Showing papers in "Harvard Law Review in 2006"

Legal origins, politics, and modern stock markets

Abstract: Legal origin--civil vs. common law--is said in much modern economic work to determine the strength of financial markets and the structure of corporate ownership, even in the world's richer nations. The main means are thought to lie in how investor protection and property protection connect to civil and common law legal origin. But, I show here, although stockholder protection, property rights, and their supporting legal institutions are quite important, legal origin is not their foundation. Modern politics is an alternative explanation for divergent ownership structures and the differing depths of securities markets in the world's richer nations. Some legislatures respect property and stock markets, instructing their regulators to promote financial markets; some do not. Brute facts of the twentieth century--the total devastation of many key nations, wrecking many of their prior institutions--predict modern postwar financial markets' strength well and tie closely to postwar divergences in politics and policies in the world's richest nations. Nearly every core civil law nation suffered military invasion and occupation in the twentieth century--the kinds of systemic shocks that destroy even strong institutions--while no core common law nation collapsed under that kind of catastrophe. The interests and ideologies that thereafter dominated in the world's richest nations and those nations' basic economic tasks (such as postwar reconstruction for many) varied over the last half century, and these differences in politics and tasks made one collection of the world's richer nations amenable to stock markets and another indifferent or antagonistic. These political economy ideas are better positioned than legal origin concepts to explain the differing importance of financial markets in the wealthy West. INTRODUCTION Do legal origins--common law vs. civil law--largely determine whether capital markets develop strongly? Many finance economists have concluded, in an explosion of influential articles in the past decade, that legal origin is indeed central. (1) Common law institutions effectively protect outside shareholders, it is said; civil law ones do not. This differing legal capacity to protect outside shareholders explains why some rich nations' capital markets are strong while others' are weak. The stakes aren't just academic. The developing world and international agencies are told that "transplanting the correct legal code (i.e., the common law) will enhance economic development." (2) This new legal origins view has in key circles elbowed aside the view that (1) economic function propels stock markets: stock markets develop when technology demands large enterprises and capital must be gathered from many sources, and this process works when (2) policymakers or private players build the institutions that support stock markets and (3) have enough political support that the polity does not attack finance. The last element--that national politics can confine policymakers' institution-building--has increasingly found theoretical support and evidence. Here I assess which approach--legal origin or political economy--is the better bet for future research and show how political and policy theories for the richer nations tie into systematic differences in how those nations experienced the turmoil of the early twentieth century. Differences in corporate finance in the wealthy West in the second half of the twentieth century could well be due more to the differing consequences of the earlier World Wars than to subtle differences between civil and common law. There's a powerful normative reason to get this assessment right. Many policymakers and some academics see strong financial markets as propelling economic development. (3) Thus, if we better understand what makes for strong financial markets, we can better understand how to engineer economic growth, or at least how to provide a necessary tool. …

Law and the rise of the firm

Abstract: Organizational law empowers firms to hold assets and enter contracts as entities that are legally distinct from their owners and managers. Legal scholars and economists have commented extensively on one form of this partitioning between firms and owners: namely, the rule of limited liability that insulates firm owners from business debts. But a less-noticed form of legal partitioning, which we call “entity shielding,” is both economically and historically more significant than limited liability. While limited liability shields owners’ personal assets from a firm’s creditors, entity shielding protects firm assets from the owners’ personal creditors (and from creditors of other business ventures), thus reserving those assets for the firm’s creditors. Entity shielding creates important economic benefits,, including a lower cost of credit for firm owners, reduced bankruptcy administration costs, enhanced stability, and the possibility of a market in shares. But entity shielding also imposes costs by requiring specialized legal and business institutions and inviting opportunism vis-a-vis both personal and business creditors. The changing balance of these benefits and costs helps explain the evolution of legal entities across time and societies. To both illustrate and test this proposition, we describe the development of entity shielding in four historical epochs: ancient Rome, the Italian Middle Ages, England of the 17th – 19th centuries, and the United States from the 19th century to the present. * Ezra Ripley Thayer Professor of Law, Harvard Law School.

Controlling Shareholders and Corporate Governance: Complicating the Comparative Taxonomy

Abstract: Corporate governance scholarship has shifted focus in recent years from hostile takeovers, which occur primarily in the widely held shareholder systems of the United States and the United Kingdom, to the comparative merits of the "controlling shareholder" systems that are the norm most everywhere else in the world. In this emerging debate, the simple dichotomy between controlling shareholder systems and widely held shareholder systems that has largely dominated the discourse is too coarse to allow a deeper understanding of the diversity of ownership structures in different national capital markets and their policy implications. In this Article, Professor Ronald Gilson seeks to complicate the prevailing analysis of controlling shareholders and corporate governance by developing a more nuanced taxonomy of controlling shareholder structures and examining the implications of this view on our understanding of widely held and controlling shareholder systems. Development of a new taxonomy begins with recognition of the controlling shareholder tradeoff: focused monitoring in return for some private benefits of control and at a cost in speed of adaptation. Building from this tradeoff, this Article looks closely at two central features of a more complex taxonomy: the concepts of controlling shareholders and of private benefits of control. In particular, the framework highlights the value of distinguishing between efficient and inefficient controlling shareholder systems, and between pecuniary and nonpecuniary private benefits of control. Together, the two distinctions reframe the taxonomy of shareholder distribution to distinguish between regimes that support companies with a diversity of shareholder distributions and regimes that support only companies with a controlling shareholder. This Article concludes by examining potential macroeconomic effects and policy implications and calling for research under this new framework to further the debate on controlling shareholder systems. I. INTRODUCTION The big issue in corporate governance scholarship is changing. Over the last fifteen years, the academic and policy debate has focused on hostile takeovers. The terms and tenor of the debate in the United States are by now numbingly familiar. The same pattern is now observable in Europe, (1) where the tone of the debate, if not necessarily its politics, seems to have moderated a great deal. (2) As the issues surrounding hostile takeovers have clarified, attention has begun to shift from debating a phenomenon--observed largely in the United States and the United Kingdom, because only in those two jurisdictions is control of most public companies in the public float--to understanding the kind of control structure that dominates public corporations everywhere other than the United States and the United Kingdom. Put simply, public companies in the rest of the world typically have a single shareholder or group of shareholders with effective voting control, often but not invariably without corresponding equity holdings. Debate is now turning to the merits of these "controlling shareholder" systems, both on their own terms and in comparison to the "widely held shareholder" systems of the United States and the United Kingdom. In this Article, I venture some early thoughts concerning how this inquiry might usefully be framed. The simple dichotomy between controlling shareholder systems and widely held shareholder systems that has largely dominated academic debate thus far seems to me much too coarse to allow a deeper understanding of the diversity of ownership structures in different national capital markets and of the policy implications of those structures. My goal here is to complicate the prevailing analysis of controlling shareholders and corporate governance by developing a more nuanced taxonomy of controlling shareholder structures, and then by examining the implications of this view on our understanding of widely held and controlling shareholder systems. …

