, you are told that, prior to your return you happen to learn that another seller is prepared to sell you the same product for $85. Subjects are then asked whether they will buy from the original seller or instead buy from the other seller at the lower price.

Mischkowski, Stone and Stremitzer find evidence of three motivations for people’s decisions to keep their promises. First, regardless of whether they made or disavowed a promise to the original seller, subjects who were told that the seller had credited their assertions that they were planning to buy from the seller were more inclined to buy from the original seller than subjects who were told that the seller had not credited or had doubted their assertions (an expectations per se effect). Second, subjects who made a promise, as opposed to those who disavowed any promise, were more inclined to buy from the original seller regardless of what they were later told about the seller’s expectations (a promising per se effect). Third, subjects were most inclined to keep their promises when they had promised to purchase from the original seller and when they were told that the seller was expecting them to purchase the product (an interaction effect).

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North American Workshop on Private Law Theory IV

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Post by Patrick Goold

Earlier this month, Fordham University School of Law hosted the fourth annual North American Workshop on Private Law Theory (NAWPLT). This edition of NAWPLT—a yearly conference that gathers U.S and Canadian private law scholars to discuss works-in-progress selected by a steering committee—was organized by Fordham Professors Aditi Bagchi and Ben Zipursky.

In twentieth century legal theory, few issues have received more attention than the question: “What is Property?” Eric Claeys, in Property as an Institutional Artifact, defends a revisionist view. To Claeys, property is not merely a form (a bundle of jural relations), but has an essential substantive content: exclusive use. A property right, on this view, confers on one individual the exclusive authority to benefit from or manage a resource. In a related vein, James Stern’s paper, titled Intellectual Property and the Myth of Nonrivalry, argued against the prevailing view that intangible goods are “nonrivalrous.” Insofar as people have incompatible desires about how intangible goods are to be used, they resemble tangible goods, and hence there can be a need for a legal architecture that delegates to one individual the exclusive right to decide how such goods are used.  

In Legal Positivism as an Idea About What Morality Might Be, Martin Stone considered through the lens of tort law another ‘eternal’ question: the relation of law and morality. Taking issue with the view that the distinctiveness of legal positivism resides in its account of the nature of law, Stone maintains that it instead resides in a particular instrumental understanding of the relation of morality to law. In Retaliatory RICO and the Puzzle of Fraudulent Claiming, meanwhile, Nora Engstrom discussed a new technique repeat-player defendants are using to fight fraudulent claims: the Racketeer Influenced and Corrupt Organizations Act (RICO). When it was signed into law in 1970, Congress probably did not envision that RICO’s provisions on bribery, fraud, and obstruction of justice would allow corporate defendants to retaliate against plaintiffs bringing baseless claims to court. Questions remain regarding whether such retaliatory RICO actions can be exercised in a sensible and even-handed manner.

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Harvard Law School’s Private Law Workshop: Patricia McMahon, The Interplay Between Nineteenth Century Codes and the Fusion of Law and Equity

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Post by Patrick Goold

Codification of the common law and the fusion of law and equity were two of the most prominent law reform efforts of the nineteenth century. Legal historians have, however, rarely considered the connection between these two movements. At a recent Private Law Workshop, Patricia McMahon tried to map out the interplay between the fusion and codification movements of nineteenth century New York and England. McMahon finds that while often fusion and codification mutually supported each other, there was an inherent tension between the two goals, and this tension has continued relevance for today.

On one level, fusion was a boon to the codification movements. In New York, procedural fusion was accomplished in 1848 with the adoption of the New York Code of Civil Procedure, also known as the Field Code after its principle architect David Dudley Field. Field believed that the codification of procedure was the best way to transition from separate systems of law and equity to one single court. The success of the Field Code for legal procedure proceeded to serve as an example that codes and codification was a realistic possibility. In both New York and England, those wishing to codify the substantive common law pointed to Field’s Code as proof that codes worked!

