Volume 2005Masthead PDF
Symposium: Uncorporation: A New Age?
The New Business Entities in Evolutionary Perspective
Henry Hansmann, Reinier Kraakman & Richard Squire | 2005 U. Ill. L. Rev. 5
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The new types of business forms that have developed over the past thirty years all combine the freedom of contracting that is traditional to the partnership with the pattern of creditors’ rights that is traditional to the business corporation. Legal scholars differ on the issue of whether these new business forms are more partnership-like or corporation-like. Those taking the partnership-like view argue that the degree of freedom of contract is the essential difference between the traditional corporation and partnership forms, while those adhering to the corporation-like view argue that the pattern of creditors’ rights is the essential difference. The authors support the latter view. They argue that an examination of the evolution of business entities reveals that the traditional inflexibility in corporations served importantly to protect creditors’ rights, but as substitute sources developed to protect the rights of all investors, the need for inflexibility diminished and freedom of contracting in the corporate form flourished.
In this essay, the authors first discuss the historical evolution of business entities, focusing on the primary role that creditor protection has played in that evolution. Next, the authors argue that, although legal scholars generally focus on limited liability when discussing creditor protection and the distinction between the corporation and the partnership, the principal feature distinguishing the corporation from the partnership is “entity shielding”—a term referring to the allocation of different rights to different groups of creditors in the assets of a firm. After discussing the importance of strong entity shielding—a characteristic of the corporation but not the partnership—and how it complements limited liability, the authors conclude that the development of new business forms is the culmination of the process of extending strong entity shielding to unrestricted types of entities and, therefore, the new business forms should be viewed as generalizations of the business corporation rather than the partnership.
The major theme underlying this symposium is the development and growth of many new forms of business associations over the last few dec-ades. These new forms are characterized by a combination of personal freedom from partner/owner liability and far-reaching freedom of con-tract for partner/owners. The question thus becomes whether this devel-opment of new business associations amounts to an extension of limited liability to partnerships or an extension of freedom of contract to corpo-rations. Leading scholars Henry Hansmann, Reinier Kraakman, and Richard Squire have posited that the latter theory prevails. Specifically, these scholars discuss the concepts of “entity shielding”—i.e., how, and to what extent, a firm’s assets may be separated, or be kept separate, from the partners/owners’ creditors—and “owner shielding”—i.e., how, and to what extent, a partner/owner’s assets may be separated, or be kept separate, from the firm’s creditors. According to Hansmann et al., entity shielding is logically prior to owner shielding; thus, new forms of busi-ness associations have developed through an extension of freedom of con-tract to corporations. Hansmann et al. believe that this understanding of the evolution of business associations possesses predictive value for future developments in business association law.
Professor Samuelsson refers to Hansmann et al.’s entity-shielding-prior-to-owner-shielding theory as the “priority thesis” and claims that it is an empirical rather than logical statement. To test that thesis, he traces the legal development of business associations in Europe and Sweden and concludes that those histories do not support Hansmann et al.’s priority thesis and that there are no regularities in the historical evolution of as-sociation law that provide predictive value for the future of association law.
Trust has long been a competitor of corporation as a form of busi-ness organization. Though corporation today dominates trust for operat-ing enterprises, trust dominates corporation in certain specialized niches. The market value of these niches measures in the trillions of dollars. Yet the modern business trust has only recently begun to be subjected to scholarly inquiry. Accordingly, this essay outlines a research agenda for the study of the trust—in particular, the modern statutory business trust—as a form of business organization. Put into the parlance of the confer-ence on which this symposium issue is based, this essay is a call for re-search on the business trust as “uncorporation.”
Ethics in the Age of Un-incorporation: A Return to Ambiguity of Pre-Incorporation or an Opportunity to Contract for Clarity?
Richard W. Painter | 2005 U. Ill. L. Rev. 49
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In this article, Professor Painter examines the scope of an attorney’s pro-fessional responsibility in the age of un-incorporation. Judicial opinions and Model Rules defining the responsibilities of attorneys representing incorporated entities are inadequate, he argues, when employed in the context of un-incorporation. Without guidance from case law or rules, attorneys and clients confront many of the same dilemmas which they confronted in the pre-incorporation era when business was done princi-pally through partnerships, trusts, and other unincorporated entities. The fluidity of the un-incorporation framework, however, renders rule making and judge-made law difficult.
Instead of relying on rules and scarce case law, Professor Painter urges the use of private ordering—where lawyers and clients contract with each other ex ante—determining before entering into representation of an un-incorporated entity what the attorney’s ethical responsibilities will be, and to whom she owes them. By contracting for clarity in an un-incorporation relationship, attorneys can protect themselves from ethical quandaries and avoid the ambiguities that plagued the era of pre-incorporation.
