Professor Bainbridge...on law, politics, religion, culture & food

Big Win for Bloggers in Delaware

The Delaware Supreme Court is best known for being the leader in state corporation law. Recently, however, the Court was given the chance to become "the first State Supreme Court to address" the issue of whether defamation plaintiffs suing an anonymous blogger was entitled to compel the blogger's ISP to disclose the blogger's identity, "particularly in the context of a case involving political criticism of a public figure."

I don't claim to be a First Amendment expert, but it looks to me like the Delaware court did a very good job in this case (Doe v. Cahill; download pdf of opinion here).

The opinion started out by demonstrating that the court "gets it":

The internet is a unique democratizing medium unlike anything that has come before. The advent of the internet dramatically changed the nature of public discourse by allowing more and diverse people to engage in public debate. Unlike thirty years ago, when "many citizens [were] barred from meaningful participation in public discourse by financial or status inequalities and a relatively small number of powerful speakers [could] dominate the marketplace of ideas" the internet now allows anyone with a phone line to become a town crier with a voice that resonates farther than it could from any soapbox. Through the internet, speakers can bypass mainstream media to speak directly to "an audience larger and more diverse than any the Framers could have imagined."

Internet speech is often anonymous. "Many participants in cyberspace discussions employ pseudonymous identities, and, even when a speaker chooses to reveal her real name, she may still be anonymous for all practical purposes." For better or worse, then, "the audience must evaluate [a] speaker's ideas based on her words alone." ...

It is clear that speech over the internet is entitled to First Amendment protection. This protection extends to anonymous internet speech. Anonymous internet speech in blogs or chat rooms in some instances can become the modern equivalent of political pamphleteering. As the United States Supreme Court recently noted, "anonymous pamphleteering is not a pernicious, fraudulent practice, but an honorable tradition of advocacy and dissent."

With this background in place, the Court turned to the question of what standard should be applied in these cases:

Before this Court is an entire spectrum of standards that could be required, ranging (in ascending order) from a good faith basis to assert a claim, to pleading sufficient facts to survive a motion to dismiss, to a showing of prima facie evidence sufficient to withstand a motion for summary judgment, and beyond that, hurdles even more stringent.

The Court noted its concern that:

... setting the standard too low will chill potential posters from exercising their First Amendment right to speak anonymously. The possibility of losing anonymity in a future lawsuit could intimidate anonymous posters into self-censoring their comments or simply not commenting at all. A defamation plaintiff, particularly a public figure, obtains a very important form of relief by unmasking the identity of his anonymous critics.

Indeed, there is reason to believe that many defamation plaintiffs bring suit merely to unmask the identities of anonymous critics. As one commentator has noted, "[t]he sudden surge in John Doe suits stems from the fact that many defamation actions are not really about money." "The goals of this new breed of libel action are largely symbolic, the primary goal being to silence John Doe and others like him." This "sue first, ask questions later" approach, coupled with a standard only minimally protective of the anonymity of defendants, will discourage debate on important issues of public concern as more and more anonymous posters censor their online statements in response to the likelihood of being unmasked.

The court finally decided that "before a defamation plaintiff can obtain the identity of an anonymous defendant through the compulsory discovery process he must support his defamation claim with facts sufficient to defeat a summary judgment motion." In other words, the plaintiff "must submit sufficient evidence to establish a prima facie case for each essential element of the claim in question" before being allowed to discover the identity of the blogger in question. In the case of public political figures, the burden of surviving a summary judgment motion in defamation cases is so stringent that public figures are highly unlikely to be able to unmask their anonymous critics.

As far as I can tell, this is a major win for bloggers and the First Amendment.

My thanks to Delaware lawyer and blogger Francis Pileggi for calling this case to my attention.

Daschle on SOX: Then and Now

On Friday, June 28, 2002, as reported in 148 Cong Rec S 6297, then-Senate Majority Leader Tom Daschle stated:

... the growing list of corporations under question makes clear that we aren't just talking about one or two isolated cases, or rogue executives.

The problem, instead, is a "climate"-a deregulatory, permissive atmosphere that has relied too much on corporate America to police itself. It is as if the line between right and wrong, legal and illegal, acceptable and unacceptable was so little enforced that it became blurred. Bringing it back into focus-as Enron's collapse did-revealed more than a few businesses standing on the wrong side.

The evidence rolling in is now unambiguous. Self-policing is no replacement for a vigilant cop on the beat. It is time to reform and strengthen the system. ...

Senator Sarbanes has done a masterful job in moving it [i.e., Sarbanes-Oxley] through committee with broad bipartisan support.

That was then. This is now, when he is in private legal/lobbying practice (from an articleon today's WSJ$ op-ed page that Daschle and Bob Dole (!) co-authored):

... SOX has also had unintended consequences that generate complaints from small and mid-sized capitalization companies who say that their access to capital from publicly-traded stock markets has been made prohibitively expensive.

... changes to SOX may come in the form of revisions to SEC regulations or, if necessary, new legislation. When Congressional hearings or regulatory review take place, there are likely to be a range of good ideas about how to achieve public protection and lower costs.