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Restitution and Unjust Enrichment Discussion Group — Samuel Beswick

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Post by Samuel Beswick, Frank Knox Memorial Fellow, SJD candidate, Harvard Law School

Private law theory is enjoying a revival in Cambridge, M.A. Alongside the HLS Private Law Workshop, the Project on the Foundations of Private Law and the Law and Philosophy Society, last Thursday saw the launch of the Restitution and Unjust Enrichment Discussion Group at Harvard. The RUED Group brings together scholars and students in the Boston area who share an interest in the law of unjust enrichment to meet and discuss topical developments in the field.s

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Harvard Law School’s Private Law Workshop: John C. Harrison, Immunity Rules

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Post by Samuel Beswick, Frank Knox Memorial Fellow, SJD candidate, Harvard Law School

In the third of our trilogy of sessions on Hohfeld, Professor Harrison this week presented to the HLS Private Law Workshop a view of Calabresi and Melamed’s famous Cathedral article through a Hohfeldian lens. Calabresi and Melamed organized legal entitlements into three types: those protected by property rules, those protected by liability rules, and inalienable entitlements. An entitlement is protected by a liability rule when, if it is interfered with, the law requires only that the defendant pay an objectively determined value for it (generally in the form of compensatory damages).

Liability rules, Harrison contends, are “a false category.” Calabresi and Melamed had taken accident law from tort and eminent domain from the law of property, and grouped the two as examples of “instances in which society uses liability rules.” But their typology obscured the analytically distinct nature of these categories in two ways: by conflating rules about right/duty and rules about power/liability; and by conflating substantive law and remedies.

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Harvard Law School’s Private Law Workshop: Christopher Newman, Hohfeld and the Theory of In Rem Rights: An Attempted Reconciliation

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Post by Patrick Goold

Few questions have received more attention in law than the question “What is Property?” Is an in rem right a right over a thing, as the traditional (and perhaps resurgent) view holds? Or is the term “right in rem” an outmoded reference to a bundle of jural relations existing between individuals (as Hohfeld argued almost a century ago)? Is there a way to reconcile these two competing theories—for property to be both a right over a thing and bundle of rights? At this week’s HLS Private Law Workshop, Christopher Newman presented a work-in-progress in which he attempted a reconciliation of these apparently conflicting understandings of in rem rights.

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“Channeling” District Court Discretion in IP and Beyond — John Golden

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Post by John Golden

In both a patent case and a copyright case from soon-to-end October Term 2015, the U.S. Supreme Court continued a long struggle to define the proper bounds of trial court discretion in various contexts. See generally Henry J. Friendly, Indiscretion About Discretion, 31 Emory L.J. 747, 748–50 (1982). Such questions of trial court discretion commonly relate to questions about the proper nature of equity or equity-like reasoning in district court decision-making, questions that are presumably of interest to a number of readers of this blog.

Questions about trial court discretion have recently had particular prominence in patent law. In this area, an ever-growing string of Supreme Court decisions has, over the course of a decade, rejected what the Court has perceived as excessively rigid rules developed by the U.S. Court of Appeals for the Federal Circuit. See David O. Taylor, Formalism and Antiformalism in Patent Law Adjudication: Rules and Standards, 46 Conn. L. Rev. 415, 464–65 (2013). The newest addition to the string came in June in Halo Electronics, Inc. v. Pulse Electronics, Inc., 136 S. Ct. 1923 (2016). In an opinion by Chief Justice Roberts, the Court rejected as “unduly rigid” a Federal Circuit rule permitting the enhancement of patent damages for willful infringement only when the infringer’s conduct was objectively reckless with respect to violation of relevant patent rights. Id. at 1932 (internal quotation marks omitted).

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Harvard Law School’s Private Law Workshop: Hanoch Dagan and Michael Heller, The Choice Theory of Contracts

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Post by Samuel Beswick, Frank Knox Memorial Fellow, SJD candidate, Harvard Law School

Let’s put freedom back into “freedom of contract.” That’s the ambition Professors Hanoch Dagan and Michael Heller set out in their forthcoming book, The Choice Theory of Contracts, excerpts of which the authors presented at this week’s HLS Private Law Workshop.

Dagan and Heller contend that contract law’s ultimate value is, and ought to be, enhancing individual autonomy. They say that only a “choice theory” of contracts facilitates such autonomy: only when contract law offers a sufficient array of contract “types” will individuals be free meaningfully to author their own destinies. The explication of this liberal theory entails engaging with, and unseating dogma on, two fundamental questions: what is contract? And what is freedom?

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In Trust We Trust — Yonathan Arbel

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Post by Yonathan Arbel

The recent leak of the Panama Papers exposed the public to the magnitude of assets held in offshore accounts. These accounts are often associated with motives such as tax evasion and asset shielding from creditors, although they may be more legitimate motives to locating one’s assets offshore, such as privacy or preference for the rules of a specific legal system.  The estimates of how much is stowed offshore vary significantly, from one to five trillion dollars, an interval so large that it mostly reveals our ignorance. We simply know too little about these accounts, their motives, structures, and value—which, from the viewpoint of those who designed these trusts, is a feature, not a bug.  The most comprehensive work to date on the topic is that of Professors Sitkoff and Schanzenbach, who studied U.S. institutional trustees. However, these trustees are not likely representative of offshore trusts, and so, our understanding of offshore trusts is still foggy.