When parties agree to share profits and control of a business venture, they are deemed under law to have formed a partnership even if the par-ties have never expressly provided for such a result. As a consequence, the accidental partners are subject to the default rules of partnership law, including the sharing of partnership losses and liability to third parties. While a case can be made that the sharing of losses may be intended by parties who have agreed to share profits, this is not certain. In any case, the extension of loss sharing beyond indemnification between the parties to liability owed a third-party consensual lender cannot be justified by the intent of the parties, at least where the partner sought by the lender was hidden from the lender at the time it extended credit. It is an open question whether other considerations, such as the minimization of transaction costs, justify a hidden partner’s liability, but it is a question that judges and legislators should carefully consider.
Courts are now routinely applying the corporate law doctrine of veil piercing to limited liability companies (LLCs). This extension of a seri-ously flawed doctrine into a new arena is not required by statute and is insupportable as a matter of policy. The standards by which veil piercing is effected are vague, leaving judges great discretion. The result has been uncertainty and lack of predictability, thus increasing transaction costs for small businesses. At the same time, however, there is no evidence that veil piercing has been rigorously applied to effect socially beneficial policy outcomes. Judges typically seem to be concerned more with the facts and equities of the specific case at bar than with the implications of personal shareholder liability for society at large.
A standard academic approach treats veil piercing as a safety valve al-lowing courts to address cases in which the externalities associated with limited liability seem excessive. In doing so, veil piercing is called upon to achieve such lofty goals as leading LLC members to optimally internalize risk, while not deterring capital formation and economic growth, but while promoting populist notions of economic democracy. Given the vagueness of veil piercing doctrine and the arbitrariness with which it is applied, however, veil piercing is too weak a tool by which to accomplish so much. Abolishing veil piercing would refocus judicial analysis on the appropriate question—did the defendant-LLC member do anything for which he or she should be held directly liable?
The Economics of Limited Liability: An Empirical Study of New York Law Firms
Scott Baker & Kimberly D. Krawiec | 2005 U. Ill. L. Rev. 107
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Since the rapid rise in organizational forms for business associations, academics and practitioners have sought to explain the choice of form rationale. Each form contains its own set of default rules that inevitably get factored into this decision, including the extent to which each individual firm owner will be held personally liable for the collective debts and obligations of the firm.
The significance of the differences in these default rules continues to be debated. Many commentators have advanced theories, most notably those based on unlimited liability, profit-sharing, and illiquidity, asserting that the partnership form provides efficiency benefits that outweigh any costs. In this article, the authors test these theories empirically by examining the choice of organizational form by New York law firms. Although the evidence indicates a strong shift from the general partnership form to the limited liability partnership form, a significant number of New York law firms remain general partnerships.
The authors conclude that the prevailing theories based on unlimited liability, profit-sharing, and illiquidity are insufficient and posit that, in contrast to the beliefs of many commentators, the choice of form decision is quite complex. It depends on a variety of factors, including the behavior of other similarly situated firms that the decision makers consid-er competitors for prestige and clients. Nonetheless, it is apparent that unlimited liability is generally considered burdensome, and it is the authors’ prediction that, at some point in time, nearly all the firms in their sample will choose to file as limited liability partnerships. The general partnership form, with its unlimited liability, will operate only as a penalty default that punishes parties who fail to sufficiently define their organization, forcing firm members to reveal relevant information to courts and interested third parties.
The Bargain in the Firm: Partnership Law, Corporate Law, and Private Ordering Within Closely-Held Business Associations
Robert W. Hillman | 2005 U. Ill. L. Rev. 171
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Partnership law and corporate law are two distinct bodies of legal scholarship. Over time, each of these separate bodies of law has adopted features of the other. The author examines the effects that partnership law has had on corporate law and the reciprocal effects that corporate law has had on partnership law. He highlights hybrid entities such as the close corporation and the centrally managed partnership. He also explores the different bargains that are made between partners in contrast to the bargains made by corporate shareholders.
The emergence of limited liability companies and other so-called uncor-porate business entities raises a number of interesting questions. This es-say argues that federal regulation often follows or competes with state regulation, rather than arising in a vacuum, and that both sources are apt to produce regulation in response to crises. States have enabled uncorporations, but these creations have been followed by state regulation. It is to be expected that federal regulation will follow, so that uncorporate law will be a mix of state and federal law, as is presently the case for corporate law. In turn, this essay predicts that the regulatory gap between corporate and uncorporate law will narrow.
The essay goes on to suggest that Delaware can be thought of as pursuing a distinct strategy with respect to corporations and uncorpora-tions. This strategy is in transition. In order to extend its dominant position from the market for corporate law into that for uncorporate law, Delaware must first welcome uncorporate forms. In time, however, we can expect some revenue extraction at the state level, as well as federal intervention. The critical competition is between Delaware and the fed-eral government.