What was it Emerson said about consistency? (That's a rhetorical question, I know what he said)

It would have been nice if Senator Daschle had pondered the law of unintended consequences back in 2002, when Congress was rushing SOX through the legislative process with essentially zero regard for costs or nuance. As Texas Congressman Ron Paul aptly observes:

Sarbanes-Oxley was rushed into law in the hysterical atmosphere surrounding the Enron and WorldCom bankruptcies, by a Congress more concerned with doing something than doing the right thing.  Today, American businesses, workers, and investors are suffering because Congress was so eager to appear “tough on corporate crime.” Sarbanes-Oxley imposes costly new regulations on the financial services industry. These regulations are damaging American capital markets by providing an incentive for small US firms and foreign firms to deregister from US stock exchanges.

Daschle owes us not just a call for reform, but an apology for having rammed the law through in the first place.

Ribstein, Behavioral Finance, and Fraud

Larry Ribstein has posted a very provocative new paper arguing that insights from behavioral finance raise serious challenges for the fraud on the market doctrine in securities law. I think he's basically right on both that issue and his larger conclusion that "contrary to the assertions of many of its proponents, the indeterminacy of behavioral economics generally, and behavioral finance in particular, may support reducing rather than increasing legal paternalism." Indeed, I made much the same point in my article Mandatory Disclosure: A Behavioral Analysis.

Executive Perks: Golf Flights

Provocative analysis in the WSJ($) of a major perk corporations give their CEOs: free flights to golf resorts and tournaments:

There are thousands of corporate aircraft flying the skies over the U.S. Most companies say these planes are necessary to conveniently and securely transport employees to distant facilities or meetings. Top executives "are really 24-hour-a-day, seven-day-a-week people," notes Mike Nichols, an official with the National Business Aviation Association, a trade group. "These are really flying offices."

But a comparison of golf scores and flight records, some of which are available from commercial aviation-data services, shows that companies also use their jets for another purpose: as airborne limousines to fly CEOs and other executives to golf dates or to vacation homes where they have golf-club memberships.

At some companies, hundreds of flights in recent years have involved golf, played either for business, pleasure or both. Among companies whose top executives have flown on corporate jets to golf destinations are Alltel Corp., Motorola Inc., General Dynamics Corp., McKesson Corp., Verizon Communications Inc., SLM Corp. (Sallie Mae), U.S. Steel Corp., Cintas Corp., PNC Financial Services Group Inc. and National City Corp.

Companies usually pick up the tab for personal travel on their jets, so each trip can cost shareholders tens of thousands of dollars. The full cost of these flights can be hard to unravel. Under Securities and Exchange Commission regulations, companies must disclose the annual so-called incremental cost of personal travel by top executives once the cost of total perquisites exceeds either $50,000, or 10% of an executive's annual salary and bonus. Companies typically define incremental cost as the added expense of a given flight -- such as fuel, landing fees and a crew's hotel costs.

HT: Paul Caron, who observes:

The article cites the findings by David Yermack (NYU, Stern School of Business) that CEOs who belong to golf clubs far from their company's headquarters tend to be big users of their company planes. The publicly disclosed cost of aircraft use for these CEOs is two-thirds higher, on average, than for CEOs who are not long-distance golf-club members.  I tracked down the paper, Flights of Fancy: Corporate Jets, CEO Perquisites, and Inferior Shareholder Returns, on SSRN.

As I observed in my article Executive Compensation: Who Decides?, perks can be a legitimate form of compensation:

If managerial power has widespread traction as an explanation of compensation practices, one would assume that the evidence would show no correlation between the provision of perks and shareholder interests. In fact, however, The Economist recently reported on an interesting study of executive perks finding just the opposite:

Raghuram Rajan, the IMF’s chief economist, and Julie Wulf, of the Wharton School, looked at how more than 300 big companies dished out perks to their executives in 1986-99. It turns out that neither cash-rich, low-growth firms nor firms with weak governance shower their executives with unusually generous perks. The authors did, however, find evidence to support two competing explanations.

First, firms in the sample with more hierarchical organizations lavished more perks on their executives than firms with flatter structures. Why? Perks are a cheap way to demonstrate status. Just as the armed forces ration medals, firms ration the distribution of conspicuous symbols of corporate status.

Second, perks are a cheap way to boost executive productivity. Firms based in places where it takes a long time to commute are more likely to give the boss a chauffeured limousine. Firms located far from large airports are likelier to lay on a corporate jet.

In other words, executive perks seem to be set with shareholder interests in mind, which is inconsistent with the possibility that managerial power offers a unified field theory of executive compensation. Additional support for that proposition is provided by a recent analysis of a number of practices criticized by Bebchuk and Fried, including perquisites, corporate loans, and encouragement of conspicuous consumption by top management, by Todd Henderson and James Spindler. In brief, they hypothesize that firms seek to discourage top employees from saving so as to avoid the final period problem that arises when such employees accumulate sufficient wealth to fund a luxurious retirement. Reduced savings by such employees encourages them to seek continued employment, which vitiates the final period problem and provides ongoing incentives against shirking. By encouraging current consumption, the oft-decried practices of providing top employees with munificent perks and loans in fact maximize the joint welfare of managers and shareholders.

It would be easy to poke fun at this particular perk. If the analysis in my paper is correct, however, it's not as obvious that it is inconsistent with shareholder interests as the Journal and Caron seem to assume.