In a new intriguing paper, forthcoming in the Hastings Law Journal, Adam Hofri-Winogradow is providing us with a glimpse into the clandestine world of onshore and offshore trusts.  Hofri used a combined qualitative methodology of surveying and interviewing providers of trust services. Overall, he surveyed 409 providers of trust services and interviewed 25. Of his many findings, I will highlight just a few.

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Harvard Law School’s Private Law Workshop: Nathan Oman, Reconsidering Contractual Consent

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Post by Patrick Goold

How important is consent in contract law? Less important than many suppose, says Professor Nathan Oman. At the first HLS Private Law Workshop of the new academic year, Oman presented his current work in progress, Reconsidering Contractual Consent: Why We Shouldn’t Worry Too Much About Boilerplate and Other Puzzles. In this thought-provoking article, Oman argues that robustly voluntary consent to obligations is far less important to the normative defense of contract law than is often assumed.

Oman’s analysis begins with a puzzle. Normative theories of contract tend to suggest that party consent is necessary to justify enforcing contractual obligations. For autonomy theorists, holding parties accountable for commitments to which they have not meaningfully consented interferes with their ability to self-govern. For economists, consent is an important indication that the transaction makes both parties better off. But here’s the paradox: contract law regularly does not require meaningful party consent before enforcing obligations. Many situations exist wherein courts uphold agreements where the parties are almost wholly ignorant of the terms – boilerplate terms providing a familiar example.

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“Zombie Debt”: Obligation without Liability? — Aditi Bagchi

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Post by Aditi Bagchi

John Oliver recently purchased and forgave about $15 million in medical debt.  (See https://www.youtube.com/watch?v=hxUAntt1z2c)  His objective was to draw attention to the dubious practices of debt collectors, as well as their “right” to buy information about people who once owed money and to try to collect money from them, even if the debt is no longer legally binding because the statute of limitations has expired.  (What I will refer to as expired debt is also known as “zombie debt.”)  If a debtor makes or promises an additional payment or admits obligation, the statute of limitations may actually be extended and the dead debt may be revived.

There is a fair amount of legislation to protect consumers from debt collectors.  Debt collectors may not discuss debt with debtors’ friends or family and they may not threaten to sue on debt that has expired.  Individuals have the right to demand that debt collectors not call at work or that they cease direct communications with the debtor all together.  A lot of the worst practices by debt collectors are already illegal.

But not all of it.  Why not flat out ban the sale of expired debt?  Why not impose hefty fines on any attempted sale of such debt, including transmission of debtors’ information?  And why not heftier fines on any attempt to collect expired debt?

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Apologies as Tort Reform — Yonathan Arbel

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Post by Yonathan Arbel

When we wrong others, there is often an expectation—perhaps a moral duty—that we apologize. By apologizing, the wrongdoer asserts ownership of the wrong and acknowledges the wrongness of the act and the moral standing of the victim. It is also said that apologies can help restore the social order disrupted by the wrong.

In recent decades, many scholars have suggested that there should be a place in the law for apologies. And so the idea of ‘apology laws’ – laws that promote and protect the use of apologies – was born. These laws, now found in 36 states, are meant to encourage wrongdoers to apologize without fear of legal repercussions, and they typically apply in private law settings, such as torts and medical malpractice. A paradigmatic example is a doctor who makes a mistake during surgery but, in the absence of a ‘safe harbor’, would be reluctant to apologize for fear that admitting the mistake would foster litigation and count as an admission of liability.  An apology law that makes apologies inadmissible as evidence of fault at trial, as most do, promises to overcome this barrier.

In a new paper, Tort Reform Through the Backdoor: A Critique of Law & Apologies, (Forthcoming S. Cal. L. Rev., 2017), Yotam Kaplan and I are challenging the predominant scholarly disposition favoring laws that create safe harbors for apologies. We argue that in commercial settings—involving insurance companies, large firms, hospitals, etc.—using the law to encourage apologies may undermine tort liability and undercut deterrence. This effect is not necessarily negative—many people believe that the tort system is out of control—but it does mean apology laws are de-facto tort reform. That many states that normally oppose tort reform adopted apology laws was the result of clever marketing and concentrated lobbying efforts by tort reformers who co-opted the legal discourse on apologies to their own ends. Perhaps most notably, Barack Obama and Hillary Clinton—neither of whom is a card-carrying tort reformer—advocated actively for apology laws in an article in The New England Journal of Medicine.