The proliferation of partnership-type entities raises many questions about how the traditional rules of business entities will be tailored for these new contexts. This includes questions concerning default fiduciary duties in partnership-type firms. In particular, should fiduciary duties apply to manager-owners as well as to managers in firms with passive owners? In contrast to Justice Cardozo’s famous dictum in Meinhard v. Salmon, Professor Ribstein concludes that partners, as such, are not fi-duciaries because they do not delegate open-ended control to their co-partners. Extending fiduciary relationships beyond this specific situation would increase litigation and contracting costs, decrease the effectiveness of owners’ governance rights, and dilute true fiduciaries’ legal and extralegal incentives.
Legal experts traditionally distinguish corporations from unincorporated business forms by focusing on corporate characteristics like limited shareholder liability, centralized management, perpetual life, and free transferability of shares. While such approaches have value, this essay argues that the nature of the corporation can be better understood by fo-cusing on a fifth, often-overlooked, characteristic of corporations: their capacity to “lock in” equity investors’ initial capital contributions by making it far more difficult for those investors to subsequently withdraw assets from the firm. Like a tar pit, a corporation is much easier for equity investors to get into, than to get out of.
An emerging school has begun to explore the implications of this idea for corporate law and practice. The idea is still novel enough to lack a uni-formly accepted label—in addition to the phrase “capital lock-in,” theo-rists have described this aspect of incorporation as “affirmative asset partitioning,” “the absence of a repurchase condition,” and “asset sepa-ration from shareholders.” Whatever label one chooses, the idea shows great promise for illuminating a variety of thorny problems that have long troubled corporate scholars and practitioners.
In illustration, this essay considers how the idea of capital lock-in sheds light on three corporate mysteries: the sui generis nature of corporate directors’ fiduciary duties; the rise of the large modern service partner-ship; and lawmakers’ enthusiasm for meddling with corporate govern-ance rules.
Executive Compensation, Corporate Governance, and the Partner-Manager
Richard A. Booth | 2005 U. Ill. L. Rev. 269
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In the debate over executive compensation, the assumption seems to be that the CEO of a publicly traded corporation is ultimately an employee of the corporation. According to the conventional view, the business belongs to the stockholders. Executive compensation is an expense like any other business expense that must be subtracted from income in reckoning stockholder return. The central problem has been that the CEO has too much power, and the board of directors has not acted as an effective monitor. Thus, the problem of executive compensation appears to be a thinly disguised problem of self-dealing.
Professor Booth argues here that partnership law offers an alternative model that may explain some of the more puzzling aspects of executive compensation. Simply stated, if one sees a publicly traded corporation as a partnership between management and stockholders, the fact that a substantial share of gains goes to management does not seem problematic. For example, it is well-known that using stock options as the primary form of executive compensation serves the purpose of focus-ing a CEO on stock price rather than second best metrics such as earnings or assets. What is less well-recognized is that options also force managers to assume additional risk. As a result, CEOs naturally insist on the prospect of greater returns. In effect, CEOs have bargained for a sub-stantial piece of the action. They have come to insist on returns more consistent with those of a partner rather than an employee. It should thus come as no surprise that success will be more richly rewarded.
In addition, Professor Booth addresses several misconceptions about executive compensation that may be clarified somewhat by the partnership model. First, he shows that in the aggregate, executive compensation (including option-based compensation) has been remarkably stable over the last twenty years, suggesting that the perception of excess may be the result of redistribution and undue focus on those who have gained from the evolution to options. Second, he argues that unlike other forms of compensation, stock options are self-regulating and thus inherently less worrisome than other more fixed forms of compensation. Finally, he contends that the partnership model of the corporation sheds new light on the debate over how to account for stock options. If stock options are seen as a way for CEOs and other high-level managers to participate as equity partners in company returns, it makes little sense to treat the grant of stock options as an expense that reduces reported earnings.
Today, many biotechnology firms are using strategic alliances to contract with other companies. In this article, Professor Smith contends that the governance structure of these alliances—specifically, the “con-tractual board”—provides an integrated restraint on opportunism. While an alliance agreement’s exit structure could provide a check on oppor-tunism by allowing the parties to exit at will, such exit provisions also can be used opportunistically. Most alliance agreements, therefore, provide for contractual “lock in” of the alliance partners, with only limited means of exit. Lock in, of course, raises its own concerns, and Professor Smith contends that the contractual board—which is composed of representatives from each alliance partner, each wielding equal power—addresses these concerns about opportunism via the potential for deadlock.
Book Review Essay
Does the Constitution Embody a “Presumption of Liberty”?
Douglas G. Smith | 2005 U. Ill. L. Rev. 319
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Review of Restoring the Lost Constitution: The Presumption of Liberty by Randy Barnett, Princeton University Press (2004).
The Fair Funds for Investors Provision of Sarbanes-Oxley: Is It Unfair to the Creditors of a Bankrupt Debtor?