Director Primacy and Shareholder Disempowerment

Abstract: In his 2004 article, Lucian Bebchuk advances proposals designed to allow "shareholders to initiate and vote to adopt changes in the company's basic corporate governance arrangements." (1) As Bebchuk explains, the housekeeping rules of corporation law effectively preclude shareholders from initiating corporate decisions. (2) Indeed, the extent to which corporate law is stacked against shareholder "intervention power" goes beyond just the housekeeping rules; much of business law acts to limit shareholder involvement in corporate governance. (3) Taken together, these rules form a regime I call "director primacy." (4) Hence, I do not quibble with Bebchuk's exposition of shareholder weakness; to the contrary, I welcome it as further evidence that my director primacy model accurately describes how corporations work. Instead, I intend to take issue with Bebchuk's proposal to replace the existing, mostly permissive rules disempowering shareholders with a new set of mostly mandatory rules empowering them.(5) Part I of this Response argues that Bebchuk's proposed default rules would be inefficient, asking: if shareholder empowerment is as value-enhancing as Bebchuk claims, why do we not already see it in the marketplace? After all, free markets typically produce only those goods people actually wish to purchase, and corporate governance terms are no exception. Part II invokes first principles to offer an alternative to Bebchuk's account of the proper role of shareholder voting in corporate governance. It argues that the present regime of limited shareholder voting rights is the majoritarian default and therefore should be preserved as the statutory off-the-rack rule. Finally, Part III questions whether shareholders would make effective use of Bebchuk's proposed regime. I. HAIL PANGLOSS The mechanism by which securities are priced "ensures that the price reflects the terms of governance and operation" offered by the firm. (6) If those governance terms are unfavorable, investors will discount the price they are willing to pay for that firm's securities. As a result, the firm's cost of capital rises, leaving it, inter alia, more vulnerable to bankruptcy or hostile takeover. Corporate managers therefore have strong incentives to offer investors attractive governance arrangements, either via the corporation's own organic documents or by incorporating in a state offering such arrangements off the rack. (7) Likewise, competition for corporate charters deters states from adopting excessively pro-management statutes. (8) In turn, when firms do not offer specific governance terms, we may infer that such items are not attractive to investors: Although agency costs are high, many managerial teams are scrupulously dedicated to investors' interests.... By increasing the value of the firm, they would do themselves a favor (most managers' compensation is linked to the stock market, and they own stock too). Nonexistence of securities said to be beneficial to investors is telling. (9) In other words, if investors valued the rights Bebchuk wishes to confer upon them, we would expect to observe entrepreneurs who are taking a company public to offer such rights either through appropriate provisions in the firm's organic documents or by lobbying state legislatures to provide such rights off the rack in the corporation code. Since we observe neither, we may conclude investors do not value these rights. Bebchuk does not accept this argument, which he calls "Panglossian." (10) As a rhetorical device this label can be effective, but as an analytical description it is too glib. Accordingly, this Part evaluates in some detail the incentives of each of the three relevant sets of players: investors, managers, and states. Investors. When a corporation first goes public, investors receive detailed information not only about the company's finances and business plans but also about its corporate governance arrangements, which facilitates the pricing mechanism described above. …

Separation of parties, not powers

Abstract: INTRODUCTION I. FROM BRANCHES TO PARTIES A. Madison and the Mechanisms of Political Competition B. Presidential, Parliamentary, and Party Government C. Conclusion: Separation of Parties II. PARTY UNIFICATION AND DIVISION OF GOVERNMENT A. The Past, Present, and Future of Unified and Divided Government 1. Unified and Divided Governments 2. Fragmented and Cohesive Parties B. The Functional Differences Parties Make 1. Legislative Efficacy 2. Executive Accountability III. REENVISIONING, AND REFORMING, THE SEPARATION OF POWERS A. Separation-of-Powers Law 1. Rights and Executive Powers During War and Crisis 2. The Administrative State 3. Judicial Review B. Democratic Institutional Design 1. Minority Opposition Rights 2. Bureaucracy and the Checking Function C. Political Parties and the Law of Democracy 1. Safe Districting 2. Primary Election Structures 3. Internal Legislative Rules 4. Encouraging Divided Government CONCLUSION American political institutions were founded upon the Madisonian assumption of vigorous, self-sustaining political competition between the legislative and executive branches. Congress and the President would check and balance each other; officeholders would defend the distinct interests of their different institutions; ambition would counteract ambition. That is not how American democracy turned out. Instead, political competition and cooperation along relatively stable lines of policy and ideological disagreement quickly came to be channeled not through the branches of government, but rather through an institution the Framers could imagine only dimly but nonetheless despised: political parties. Few aspects of the founding generation's political theory are now more clearly anachronistic than their vision of legislative-executive separation of powers. Yet few of the Framers' ideas continue to be taken as literally or sanctified as deeply by courts and constitutional scholars as the passages about interbranch relations in Madison's Federalist 51. This Article reenvisions the law and theory of separation of powers by viewing it through the lens of party competition. In particular, it points out that during periods--like the present--of cohesive and polarized political parties, the degree and kind of competition between the legislative and executive branches will vary significantly and may all but disappear, depending on whether party control of the House, Senate, and Presidency is divided or unified. The practical distinction between party-divided and party-unified government thus rivals, and often dominates, the constitutional distinction between the branches in predicting and explaining interbranch political dynamics. INTRODUCTION Describing a set of "wholly new discoveries" in the "science of politics" that might enable democratic self-government to succeed in the American republic, Alexander Hamilton listed first the "balances and checks" that distinctively characterize the American system of separation of powers. (1) In Madison's ingenious scheme of separated powers, "the interior structure of the government" would be "so contriv[ed]" "as that its several constituent parts may, by their mutual relations, be the means of keeping each other in their proper places." (2) By institutionalizing a differentiation between executive and legislative powers (as well as by dividing the legislature into two chambers), the separation of powers would harness political competition into a system of government that would effectively organize, check, balance, and diffuse power. What is more, the system would be self-enforcing, relying on interbranch competition to police institutional boundaries and prevent tyrannical collusion. In the Framers' Newtonian vision, the separation of powers was to be "a machine that would go of itself." (3) To this day, the idea of self-sustaining political competition built into the structure of government is frequently portrayed as the unique genius of the U. …