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Private Law and Asset Shielding — Yonathan Arbel

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Post by Yonathan Arbel,  postdoctoral fellow in private law, Harvard Law School (job market candidate)

One of the central questions in the New Private Law is how ‘down-to-earth’ should legal analysis be? Regardless of one’s substantive view on this debate, there is one area in which we have been insufficiently realistic: private law enforcement. There is a real gap in our understanding of how legal norms are executed by sheriffs, bailiffs, and private ordering. Understanding the limits of doctrine and law could be informative for both economic and justice-based views of the law, as well as to views that look at the law from the internal point of view.

My scholarship focuses on questions concerning the enforcement of private legal norms. In Shielding of Assets and Lending Contracts (Forthcoming, Int’l Rev. L. Econ.) I consider the problem of asset shielding. Most judgments, if not voluntarily implemented, depend on enforcement through the seizure of the judgment-debtor’s assets. The problem is that ownership is too malleable and enforcement is too constrained, so there are many ways in which people can hide, shield, or protect their assets (transfer of money to an exotic offshore trust, bankruptcy planning, sham transfer to one’s relatives, hiding money under the mattress, etc.). Some of these techniques are more complicated than others, and some people will have moral reservations about deploying certain kinds of shielding techniques, or self-interested concerns about the effects of shielding on their credit scores, but overall, there is a real temptation here – especially since criminal enforcement against those who shield is quite rare. Given this temptation, it is puzzling why people do not shield assets more often. More generally, because avoiding judgments through asset shielding undermines many private legal obligations, it is important to have an account of when people would choose to meet their obligations and, if they decide to shield, the magnitude of assets that would be shielded.

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Why Private Law? — Patrick Goold

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Post by Patrick Goold

I have a question for the readers of this blog: Why make a distinction between public law and private law? Note, my question is not what is the distinction, but why is it a useful and helpful division to make? Of course, both questions are important and interrelated, but for now, I would like to focus on the latter.

This may be the central question in the New Private Law. Prior private law scholarship has typically fallen into two broad schools. On one hand, there are the Private Law Skeptics, who argue that all law has “public” ends, and ergo all law is public. On the other hand, we find Private Law Disciples, who point to the millennia-old private-public law distinction and assume it will simply continue. New Private Lawyers are different from both traditional camps. We do not take for granted the private-public distinction. Rather, as inclusive pragmatists, we demand to know whether this is a distinction worth retaining. What good does it do us? But, contrary to Private Law Skeptics, most of us, at least intuitively, believe that something is or can be accomplished by retaining the distinction. So the question is: what is that?

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Faulty Facades and Product Liability — Samuel Beswick

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Post by Samuel Beswick, Frank Knox Memorial Fellow, SJD candidate, Harvard Law School

* At the outset I should disclose that I had a hand in drafting the plaintiffs’ claim as a solicitor at Meredith Connell, New Zealand, in 2012/13.

Although the paradigm case of a tort suit against a product manufacturer involves a claim of personal injury caused by the manufacturer’s allegedly defective product, there is a wealth of litigation concerning products whose defects do not pose a risk of personal injury. For example, currently progressing through the District Court of Minnesota is a class-action product liability lawsuit, which consolidates claims arising in eight states against James Hardie Building Products Inc. in respect of its allegedly defective Hardiplank cladding product. The plaintiffs contend that Hardiplank fails prematurely by allowing moisture ingress, which causes damage to underlying building structures and adjoining property. Their claims sound in negligence, breach of express and implied warranties, and breach of consumer protection legislation. The plaintiffs might find some reassurance in last Friday’s decision of the Supreme Court of New Zealand: Carter Holt Harvey Limited v. Minister of Education [2016] NZSC 95. 

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Bagchi, Dagan, and Hesselink at “Contract Law in a Liberal Society” Summer School in June — John Golden

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Post by John Golden

From June 29 to July 1, the University of Amsterdam hosted a “summer school” on “Contract Law in a Liberal Society.”  The gathering featured extended presentations by Aditi Bagchi of the Fordham University School of Law, Hanoch Dagan of Tel Aviv University’s Buchmann Faculty of Law, and Martijn Hesselink of the University of Amsterdam, as well as additional short presentations of completed works or works in progress by more junior scholars.  This post describes aspects of the presentations by Bagchi, Dagan, and Hesselink as I perceived them.