Zack Christensen | 2005 U. Ill. L. Rev. 339
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In the wake of the stock market decline in early 2000, many major corpo-rations announced fraudulent accounting errors, sought bankruptcy pro-tection, or both. In rapid response, Congress enacted the Sarbanes-Oxley Act of 2002 in order to strengthen the Securities and Exchange Commission and enhance penalties for violations of securities laws.
In its haste, Congress overlooked an important conflict between Sar-banes-Oxley and the Bankruptcy Code. The Fair Funds for Investors provision, contained in section 308(a) of Sarbanes-Oxley, allows the SEC to place a civil penalty obtained from violators of the federal securities laws into a disgorgement fund to be distributed to injured investors. On the other hand, section 510(b) of the Bankruptcy Code subordinates investors’ securities-related claims to those of all other creditors.
As a result, the SEC and common stockholders may work an end-run around section 510(b) of the Bankruptcy Code and elevate the stockhold-ers’ claims by resorting to the Fair Funds for Investors provision. Fur-ther, as corporate malfeasance increases public outrage, the SEC will face increasing pressure to divert funds to defrauded investors, leaving creditors to collect from a depleted bankruptcy estate. The author con-cludes that Congress should address this conflict by amending section 308(a) of Sarbanes-Oxley to comport with section 510(b) of the Bank-ruptcy Code and maintain its established distributional scheme.
Statutory Interpretation in Illinois: Abandoning the Plain Meaning Rule for an Extratextual Approach
Matthew J. Hertko | 2005 U. Ill. L. Rev. 377
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The plain meaning rule and the extratextual approach are two distinct methods of statutory interpretation. The plain meaning rule, currently used in Illinois, permits consultation of extratextual sources only after a court has determined that the statutory language in question is ambiguous. The rule attempts to prevent judicial lawmaking by limiting discretion. However, the author argues that the plain meaning rule is ineffective because it is “deliberately uninformed” and may lead to result-oriented decisions as a consequence. Also, the line drawing inherent in determining whether a statue is ambiguous invests judges with the kind of broad discretion that the plain meaning rule was designed to avoid in the first place.
The extratextual approach allows a court to interpret a statute in light of its history and purposes without first finding it to be ambiguous. The author argues that a modified form of this approach should be adopted in Illinois. Although interpretive tools like legislative history and the canons of construction are subject to criticism, this should not preclude their use. Courts should merely be aware of their shortcomings and proceed with the appropriate level of caution.
An original examination of the recently interpreted Illinois Ticket Scalping Act demonstrates how the different modes of statutory interpretation can produce contradictory results. Even within the constrictive bounds of the plain meaning rule, opposite results may issue depending on whether a court decides that the statutory text is ambiguous. Both the plain meaning and extratextual methods of statutory interpretation are assailable on the grounds that they permit courts too much discretion. Ultimately though, a limited version of the latter approach is preferable because it allows courts to make a more informed decision after exhausting all of the interpretive tools at their disposal.
There have been several recent proposals to abolish life tenure for Supreme Court Justices in favor of fixed terms. Professor Farnsworth of-fers the first substantial defense of the constitutional system of life tenure. Professor Farnsworth contends that most of the suggested benefits of fixed terms are speculative, illusory, or would cause additional, perhaps greater, problems than those they are intended to resolve. While the au-thor admits that the current system is far from perfect, he suggests that life tenure serves many useful purposes, some of which are not obvious on initial inspection. The author also argues for a serious consideration of various reforms to the current system that are less drastic than eliminat-ing life tenure altogether. Professor Farnsworth concludes by suggesting that we more fully consider the consequences and implications of life tenure so that we might find ways to improve the system without resorting to constitutional amendment.
Embracing Segregation: The Jurisprudence of Choice and Diversity in Race and Sex Separatism in Schools
Nancy Levit | 2005 U. Ill. L. Rev. 455
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In this article, Professor Levit studies the growing impulse toward resegregation in education. She traces the history of the judicial move away from court-ordered desegregation in the name of “choice” and a “diversity of options,” and she describes the educational system’s paral-lel increase in experimentation with single-sex schools and classes, also in the name of choice and diversity. In both movements, courts and com-mentators have been resistant to use empirical data when considering the constitutionality of single-sex and resegregated schools. Professor Levit contends that the primary arguments used to support separatism—choice and diversity—are flawed. The concepts of choice and diversity in the separatist educational movements are vastly different from the constitu-tionally endorsed concept of diversity in school admissions or affirmative action cases. The article returns to the message of Brown that “separate educational facilities are inherently unequal”—that official endorsement of segregation based on identity characteristics creates inequality. Em-bracing Segregation presents empirical evidence from the social sciences, as well as international experiences with gender and racial apartheid, that government-sponsored separatism tends to stigmatize citizens, even under conditions of relative equality. Finally, Professor Levit urges local schools and communities to experiment with less-segregative methods of education. She also encourages courts and commentators to consider empirical literature that studies the effects and cultural meanings of segregative educational practices.