Toward a True Corporate Republic: A Traditional Response to Lucian's Solutions for Improving Corporate America

Abstract: I am honored to have this chance to comment on Professor Lucian Bebchuk's typically thoughtful article, The Case for Increasing Shareholder Power. (1) In that article, Bebchuk sets out a reform proposal designed to meet some of the objections of skeptics who doubt the desirability of increasing shareholder power to influence corporate decisionmaking. As a judge who decides corporate law cases, my essay responding to Professor Bebchuk is necessarily constrained. I will not enter the debate with my own vision of the appropriate role of stockholders in the governance of corporations. Instead, lest my essay be devoid of anything but platitudes, I present a critique of Bebchuk's proposed reform from a particular viewpoint. That viewpoint should not be confused as representing my own. Instead, I adopt the perspective of what I will call an open-minded corporate law "traditionalist." My description of this perspective attempts to describe fairly a school of thought about the American corporate governance system that not only has many adherents among investors, but also pervades the two major political parties whose members populate Congress and state legislatures. The substantial influence of the traditionalist perspective in our society means that in order to be successful, a proposal for the reform of corporate law such as Bebchuk's must address traditionalist views. This essay proceeds in four steps. Initially, I summarize Bebchuk's policy proposal. Then, I describe in colloquial terms the perspective many traditionalist investors have about corporate governance. From there, I identify why Bebchuk's policy proposal likely would not find favor with such investors. Finally, I set forth, for illustrative purposes, the type of proposal to increase stockholder clout that might serve as the basis for a responsible reform that would address the legitimate concerns of traditionalists. This proposal would periodically bolster the ability of stockholders to run a competing slate of directors against an incumbent board they believe is performing poorly. Reform along these lines would strengthen the hand of stockholders, but only insofar as institutional investors are serious about being active, involved long-term, and willing to devote reasonable efforts to improving the overall integrity and performance of American operating companies. Of course, in and of itself, any reform of corporate law is unlikely to promote a more rational focus by managers and stockholders on fundamental, long-term earnings growth. Absent changes in economic, tax, and disclosure practices at the federal level and, equally as important, absent behavioral changes by institutional investors to align their actions with the interests of the individual investors whose capital they invest, American corporations will have suboptimal incentives to concentrate on sustainable wealth creation. But the approach to reform outlined here channels stockholder activism in that direction. I. PROFESSOR BEBCHUK'S REFORM PROPOSAL To refresh the reader, Bebchuk's basic proposal is that stockholders should be given the power to initiate changes in the equivalent of the corporate constitution: the certificate of incorporation or charter. (2) Permeating Bebchuk's proposal is his belief that stockholders should have the affirmative power to set corporate policy in important areas, not simply the rights to veto major transactions (such as mergers) and to replace the board through the electoral process. (3) He would not permit stockholders to amend the charter to demand that the board of directors make any specific business decision, such as merging with a particular corporation. (4) But he would permit stockholders to establish "rules of the game" under which the board would be required to undertake certain actions--such as enabling stockholders to decide whether to accept a tender offer or requiring the board to pay a dividend--when triggering conditions in the charter are met. …

Misfearing: A Reply

Abstract: For several decades, social scientists have investigated bounded rationality and its relationship to human behavior.' In processing information, people use identifiable heuristics, which can produce severe and systematic errors.2 When people use the availability heuristic, for example, they answer questions of probability by asking whether examples readily come to mind.3 In assessing the risk of crime or certain methods of travel, people are affected by their ability to recall instances in which the risk materialized. In addition, human beings do not follow expected utility theory.4 Most importantly, they dislike losses more than they like corresponding gains, and in that sense they show loss aversion.5 As a result of various forms of bounded rationality, human beings are prone to what might be called "misfearing"6: they fear things that are not dangerous, and they do not fear things that impose serious risks. An understanding of bounded rationality has obvious implications for law and policy. Much of the time, private fears are translated into public action.' No one doubts that democratic nations should respond to the public will, but there is reason for real concern if small problems

Judiacially manageable standards and Constitutional meaning

Abstract: i. Intelligibility .... 1285 2. Practical Desiderata 1287 (a) A nalytical B ite .... 1287 (b) An (Important) Aside on Determinacy . 1287 (c) Ability To Generate Predictable and Consistent Results 1289 (d) Administrability Without Overreaching the Courts' Empirical Capacities 1291 (e) Capacity To Structure Awards of Remedies 1292 3. Further Normative Determinants of Fitness of Adjudication 1293 C. A Partial Summary 1296 II. JUDICIALLY MANAGEABLE STANDARDS BEYOND THE POLITICAL QUESTION DOCTRINE 1297

