Current Print Issue

Vol. 165, Issue 6

  June 2017

Featured Article

Independent Directors and Controlling Shareholders

Lucian A. Bebchuk & Assaf Hamdani
165 U. Pa. L. Rev. 1271 (2017)

Independent directors are an important feature of modern corporate law. Courts and lawmakers around the world increasingly rely on these directors to protect investors from controlling shareholder opportunism. In this Article, we argue that the existing director‐election regime significantly undermines the ability of independent directors to effectively perform their oversight role. Both the election and retention of independent directors normally depend on the controlling shareholders. As a result, these directors have incentives to go along with controllers’ wishes, or, at least, have inadequate incentives to protect public investors.

To induce independent directors to perform their oversight role, we argue, some independent directors should be accountable to public investors. This can be achieved by empowering investors to determine or at least substantially influence the election or retention of these directors. These “enhanced‐independence” directors should play a key role in vetting “conflicted decisions,” where the interests of the controller and public investors substantially diverge, but not have a special role with respect to other corporate issues. Enhancing the independence of some directors would substantially improve the protection of public investors without undermining the ability of the controller to set the firm’s strategy.

We explain how the Delaware courts, as well as other lawmakers in the United States and around the world, can introduce or encourage enhanced‐independence arrangements. Our analysis offers a framework of director election rules that allows policymakers to produce the precise balance of power between controlling shareholders and public investors that they find appropriate. We also analyze the proper role of enhanced‐independence directors as well as respond to objections to their use. Overall, we show that relying on enhanced‐independence directors, rather than independent directors whose elections fully depend on the controller, can provide a better foundation for investor protection in controlled companies.

Featured Comment

Particularity Discovery in Qui Tam Actions: A Middle Ground Approach to Pleading Fraud in the Health Care Sector

Brianna Bloodgood
165 U. Pa. L. Rev. 1435 (2017)

Health care fraud in the United States is policed in a unique enforcement landscape. The False Claims Act, one major piece of that landscape, grants private citizen whistleblowers the ability to sue on behalf of the government to remedy fraud. Plaintiffs in these qui tam actions are subject to procedural requirements characteristic of any federal civil fraud lawsuit, including the rigid pleading standard of Federal Rule of Civil Procedure 9(b). The Supreme Court has repeatedly declined to resolve a circuit split as to the precise particularity of the claim required under the rule; some circuits require a representative sample of false claims for a complaint to survive a motion to dismiss, while others relax the requirement and hold that general allegations supporting a strong inference of fraud will suffice. Ample literature exists in support of the latter, more lenient approach to evaluating a complaint, but little, if any, explores the possibility that a resolution outside the existing dichotomy could optimize results in the health care fraud qui tam context.

This Comment explores one such solution: pre‐merits “particularity discovery” designed to allow a qui tam plaintiff to plead a representative sample of false claims in her complaint. By exploring the merits and shortfalls of the particularity requirement as it applies to False Claims Act qui tam plaintiffs, this Comment first suggests that health care fraud cases may warrant special considerations at the pleadings stage. Then, this Comment uses examples of pre‐merits discovery in other contexts, namely class certification and jurisdictional disputes, to illustrate relevant, albeit imperfect, blueprints for a particularity discovery procedure. Finally, this Comment proposes a framework for ruling on a qui tam plaintiff’s motion for particularity discovery that could operate within the district court’s existing discretion. Because of the importance of remedying health care fraud, this middle ground could provide opportunities for plaintiffs to bring meritorious claims to court without sacrificing the benefits and purpose of the particularity requirement. This Comment will hopefully encourage courts to consider adopting the more rigid representative sample standard for particularity pleading, recognizing that the addition of targeted particularity discovery to the procedure creates a viable middle ground between the two existing approaches to pleading.

Online Exclusives
 Last updated: September 10, 2017


Discovering Third-Party Funding in Class Actions: A Proposal for In Camera Review

Aaseesh P. Polavarapu
165 U. Pa. L. Rev. Online 215 (2017)

Third‐party funding increasingly is a feature of litigation in the United States. One of the issues raised by third‐party litigation funding is whether outside funders will positively or negatively impact the American judicial system. In particular, some commentators have observed that third‐party funding arrangements have the potential to create conflicts of interest between attorneys and their clients due to the control that outside funders may attempt to exert over litigation. This Comment addresses how those conflict‐of‐interest concerns impact discovery rules in the class action context. It ultimately concludes that because there is a potential for third‐party funders to impair class counsel’s adequate representation of absent class members, a class relying on third‐party funding should be required to disclose the arrangement to the court for in camera review.