Despite being the most vigorous defender of private property rights in the world, the United States has given rise to a strong property-rights movement. In his lecture, Joseph L. Sax notes that the basis of discontent in the system is the way in which similar plots of land are treated differently because land-use rules are created after substantial development has occurred. However, it is most often the developers themselves that oppose setting out the rules for development at the start. While the developer prospective that equal plots of land should be permitted to be developed equally is initially attractive, Sax concludes that courts should consider the time in which lots are developed, as landowners have advance notice that the circumstances affecting development may change with time.
Strengthening the Public Company Board of Directors: Limited Shareholder Access to the Corporate Ballot vs. Required Majority Board Independence
Seth W. Ashby | 2005 U. Ill. L. Rev. 521
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Federal regulators continue to capitalize on the onslaught of mas-sive corporate fraud in the United States, promulgating corporate gov-ernance legislation seeking to reform and improve public company boards of directors. This note considers two such reforms, both of which purport to influence the composition of public company boards to im-prove shareholder confidence in corporate management. The first regu-lation, already approved by the SEC, requires majority board independ-ence for publicly-held companies listed on the NYSE and Nasdaq. The second is a proposed amendment to SEC proxy rules to allow direct shareholder access to the corporate ballot for the purpose of facilitating shareholder-nominees to the boards of publicly-held companies. The ef-fectiveness of both regulations is examined under the director primacy model of corporate governance. This note concludes that, while public companies should not be required to place a majority of independent di-rectors on their boards, a narrowly defined access rule to provide share-holders with a proactive means to hold management accountable to its fi-duciary duties is a tenable option. Accordingly, the proposed shareholder access mechanism should be adopted by the SEC.
From Columbine to Kazaa: Parental Liability in a New World
Amy L. Tomaszewski | 2005 U. Ill. L. Rev. 573
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In light of the recent high-profile violent acts committed by teenagers, there has been an increased interest in strengthening parental liability statutes. Ultimately, though, parental liability statues have proven to be ineffective. If parental liability statues are to be more effective, there must be a correlation between parenting and the child’s tortious conduct. If this relationship is absent, culpability is missing and the threat of civil or criminal liability imposed by these parental liability statutes cannot compel parents to better monitor their children’s activities.
The sole cause of child delinquency is not bad parenting. Numerous studies have concluded that even though parenting may be one factor that increases the likelihood that the child will commit a delinquent act, there are other contributing factors, including socioeconomic status, biological factors, and the media. Further, there is no exact science to parenting and no exact way of anticipating how the child will react in every situation. Because no direct relationship exists between a parent’s parenting and her child’s malfeasance, a parent is not culpable and should not be held liable for every bad act of her child. Therefore, even though parental liability laws may help to ensure that the injured party is fully compensated, these statutes should not be used to hold parents liable for their child’s tortious conduct.
Freudian psychoanalytic theory has had a predominating effect on the development of important criminal law concepts of culpability. In-deed, a large portion of the language of key criminal statutes, cases, and psychiatric testimony appears to be framed by psychoanalytic concepts. This impact seems particularly evident in the Model Penal Code’s mens rea provisions and defenses, which were developed in the 1950s and 60s, a time of great Freudian psychoanalytic influence in the United States. For modern day criminal law, however, this degree of psychoanalytic in-put is troublesome. Freudian theory is difficult to apply to group con-flicts and legal situations, and it focuses on unconscious (rather than conscious) thoughts. In contrast, the new science of consciousness and conscious will provides continuity with Freudian theory, while at the same time offering modern criminal law a means of enlightening existing mens rea doctrine and defenses with advanced discoveries that more easi-ly comport with group behavior and evidentiary standards. Recent con-sciousness research also suggests that efforts to distort or reduce the sig-nificance of mens rea in the criminal law arena are unwarranted. In es-sence, consciousness research provides a more precise way in which crim-inal law can benefit from Freudian psychoanalytic theory’s moral in-sights by returning the law’s focus to intentional mental states.
The classic view in the law and economics literature pertaining to shareholder voting and the resulting “one-share/one-vote” rule holds that share ownership is both necessary and sufficient to create voting rights, and that voting rights should be directly proportional to share ownership. However, the authors demonstrate that these assumptions are unfounded and that the one-share/one-vote rule is flawed for economical-ly and legally encumbered shares. The former describes shares held by shareholders who are not pure residual claimants, such as shareholders who own one share and are short one or more shares. The latter de-scribes shares, including shares which are loaned to a short and then sold to another buyer, held by or associated with more than one share-holder. The authors demonstrate that the one-share/one-vote rule is not only economically suboptimal but also effectuates substantial deleterious consequences. Such consequences include distortion of quorum and reg-ulatory requirements; ill-advised approval of mergers and acquisitions; undervaluation and incorrect compensation in securities class actions; simultaneous over- and underinclusion in bankruptcy distributions; and preference of fixed-ratio stock offers over economically superior alterna-tives. These results all derive from an unfounded reliance upon the one-share/one-vote principle and the belief that even economically or legally encumbered shares should be entitled to vote.