Letting Shareholders Set the Rules

Abstract: In companies with dispersed ownership, boards are bound to have significant power. But the power that boards of U.S. companies have is not an inherent corollary of the separation of ownership and control. This power is partly a product of legal rules that insulate boards from shareholder intervention. In my view, which I have put forward in earlier work, corporate governance of U.S. public companies could be improved by eliminating or reducing some of the legally imposed limits on shareholder power.(1) The reform that I support has two key elements. First, it would reduce some of the substantial impediments facing shareholders when they seek to replace incumbent directors. Under existing arrangements, shareholder power to replace directors is largely a myth; outside the takeover contest, electoral challenges to incumbent directors are rare.(2) To make boards accountable, I support changes that would turn this myth into a reality. (3) The second element is one that I put forward in an article published last year in this journal, The Case for Increasing Shareholder Power. (4) Increasing Power advocates providing shareholders with power to initiate rules-of-the-game decisions--decisions to change the governance arrangements in the company's rule book by changing the corporate charter or the company's state of incorporation. In contrast to the corporate law of the United Kingdom and other common law countries, U.S. corporate law has long denied shareholders the power to change the company's basic rules of the game. Increasing Power puts forward a detailed proposal for a new default regime under which shareholders would be able to make rules-of-the-game decisions. Under this regime, shareholders satisfying some minimum ownership and holding requirements would be able to place on the corporate ballot proposals for changing the charter or state of incorporation. To ensure that such changes are not produced by transient circumstances or majorities, they would take effect only if approved by shareholders in two consecutive annual meetings. To provide incentives to initiate beneficial proposals, shareholders initiating proposals that receive a sufficiently large number of votes--but not those that fail to attract meaningful support--would receive a reimbursement of their expenses. The proposed regime would be expected to affect governance arrangements mainly indirectly by inducing boards themselves to initiate changes that shareholders view as value-maximizing. (5) In this issue of the journal, Professor Stephen Bainbridge and Vice Chancellor Leo Strine take issue with my arguments for increasing shareholder power. (6) Professor Bainbridge offers the perspective of one who does not wish to see any change in the status quo. He accepts my account of shareholder weakness but believes it should be "welcome[d]." (7) In his view, any increase in shareholder power would be undesirable. Vice Chancellor Strine puts forward a critique from the perspective of an "open-minded corporate law 'traditionalist.'" (8) Unlike Bainbridge, Strine is sympathetic to the concern that, under existing arrangements, boards are insufficiently accountable and excessively insulated. (9) In his view, however, changes, if any, should be limited to enhancing shareholder power to replace directors. Companies must remain purely representative democracies in which shareholders can overrule a board that refuses to make rules-of-the-game changes the shareholders favor only by electing a new team of directors that would initiate such changes. I respond below to Bainbridge and Strine as well as further develop my arguments for shareholder power to make rules-of-the-game decisions. Part I discusses the significant costs arising from granting boards control over rules-of-the-game decisions during the often long life of public companies. Part II responds to the claim that shareholder power to make rules-of-the-game decisions is inconsistent with reaping the benefits of centralized management. …

Legal Origins and Modern Stock Markets

Abstract: Legal origin — civil vs. common law — is said in much modern economic work to determine the strength of financial markets and the structure of corporate ownership, even in the world’s richer nations. The main means are thought to lie in how investor protection and property protection connect to civil and common law legal origin. But, I show here, although stockholder protection, property rights, and their supporting legal institutions are quite important, legal origin is not their foundation. Modern politics is an alternative explanation for divergent ownership structures and the differing depths of securities markets in the world’s richer nations. Some legislatures respect property and stock markets, instructing their regulators to promote financial markets; some do not. Brute facts of the twentieth century — the total devastation of many key nations, wrecking many of their prior institutions — predict modern postwar financial markets’ strength well and tie closely to postwar divergences in politics and policies in the world’s richest nations. Nearly every core civil law nation suffered military invasion and occupation in the twentieth century — the kinds of systemic shocks that destroy even strong institutions — while no core common law nation collapsed under that kind of catastrophe. The interests and ideologies that thereafter dominated in the world’s richest nations and those nations’ basic economic tasks (such as postwar reconstruction for many) varied over the last half century, and these differences in politics and tasks made one collection of the world’s richer nations amenable to stock markets and another indifferent or antagonistic. These political economy ideas are better positioned than legal origin concepts to explain the differing importance of financial markets in the wealthy West. * Professor, Harvard Law School. Thanks for comments and, in four cases, research assistance on the data go to Michael Abramowicz, Marcelo Barbosa, Thorsten Beck, Robert Clark, John Coates, Christine Desan, Simeon Djankov, Charles Donahue, Antonio Duarte, Allen Ferrell, Martin Gelter, Peter Gourevitch, Claudio Haddad, Peter Hogfeldt, Howell Jackson, Rafael La Porta, Karl Lins, Tamara Lothian, Richard Pierce, John Pottow, Manoj Ramachandran, Mark Ramseyer, Alvaro Santos, Frederick Schauer, Wendy Sheu, Bryan Shinn, Andrei Shleifer, Holger Spamann, Lynn Stout, Guhan Subramanian, Marcelo Trindade, Detlev Vagts, Agata Waclawik, Luigi Zingales and those at workshops at the Columbia, Duke, George Washington, Georgetown, Harvard, NYU, Pennsylvania, Sao Paulo, and Vanderbilt law schools, at Harvard Business School, at IBMEC Business School, and at the World Bank. Thanks for research support go to Harvard Law School’s John M. Olin Center. Legal Origins and Modern Stock Markets

The deviance of the will: Policing the bounds of testamentary freedom in nineteenth-century America

Abstract: INTRODUCTION ........ ...... 960 I. FREEDOM AND THE W ILL 966 A. The Origins of the Will 966 B. Revolutionary Revisions 969 C. Depravity and the Disposing M ind 976 II. THE OFFSPRING OF DELUSION . 985