This Comment begins with an overview of third‐party litigation funding in the United States and the rules of discovery regarding a class’s financial resources during the class certification phase of litigation. Next, it describes the debate over whether third‐party funding will positively or negatively affect class counsel’s ability to adequately represent the interests of absent class members. It also explains that because the empirical data on the issue is scarce, courts should develop discovery rules to help ensure that they will learn when and how third‐party funders are supporting the litigants before them. Finally, after considering alternative potential discovery rules, this Comment concludes that requiring disclosure of third‐party funding arrangements to the court for in camera review is the means most likely to balance the interests of class action plaintiffs and defendants, while simultaneously assisting the court in assessing the adequacy of representation under Rule 23.


Contextualizing Shadow Conversations

James J. Brudney
166 U. Pa. L. Rev. Online 37 (2017)

In Legislating in the Shadows, Professor Walker has deftly presented one side of the drafting conversation that occurs between agency officials and congressional staff. Looking through the window of technical drafting assistance—assistance typically provided through conversations responding to congressional staff requests without Office of Management and Budget (OMB) review or approval—Professor Walker sets forth and develops wide‐ranging and nuanced findings from agency participants in these conversations. His findings describe how agency officials understand their active and nonpublic role in the formulation of statutory text from its early stages. He then cogently analyzes certain implications from the standpoint of how agencies apply their interpretive authority and power.

There is much to admire in Professor Walker’s approach. Empirically, he identifies and unpacks an underappreciated aspect of contemporary federal lawmaking. Analytically, Walker offers a rigorous assessment of doctrinal implications from a statutory interpretation standpoint. He situates both the purposivist possibilities and the deference‐related risks in the context of other scholarly efforts, including several quite recent contributions.

I approach the drafting conversation described by Professor Walker from the opposite side—that of congressional staff. In doing so, I suggest that this conversation is complex and variable in ways that go beyond what might typically be understood by agency officials. Building off of this complexity, I explore certain implications of Professor Walker’s analysis, by examining the four principal reasons that agency officials offered for responding to every congressional request for technical assistance. While I share Professor Walker’s view that agencies gain special purposivist insights from their privileged participatory position in the drafting process, I am not convinced that this privileged position is due in any meaningful way to agencies’ role as shadow legislative drafters. Consequently, I remain skeptical that the shadow drafting role creates special risks of self‐aggrandizing interpretive powers, or that it materially contributes to existing concerns regarding the amount of deference agency interpretations should receive.

Case Note

Of Laundering and Legal Fees: The Implications of United States v. Blair for Criminal Defense Attorneys who Accept Potentially Tainted Funds

Philip J. Griffin
164 U. Pa. L. Rev. Online 179 (2016).

“In the common understanding, money laundering occurs when money derived from criminal activity is placed into a legitimate business in an effort to cleanse the money of criminal taint.” 18 U.S.C. § 1957, however, prohibits a much broader range of conduct. Any person who “knowingly engages” in a monetary transaction involving over $10,000 of “criminally derived property” can be charged with money laundering under § 1957.

Because § 1957 eliminates the requirement found in other money laundering statutes that the government prove an attempt to commit a crime or to conceal the proceeds of a crime, § 1957 “applies to the most open,

above‐board transaction,” such as a criminal defense attorney receiving payment for representation. In response to pressure from commentators, Congress passed an amendment two years after § 1957’s enactment defining the term “monetary transaction” so as to exclude “any transaction necessary to preserve a person’s right to representation as guaranteed by the sixth amendment to the Constitution.”

The statutory safe harbor found in § 1957(f)(1) has successfully immunized defense attorneys from money laundering prosecutions. However, United States v. Blair raised concerns among the criminal defense bar because of its holding that an attorney‐defendant was not entitled to protection under § 1957(f)(1). In Blair, an attorney‐defendant was convicted of violating § 1957 for using $20,000 in drug proceeds to purchase two $10,000 bank checks to retain attorneys for associates of his client. Noting that Sixth Amendment rights are personal to the accused and that Blair used “someone else’s money” to hire counsel for others, the Fourth Circuit held that his actions fell “far beyond the scope of the Sixth Amendment” and were not protected by the safe harbor. In his strongly‐worded dissent, Chief Judge Traxler criticized the court for “nullif[ying] the § 1957(f)(1) exemption and creat[ing] a circuit split.”

This Case Note discusses the implications of Blair for the criminal defense attorney who accepts potentially tainted funds and proposes a solution to ameliorate its unintended consequences. First, Part I provides relevant background information by discussing the money laundering statutory framework, the criticisms leveled at the framework as it was written, the Congressional response to that criticism, and § 1957(f)(1)’s application up until Blair. Next, Part II describes the Blair decision in detail and examines its implications. Part III then proposes a novel solution to the problems it created. Finally, the Case Note concludes with a brief word of practical advice for the criminal defense bar.