Lawyers as Upholders of Human Dignity (When They Aren’t Busy Assaulting It)
David Luban | 2005 U. Ill. L. Rev. 815
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David Luban argues in this lecture that the moral foundation of the lawyer’s profession lies in the defense of human dignity—and the chief moral danger facing the profession arises when lawyers assault human dignity rather than defend it. The concept of human dignity has a rich philosophical tradition, with some philosophers identifying human dignity as a metaphysical property of individuals—a property such as having a soul, or possessing autonomy. Luban argues instead that human dignity is a relational property of “the dignifier” and “the dignified,” emphasizing that assaulting human dignity humiliates the victim. Lawyers honor the human dignity of others by protecting them against humiliations, and defile that dignity by subjecting them to humiliations. The lecture develops these ideas through four traditional issues in legal ethics: the right of criminal defendants to an advocate, the duty of confidentiality, paternalism of attorneys toward their clients, and pro bono service.
Make Way for the New Kid on the Block: The Possible Zoning Implications of Lawrence v. Texas
Sara L. Dunski | 2005 U. Ill. L. Rev. 847
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This note examines the potentially far-reaching impact of the Supreme Court’s decision in Lawrence v. Texas, specifically the possible implica-tions for zoning regulations that relate to familial composition. Many municipalities have adopted zoning ordinances that prohibit certain household compositions from living in a residential neighborhood. The most common example of this type of zoning regulation limits nontradi-tional living arrangements in single-family neighborhoods.
After examining the evolution of zoning regulations in the United States, this note examines, in light of Lawrence, the validity of ordinances that seek to regulate activity within the four walls of the home. Although courts have traditionally deferred to the discretion of zoning bodies, Lawrence may provide the ammunition necessary to eliminate laws that mandate traditionally accepted living arrangements. This note examines how familial zoning ordinances fail to comport with, and even conflict with, permissible zoning objectives. Finally, this note concludes that courts should rely on the reasoning of Lawrence to invalidate existing familial zoning ordinances.
Punishing Prenatal Alcohol Abuse: The Problems Inherent in Utilizing Civil Commitment to Address Addiction
Erin N. Linder | 2005 U. Ill. L. Rev. 873
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New laws seek to protect unborn children from fetal alcohol syndrome by committing or even imprisoning, women who consume alcohol during their pregnancy. These laws fall afoul of the Due Process and Equal Protection Clauses of the Constitution. Although civil commitment or imprisonment of expectant mothers who drink seems effective at first blush, it is likely that it would deter pregnant women from seeking appropriate medical treatment for fear of being incarcerated. Further, such laws cannot reverse the damage the mother has already done to her unborn child. Ultimately, the only way to protect the rights of expectant mothers and their unborn children is to follow a strategy of education and treatment aimed at stopping prenatal alcohol addiction before it starts
The outcome of a class action binds all class members except the few who take the trouble to opt out. This default rule enables plaintiffs’ lawyers and defendants to settle class lawsuits on mutually beneficial terms that exploit class members. Judges approve such settlements be-cause, among other things, they have a strong incentive to clear their dockets. This article suggests changing the default rule so that class set-tlements include only those who expressly assent to the terms of the set-tlement by opting in. This change would be aimed at removing the incentive to settle collusively, discouraging frivolous class lawsuits, and rewarding those plaintiffs who have the most meritorious claims.
Predictions, Projections, and Precautions: Conveying Cautionary Warnings in Corporate Forward-Looking Statements
Susanna Kim Ripken | 2005 U. Ill. L. Rev. 929
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In this article, Professor Ripken discusses the problems that are created when corporate insiders make public predictions about the future prospects of their business. Investors crave these types of forward-looking corporate disclosures because investors use them to make judgments about the future profitability of companies. Corporations, however, are often reluctant to make predictions and projections because sometimes the predictions fail to come true, and investors may then sue corporations for misleading the market. Congress enacted a controversial statutory safe harbor designed to encourage corporations to make forward-looking statements. The safe harbor immunizes corporations from liability so long as they include meaningful cautionary warnings disclosing the risks that could cause actual results to differ from the insiders’ predictions.