The Political Constitution of Criminal Justice

Abstract: TABLE OF CONTENTS INTRODUCTION I. CRIME, POLITICS, AND THE CONSTITUTION A. The Allocation of Power B. Legislative Politics and the Constitution 1. Policing and Procedure 2. Defining Crimes and Sentences 3. Spending C. Executive Branch Politics and the Constitution II. REPRESENTATION REINFORCEMENT: A BLUEPRINT A. The Content of Constitutional Regulation B. The Method of Constitutional Regulation III. A REFORM PROGRAM A. Policing the Police B. Defining Crimes and Adjudicating Guilt C. Punishment D. Federalism E. Imagining Constitutional Reform CONCLUSION The politics of crime is widely seen as punitive, racist, and inattentive to the interests of criminal suspects and defendants. Constitutional law is widely seen as a (partial) remedy for those ills. But in this instance, the cure may be causing the disease. At the margin, constitutional law pushes legislative attention--and budget dollars--away from policing and criminal adjudication and toward corrections. The law also widens the gap between the cost of investigating and prosecuting poor defendants and the cost of catching and punishing rich ones. Overcriminalization, overpunishment, discriminatory policing and prosecution, overfunding of prison construction and underfunding of everything else--these familiar political problems are more the consequences of constitutional regulation than justifications for it. Solving these problems requires radical constitutional reform. The Article explains why, and then offers brief sketches of what that reform might look like in four areas: policing, adjudication and crime definition (two fields that are better seen as one), punishment, and federalism. It closes by explaining how reform could happen, and why it probably won't. INTRODUCTION Large literatures discuss the constitutional law of criminal justice and the politics of crime. To date, no substantial literature addresses the relationship between the two. At first blush, that relationship seems straightforward: politicians ignore the interests of criminal suspects and defendants, so the Supreme Court steps in to protect those interests. On this view, politics is to constitutional law as a disease is to the medicine that cures it. America's politics of crime is indeed diseased. But the metaphor may get causation backward. The constitutional proceduralism of the 1960s and after helped to create the harsh justice (1) of the 1970s and after. Overcriminalization, excessive punishment, racially skewed drug enforcement, overfunding of prisons and underfunding of everything else--these familiar political problems are as much the consequences of constitutional regulation as the reasons for it. The medicine is reinforcing the disease. Political incentives are the mechanism. Constitutional law creates a series of political taxes and subsidies, making some kinds of legislation and law enforcement more expensive and others cheaper. Since the 1960s, the Supreme Court has regulated policing and trial procedure aggressively, while leaving substantive criminal law and (until the past few years) (2) noncapital sentencing to the politicians. Consequently, legislators find it easy to expand criminal codes and raise sentences but harder to regulate policing and the trial process. These incentives apply to spending as well. Prison budgets receive a constitutional subsidy. Budgets for criminal adjudication and (especially) local police are subject to a constitutional tax. (3) To see how perverse those taxes and subsidies are, it helps to visualize the criminal justice system as a giant funnel. Entering the broad end of the funnel are the tens of millions of men and women whom the police search or seize each year, most of them guilty of nothing worse than a traffic offense. (4) Slide down the funnel, and that broad pool of suspects narrows considerably, producing a smaller pool of criminal defendants: about two million per year charged with felonies, and several million more charged with misdemeanors. …

The Court's Agenda and the Nation's

Abstract: TABLE OF CONTENTS I. THE NATION'S AGENDA A. Definitional Preliminaries B. The Data C. Some Surprising Omissions II....AND THE COURT'S A. The Highlights B. A Quiet Term? III. THE LONGER VIEW A. Looking Back B. A Digression on Importance IV. IMPLICATIONS A. On Salience and Democracy B. In Search of Explanation 1. The Puzzle of Esteem 2. The Puzzle of Power V. CONCLUSION: SITUATING THE SUPREME COURT "Government by judiciary" is the traditional warning from those who seek to limit the power of the courts. (1) Policymaking in a democracy, so the argument goes, should be left to officials more responsive to popular will than judges, who because of their comparative nonaccountability to the public should keep their policymaking to a minimum. Government by judiciary, it is said, is the antithesis of democracy. (2) The charge of government by judiciary is one side of an old debate, (3) to which there is hardly more to add as a matter of political or constitutional theory. Yet the question of government by judiciary lingers, even as its political and ideological coloration changes. (4) It is this very persistence of the issue that invites us to assess what appears to be one of its fundamental empirical premises--that the courts are on the verge of occupying a substantial portion of American policymaking terrain. (5) To evaluate this premise, however, we must examine critically the actual business of the courts and compare it to the business of the country and its citizens. One component of this examination, and my focus here, is the narrower question of what the Supreme Court does and how its agenda relates to the agenda of government as a whole. Implicit in the typical charge of government by judiciary is the belief that much of the task of governance and policymaking has been, is now, or might in the future be commandeered by an unelected federal judiciary, in particular the Supreme Court. And although concerns about government by judiciary need not be restricted to or focused on the Supreme Court, in practice the Court is the most frequent object of worries about judicial activism, with their accompanying calls for judicial restraint, judicial modesty, judicial minimalism, and judicial deference to the decisions of legislatures and administrative agencies. (6) Yet the extent to which this anxiety about judicial aggressiveness rests on a sound factual foundation has seldom been investigated, in part because the existing debates tend to focus on a small number of admittedly important substantive issues--abortion, same-sex marriage, affirmative action, the right to die, and the role of religion in public institutions, for example--and neglect to consider just what proportion of governance in the aggregate is actually at risk of being controlled by the judiciary in general or the Supreme Court in particular. (7) This failure to probe how much of the policymaking or governance function resides in the Supreme Court can thus be seen as the consequence of a persistent misframing of the question in which commentators appear to make the fallacious leap from the accurate premise that much of what the Supreme Court does is important to the erroneous conclusion that much of what is important is done by the Supreme Court. Lawyers, judges, and legal academics are not alone, of course, in seeing the world through the lens of their own discipline. (8) But the tendency to exaggerate our own profession's role in the grand scheme of things appears more pronounced for constitutionalists and Courtwatchers than for, say, rocket scientists, dentists, and plumbers. This tendency shows no signs of abating, and it is what prompts a careful look at the place of the judiciary and the place of the Supreme Court within the larger domain of politics and policymaking. My goal in this Foreword is to examine the relationship between the Supreme Court's activities and the totality of the nation's governance. …

The Strategic Substitution Effect: Textual Plausibility, Procedural Formality, and Judicial Review of Agency Statutory Interpretations