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Yale Law School’s Seminar in Private Law: Dispute Resolution in Universities — Sadie Blanchard

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Post by Sadie Blanchard, Research Fellow Yale Law School

At the last session of this spring’s Seminar in Private Law, we considered dispute resolution in universities. The speakers were Jonathan Holloway, Dean of Yale College and Professor of African American Studies, History, and American Studies, and Mary Rowe, who teaches at MIT’s Sloan School of Management and was MIT’s Ombuds for over 40 years. In view of the tumult on campuses over the past year, it seemed apt to consider universities as part of our survey of dispute resolution beyond the state. What is distinctive about conflicts in this setting? What processes are best suited to resolve or manage them? Are protests evidence of a failure of dispute resolution, or are they a desirable or inevitable form of complaint?

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Communal Property and Two Legal Cultures — Henry Smith

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Post by Henry Smith

Last week I took part in some events at the Intensive Doctoral Week at Sciences Po in Paris.  This is a conference for Ph.D. students in law from all over France, organized by Mikhail Xifaras of Sciences Po Law School, and it features panels devoted to a wide range of topics.  One of two on property focused on the future of communal property, with panelists Bob Ellickson, Séverine  Dusollier, Maria Rosaria Marella, and myself (with my name spelled “Henri” no less!).  The notion of common property has a long pedigree and is very important in the work of legal scholars such as Bob Ellickson and Carol Rose and economists such as Gary Libecap and Elinor Ostrom.  The Europeans have a renewed interest in communal property for two reasons. First, they believe that it is a way of breaking down the supposedly hyper-individualist notion of property enshrined in the civil code.  Second, communal property can be used to solve cutting-edge problems like providing new forms of low-income housing. 

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Who is Entitled to a Fair Price? — Aditi Bagchi

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Post by Aditi Bagchi

Making waves recently was a ruling by the Delaware Court of Chancery that Michael Dell and the private equity firm Silver Lake paid too little for Dell when they bought the company in 2013 in a leveraged buyout. See http://courts.delaware.gov/Opinions/Download.aspx?id=241590. Vice Chancellor J. Travis Laster concluded in an appraisal proceeding that shares were worth about $17.62 rather than the $13.75 that shareholders were paid.

The court arrived at this result without finding that Mr. Dell and management breached their fiduciary duties. To the contrary, they appear to have taken many “praiseworthy” steps in the sales process. No one else came forward with a clearly better offer. The court found, however, that there were structural problems with the accuracy of the market valuation of the company, including some inherent conflicts of interest but, more importantly, limitations in the valuations by potential classes of buyers, including shareholders (short-termism), private equity (high return expectations), and strategic acquirers (integration risk). The result is that the company was found to be worth more than anyone was willing to pay for it.

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More on Fraud in the Performance, this time from the Supreme Court — Greg Klass

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Post by Greg Klass

A few weeks ago I posted on the Second Circuit’s decision in US ex rel. O’Donnell v. Countrywide Home Loans, which held that Countrywide’s knowing delivery of effectively worthless loans to Fannie Mae and Freddie Mac, without disclosing that fact, was not fraudulent. One way to read the decision is as affirming the well established, and to some baffling, rule that a party to a contract has no duty to disclose its breach of the contract, no matter how knowing or material. (For more evidence of bafflement on this count, see Brandon Garrett’s fine post on the case.)

I mentioned in my post that the result might have been different had the Countrywide plaintiffs’ False Claims Act claim not been dismissed. Those who are interested in that road not taken in Countrywide might take a look at the Supreme Court’s decision last Thursday in Universal Health Services v. United States ex rel. Escobar, which addressed the implied certification doctrine under the FCA. In its most robust form (and oversimplifying a bit), the implied certification rule says that the mere act of submitting a claim for payment on a covered contract represents compliance with the contracts material terms, as well as with other governing laws and regulations. Or what is functionally equivalent: If the contract, a law or a regulation requires compliance, there is a duty to disclose any material noncompliance when requesting payment. Had this rule applied, Countrywide would have almost certainly been subject to the FCA’s treble damages and per-claim fines.

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SIOE 2016 — Dan Kelly

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Post by Dan Kelly

 

The Society for Institutional and Organizational Economics (SIOE) (formerly, the International Society for New Institutional Economics (ISNIE)) is hosting its 20th Annual Conference this week, June 15-17, at Sciences Po in Paris, France.  The conference website includes details on this year’s program and links to abstracts and papers.

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