The corporate scandals that have come to light in recent years have caused investors to question whether it is appropriate to have a statutory safe harbor that allows a corporate executive to publicly paint a rosy picture of the company while knowing the business is in serious jeopardy. Because no clear standards exist for determining what constitutes a truly meaningful warning, it has become increasingly problematic to allow corporations to rely on cautionary warnings to protect corporations from liability. This article addresses this problem and discusses the nature of effective risk communication in the corporate context. Professor Ripken draws on insights from the “duty to warn” doctrine in tort law to develop a richer understanding of risk communication in consumer and securities markets. She ties these concepts into a more fundamental debate over the efficacy of warning law and the ability of financial markets to incorporate risk statements efficiently in the pricing of securities. Using the psychological research on cognitive and motivational constraints, biases, and heuristics, the article proposes guidelines for constructing warning statements that are more meaningful and instructive.
The Dirty Words You Cannot Say on Television: Does the First Amendment Prohibit Congress from Banning All Use of Certain Words?
Stephanie L. Reinhart | 2005 U. Ill. L. Rev. 989
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To counter the indecent and profane language currently being used on television and radio, Representative Doug Ose of California proposed the Clean Airwaves Act which, if enacted, would punish television and radio broadcasters for airing eight specific words and phrases deemed to be profane, regardless of the context used by the speaker. In this note, the author takes issue with this legislation and questions its validity under the First Amendment.
In order for the Clean Airwaves Act to be constitutional under the First Amendment, it must regulate unprotected speech. Both obscene and in-decent speech are types of unprotected speech. Indecent speech, on the other hand, receives some First Amendment protection.
The author argues that the Act seeks to regulate protected speech, and thus is unconstitutional.
In the modern era of managed healthcare, the number of indigent and uninsured patients continues to rise, placing greater strain on hospi-tals to provide adequate treatment to patients requiring emergency medi-cal care. In response, Congress enacted the Federal Emergency Medical Treatment and Active Labor Act (EMTALA) in 1986 in an effort to pre-vent hospitals from denying emergency medical treatment as a way of cutting costs. EMTALA was intended to guarantee health care access to all. In practice, however, EMTALA’s functionality has been diminished by ineffective monitoring and enforcement and a lack of uniformity among courts interpreting the statute. This note delves into the myriad problems plaguing EMTALA’s effectiveness as a deterrent to patient dumping by focusing on the statute’s amended regulations which became effective in November 2003. After an analysis of the weakening effect the amended regulations have on access to health care, the author concludes that courts must make an effort to increase the burden of proof hospitals must meet in order to avoid compliance with EMTALA. In addition, the author advances the proposition that Congress needs to reexamine the conundrum of providing emergency medical treatment to the poor and, accordingly, amend EMTALA to better achieve Congress’s original in-tent.
This article provides a causal explanation of adjudicative compli-ance that is distinct from both the court’s threat of sanctions and its institutional legitimacy. The new mechanism for compliance is the power of adjudicative expression. The theory of “expressive adjudication” arises from a previously neglected synergy among three expressive concepts in game theory—correlated equilibria, focal points, and signals. The article identifies the circumstances in which adjudicative expression can, by itself, influence the behavior of existing disputants and of future potential disputants. In each case, ambiguity in the relevant facts or the concepts underlying intentional and spontaneous order can cause a conflict that clarifying expression resolves. This expressive power explains otherwise puzzling instances of compliance with tribunals that lack the power of sanctions, and unifies theories of third-party norm enforcement with a theory of legal sanctions. Finally, the article examines certain normative implications of the expressive theory, including a novel function of adjudicative impartiality, a new justification for the system of public adjudication, and a trade-off between dispute resolution and dispute avoidance.
Constitutional Violations by the United States Supreme Court: Analytical Foundations
Jack Wade Nowlin | 2005 U. Ill. L. Rev. 1123
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Legal scholarship has generally neglected the questions surrounding the analytical foundations of the concept of constitutional violations by courts of last resort and the implications of this concept for traditional debates over the judicial power between proponents of judicial restraint and activism. In this article, Professor Nowlin examines these questions and concludes that constitutions can limit courts of last resort and, thus, that the U.S. Constitution can limit the U.S. Supreme Court. Significant-ly, the purposes of constitutions include creating and limiting governmental institutions such as courts of last resort, and the U.S. Constitution both created and limits the U.S. Supreme Court. Constitutional limits on the federal judicial power likely extend beyond familiar constraints on federal jurisdiction to the use of interpretive methodologies and thus encompass questions of the proper judicial role as activist or restrained.
Professor Nowlin further concludes that the Court’s finality of decision in no sense entails a substantive infallibility, and, therefore, the Court’s su-preme self-affirmation of the constitutionality of its own decisions does not finally resolve the question of whether the Court has violated the Constitution. Professor Nowlin also elucidates the distinction between extra-constitutional and intra-constitutional interpretive authority, ex-plaining in what manner a constitution may authorize and limit the inter-pretive authority of institutions internal to a constitutional system. Pro-fessor Nowlin also outlines a conceptual framework for analyzing judicial constitutional violations, including violations via exceeding structural authority, contravening Rule-of-Law norms, invoking judicial review pre-textually, and infringing other substantive constitutional norms. In sum, the concept of (un)constitutionality is as applicable to courts of last resort as it is to other governmental institutions or actors within a constitutional system and has important implications for traditional debates about the judicial power.