Abstract: This Article presents a positive theoretical analysis of the relationship between the textual plausibility of an administrative agency's statutory interpretation and the procedural formality with which the agency promulgates that interpretation. The central claim is that, from the perspective of an agency subject to judicial review, textual plausibility and procedural formality function as strategic substitutes: greater procedural formality will be associated with less textual plausibility, and vice versa. Greater textual plausibility increases an agency's chances of a favorable judicial ruling but entails some sacrifice of policy discretion. Procedural formality is costly, but a reviewing court may give an agency more substantive latitude when the agency promulgates an interpretive decision via an elaborate formal proceeding. The court may view formal process as a proxy for variables that the court considers important but cannot observe directly, such as the significance of the interpretive issue to the agency's policy agenda. Because procedural formality and textual plausibility are both costly methods for increasing the agency's odds of surviving judicial review, a rational agency will choose the optimal mix of textual plausibility and procedural formality. Changes that increase or decrease the costs or benefits associated with one of these two variables will therefore have an indirect effect on the other variable as well. This Article develops the theoretical basis for this strategic substitution effect and explores its ramifications for administrative law. Administrative law scholarship is obsessed with the appropriate scope of judicial review of agency decisions. (1) This issue implicates questions not only about the scope or intensity of judicial oversight, but also about the relative significance of substance and procedure in judicial review of agency decisions. This Article, which focuses on review of agency legal interpretations, contends that the substantive plausibility of agency interpretations to a reviewing court (which I refer to as "textual plausibility" (2)) and the procedural formality with which an agency promulgates those interpretations are linked at a fundamental behavioral level that the existing literature has not explored. Specifically, the textual plausibility and procedural formality of agency interpretive decisions function as "strategic substitutes" from the perspective of an agency subject to judicial review. (3) This Article develops the theoretical basis for this strategic substitution effect and explores its ramifications for administrative law. The strategic substitution argument proceeds from the observation, occasionally noted but rarely pursued in depth, that courts often give an agency more substantive latitude when the agency promulgates an interpretive decision via an elaborate formal proceeding than when it announces its interpretation in a more informal context. (4) This behavior may arise because courts tend to view formal process as a proxy for variables that the court considers important but cannot observe directly, such as the significance of the issue to the agency's mission or the degree to which the agency's judgment reflects a sensible balancing of the relevant considerations. But although procedural formality and textual plausibility both increase the agency's odds of surviving judicial review, they are also both costly to the agency. Procedural formality is costly because of the time, effort, and resources that it requires, and perhaps also because it may trigger unwelcome external attention. Textual plausibility is costly because the agency often must sacrifice some of its policy goals in order to advance an interpretation that will appease the court. If the agency is rational, it will try to secure judicial approval for its interpretation at the minimum possible cost to itself, which means it will neither adopt an interpretation that is more plausible than necessary nor use procedures that are more formal than necessary to satisfy the reviewing court. …

Creating an American Property Law: Alienability and Its Limits in American History

Abstract: This article analyzes an issue central to the economic and political development of the early United States: laws protecting real property from the claims of creditors. Traditional English law, protecting inheritance, shielded a debtor's land from the reach of creditors in two respects. An individual's freehold interest in land was exempted from the claims of unsecured creditors both during life and in inheritance proceedings. In addition, even when land had been explicitly pledged as collateral in mortgage agreements, chancery court procedures imposed substantial costs on creditors using legal process to seize the land. American property law, however, emerged in the context of colonialism and the dynamics of the Atlantic economy. In 1732, to advance the economic interests of English merchants, Parliament enacted a sweeping statute, the Act for the More Easy Recovery of Debts in His Majesty's Plantations and Colonies in America, which required that real property, houses, and slaves be treated as legally equivalent to chattel property for the purpose of satisfying debts in all of the British colonies in America and the West Indies. This statute substantially dismantled the legal framework of the English inheritance system by giving unsecured creditors priority to a deceased's land over heirs. The Act also required that the courts hold auctions to sell both slaves and real property to satisfy debts in most colonies. More broadly, this legal transformation likely led to greater commodification of real property, the expansion of slavery, and more capital for economic development. American landholders, however, were subjected to greater financial risk than would have been the case in the absence of the Act. The Act for the More Easy Recovery of Debts was reenacted by most, but not all, state legislatures in the founding era. One legacy of the colonial era was that, through the 1840s, most states exempted only minimal amounts of property from creditors' claims. Tensions relating to creditors' remedies, both between the states and the federal government and between states with differing policies, had important consequences for American federalism. The history of creditors' claims to real property in the colonial and founding periods is important to understanding the emergence of an American property law, the economic development of the colonies and states, the expansion of slavery, and American federalism. INTRODUCTION Joseph Story, writing about American legal development in his Commentaries on the Constitution, described a transformation in colonial property law, the effect of which was to "make land, in some degree, a substitute for money, by giving it all the facilities of transfer, and all the prompt applicability of personal property." (1) The legal treatment of land as a substitute for money--the most fungible of all assets--had important economic and political implications in the context of the Anglo-American property tradition. It suggests that, in America, land was treated as a commodity without special status. The description of land as having the "facilities of transfer" and "prompt applicability" of chattel property suggests that few legal and procedural hurdles impeded the use of land in market exchanges, and therefore that land was potentially available for full economic use. Story's comment also implies that America had departed from the traditional English law of real property which treated land as the source of wealth of families that, like an endowment, would persist through the generations. English law reflected a society in which political and social authority was vested in a landed class that perpetuated itself through long-term ownership of real property. Blackstone's Commentaries of the late eighteenth century described "the principal object of the laws of real property in England" as the law of inheritance (2). Americans from the founding era forward, however, viewed the greater circulation of land in America as the basis of a new political ideal--republicanism--that offered more opportunity for political participation than existed in European society. …

Hamdan V. Rumsfeld: The Legal Academy Goes to Practice

Abstract: TABLE OF CONTENTS I. HAMDAN: HOW THEORY INFORMED PRACTICE A. Framing Effects B. The Passive Virtues C. Default Rules and the Veto II. HAMDAN: HOW PRACTICE REINED IN THEORY A. Inherent Authority B. Deference III. FUTURE REFORM A. In the Government B. In Law Schools 1. Oral Advocacy 2. Working in Groups 3. A Moral Compass IV. CONCLUSION Hamdan v. Rumsfeld (1) is a rare Supreme Court rebuke to the President during armed conflict. The time is not yet right to tell all of the backstory of the case, but it is possible to offer some preliminary reflections on how the case was litigated, the decision, and its implications for the oft-noticed divide between legal theory and practice. In a widely cited article, Judge Harry Edwards lamented "the growing disjunction between legal education and the legal profession," claiming that "many law schools ... have abandoned their proper place, by emphasizing abstract theory at the expense of practical scholarship and pedagogy." (2) This observation is truer today than when Judge Edwards penned those words in 1992. Perhaps fueled by an intense desire to move up in published law school rankings, (3) many of the nation's leading law schools have ramped up course offerings and the number of faculty members devoted to legal theory while disparaging practitioners. (4) Like any excluded group, practitioners have begun disparaging the theoreticians in return. (5) We are witnessing one of the most significant developments in the history of American law: the majority of professors on many law faculties are now specializing in areas that are of no obvious relevance to their students' activities upon graduation. (6) This Comment uses Hamdan to illustrate why the disparagement of theory is partially wrong. By examining the litigation of the case, it demonstrates some of the benefits of theory to practice. At least three different theoretical tools were involved in Hamdan: (1) psychological research on framing effects and bias toward compromise; (2) theoretical inquiry into the timing of Supreme Court litigation and the "passive virtues"; and (3) economic analysis of penalty default rules and political science research on the veto. The study of each in law school is widely--and incorrectly--believed irrelevant to practice. To take one example, sophisticated Supreme Court practitioners sometimes employ a strategy that turns out to harness what cognitive psychologists call "extremeness aversion." (7) An advocate files a certiorari petition based on arguments that push the lower court's logic to the maximum, and then argues that if the opinion becomes the law, a parade of horribles will inevitably follow. The petition then advocates a strong, but seemingly more reasonable, position completely opposite to that lower court opinion, thereby casting the dispute as a fairly extreme one. The sharply opposed positions might persuade the Court to hear the case. At that moment, the advocate changes her goal--from getting the case selected to winning it. Winning often requires the definition of a narrower rationale. The extreme position announced in the petition becomes not a liability, but rather a useful anchor for the discussion by presenting the advocate as a reasonable friend of the Court who would be content with more limited relief. The advocate comes across not as reversing course, but merely as courting the Court by acceding to the inevitable compromises the Justices will seek. In taking this turn, the lawyer cannot give up on the broader position; instead, she explains that the broad-yet-defensible position is not necessary to reach because of an available, and more limited, rationale in her client's favor. Oral argument both continues this strategy and furthers a second objective. The advocate must now explain why the other side's position is extreme, and how its purported compromises (if any) remain extreme (unlike her own, which are of course entirely reasonable). …

The Riddle of Hiram Revels

Abstract: In 1870, a black man named Hiram Revels was named to represent Mississippi in the Senate. Senate Democrats objected to seating him and pointed out that the Constitution specifies that no person may be a senator who has not been a citizen of the United States for at least nine years. Before the ratification of the Fourteenth Amendment in 1868, the Democrats argued, Revels had not been a citizen on account of the Supreme Court's 1857 decision in Dred Scott v. Sandford. Thus, even if Revels were a citizen in 1870, he had held that status for only two years. After three days of heated and highly publicized debate, the Senate voted to admit Revels. Modern constitutional law has entirely forgotten the Revels debate. In this Article, Professor Richard Primus recovers the episode and analyzes the Senate's proceedings as an instance of nonjudicial constitutional interpretation. He shows how examining our modern intuitions about the Revels debate can prompt us to endorse certain principles of constitutional interpretation, in particular the notion that the Civil War altered the antebellum constitutional regime and the idea that legislatures should be empowered to interpret constitutional provisions flexibly under certain conditions of transitional justice. Professor Primus then uses these principles to criticize the Court's 1883 ruling in the Civil Rights Cases. INTRODUCTION In some respects, his journey to Washington followed a familiar pattern. He worked a variety of jobs, found a calling as a preacher and a schoolmaster, and served his country in the Civil War. (1) A few years after leaving the army, he sought and gained public office, first as an alderman and then in the Mississippi state legislature. (2) Soon thereafter, he was chosen to serve as a United States Senator. (3) In a more literal sense, however, Hiram Revels's journey to Washington differed from that of anyone elected to Congress since the beginning of the Republic. As he traveled from Mississippi to the nation's capital, railroad conductors and steamboat captains required him--senator or not--to ride in the separate colored compartments. (4) On February 23, 1870, having arrived safely in the District of Columbia and enjoyed an enthusiastic reception from the local black community, (5) Hiram Revels entered the Senate chamber. The symbolism of the moment was obvious. Nine years earlier, in the very same room, the last man to serve as a senator from Mississippi--Jefferson Davis--had broken faith with his country and walked off the floor. (6) The chairs belonging to Mississippi's senators had been empty ever since. In what one newspaper called an act of "poetical retribution," a black Republican would now occupy Davis's old office, (7) representing not only the interests of Mississippi but also the transformation of America. As it happened, however, Revels did not become a senator that day. As soon as his credentials were read, Senate Democrats objected to seating him. (8) They argued that neither Revels nor any other black person could hold the office in 1870. As the Democrats pointed out, the Constitution specifies in Article I, Section 3 that no person may be a senator who has not been a citizen of the United States for at least nine years. (9) Assuming that the Fourteenth Amendment was a valid part of the Constitution, (10) Revels was a citizen of the United States. He had been born--free--in North Carolina, (11) and Section 1 of the Fourteenth Amendment provides that all persons born in the United States and subject to its jurisdiction are American citizens. (12) But the Fourteenth Amendment had been ratified only in 1868, two years before Revels arrived in Washington. Before 1868, the Democrats argued, Revels had not been a citizen. Their proof of that proposition was Dred Scott v. Sandford, (13) in which the Supreme Court held that blacks could not be citizens of the United States. (14) Whatever the law might be since 1868, the Democrats maintained, the law before that date was stated authoritatively by Dred Scott. …