Running in Place: The Paradox of Expanding Rights and Restricted Remedies
David Rudovsky | 2005 U. Ill. L. Rev. 1199
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In the spring 2004 David C. Baum Memorial Lecture, David Rudovsky argued that although constitutional and statutory rights have generally been expanding since the historic Brown v. Board of Education, federal remedies have not kept pace. Contrary to views expressed by Chief Justice John Marshall, there now exists a paradox of legal rights without remedy. Although major remedial decisions of the Warren Court, such as Mapp v. Ohio and Monroe v. Pape, have not been expressly overruled, the Supreme Court has in later decisions significantly limited their impact. The Court has increasingly turned to prospective rulings, but while these provide some guidelines to future actors, they deprive the harmed individual recompense for the violations of her rights. Extensions of the doctrine of qualified immunity and the Eleventh Amendment’s sovereign immunity, as well as congressional legislation limiting litigation by prisoners and access to habeas corpus, have created a system where only egregious violations of rights may be subject to remedial judicial action.
Slicing Through the Gordian Knot: “Employers,” Standing, and Removal Under ERISA
Scott Kording | 2005 U. Ill. L. Rev. 1257
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The Employee Retirement Income Security Act of 1974 causes judi-cial and legislative confusion of mythological proportions. The simple issue of an employer’s standing to sue his or her benefits provider under ERISA has become a major source of judicial uncertainty owing to ERISA’s tangled web of interlocking definitional provisions. This note recommends that courts determine as a threshold matter whether a plain-tiff is an “employer” under common law agency principles, rather than under ERISA’s circular definition of the term. Once the term “employer” is defined more usefully in this fashion, ERISA’s other crucial terms—such as “employee,” “participant,” “beneficiary,” and “employee welfare benefits plan”—become helpful interpretive guides, instead of the statutory construction pitfalls they are currently. The author’s recommendation of implementing a modified version of the minority approach would, if adopted, permit courts to slice through the Gordian Knot and swiftly resolve ERISA employer standing cases consistent with the statute’s purpose.
Hospital Vicarious Liability for Negligence by Independent Contractor Physicians: A New Rule for New Times
Howard Levin | 2005 U. Ill. L. Rev. 1291
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The contractual relationship between a treating physician and the hospital where treatment takes place is a factor in determining whether a patient can hold the hospital liable for medical malpractice occurring on the hospital’s premises. Under the doctrine of respondeat superior, a hospital is vicariously liable only if an agent or employee of the hospital commits malpractice. Historically, physicians were agents or employees of the hospitals where they provided treatment. Therefore, patients could hold hospitals responsible for malpractice committed on the hospitals’ premises. However, under common law, hospitals were immune from liability caused by the negligence of independent contractors.
Due to dramatic changes in the health care industry, hospitals started providing a wide array of medical services through independent contractor physicians. Relying on their common-law immunity, hospitals were able to benefit from relationships with independent contractor physicians while avoiding any risk of liability for medical malpractice committed by those same physicians on hospital premises. Recognizing the ability of hospitals to exploit their common-law immunity, courts across the nation began holding hospitals responsible for the negligence of independent contractor physicians.
In Gilbert v. Sycamore Municipal Hospital, the Illinois Supreme Court abrogated hospital immunity to vicarious liability of independent contractor physicians. The Gilbert court held that hospitals could be held liable for the actions of independent contractor physicians under the doctrine of apparent authority. However, the court’s decision failed to adequately set forth the requirements for apparent authority liability. In particular, the court failed to sufficiently define the required element of reliance and did not address the situational differences between emer-gency room and non-emergency room treatment.
After Gilbert, courts in Illinois imposed divergent reliance standards, including detrimental and assumed reliance. Furthermore, courts applied different and contradictory interpretations of those standards. As a result, vicarious liability of hospitals under the doctrine of apparent authority has developed into a confusing and unpredictable area of law in Illinois. Other states have also struggled with the reliance requirement of independent contractor vicarious liability for hospitals.
The author proposes a comprehensive, hospital-specific vicarious liability rule for independent contractor physician negligence. The rule accounts for both emergency room and non-emergency room situations, as well as situations where a patient relies on a third-party for treatment decisions. The rule is based on traditional agency by estoppel principles and diverges from those principles only where required by the public policy concerns giving rise to the abrogation of hospital common-law immunity to independent contractor vicarious liability. In short, the author proposes that non-emergency room patients have a heavy burden to establish the reliance requirement for liability, while emergency room patients are relieved of the burden to show reliance.