In Memoriam: Arthur T. Von Mehren

Abstract: The editors of the Harvard Law Review respectfully dedicate this issue to Professor Arthur T. von Mehren. Daniel R. Coquillette * "There were giants in the earth in those days." (1) Arthur Taylor von Mehren was an intellectual giant. He was awarded the Lifetime Achievement Award at the 2004 Annual Meeting of the American Society for Comparative Law. The citation records: 210 publications (10 books, 4 monographs, 119 articles, 48 book reviews, and 29 other articles) in six languages (English, French, Spanish, Italian, German, and Japanese). They included his path-breaking Civil Law System, his pioneering two books and nine articles on Japanese law, his highly original Law of Multistate Problems, his foundational monographs on contract formation and form, his "law-making" articles on jurisdiction, and his award-winning Hague lectures. He studied law in three countries, taught in nine countries, lectured in many more, and has represented the United States for 38 years in the Hague Conference of Private International Law. (2) But I remember Arthur and his life on much more intimate terms. Every year he would contribute a copy of one of his famous texts to the Harvard Law School Public Interest Auction run by our students. He inscribed each one, not knowing who would receive it: "For future resolvers of disputes." "Resolvers of disputes!" Mary Beth Basile and I had the honor of interviewing Arthur for the Harvard Law School History Project. Brought up in Minnesota, Arthur had an exceptional family, fluent in both Danish and Norwegian, an exceptional twin brother, Robert, and an extraordinary high school German teacher, Fraulein Katz. Arthur was a brilliant linguist. As World War II approached, Arthur "even offered to learn Japanese if the Army would employ [him] in that capacity," but his bad eyesight made him unable to serve. (3) Graduating in the skeleton Harvard Law School class of 1945, he looked out on a world devastated by war. Harvard Law School, since the appointment of Joseph Story as Dane Professor in 1829, has aspired to a "global" perspective on legal education. But by 1945 even the last vestige of comparative law, a Roman law course by James Bradley Thayer, had disappeared. Europe lay in ruins. Japan, a target of nuclear attack, was essentially destroyed. China was in civil war, and India in the last agony of colonialism. Harvard Law School was swamped by returning veterans, seeking to make up for lost years and haunted by terrible recollections. "Resolvers of disputes!" It took extraordinary wisdom, in 1946, for the likes of Lon Luvois Fuller, Austin Wakeman Scott, and Erwin Griswold to see in a young myopic law student the future of a global Harvard Law School. But see it they did. They encouraged Arthur not only to complete his clerkship with Chief Judge Calvert Magruder, but also to complete a Harvard Ph.D. in government almost simultaneously. When Arthur was appointed to the Law School faculty, he was given an extraordinary gift: three free years to study Swiss, German, and French law at the University of Zurich and Paris! He went, by his own account, as an ignorant, humble student to the last intact universities in Europe. Within a year, he found himself the Acting Chief of the legislative branch of the Legal Division at the Office of Military Government for the United States (OMGUS) in Berlin, with twenty German lawyers working for him in the administration of occupied Germany. It was an astonishing time. "People were afraid that the Russians might very well declare war and take us captive. I even thought at times of starting to learn Russian, but I didn't have the time." (4) This extraordinary investment in a young, unproven scholar has a message for us today. Arthur von Mehren became a cornerstone of Harvard Law School's global reputation. But at the time, it was a great act of faith, for both Arthur and the Law School. …

Searches and Seizures in a Networked World

Abstract: This paper can be downloaded without charge from the Social Science Research Network electronic library at: http://papers.ssrn.com/Abstract=916046 An index to the working papers in the University of Oxford Faculty of Law Research Paper Series is located at:

"Recoding" and the Derivative Works Entitlement: Addressing the First Amendment Challenge

Abstract: An author redefines the characters of a classic literary tale to criticize the original narrative and the slave-owning society it romanticizes. (1) A sculptor works from a photograph to duplicate the image of eight puppies and their owners in a critique of the banality of modern society. (2) A publisher releases a comic book that depicts classic and wholesome cartoon characters engaging in decidedly unwholesome activities. (3) These creators have in common their use of "recoding": the appropriation of a copyrighted cultural object for new expression in a way that ascribes a different meaning to it than intended by its creator. (4) Whether and to what extent recoding should be tolerated raises concerns that go to the foundations of copyright law: How much compensation for artists is enough? Should they be able to collect license fees from new artists in addition to the compensation they get from selling their works to the public? Who benefits when copyright owners dictate the terms of use for cultural icons that society has widely recognized? This Note focuses on various utilitarian implications of recoding and how they relate to an ongoing, heated debate over the proper role of the First Amendment in limiting (or strengthening) the entitlements granted by copyright law. By exploring this intersection of utilitarian and First Amendment concerns, it arrives at two tentative conclusions. First, a more explicit role for the government in determining the ground rules of recoding could ameliorate utilitarian and, somewhat paradoxically, First Amendment concerns. Second, a reform conditioning the right to recode on the passage of time and the cultural saturation of the underlying object would have utilitarian and possible First Amendment advantages over other suggested reforms. Part I sets up the competing interests at stake by summarizing important aspects of the law governing recoding and the nature of First Amendment challenges to the entitlements granted by copyright. Part II engages in the thought experiment of abolishing the derivative works entitlement, a fundamental obstacle to recoding, and concludes that this entitlement is desirable but overly broad--a problem that could be addressed with a more explicit government role in the pro-cess. Part III explores three suggested reforms: a compulsory license, an intent/estoppel theory relating to the copyright owner's actions, and a rule granting the right to recode any cultural object that has become established over time or through cultural saturation. It concludes that the third is most beneficial for the interests explored. I. LEGAL CONTOURS OF RECODING A. Copyright Law Legal scholars have long debated the justification for intellectual property rights (5) and questioned their proper role and scope in a free-speech democracy. (6) The Constitution explicitly states that the purpose of intellectual property legislation must be "To promote the Progress of Science and useful Arts. (7) Congress enacted the first copyright statute in 1790 and has made many statutory modifications since; "the general goal of these statutes has been to establish an incentive for authors to create, by providing them an avenue for obtaining remuneration. (8) The Supreme Court has similarly interpreted the constitutional mandate in a utilitarian cast. (9) Consistent with recent scholarship, this Note considers utilitarian aims beyond ex ante incentives to create; relevant concerns include the development of markets for the protected work and the prevention of harmful externalities. (10) Many provisions of the Copyright Act go to the basic question of how cultural objects may be recoded. These include provisions dealing with the simple act of reproduction itself (11) and with compulsory licenses for certain performances. (12) The Act also grants a creative work's author the exclusive right to prepare "derivative works" (13) and consequently restricts recoding. …